FreightCar America Inc (RAIL) 2017 Q1 法說會逐字稿

Welcome to FreightCar America's First Quarter 2017 Earnings Conference Call and Webcast. (Operator Instructions)

Please note this conference is being recorded. An audio replay of the conference call will be available 1 p.m. Eastern time today until 11:59 p.m. Eastern time on June 4, 2017. To access the replay, please dial 1 (800) 475-6701. The replay passcode is 422845. An audio replay of the call will be available on the company's website within 2 days following this earnings call.

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

Thank you, and welcome to FreightCar America's 2017 First Quarter Earnings Conference Call and Webcast. Joining me today are Joe McNeely, President and CEO; and Ted Baun, Chief Commercial Officer.

I'd like to remind 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 2016's 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 are not measures 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 2016 Form 10-K and earnings release for the first quarter of 2017 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. The operational improvements we have put in place have begun to positively impact our results. Our production rates and efficiency improved when compared to the fourth quarter of last year. Additionally, we realized the benefits of the lower cost structure during the quarter from our previously announced cost reduction initiatives.

Looking forward, against a tough market backdrop, it's essential that we continue to make further operational improvements in our production processes, to counter the impacts of pricing pressures and lost operating leverage on overall lower deliveries in 2017 as compared to last year. As previously announced, we have reduced our cost structure through a combination of headcount reductions, spending reductions and the idling of our Danville, Illinois manufacturing facility.

In the second quarter of 2017, with the reduction of work to support production, we will begin the cutback of workforce at our Roanoke, Virginia manufacturing facility as we complete existing orders. We continue to actively pursue orders for our Roanoke facility. However, the market remained soft, as evidenced by the first quarter industry orders of non-tank cars totaling just 3,200 cars, which represented the fourth consecutive quarter of non-tank car orders under 5,000 cars.

With limited visibility to future orders, we continue to base our 2017 delivery guidance primarily on our current production schedules and customer delivery requirements, which, including orders received after our quarter closed, is now expected to be between 4,200 and 4,400 railcars.

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

Thank you, Joe. Current market softness has impacted inquiry and order levels. We received orders of 68 railcars in the first quarter of 2017, of which, 15 were new railcars and 53 were rebuilt railcars. Comparatively, we received orders for 145 railcars prior to cancellations in the first quarter of 2016 and orders of 10 railcars in the fourth quarter of 2016.

Deliveries for the first quarter of 2017 totaled 1,525 railcars, which included 1,425 new railcars and 100 leased railcars. This compares to 1,609 railcars delivered in the same quarter of 2016, all of which were new railcars. There were 1,364 railcars delivered in the fourth quarter of 2016, which included 1,137 new and 227 rebuilt railcars.

Our order backlog at March 31, 2017, was 2,802 railcars with a sales value of approximately $285 million, down from a backlog of 7,735 railcars at March 31, 2016, and 4,259 railcars at December 31, 2016.

Industry-wide, non-tank car orders totaled 3,225 railcars for the first quarter of 2017, which was weaker than the first quarter 2016 orders. Non-tank car orders for the fourth quarter and full year of 2016 were approximately 4,000 and 17,500 units, respectively. Please note that these industry figures do not include orders, deliveries or backlog totals for rebuilt railcars.

Traffic on U.S. railroads was strong in the first quarter of 2017 when compared to the first quarter of 2016. Commodity loadings grew in the first quarter of 2017 with coal; grain; and stone, sand and gravel loadings all up versus the first quarter of 2016. U.S. intermodal container loadings grew by 1.5% in the first quarter of 2017 from first quarter 2016 levels.

Despite positive loadings data, we do not expect to see any meaningful recovery in inquiry and order levels in the near term. As a result, we expect the competitive environment to keep railcar prices depressed.

Now I'd like to turn the call over to Matt to address our first quarter financial results.

