FreightCar America, Inc.
Q1 2016 Earnings Call Transcript

Published: 3 May 2016

[Operator:]

Welcome to FreightCar America’s First Quarter 2016 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

[Matt Kohnke:]

Thank you and welcome to FreightCar America’s first quarter 2016 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Sean Hankinson, Vice President, Manufacturing Operations. I would 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 2015 Form 10-K for a description of certain business risks, some of which maybe 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 net income. Neither of these is a measure in accordance with GAAP. For a reconciliation of adjusted operating income to operating income, the most directly comparable GAAP measure and for a reconciliation of adjusted net income to net income, please see the supplemental disclosure attached to the earnings. Our 2015 Form 10-K and earnings release for the first quarter of 2016 are posted on the company’s website at www.freightcaramerica.com. Let me now turn the call over to Joe McNeely.

[Joe McNeely:]

Thank you. Thank you, Matt and good morning, everyone. Before I get started, I would first like to welcome Matt Kohnke to the team in his first quarterly call with our company. Since last quarter’s call, Matt has officially joined us from Dorman Products, another publicly held company, where he was CFO since 2011. We’re excited about the experience Matt brings with him as we look to create long-term value for our shareholders. Moving on to review the quarter, and I’m pleased to report another solid quarter of results. First quarter net income of $12.7 million or $1.03 per diluted share included an approximately $9 million gain on the settlement of the hourly retiree medical benefits litigation. Excluding this gain, adjusted net income was $3.4 million or $5.5 million higher than the same period last year. This improvement was driven by double digit gross margins which we obtained for the third consecutive quarter and speaks to the success of our railcar diversification strategy. Looking forward, the continued decline in rail car loadings may put additional pressure on our customers to cancel, defer, or substitute orders. While we cannot predict how long the current down market cycle will last, our efforts will be focused on maximizing our operating efficiency in managing our cost structure to reflect our current production plans. As we discussed on last quarter’s conference call, given the coal car market’s ongoing challenges and coupled with the completion of our coal car rebuild program, we significantly curtailed operations at our Danville, Illinois facility. However, our sales team continues to actively market orders that may be suitable for Danville. Our backlog at the end of the first quarter was about 7,700 rail cars, which provides us with a solid base of businesses as we enter a lower demand environment. For the full year 2016, we now anticipate deliveries to be between 6,000 and 6,500 rail cars with the balance of the backlog extending into 2017 and beyond. Ted will now give an update on our markets and commercial activities.

[Ted Baun:]

Thank you, Joe. Overall, we’re still in a period of relative softness for rail car demand. While we do see some pockets of demand in certain car types, enquiry levels remain below 2014 and 2015 levels. Commodity loadings on US rail roads in the first quarter of 2016 were down 13.8% when compared to the first quarter of 2015. Coal grain metallic ores and crushed stone, sand and gravel loadings all weakened in the first quarter of 2016 from the first quarter 2015 levels. Intermodal container loadings however did grow by 4.6% over the same time period. Deliveries for the first quarter of 2016 totaled 1,609 rail cars, all of which were new rail cars. This compares to 1,059 rail cars delivered in the same quarter of 2015, which included 651 new and 408 rebuilt rail cars. There were 2,464 rail cars delivered in the fourth quarter of 2015, which included 1,692 new rail cars, 672 rebuilt rail cars and 100 rail cars leased. Our order backlog at March 31, 2016 was 7,735 rail cars with a sales value of approximately 759 million down from a backlog of 15,068 rail cars at March 31, 2015 and 9,840 rail cars at December 31, 2015. The March 31, 2016 backlog reflects new orders taken of 145 rail cars and cancellations of 641 rail cars that we received in the first quarter of 2016. Order levels for the first quarter of 2016 compare to 1,336 units ordered in the first quarter of 2015 and net orders of 67 units ordered in the fourth quarter of 2015. Similar to last quarter, customers are struggling with asset utilization as a result of lower commodity traffic, higher train velocity and a high level of existing equipment in storage. As such, we have had and continue to have conversations regarding substitutions, deferrals and cancellation of railcar types. First quarter cancellations are reflected in our March 31 backlog. Today we feel comfortable in our delivery guidance range of between 6,000 and 6,500 railcars. Now I'd like to turn the call over to Matt to address our first quarter financial results.

