FreightCar America, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Operator:]

Welcome to FreightCar America's Second Quarter 2015 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

[Chip Avery:]

Thank you, and welcome to FreightCar America's second quarter 2015 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'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 2014 Form 10-K for a description of certain business risks, some of which maybe outside of 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. Our 2014 Form 10-K and earnings release for the second quarter of 2015 are posted on the company's Web site at freightcaramerica.com. Let me now turn the call over to Joe McNeely.

[Joe McNeely:]

Thank you, Chip, and good morning everyone. I am pleased that we delivered much improved results in the second quarter. A number of factors contributed to the improvement including delivering the highest level of railcars since the second quarter of 2012, improved manufacturing productivity at all of our facilities including our Shoals facility and a favorable product mix. Our revenues and operating margins were significantly higher year-over-year and sequentially, which yielded earnings per share at $0.60 for the quarter. During the second quarter, we made meaningful operational strides at Shoals, which led to improved manufacturing efficiency. As planned, the additional production line at our Shoals facility became operational, and the productivity of our employees there continues to improve. While we are pleased with the progress we made to-date, we still have areas for further improvement, and we will continue to make investments to improve productivity through continued training, technology enhancements, and automation as part of our broad railcar product portfolio. Looking forward, the success of our diversification strategy has allowed us to build and maintain a strong backlog, despite the continued decline in coal, which Ted will speak to shortly. Our backlog is at 14,000 railcars, which is 5500 railcars higher than this time last year. More importantly, 86% of this backlog or about 12,000 represents non-coal cars, which a year ago only accounted for 56% of our backlog or about 4800 railcars. Given our improved visibility for production over the remaining five months of 2015, we now expect full year delivery to be approximately 9500 railcars. Meanwhile, our services business continued their strong performance in the second quarter, and we continue to see steady volume of maintenance and repair work with a healthy backlog of program work for the remainder of the year. Ted will now give you an update on our markets and commercial activities.

[Ted Baun:]

Thank you, Joe. To recap order activity for the period, 1618 railcars of various types were ordered in the second quarter of 2015, all of which were new cars. It also included our first order for plastic pellet covered hopper cars which continues our strategy of divesting our railcar product portfolio. Order levels this quarter compared with 2401 units ordered in second quarter of 2014, and 1336 units ordered in the first quarter of 2015. Deliveries for the second quarter of 2015 totaled 2611 railcars, which included 1861 new, and 750 rebuilt railcars. This compares to 1635 railcars delivered in the same quarter of 2014, which included 510 new, 325 leased, and 800 rebuilt railcars. There were 1059 railcars delivered in the first quarter of 2015, of which, 651 were new, and 408 were rebuilt. As Joe mentioned, our order backlog at June 30, 2015 was 14,075 [ph] railcars with the sales value of approximately $1.26 billion, which is up from 8493 railcars at June 30, 2014, and compares to 15068 railcars at March 31, 2015. Industry-wide 19786 unites were ordered and 21567 units were delivered during the second quarter of 2014. While order levels are below those of the same period in the prior year, they are above first quarter order amounts. Tank car orders as a percentage of total orders were only 16%, while covered hoppers accounted for 47% of total orders, which demonstrates there is still relatively strong demand for covered hopper cars, particularly those of medium and large cube capacity. Industry-wide backlog was 135,805 units at the end of June, down 5% from the record high at the end of December 2014, but still representing over six quarters of backlog at current delivery rates. Commodity loadings on U.S. railroads in the second quarter of 2015 were down 7.4% when compared to the second quarter of 2014. Coal, grain, metallic ores, crush stone, sand and gravel all weakened year-over-year. Intermodal container loadings continued their strong growth, increasing by 5.4% in the second quarter from year ago levels. The coal market continues to weaken. As of the end of May, utility coal stock piles increased to 175 million tons, which is 28% above May 2014 levels, and 6% higher than previous 10-year averages for May. U.S. coal production in the first half of 2015 was down 9% versus the same period in 2014, while U.S. coal exports are expected to show a decrease of 20% in full year 2015 versus 2014. As a result of the continued pressure on coal, loadings fell 15.5% in the second quarter versus the same quarter of 2014. These factors coupled with the improved rail velocities caused significant increase in coal cars and storage to approximately 27,000 coal cars at the end of the second quarter of 2015. This compares to approximately 5,000 units in storage at the end of the first quarter of 2014, and approximately 18,000 at the end of the first quarter of 2015. Given all of these factors, and with ongoing pressure from natural gas, we continue to believe that there will not be any meaningful orders for coal cars in the foreseeable future. Now I would like to turn the call over to Chip to address our second quarter financial results.

