FreightCar America Inc (RAIL) 2016 Q4 法說會逐字稿

Ladies and gentlemen, good morning. Thank you for standing by. Welcome to FreightCar America's Fourth Quarter 2016 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments.

Please note this conference is being recorded. An audio replay of the conference call will be available from 1:00 p.m. Eastern Time today until 11:59 p.m. Eastern Time on March 28, 2017. To access the replay, please dial (800) 475-6701. The replay passcode is 418091. An audio replay of the call will be available on the Company's website within two days following the earnings call.

I would now like to turn the call over to Matt Kohnke, Chief Financial Officer of FreightCar America. Please go ahead, sir.

Thank you and welcome to FreightCar America's fourth quarter 2016 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO; and Ted Baun, Chief Commercial Officer. Find everyone that statements made during this conference call relating to the Company's expected future performance, future business prospects or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to FreightCar America's 2015 Form 10-K for a description of certain business risks, some of which may be outside the control of the Company that may cause actual results to materially differ from those expressed in the forward-looking statements.

We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. We will also make references to adjusted operating income and adjusted operating loss, which is not a measure in accordance with GAAP. For a reconciliation of adjusted operating income and loss to operating income and loss, the most directly comparable GAAP measures, please see the supplemental disclosure attached to the earnings release. Our 2015 Form 10-K and earnings release for the fourth quarter of 2016 are posted on the Company's website at www.freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Thank you, Matt, and good morning everyone. Fourth quarter proved to be a difficult quarter and the results did not meet our expectations. In the quarter, we experienced challenges related to production rates in overall efficiency with first time car build. We continue to identify opportunities to improve our production processes and strive to become more productive and believe improvements will be made in 2017.

As Ted will highlight the railcar industry in the midst of a more pronounced downturn than previously anticipated. Fourth quarter non-tank orders were approximately 4,000 railcars, which were sequentially worse in the third quarter of 2016. Non-tank orders for all of last year were less than 17,500 units, which is on par with the bottom of the market in 2009. Given these order rates, we reevaluated our cost structure earlier this year and have taken additional steps to align our cost to where we're at in the market cycle. These new cost reductions are expected to save $3 million annually. These savings are in addition to the $5 million of annualized savings announced last year. Furthermore, we will be idling our Danville, Illinois, manufacturing facility effective March 31, 2017 and in effort to reduce excess capacity within our manufacturing footprint.

In addition to the uncertainty around the demand for new railcars, the impact of the administration's proposed tax trade and infrastructure improvement policy provide further uncertainty while we welcome and support of any improvements to our nation's infrastructure and energy tax reforms, specific policies and proposals once be set for us to determine the near term and longer-term economic impacts and the associated demand for railcars, with such uncertainties it's difficult to predict with any degree of confidence, future orders and deliveries. As a result we are basing our 2017 delivery guidance primarily and our current production schedule and customer delivered requirements, which is expected to be between 3,200 and 3,800 new railcars.

Ted will now update you on our markets and commercial activities.

Thank you, Joe. The level of railcar inquiries and orders in the fourth quarter of 2016 remained well below average. We received a net order for 10 railcars in the fourth quarter of 2016 resulting from a customer substitution, comparatively we received net orders of 67 railcars in the fourth quarter of 2015 and 620 railcars in the third quarter of 2016.

Deliveries for the quarter of 2016 totaled 1,364 railcars, which included 1,137 new and 227 rebuild railcars. This compares to 2,464 railcars delivered in the same quarter of 2015, which included 1,692 new railcars 672 rebuild railcars and 100 railcars, at least. There were 1,214 railcars delivered in the third quarter of 2016, all of which were new.

Our order backlog at December of 31 2016 was 4,259 railcars with the sales value of approximately $419 million, down from a backlog of 9,840 railcars at December of 31, 2015 and 5,613 railcars at September 30, 2016.

Industry-wide non-tank car orders have drastically fallen over the past couple years. Non-tank car orders for 2016 totaled 17,500 units compared to 41,200 units in 2015 and 99,700 units in 2014. Please note that these industry figures do not include orders, deliveries or backlog totals for rebuild railcars.