[Matt Kohnke:]

Thank you, Ted. First, I want to thank the management team for being so welcoming during my first few weeks here. It’s been extremely exciting and I look forward to working with our analysts and shareholders in discussing our company's results and strategic initiatives as we move forward. Consolidated revenues were $148.6 million in the first quarter of 2016 compared to $92.8 million in the first quarter of 2015 and $203.3 million in the fourth quarter of 2015. Revenues decreased over the fourth quarter of last year due to the lower number of railcar deliveries. Consolidated operating income for the first quarter of 2016 was $19.6 million which included a pretax gain on the settlement of our hourly retiree benefit litigation of $14.3 million. This settlement will result in lower expenses going forward of approximately $3.7 million annually. Excluding this gain, adjusted operating income for the first quarter of 2016 was $5.3 million compared to an operating loss of $3.1 million in the first quarter of 2015 and operating income of $16.1 million in the fourth quarter of 2015. The decrease in adjusted operating income versus the fourth quarter of 2015 reflects lower deliveries, primarily attributable to the completion of the coal car rebuild program at Danville as well as the change in product mix and pricing. Selling, general and administrative expenses for the first quarter of 2016 were $10.6 million compared to $8.8 million in the first quarter of 2015 and $11.2 million in the fourth quarter of 2015. The increase on a year-over-year basis was attributable to higher personnel related expenses including severance as well as to the ongoing patent litigation. The effective tax rate was 35.5% in the first quarter of 2016. Turning to our balance sheet, our financial position remains strong with no outstanding debt and $96 million in cash and short-term investments at March 31, 2016 versus $117 million at the end of 2015. Excluding the $33 million settlement payment related to the retiree benefits litigation, we generated a positive cash flow of approximately $12 million. Capital spending for the first quarter of 2016 was $2.4 million. For the full year of 2016, we continue to expect capital expenditures to be approximately $12 million. At this point, I will turn the call over to Joe for concluding remarks.

[Joe McNeely:]

Thanks, Matt. While we're pleased with our first quarter’s financial results, we're also mindful of environment we are currently operating in. Under the aforementioned market conditions, we are focused on optimizing our cost structure, improving our operational efficiency and refocusing our marketing efforts to pursue new orders. We have successfully managed our uncertainty in past cycles and our strong balance sheet will assist in providing us with support to work through the current market conditions that will enable us provide long term value to our shareholders, customers and employees. This ends our prepared comments and we are now ready to address your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question today will come from the line of Michael Gallo with C.L. King. Please go ahead.

[Michael Gallo:]

Hi, good morning.

[Joe McNeely:]

Good, Mike.

[Michael Gallo:]

Couple of questions. Do you feel the backlog at this point is de-risked, I mean obviously you had the cancellations? I think the preponderance of what’s remaining is expected to ship this year or early next year, so just walk us through how comfortable you are with where the backlog sits today post those cancellations.

[Ted Baun:]

Yeah, hey, Michael, it's Ted here. As we said in our opening remarks, we do continue to have conversations with customers regarding production schedule changes, substitutions et cetera, but we will reiterate that 6,000 to 6,500 car guidance for the year remains accurate and we feel comfortable with that.

[Michael Gallo:]

Okay. Are there any - I know you mentioned, Ted, in your prepared remarks that you saw some areas where there are pockets of strength in orders or potential increase. Can you speak to some of those areas and then can you also speak to whether you've seen any change in the level of increase thus far in Q2 relative to Q1?

[Ted Baun:]

Sure. The areas of strength that we see from the industry perspective is automotive, intermodal and certain construction material segments. But other than that the rest of the commodity segments are struggling right now, certainly coal being at the top of the list. And I would say that we haven't seen that change markedly from Q4 '15 into Q1 '16 and as we sit here today going into the first few weeks of Q2 we really haven't seen much of a change in that regard either.

[Michael Gallo:]

Okay. And then just final question. I was wondering the G&A level in Q1, I was wondering if you could break out how much the severance and legal expense is, Ron, on an incremental basis year-over-year and then also with some of the other adjustments you made to cost, I know you have legal, but what kind of G&A level should we expect kind of Q2 through Q4 with the legal now behind you and with obviously the reduced manufacturing footprint. Thanks.

[Matt Kohnke:]

Sure, Mike, it’s Matt. So, good morning to you and everybody. The first quarter question related to the severance, there was total severance and other personnel cost in the quarter of about $650,000 that would be considered one time. Beyond that the legal costs you said behind us, it’s not really behind us, there is other ongoing litigation that we have and it’s hard to predict that’s highly of all of those expenses going forward, what I would say is as we lookout to 2016 we would expect SG&A levels to decline compared to 2015 levels and be more in line with those levels that around 2014.