Thank you, Ted. Consolidated revenues were $139.5 million in the first quarter of 2017 compared to $148.6 million in the first quarter of 2016 and $135.5 million in the fourth quarter of 2016. Consolidated operating income for the first quarter of 2017 was $1.1 million, which included $1.8 million of charges incurred with our previously announced cost reduction plans.

Consolidated operating income for the first quarter of 2016 was $19.6 million, which included the gain on the settlement of retiree benefit plan obligations of $14.3 million. Consolidated operating loss for the fourth quarter of 2016 was $3.1 million, which included restructuring and impairment charges of $700,000 relating to the cost reduction program.

Excluding these gains and costs, adjusted operating income for the first quarter of 2017 was $2.9 million compared to adjusted operating income for the first quarter of 2016 of $5.3 million and an adjusted operating loss of $2.4 million in the fourth quarter of 2016. The improvement in results versus the fourth quarter of 2016 reflected increase in deliveries and operational improvements on our first-time railcar builds.

Selling, general and administrative expenses for the first quarter of 2017 were $7 million compared to $10.6 million for the first quarter of 2016 and $9.1 million in the fourth quarter of 2016. The decrease on a sequential basis was primarily attributable to sales commissions on international orders that occurred in the fourth quarter of 2016 and lower personnel-related costs as a result of our cost reduction plans.

Turning to our balance sheet. Our strong -- our financial position remained strong with no outstanding debt and $114.8 million in cash, including cash equivalents, marketable securities and restricted cash at March 31, 2017. We generated positive operating cash flow of $16 million in the first quarter of 2017, largely driven by a reduction in our inventory levels. We are pleased with our strong financial position and with the flexibility that it provides.

Capital spending for the first quarter of 2017 was approximately $300,000. For the full year of 2017, we expect capital expenditures to be approximately $4 million.

Lastly, we incurred approximately $1.8 million of employee-related severance cost and facility closure cost during the first quarter of 2017 as a result of the previously announced cost reduction initiatives. We expect to incur minimal additional restructuring expenses going forward associated with these plans.

Let me now turn the call over to Joe for concluding remarks.

Thanks, Matt. While we are facing a challenging and uncertain market, we have taken the necessary actions over the last 4 years to navigate this industry downturn. We have aligned our cost structure to meet lower railcar demand. In addition, we have a diversified product offering, a strong balance sheet and a dedicated workforce that positions the company not only to manage through this downturn, but also sets us up for long-term success upon the market rebound.

This ends our prepared comments, and we're now ready to address your questions.

(Operator Instructions) First question is from the line of Matt Elkott of Cowen.

Can you tell me if you guys had any deliveries pulled forward to 1Q? Is that part of the reason why your deliveries were so solid in the first quarter? And if so, can you give us an idea on what type of equipment they were for and what the original delivery dates had been?

Yes, Matt, this is Joe McNeely. No orders were pulled forward. We delivered in accordance with our customers' delivery requirements.

Okay. And was this in line with your expectation going into the quarter, the delivery number in the first quarter? Or was it a little bit higher?

It was in line. Again, deliveries were based upon customer requirements.

Got it. And then on the margin front. What should we expect going forward, both on the gross margin and SG&A as a percentage of revenue? Is the first quarter a good proxy for the rest of the year?

So, Matt, it's Matt Kohnke. As you know we don't give guidance amounts going forward. What I would say on a gross margin and on the operating side, we will -- as we look out for the rest of this year, pricing is competitive, and we'll feel some of those pressures going forward, as well as lower deliveries and the lost leverage that associates with that.

Got it. And then just one more quick question on deliveries. Can you give us an idea on the cadence of deliveries you expect for the remainder of the year?

Matt, this is Ted Baun. we expect Q2 and Q3 to follow a similar path as Q1. And then Q4 is a bit fuzzy right now, I would say. It's soft at this point.

Next question is from the line of Michael Call (sic), CL King.