Commodity loadings on US railroads in the fourth quarter of 2016 were down 0.8%, when compared to the fourth quarter of 2015. US intermodal container loadings grew by 4.5% in the fourth quarter of 2016 from fourth quarter 2015 levels. Grain loadings grew by 12% over the same time period but coal, metallic ores, and crushed stone, sand and gravel loadings all weakened.

US coal car loadings for the fourth quarter of 2016 were down 2.2% versus the same period in 2015. Yet reports late in the quarter point to do a slight resurgence in metallurgical coal exports. Looking forward, we do not expect to see a meaningful recovery in inquiry and order levels until commodity traffic and asset utilization trends improve.

Now I would like to turn the call over to Matt to address our fourth quarter financial results.

Thanks, Ted. Consolidated revenues were $135.5 million in the fourth quarter of 2016, compared to $203.3 million in the fourth quarter of 2015 and $113.5 million in the third quarter of 2016.

The consolidated operating loss for the fourth quarter of 2016 was $3.1 million, which included $700,000 of charges incurred associated with our previously announced cost reduction plans. Excluding these costs, adjusted operating loss for the fourth quarter of 2016 was $2.4 million compared to operating income for the fourth quarter of 2015 of $16.1 million and adjusted operating income of $1.5 million in the third quarter of 2016. The decrease in the results versus the third quarter of 2016 reflects production inefficiencies on first time car builds that Joe mentioned earlier, as well as an unfavorable product mix.

Selling, general and administrative expenses for the fourth quarter of 2016 were $9.1 million compared to $11.2 million in the fourth quarter of 2015 and $8 million in the third quarter of 2016. They increased on a sequential basis was primarily attributable to sales commissions and international orders.

The Company's effective tax rate for the fourth quarter of 2016 was favorably impacted by $2.7 million tax benefit related to a reduction of a reserve for an uncertain tax position. For the full year of 2017, we currently anticipate an effective tax rate of approximately 35%.

Turning to our balance sheet, our financial position remains strong, with no outstanding debt and nearly $99 million in cash, including cash equivalents and restricted cash at December 31, 2016. We generated positive operating cash flow of $215,000 in 2016 despite the $32.9 million payment made in connection with the settlement of our retiree medical benefits litigation earlier in the year. We are pleased with our strong financial position and with the flexibility that it provides.

Capital spending in the fourth quarter of 2016 was approximately $800,000, while our full year 2016 capital expenditures were $13.8 million. For the full year of 2017, we currently expect capital expenditures to be between $4 million and $5 million. In the fourth quarter of 2016, we incurred approximately $700,000 of charges related to our cost reduction plan, bringing the full year 2016 charges to $2.3 million. We expect to incur approximately $400,000 of additional cost in the first quarter of 2017. We remain on track to deliver $5 million of annualized cost savings once these changes are fully implemented. As Joe noted, in January, 2017, we took actions to further reduce our annual operating cost by $3 million on an annualized basis. These actions include the reduction of salary administrative personnel and the elimination of certain discretionary costs. Combined with the $5 million of savings expected to be generated from the initial cost reduction plan, we are now targeting $8 million of annualized savings primarily within selling, general and administrative expenses. The total estimated costs related to 2017 cost reduction actions are approximately $1 million of employee-related costs. As the personnel reductions have already occurred, we expect to realize savings in the first quarter of 2017. Let me now turn the call over to Joe for concluding remarks.

Thanks, Matt. 2016 was a difficult year as the financial results demonstrate. However, we have delivered on a couple of key strategic objectives over the course of the year. As we have stated on previous calls, expanding our product, offering (inaudible) and continues to remain key to our long-term success. We added to our product portfolio with 33 newer redesigned products sold over the last five years. We have proven our ability to build and sell a diverse portfolio of high quality railcars. Finally, we settled our long running retiree benefits litigation which removed significant contingency from a balance sheet, and we entered 2017 with a very strong balance sheet nearly $143 million in liquidity including the unused portion of our amended credit facility and no debt. Looking ahead, we continue to face headwinds from the industry wide slump in railcar demand in the loss of operating leverage on our fixed costs given the anticipated reduction in deliveries. In response, we have right-sized our organization for this point in the market cycle and has taking capacity out of our footprint. Our focus will remain to prudently manage our cost structure, improved production efficiencies and drive positive operating cash flow. This ends our prepared comments and we're now ready to address your questions.