[Operator:]

Thank you. Next we will go to the line of Justin Long with Stephens. Your line is open.

[Justin Long:]

I wanted to ask, when we look at the 2016 delivery guidance, if there was any color you could provide on the quarterly cadence of deliveries you expect over the remainder of the year?

[Sean Hankinson:]

Hi Justin, this is Sean Hankinson. Going forward the second quarter is going to be stronger than our third and fourth just based on changeovers and product mixes.

[Justin Long:]

I guess that kind of implies from a margin standpoint as well I know you don’t give specific guidance but maybe better margins in 2Q than 3Q and 4Q?

[Ted Baun:]

Justin it’s an area - that will be, we don’t give the guidance and that’s always a function of mix of products in that as well as volume deliveries, the volume we’re definitely going to be higher in Q2 than 3 and 4, but it’s not going to matter, probably no other comment.

[Justin Long:]

And then I also wanted to try to frame up the potential risk from cancellation or deferrals going forward, I know we saw some of that here in the first quarter and maybe the best way to look at it, if you can is to say what percent of your backlog today you would feel would potentially be at risk based on the conversations that you're having with your customers?

[Ted Baun:]

Justin, it’s Ted again, we have firm contracts in place across the board with very strong cancellation clauses. So to answer your question, we feel comfortable that those contracts will remain in place. However, having said that we also realize the customers are struggling with the economic environment right now, the industry conditions and it’s a narrow customer base and [indiscernible] industry we have long customer relations and we want to help those customers out, so each - we were not going to get into the specifics, we will continue to endeavor to find win-win solutions with those customers to defer or substitute primarily and I think we’ll just leave it at that.

[Justin Long:]

Fair enough, is there any color you can provide on the car types that were canceled, I'm guessing those were probably small cute covered hoppers but maybe the car types you saw cancelled in the first quarter and the car types where you see potential risk going forward?

[Ted Baun:]

Hey Justin, we're not going to get into the specific details of what was cancelled; we don't get into that level of detail. But if you look at it from an industry perspective there were 6,000 cars cancelled in the industry, so our negative 496 cancellation is a small portion of that broader number and in the industry number you see that there are some tubes cancelled as well some long equipment and others, we're not going to comment on what [Technical Difficulty].

[Justin Long:]

I guess one last question from me, clearly you have a healthy balance sheet but as we look out the next few years into a market that could be, call it at or below replacement levels, could you talk about your ability to sustain that balance sheet, let’s say we saw the industry deliver an average of 40,000 to 50,000 cars annually for the next several years is that an environment where you can maintain or grow your current cash balance or is that an environment where you can think you would be burning cash?

[Joe McNeely:]

Justin, this Joe, I’ll take that one, I think when you look through the last email kind of cycle you see that as the cycle you know when you’re in downward slope, our business we tend to generate cash at working capital kind of balance sheet gets generated, until such point that you end up needing to rebuild that to go up. So I think at least in the near term here, we probably expect our cash balance still to be pretty generating ability to be pretty good now as it goes on for years, a lot of that then depends on what the pricing look like as well as actual volumes of delivery. That's going to be - that’s one is pretty hard to say with any degree of certainty.

[Operator:]

Next we'll go to the line of Matt Brooklier with Longbow Research. Please go ahead.

[Matt Brooklier:]

I just wanted to take one more shot at the cancellations during the quarter, was it just one customer or was it multiple customers, are you able to share a bit more in terms of what drove the cancellations and was just one customer or multiple customers?

[Joe McNeely:]

Hey Matt, I appreciate the third attempt to get information, but we’re just going to - we’re not going to be able to comment on that level of specificity.

[Matt Brooklier:]

Are you able to provide some color in terms of current backlog, the types of cars that are in the backlog, I'm not sure if you want to give percentages in terms of the big buckets but can you just talk about what's in the backlog at this point in time from a car type perspective?

[Joe McNeely:]

Yeah, sure. We see a broad mix of car types essentially everything except for coal, we don't do tank cars, we don't do autoracks, so just about everything else is in our backlog. It’s the first time in the company's history that we’ve had virtually no coal cars and we’re excited that we got up to this point and diversified our backlog.

[Matt Brooklier:]

And did you comment on the demand activity, any queries subsequent to the quarter closing?