I was wondering -- I know of that obviously, the market environment's been challenging. But can you speak to it at all, what you're seeing subsequent to quarter end, that either on the inquiry or order front, that's caused you to raise your delivery guidance for this year?

Michael, it's Ted. We're not going to comment, like we do -- we don't typically comment on post-order activity. But we'll suffice it to say that there has been some activity, and our current delivery guidance is reflective of where we stand today.

Those are just -- let me just stick on that for a second. In terms of -- what car types do you see improving activity? If you wouldn't mind going there without any specifics.

Yes. I would say, there's not really a particular segment that's showing any real signs of life at this point. It's just the same segments we have been engaged in, covered hoppers, intermodal. But no real shining star at this point.

And the next question is from the line of Justin Long with Stephens.

So maybe to follow up on the delivery guidance for 2017. So it sounds like there have been some orders, post quarter, that influenced that. But have you had any orders that were originally allocated for a later day, 2018, that had been pulled forward that influenced that guide up on delivery expectations for this year?

Justin, this is Joe. No, we haven't. This was just current activity.

Okay. That's good to clarify. And then you commented on the competitive nature of the market right now, and I think we're all well aware of that. But one think I wanted to ask about is how you've seen things progress on a sequential basis. If you look back to the end of last year versus today, have things gotten more competitive? Has pricing gotten worse? Or have you seen some stabilization in the market?

Justin, Ted here. I would say that pricing and the competitive nature of the industry continues to get more competitive. It's getting more competitive as we move on.

Okay. And then lastly, you mentioned some of the reductions you're planning at Roanoke, but I wanted to ask kind of a bigger-picture question. Have you considered adjusting operations at Roanoke and/or Danville to build non-coal cars? I don't know if that's even feasible based on the way the facilities are set up, but if so, is that a strategic option that's on the table? And what kind of capital investment would you need to make in order to do that?

Justin, this is Joe. I think as we talked in the past, we like our footprint where we've got Roanoke and Danville had produced the -- kind of the coal car type of cars, (inaudible), our Shoals facility handled our higher welded content cars, most of a new cars. And we like that footprint. In terms of changes, we managed Danville and Roanoke through the of upswings and downturns with flexing the workforce as we're currently doing. So I think that we like our footprint that we've got right now.

Okay. And maybe one last one I'll sneak in. On the cost reduction efforts, could you just provide an update on where we stand in that process? You kind of outlined the incremental cost savings that you're targeting. Where are we? And what's the incremental opportunity from here?

Justin, it's Matt. We executed our plans that we had announced last year in 2016 as well as the reductions that we went through in the first quarter of 2017. Annual cost savings of about $8 million that we targeted as a result of those initiatives. So we remain on track with the execution there.

Okay. But it sounds like that $8 million, is that completed at this point?

The $8 million is on an annual basis. The vast majority of it in place now, as of today.

The next question is from the line of Mike Baudendistel of Stifel.

Yes, I know you don't want to comment on how many orders you received in the second quarter so far, but you've raised the delivery guidance between 600 to 1,000 units. And so sort of intuitively, I would think that the orders were sort of in that range or that much higher than you're expecting. I mean, am I sort of directionally right about that?

Yes, I think directionally right. Again, we're confident and comfortable with our delivery guidance of 4,200 to 4,400 cars for the year.

Okay. And so that delivery guidance implies about 2,800 units remaining in the rest of the year. I mean, how many of those are already in backlog? Or how many units in backlog would you say are for post-2017 at this point?

Again, outside of we don't comment on backlog post-quarter end, and you've got the number of 2,800 that existed at the end of March.

Okay. And then I want to ask you, on the balance sheet, you had a nice release of working capital in the quarter. And if demand sort of stays where it is and you sort of build roughly 4,000 railcars a year for the next couple of years, I mean, would there be a further release of working capital? Or would it stay roughly where it is today -- or where it was at the end of the quarter?

