FreightCar America Inc (RAIL) 2017 Q2 法說會逐字稿

Welcome to FreightCar America's Second 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 from 1 p.m. Eastern time today until 11:59 p.m. Eastern time on September 3, 2017. To access the replay, please dial 1 (800) 475-6701. The replay passcode is 427475. 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.

Thank you, and welcome to FreightCar America's Second Quarter 2017 Earnings Conference Call and Webcast. Joining me today are Jim Meyer, our new President and Chief Executive Officer; 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 second quarter of 2017 are posted on the company's website at www.freightcaramerica.com.

Before we discuss our second quarter results, I would like to first introduce our new President and CEO, Jim Meyer, whose first day at FreightCar was Monday. Jim joins us from Commercial Specialty Truck Holdings, LLC, where he currently serves as Chairman of the Board and an investor since 2015. Prior to that, Jim served as Chief Operating Officer of Allied Specialty Vehicles, Inc., a manufacturer of specialty vehicles for the fire and emergency, commercial and recreation segments. He has also held various leadership positions in public companies, including Ford Motor Company. Jim succeeds Joe McNeely, who has been with FreightCar since 2010. On behalf of the company, I would like to thank Joe for all his contributions during his time at FreightCar America.

With that said, I would like to turn the call over to Jim for a few opening remarks. Jim?

Thank you, Matt, and good morning to everyone.

FreightCar America is a very compelling business, and I'm delighted to now be part of it. It really isn't very often that one has the opportunity to be part of a company with a 100-plus year history, a legacy of product innovation, a stellar balance sheet and I have no doubt a great team of dedicated people. The team has already accomplished a lot of work, which should not be underappreciated, namely, diversifying the product portfolio, idling the Danville production and achieving important reductions in our SG&A costs. Having said that, our single biggest cost line item on the P&L is COGS, and this is where we will channel much resource going forward. Namely, we will be working very hard to accelerate reductions in our material cost, making it easier and more efficient for our workforce to build high-quality railcars and improve on our ability to execute flawlessly. The latter applies to our everyday operations work, product changeovers, new model launches, et cetera. I'm a big believer that good people and good processes will make for great results.

So as I think about where we sit as a business today, the challenging market conditions and what I believe to be a great opportunities that we have control over, our challenge will be to realize those opportunities and to get as much done as quickly as our men and women are able to do so. In other words, we will measure ourselves not simply on our ability to survive in this difficult market but on the progress we make towards positioning us well for when the markets turn.

Again, I feel very fortunate by the work already accomplished and in knowing that we have the people and financial strength to accomplish everything we put our minds to. Ted, I will now turn it over to you.

Thank you, Jim. We experienced an uptick in orders in the second quarter of 2017, as we received new business for 1,520 railcars, of which 500 railcars will be delivered to our lease fleet. Comparatively, we received orders for 426 railcars prior to the atypical cancellation in the second quarter of 2016 and orders for 68 railcars in the first quarter of 2017, of which 15 were new and 53 were rebuilt railcars.

Deliveries for the second quarter of 2017 totaled 1,096 railcars, all of which were new. We also sold 100 railcars which were previously on lease to a third-party in the second quarter of 2017. This compares to 1,372 railcars delivered in the same quarter of 2016, all of which were new. There were 1,525 railcars delivered in the first quarter of 2017, which included 1,425 new and 100 leased units. Our order backlog at June 30, 2017, was 3,226 railcars with a total sales value of approximately $293 million compared to 2,802 railcars at March 31, 2017, and down from a backlog of 6,207 railcars at June 30, 2016.

Based on our current production and delivery schedules, we have increased our full year delivery guidance and now expect to deliver between 4,300 and 4,500 railcars for the full year of 2017, including approximately 100 railcars to be delivered under lease and 53 rebuilt railcars.

Industry-wide, non-tank car orders totaled 13,207 units for the second quarter of 2017, which was much improved versus non-tank car orders of 4,363 units in the second quarter of 2016 and non-tank car orders of 3,225 units in the first quarter of 2017. Please note that these industry figures do not include orders for rebuilt railcars.

Traffic on U.S. railroads was very strong in the second quarter of 2017 when compared to the second quarter of 2016. Commodity loadings grew in the second quarter of 2017, with grain, stone, sand and gravel and coal loadings all exhibiting growth of 15% or better when compared to second quarter 2016 levels. U.S. intermodal container loadings grew by 3.7% in the second quarter of 2017 from second quarter 2016 levels. We are encouraged by positive loadings data as well as an improving level of inquiries. That being said, we remain in a very competitive pricing environment, which will continue to put pressure on our gross margins over the near term.