[Joe McNeely:]

I did mention that it's about the same as Q4 ‘15 going into Q1 and just a little bit in the April, it’s still about the same, we see pockets of demand for a limited car types, not a lot of volume. So overall being, it’s tough out there. Our customers are struggling to rationalize their equipment given the uncertain economy, but we do have - our sales teams focused on chasing few select settings if you will.

[Matt Brooklier:]

Okay, understood. And then just my last question. Can you talk about potential cost levers that you can pull as we progress through the years or potential incremental op costs you can take out of the model, is there a potential to further rationalize your manufacturing capacity? Maybe just give a little bit of color in terms of your ability to potentially take some fixed cost out of the model.

[Joe McNeely:]

I’ll take that Matt, this is Joe. I think as I said in my opening comments, when we look at [indiscernible] that’s going to be could be piece of that given where the volume on the coal cars and the rebuild programs is now over, that operation since being curtailed. Elsewhere, we are going to be just looking at all that I call discretionary spending, nothing specific. The rest of the footprint as we look at the production of the 6,000, 6,500 rolling out in our shoals facility they are going to be pretty busy the rest of the year. So we will be look at discretionary spending items.

[Matt Brooklier:]

Okay. That’s helpful. I appreciate the time.

[Operator:]

Thank you. Now, we will go to the line of Mike Baudendistel with Stifel. Please go ahead.

[Mike Baudendistel:]

Thank you. I think I heard you say that you have a cancellation clauses in your contract, I just wanted to ask you did you receive any compensation for the orders that were cancelled or any other concessions from customers.

[Ted Baun:]

Mike, Ted here. Again, we are going to get into those level of details.

[Mike Baudendistel:]

Okay. And then I know you don’t disclose your backlog by car type, but is it possible to tell us what are the magnitude, how many of those cars are small cube covered hoppers, because I think those are the cars where most of the cancellations were in the industry in the quarter and the ones people are most concerned about going forward?

[Joe McNeely:]

As I said, the backlog is a broad mix of car types across all non-core, non-tank, non-autoracks, and there is no real concentration of any one car type.

[Mike Baudendistel:]

Okay. And then is there anything you can share with us about how much in your fixed cost there is at the Danville facility since that’s the one that you’re scaling back in terms of capacity and is that where most of your unionized employees are located and how flexible are you with scaling labor efforts there?

[Joe McNeely:]

This is Joe. I think, as I indicated in my last - fourth quarter call earlier this year, we had already scaled back a lot of that operation and continue to do that. So a lot of those cost are behind us and maybe a little more to go. It is a represented facility, but we are doing everything within our contract there. In terms of fixed cost, it’s not a high fixed cost facility per se. You may recall back in 2013, we did take some charters related to that facility that reduced our fixed cost footprint.

[Mike Baudendistel:]

Okay. And then the last one for me is, I guess, for those people that aren’t expecting lot of orders going forward next few quarters because of the industry headwinds, I mean, is there a certain breakeven point that you have in terms of how many cars you have to build in order to have a breakeven EPS, I think Justin asked about cash flow, but do you have any sense on EPS?

[Joe McNeely:]

Yes, Mike, this is Joe again. We don’t give financial guidance, so we don’t comment on the breakeven question.

[Mike Baudendistel:]

Okay. That’s all for me.

[Joe McNeely:]

Thank you.

[Operator:]

And we have a follow-up from Michael Gallo with CL King. Your line is open.

[Michael Gallo:]

I just wanted to ask a question on working capital. Assuming orders stay at a very low level and you kind of run through you production over the next 6 to 12 months, run through your backlog, what do you think you can take out of working capital? Thanks.

[Joe McNeely:]

Mike, this is Joe. I think as we talked through, as we produce the working capital, which is inventory and AP gets turned in the cash receivables are never really big for us, that’s just timing matter between delivery and collection. So you see a lot of that what’s on the balance sheet gets converted to cash. What’s hard to answer that question is what do we need then to buy inventory and pay for, so it’s always harder to get where our cash pay-ons and working capital is going to be at any quarter end.

[Michael Gallo:]

[indiscernible] certainly seen in many quarters where receivables where say south of $10 million and inventories were certainly well below $100 million, so we’ve seen particularly inventory, which I know was up sequentially this quarter, it would seem that’s probably an area you have a lot of room over time, would you agree with that?

[Joe McNeely:]

Yes, I think what we’re saying is, as the backlog gets built out assuming that getting replaced that that gets monetized.

[Michael Gallo:]

Thank you.

[Operator:]

Thank you. At this time, there are no other questions in queue.

[Joe McNeely:]

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, 392000. Good day.