(Operator Instructions) Justin Long, Stephens.

Thanks and good morning. First question I had was on Danville. You mentioned that you will be idling that facility, so I was wondering if you could comment on the expected impact from that and is that amount included in the $3 million of additional annualized savings that you talked about?

Justin, good morning. It's Matt Kohnke. The Danville idling will happen at the end of March after our current bill that's in process. After that, the carrying cost associated with that building are relatively insignificant, you might remember that few years ago we wrote down the assets into 2013. And as such, there's not a lot of carrying costs remaining on that building going forward.

And then, add to that in terms of the additional $3 million, that is, it does not include the Danville cost that's more [SG&A] related costs.

Great, that's helpful. And looking ahead, if we want to paint a bullish scenario where railcar demand accelerates in 2018 and beyond, how should we think about this $8 million of annualized cost reductions coming back into the business. I'm just curious what portion of these costs would come back versus being structural cost reductions that you think are sustainable.

Justin, this is Joe. I think when we look at that, there would be some cost in there, some in, what I'd call incentive compensation numbers that are in this kind of year-over-year changes that will come back, but big portion of this would be structural.

And then lastly, I wanted to ask about the cash balance. At the end of the quarter, right around $100 million, if you assume the demand environment doesn't really change versus where it is today, how long do you think that cash balance could support the business when you account for any expected changes in working capital and CapEx?

Justin, it's Matt. So we, the cash balance that ended up again in the year was in line with our expectations at the end of the third quarter. To the extent that we don't get more orders going forward, we'll continue to work down our existing working capital and monetize that going forward. So that being said, we should generate more cash. We should be sustainable for a fairly long period of time and sustained downturn market.

Okay. Maybe on working capital, do you have an expectation for where inventory levels will go by year-end based on the delivery guidance you provided?

Yes, based up on the guidance that we've provided it should decline, but given the uncertainty, especially in the second half of the year, it's hard to quantify at this point.

Okay, fair enough. I'll go ahead and pass it on. I appreciate the time this morning.

Matt Elkott, Cowen and Company.

Sorry, if I missed it, but do you guys say if you've gotten any orders in the first quarter?

Yes, hey Matt, this is Ted Baun talking. We do not comment on current order activities.

Okay. And just staying on the order front, just wanted to make sure that you said in your production forecast is based on schedule deliveries, so there are no assumptions for or no projections for orders coming in 2017 for same year delivery in that production number?

Yes, just a small amount that we expect to come in, but we're being conservative with our outlook -- with our --.

Got it. And then just finally, you had solid topline in the quarter, you had solid deliveries, but the gross margin, I think it was the lowest since 1Q 2015. Can you just give us some more color on that?

Yes, this is Joe. It really is two things. One is, I mentioned some production and efficiencies and some of our first time car builds, which was the combination of a number of things between material issues, equipment issues, people issues. We're making changes to address that. The other that was impacting as Matt indicated was product mix.

Matt Brooklier, Longbow Research.

Yes. Thanks and good morning. So a question around your delivery expectations for 2017. I think at the end of the third quarter, you did indicated that what you had in backlog, which was a bigger number you anticipated to deliver most of what you had. And the 3.5000 midpoint that guy that's a pretty big change. So, I'm just trying to get a sense for, what's changed over the past couple months where you anticipate delivering a fewer amount of cars that you have in your backlog.

Matt, this is Joe. I think what changes again, the market with a little softer than we thought when we talked back last fall. Again in orders, there is only [4,019] cars sold in the quarter, so we anticipated being a little softer. And with the uncertainty that's out there in the marketplace, what the administration is doing, the visibility with kind of any degree of confidence and the kind of the back half of the year is causing us to be a little more conservative on our projections.

And then maybe you could talk to the cadence of deliveries, how your annual delivery guidance shakes out during the first half of the year versus the second half?

Given what we've got in the numbers of the [32 to 38], we expect majority of that is kind of front-end loaded with some of that triggering the back half. So we do have capacity in the back half of the year that we're trying to fill.

And then my final question, we've seen some relative improvement in terms of coal car loadings, particularly towards the back end of fourth quarter, just trying to sense for, has there been any increase in terms of inquiries for coal car refurbishments at this point in time, what's your sense, I think previously you'd stated you're not too optimistic that we're going to see some of those refurbishment orders potentially trickle enduring 2017, but just given the directional improvement in the coal car market, I guess what's, has there been a pickup in terms of inquiries and what are your expectations for the year?