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

Thank you, Ted. Consolidated revenues were $118.7 million in the second quarter of 2017 compared to $126.2 million in the second quarter of 2016 and $139.5 million in the first quarter of 2017. Consolidated operating loss for the second quarter of 2017 was $944,000, which included $369,000 of charges incurred with our previously announced cost reduction plans.

Consolidated operating loss for the second quarter of 2016 was $601,000. Consolidated operating income for the first quarter of 2017 was $1.1 million, which included restructuring and impairment charges of $1.8 million relating to the cost reduction program. Excluding these costs, adjusted operating loss for the second quarter of 2017 was $575,000 compared to adjusted operating income for the first quarter of 2017 of $2.9 million. The results on a sequential basis are unfavorably impacted by a loss of operating leverage on lower deliveries as well as pricing pressure in the mix of railcars delivered in the second quarter of 2017.

Although, we do not provide forward-looking financial guidance, please be mindful that we expect to be negatively impacted by a loss of operating leverage in the second half of 2017, as second half deliveries are expected to be lower than the first half of 2017. Additionally, margins will continue to be challenged as we face significant pricing pressure from the competitive market environment.

Selling, general and administrative expenses for the second quarter of 2017 were $5.9 million compared to $8.7 million in the second quarter of 2016 and $7 million in the first quarter of 2017. The decrease on a sequential basis was primarily attributable to lower personnel-related cost as a result of our cost reduction efforts.

Looking ahead to the third quarter of 2017, please note we expect to incur approximately $1.2 million in cost associated with the change in our Chief Executive Officer position.

Turning to our balance sheet. Our financial position remains extremely strong with no outstanding debt and $138.3 million in cash, cash equivalents, marketable securities, restricted cash and restricted certificates of deposit at June 30, 2017. We have generated positive operating cash flow of approximately $40 million in the first half of 2017, largely driven by a reduction in our net working capital levels as well as the receipt of an $11.9 million federal tax refund. We continue to be pleased with the strong financial position and the flexibility that it provides.

Capital spending for the second quarter of 2017 was approximately $150,000. For the full year of 2017, we expect capital expenditures to be approximately $3 million.

Lastly, we incurred approximately $400,000 of additional restructuring expenses in the second quarter of 2017, which was primarily related to a noncash write-down of certain assets at our idled Danville manufacturing facility. Going forward, we expect to incur minimal additional restructuring expenses on these previously announced cost reduction initiatives.

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

(Operator Instructions) Our first question is from the line of Matt Elkott, Cowen.

Jim, congratulations on the new role. I know you guys don't give specific information on orders by car type. But I was just wondering, generally speaking, how diversified the order you got in the second quarter were or if they were primarily 1 or 2 types of railcars? And also, the order momentum and the inquiry momentum, has it continued in July and into August? And then I have another question on deliveries after that.

Okay. Matt, Ted here. When we look at orders, as you pointed out, we're not going to comment on the specifics. But we did receive a few orders, and they were a mix of different car types. With respect to momentum going forward, we still see an active inquiry environment. Whether those inquiries translate into orders remain to be seen, as customers have been evaluating a lot of potential business but not pulling the trigger like we would like to see.

Got it. And as far as deliveries for the remainder of the year, how do you see the cadence of delivery between the third quarter and the fourth quarter? I also believe that based on delivery guidance for the full year if we just take the midpoint minus the deliveries you've done in 1Q and 2Q, the year second half delivery are about 55% of your June and backlog. The remaining 45% is that all for 2018 or does some of it go beyond that?

Good morning, Matt, it's Matt. The splits between the third and the fourth quarter are pretty weighted -- evenly weighted between the 2 quarters. So hopefully that answers your first question. In terms of the remaining backlog, that is expected to be delivered in 2018 predominantly.

Okay. And then just one final one. Jim, you mentioned that you guys weren't satisfied with the operating leverage and the cost efforts. Was there anything -- I know you've only been in the role a couple of days, but this goes for Matt as well and Ted. Was there anything that you guys -- did anything go not according to plan? Or was there anything that surprised you at the end of the quarter as far as your cost reduction plan and your operating leverage efforts?

Matt, it's Matt again. As we said in the release, the results for the quarter were in line with our outlook with no significant surprises. Certainly, we're pleased with the cost reduction efforts that we've made, and you see that decline in SG&A as a direct result of the efforts that we've taken over the last 12 months.