Yes. What I'd say is for the -- going forward, if I look at inventory levels, we've seen -- our inventory levels will likely continue to drop for a period of time as we do more operational improvements and being more efficient in terms of our buying patterns for materials. But we were certainly pleased with the results that we saw in the first quarter and the level of the work -- of the inventory that's come down from the first quarter as well as through the second half of last year.

This is Joe. I'll probably add just a little color to that, too. And we talked in the past, working capital at any point in time really depends on where orders are going forward and the timing of inventory and payables purchases. So you could see some big swings quarter-to-quarter just on a timing basis, not actually where the business has gone. So just keep that in mind, yes.

Okay, yes. That makes sense. And then the last one I have is, in the last quarter, you talked about some production inefficiencies related to first-time car builds. Is there any still -- of that remaining to work through? Or are you sort of much fully worked through that?

This is Joe again. I think as I've indicated, we made some changes. We saw improvements. We need to continue to make improvements in light of the market's at, given where -- overall deliveries were down, operating leverage is down and we've got pricing pressure. So we're going to have to continue to improve our operating efficiency as we go forward.

And next question is from the line of [John Waldhausen] of [Waldhausen].

I have a couple of questions. One is sort of a mathematical one. I think you said that the backlog in dollars is about $285 million, which equates to a little bit over $100,000 per car. But we were -- the shipments were about $90,000. Does that imply that we have some higher value-added cars in the backlog? And what will that mean for the margins, if I'm doing the calculation right?

John, it's Matt. So just one thing to be noted in the first quarter, we had 100 cars that we -- in the 1,525 that went on lease, so obviously, there's no revenue associated with that. So the average sell price would be higher as a result of that. The rest of the backlog -- that compared to the future backlog is a little bit higher based upon the mix of cars that are sitting in the backlog.

Okay. The second question is -- was, the 100 cars going into the lease portfolio, I guess, leads into -- is how is the lease portfolio positioned? And what's the utilization at this point?

John, it's Ted. Our lease strategy remains the same, which is opportunistic. And we work with a number of different banks and lessors in the marketplace. So from quarter-to-quarter, you will see cars coming in and out of that lease fleet. At this point, the lease fleet isn't a large one. And so I don't think that utilization is a really good metric for you.

Okay. Then my final question is with Trump and the cessation of the war on coal and other changes in trade regulations and operating regulations. Are you seeing anything that's affecting the outlook for your marketplace and/or for your way of doing business?

This is Joe. And again, there's been a lot of talk, again, with the tax reform that's out there; and border taxes previously -- that's gone away; the war on coal -- and we've seen coal loadings go up. But again, a lot of that is too early to tell how that will actually manifest in regulation and how that will impact our business. What we do see right now is that railcar loadings are up, which is generally good. But as Ted said in his comments, we don't see a catalyst for a big change in inquiries and orders in the near term.

And our next question is from Michael Call (sic), CL King.

Mike Gallo. Just a follow-up. Did you have a number on coal cars in storage at the end of the quarter?

Michael, it's Ted. We don't -- it's become a more difficult number to track when we survey our third-party friends, so we do not have that number. But suffice to say, we still believe it's elevated, in the 20,000 to 30,000 range number of cars in storage.

Okay, 20,000. And I'm trying to remember, was it about 30,000 last quarter? Is that the right number?

Yes. I think it was generally in a range of 25,000 to 30,000 last quarter. I can't recall the specifics. But I don't think that's changed much. I just -- I threw out 20,000 to 30,000, but I really have no science behind that number.

So it sounds like it's getting a little fuzzier. But suffice it to say, given the loadings, I would think it would have come down somewhat.

Yes, the loadings have been strong. But that's for export coal, primarily, and that's a small subset of the overall fleet.

Okay. Now at this time, no other questions in queue.

This concludes today's conference call. Thank you for joining. See you next quarter.

Thank you, ladies and gentlemen. You may now disconnect. Have a good day.