Hey, Matt, it's Ted. We've seen a little bit of an uptick in inquiries some around coal, but it's mostly the eastern coal market that we have seen the majority of the improvement from one quarter to the next. But still structurally, we don't see any real demand for coal cars rebuilds or otherwise in the near term. There is still a lot of equipment overhang out there, both in the East and in the West. I would say the East could come back quicker given the met coal exports that are taking place right now, but structurally still a challenging market.

Matt, this is Joe. One of the thing as Ted mentioned on the east exports. So, it's little different, we seen some loadings tick up, a lot of those contracts are short term in nature than that long term. So not of duration enough where we think the railroads would start ordering cars instead of replace their fleet, but we will see as time goes on, whether that stays consistent or (inaudible), or drop back off.

Mike Baudendistel, Stifel

Thank you. Just wanted to ask you, you said there's not a lot of carrying cost at the end going forward now that titled. Could you quantify what those carrying cost are?

What the cost?

The carrying cost associate with Danville, (inaudible) said there were many, but if you could just quantify that, I think that will be helpful.

Yes. Mike it's Matt. So we haven't publicly said that number (inaudible) at this point but, it is certainly not a significant number going forward.

Okay. And then do you guys have any further thoughts and whether you still need the three manufacturing facilities, given your outlook?

Yes. This is Joe, Mike. Given kind of the uncertainty in the railcar demand and what's going on with the administration. I think at this point, we made no decisions and I think we'll wait to see how all the railcar market evolves into what demand at any some of the administration's policy is generated over time.

Okay. I just had a couple of questions on the sort of help us with us the models. I think the gross margin percentage, first quarter was about 5% and that was a pretty steep drop and maybe you can help us with what that should look like going forward, I know you don't give guidance in that area, but maybe just directionally given that there's lot of moving pieces with cost being taken out and changes in production rates, et cetera?

Yes, Mike it's Matt. You're right, we don't give guidance on it. Given where we are in the marketplace and the capacity that's out there certainly pricing on jobs is soft and will have margin relative to what I'd call a normalized rate. So what we said in the past is in margin we'd like to have somewhere our benchmark around 10% and then a soft software environment, it's going to be below that and the good environment, it's going to be above that.

Okay, make sense. And then, I just want to ask you in the fourth quarter ASP, I mean that was better than I think we're expecting and especially considering there were some rebuilds in the fourth quarter. And maybe if you could just talk, -- can you give us a sense for what the ASP per unit was sort of excluding those rebuilds, sorts of some of the new car deliveries?

Yes. ASP during the quarter inclusive but the rebuilds was still stronger relative to prior periods rather not call out the specific numbers there, but certainly mix for the cars that we are delivering in the quarter are certainly, led to the higher ASP.

Okay. So it is a mix issue then.

Yes.

Okay. That's all I had. Thank you.

Justin Long.

. Thanks for taking the follow-up I wanted to ask about the comment you made in the prepared remarks that sales commissions sequentially bumped up due to some international orders, if you look at the backlog today, how much of that backlog is allocated to international markets versus North America?

Hey Justin, right now, looking forward there is very little international activity in the current backlog.

And then I also wanted to ask follow-up on the question about coal cars. You guys used to disclose the number of coal cars in storage and I was just wondering if you have that number available today and maybe you could provide a comparison of where we stand today versus the peak, which I'm guessing was the middle part of last year.

Yes Justin, it's a number that we still track, but we're just not comfortable with the science behind it, if you will. And so that's really the reason we don't disclose. It's more or less just very subjective measure. We would say that that number is somewhere around 30,000 cars out of a, call it a 230,000 car fleet, but again, you know there is some east versus west ambiguity and some aluminum, steel, new versus existing, it's been just tough to really pin that down and then have a confidence in it.

I think though it would be fair to say it is probably down from the peak that we saw, but there's still a lot of cars in storage.

And gentlemen, there are no other questions queued up at this time.

This concludes today's conference call. Thank you for joining. Replay of this call will be available beginning at 1:00 PM Eastern Time today at 1800-475-6701, pass code 418019. See you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference. You may now disconnect.