Our next question comes from the line of Justin Long, Stephens.

Jim, congrats on the new role and look forward to working with you. I wanted to start maybe, Jim, with you following up on your comment about improving COGS, specifically as it relates to materials. I know it's still early, but just big picture, could you talk about some of the ways you plan to do this and anything on the expected timing on when these efforts could start to bear fruit?

Yes, thanks for the question. And let me comment like this. My view on FreightCar is we've got a company with a good strong body. We've got good people. We've got good physical plants. We've got a product portfolio, and we've got a great balance sheet. And what we now have to do is turn ourselves into a great athlete. So we're going to ask ourselves a lot of tough questions. Do we have a world-class supply chain strategy? Do we have efficient product designs? Do we have efficient and well-tuned factories? And so efficient and well-tuned factories is about much more than just do we have the right people and are they working hard enough. It's much more than that. So we're going to be examining every aspect of our operations. Every indication is we've got opportunity, and we're going to look at how we can do much, much better. As you've noted and we've commented, it's Day 3. The team and I we're all going to start down in one of our facilities come next Monday and get to the hard work.

Okay, that's helpful and all makes sense. But it sounds from that commentary, you feel pretty good about how the business is positioned strategically, so the focus is really more on just improving the existing operations. Is that a fair statement?

Yes, we have a good product portfolio. It's a broad, diversified portfolio. Again, we've got great physical assets and a very strong balance sheet. And everything that I've mentioned so far as they relate to COGS, efficiencies, flawless execution, these are things we ultimately can control. And we're going to examine ourselves and ensure that we get very, very good at all those things that we can control. That will all serve us well now, and it will serve us even better as the markets turn.

Great. And maybe secondly, kind of shifting gears to the quarter. I think last quarter on the call your commentary was that the market was continuing to get more competitive. Did you see that trend continue in 2Q? I know you mentioned it was competitive, but did pricing get more competitive sequentially in the second quarter? Or did you start to see some signs of stabilization as the industry order environment improved?

Justin, it's Ted. If we look at the quarter, it's tough to say that it's gotten more competitive. It's just been competitive for the last several quarters if not 1.5 years. I don't think it's getting incrementally worse. I think it's just -- I'll just leave it, it's just a competitive market environment. It's tough to say where it's going to go. We'll just have to wait and see.

Okay, fair enough. And I know you don't give guidance on margins, but you made a couple of comments about reduced operating leverage in the back half of the year. And it sounds like gross margins that percentage could come under a little bit of additional pressure as we get into the back half relative to what we saw in the second quarter. So first of all, would you agree with that comment? And second of all, do you still think you'll post a positive gross profit in the back half of the year?

Justin, its Matt. You're right, we're not going to comment on guidance going forward. But certainly, the pressures that you mentioned in terms of lower leverage, lower deliveries is something of a headwind that we're going to be face with.

Our next question is from the line of Michael Gallo, CL King.

Question for Jim, and a follow-up for Matt. Jim, congratulations on the new role as well. My question, Jim, is as you look kind of broader strategically at the company, obviously, primarily really manufacturing player, I was wondering whether you think whether it's service or adjacencies or other businesses? Obviously, you have the balance sheet to have a lot of flexibility to do a lot of things come into play. Or whether you plan to just stay focused on the manufacturing operations?

Well, thanks for the question. As I already mentioned in a couple of comments, front and center to us is to examine our operations and take the business that we have and ensure that we're as good as we can possibly be at it. Beyond that, I've got lots of questions. I know the management team here has lots of thoughts and ideas and questions. And we're going to be talking about a lot of stuff over the coming weeks. So I think I'll just leave it at that for right now. But thanks for the question.

I appreciate that. And then, Matt, obviously, working capital has been a nice benefit so far. It sounds like you expect, obviously, deliveries will be down. Would you expect to be able to take more out of working capital? Or where do you expect working capital to be kind of end of the year versus where it was at the end of the second quarter?

Michael, as I said in the past quarters, the exact levers that we can pull with working capital reductions it really depends on the timing of orders received to the extent that we get more orders in and we have to bring more inventory or the timing of deliveries of railcars, that could be impacted as a result of changes in our delivery schedule. So that being said, I think there are -- is some opportunity to further work down the working capital levels. Certainly, we've done a lot in the first half this year, and there is opportunity to work it down a little bit more. But there are different levers that need to happen in order for that to work.

Our next question comes from the line of Matt Brooklier, Buckingham Research.

Jim, welcome and congratulations. So my first question, just looking at SG&A, it's come down nicely. Is $6 million kind of the right number to think about as we move into the back half of the year? Or do you think there's further potential cost benefits from the previously announced plans that you guys have already set into motion?

Matt, it's Matt. I'd say the cost reduction efforts that we've had in the past were pretty much fully realized in the second quarter. So it is representative for where it should be on a go-forward basis. That being said, I'd just mentioned the additional cost that I called out in the third quarter for the position -- the Chief Executive Officer position, just don't forget about that.

Okay. And then with respect to the orders in the quarter, it sounds like there's a good amount of inquiry activity that's also continued in the third quarter. But are you able to share a little more color on the types of customers that ordered railcars and the type of customers that are coming in with the railcar inquiries at this point in time? Is it overweight, lessors, shippers, railroads? Can you just give a little more color there?

Sure, Matt. Ted here. If we look at the segments, it's intermodal that's where we're seeing inquiry, various covered hopper car segments and various infrastructure-related car types, so fairly broad based. With respect to is it shippers or railroads or financing companies, that too I would say it's more shippers and financing companies at this point. Little bit of railroad activity, but as you know, they are -- there are excess equipment right now the railroads are, and they are not in any hurry to add equipment at this stage.

Okay, that's very helpful. And then just my last question. What are your thoughts on the potential for coal cars and coal car prospects maybe over the next 12 months? It doesn't feel like it's an immediate term event, but there's still a potential replacement story that has yet to play out. Just curious to hear your kind of updated thoughts on that.

Matt. Ted again. I don't think much has changed in terms of our outlook on where we see the demand for coal cars. We still that -- we still see that as out into the future quite a bit. There has been good news with respect to coal traffic. A lot of that is export coal. But as you know, that's more of a spot market, and it's tough to say how much legs that market has. So we're keeping an eye on it, but for the time being, we really view this as everything but coal going forward.

The next question comes from the line of Mike Baudendistel, Stifel.

Jim, congratulations. I just had a couple of questions for you that have come up on previous calls with Joe McNeely, and I just wanted to see if your perspective was any different or similar. The first sort of issue is the company has had a huge cash balance for some time. Joe seemed to have the opinion that he needed to have a huge cash balance to sort of protect himself against cyclical downturn. So I wanted to see first if you think that huge cash balance is necessary or can some of that be returned to shareholders or deployed in another manner? And then secondly, is the current manufacturing footprint the right one with 3 manufacturing facilities? You say in the presentation you have a 6,000 to 8,000 units of capacity there? So -- I know you've just started, but any initial thoughts on those 2 issues would be great.

Mike, let me comment on the latter, and then I'm going to politely ask Matt here to comment on the first question around cash only because it's Day 3.5. On the manufacturing footprint, let's not lose sight of a very important and difficult piece of work that's already been accomplished, which is the idling of the Danville facility. So I do note that. I can tell you we will constantly be examining every facet of the business as we go forward. We will -- as we get better at what we do, we will self-generate additional capacity. So this is a dynamic piece of the business. It's a dynamic question. And we will constantly be asking ourselves are we holding the right footprint for the immediate as well as staying in position for the future. Matt, would you comment on the cash?

Mike, at this point, as Jim said, it's the start of his fourth day here. So there'll be some discussion that we will have as a team with what to do with the cash and how to make it productive for the company and our shareholders. So it is a discussion that continue to have and will continue to have going forward.

And our last question is from the line of Michael Gallo, CL King.

Just a follow-up question on the coal question. I was just wondering if you had any updated numbers on coal cars and storage? I think it was 20,000, 25,000 last quarter. Has that changed much with the loadings? Or is it still on the same range?

Mike, I think we also -- Ted here. We shared last quarter that it's becoming an ever increasingly difficult metrics to track. We just can't get that information in an accurate fashion from our customer base to a point where we're comfortable giving it to you. So I'm just going to have to give you directional -- a directional feel, if you will. And I think that, that number feels about the same. If you look at the coal market, we do have a strengthened Eastern export business, but the vast majority of the cars that are in storage serve the Western [part over] basins. And that -- while hot weather and the stockpiles are trending in the right direction and natural gas is staying above $3 per MMBTu, the long-term fundamentals are still challenged. So we're not seeing a real run on Western-style coal cars at this point.

And at this time, there are no other questions in queue.

This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1 p.m. Eastern time today at 1 (800) 475-6701, passcode 427475. See you next quarter.

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