[Chip Avery:]

Thank you, Ted. For the second quarter of 2015, consolidated revenues were $235.6 million, compared to $139.7 million in the first quarter of 2014, and $92.8 million in the first quarter of 2015. Net income for the second quarter of 2015 was $7.4 million, or $0.60 per diluted share; the highest level of quarterly EPS in the last 11 quarters. These results compare to net income of $1.6 million, or $0.13 per diluted share for the second quarter of 2014. The net loss for the first quarter of 2015 was $2.1 million, or a loss of $0.17 per diluted share. Manufacturing segment revenues for the second quarter of 2015 were $227 million, compared to $128.8 million in the second quarter of 2014, and $85.1 million in the first quarter of 2015. Manufacturing segment operating income for the second quarter of 2015 was $17.2 million, compared to $7.4 million in the second quarter of last year, and $1.9 million in the first quarter of 2015. Start-up costs associated with the capacity expansion at Shoals were $900,000 and $1.4 million in the second and first quarters of 2015 respectively. These costs are primarily associated with the hiring and training of new employees, as well as certain facility-related expenses. The services segment had revenues of $8.6 million in the second quarter of 2015, compared to $10.9 million in the second quarter of 2014, and $7.7 million in the first quarter of 2015. The services segment operating income was $1.5 million in the second quarter of 2015, compared to $1 million in the second quarter of last year, and $1.2 million in the first quarter of 2015. The increase in operating income, both year-over-year and sequentially reflects a favorable mix of program work and part sales. Corporate costs for the second quarter of 2015 were $7.8 million, compared to $6 million in the second quarter of 2014, and $6.2 million in the first quarter of 2015. The increase in corporate costs on a sequential basis was driven primarily by second quarter legal and consulting costs. Turning to our balance sheet; our financial position remains strong with no outstanding debt, and $76 million in cash and short-term investments at June 30, 2015. The decrease in cash and investments from 168 million at the end of 2014 was driven primarily by an increase in inventory to support production requirements and utilization of a customer deposit. At June 30, 2015, we held 214 leased railcars with the book value of $16 million, compared to $345 railcars with the book value of $23 million at the end of 2014. Capital spending for the second quarter of 2015 was $6.3 million, of which, $4.4 million related to the Shoals facility. For the full year of 2015, we continue to expect capital expenditures to be approximately $15 million, including amounts already spent. At this point, I will turn the call over to Joe for concluding remarks.

[Joe McNeely:]

Thanks, Chip. While we are pleased with the operating improvement that the team has made in the second quarter, we continue to be focused on driving further improvements. As Ted indicated, industry orders, backlog, and deliveries remain strong as compared to historical averages, but we are ever mindful that we are in a cyclical industry and are carefully watching trends in the energy markets and railcar loading for developments that could impact our business. However, we are confident that diverse railcar offerings, efficient manufacturing facilities, and the talented team will allow us to effectively compete throughout the cycle, which over the long-term will drive increasing value for our customers, shareholders, and employees. This ends our prepared comments. We are now ready to address your questions.

[Operator:]

[Operator Instructions] And first question will come from the line of Mr. Michael Gallo of CL King. Please go ahead.

[Michael Gallo:]

Hi, good morning. Congratulations on the improvement.

[Joe McNeely:]

Thanks, Michael.

[Michael Gallo:]

Just a couple of questions; I was wondering if you just could speak to what car areas you're currently seeing some strength, obviously there has been some areas, certainly that there's been weakness. I was just wondering if you can speak to where you see strength to start. Thanks.

[Ted Baun:]

Hey, Michael, it's Ted. I would say the two general categories of strength are intermodal and automotive products. Obviously we play in the intermodal space. Aside from that, obviously the railroads are showing weak traffic in every other commodity category, but from our standpoint, entry levels have remained fairly steady over the past few quarters. So it hasn't -- from our standpoint, we are still receiving enquiries for a broad base of car types.

[Joe McNeely:]

And Michael, I think as Ted said, when you look at the orders for the quarter, which are actually from historical level still pretty good, 47% of those were in covered hoppers. So in those medium and large covered hoppers still seem to have some demand out there.

[Michael Gallo:]

And I think you mentioned those are to cover plastic pellet, is that right?

[Joe McNeely:]

Yes. The larger cube cars usually tend to go in plastic pellets.

[Michael Gallo:]

All right, okay, great. And then second question I have is, just can you update us on the expansion of Shoal, it sounds like it was on plan. I know you also mentioned in your prepared remarks you thought there was still some room to garner some efficiencies at Shoal. I was wondering, if you could update us on what we should expect in the back half obviously you had a good margin, but it seems like at least per year 9,500 unit guidance that we should actually see an uptick in shipments in the back half [indiscernible]? Thanks.

[Ted Baun:]

Let me try to hit a couple of those points that are in there, Michael. In terms of the Shoal's, the production line did come on line. That line is in startups. So we have production. And as you look at the number of people we've hired since the beginning of the year, those groups of people are still learning and gaining experience. So we do expect them to become productive as the year goes on. In terms of delivery cadence, again, I think we are pretty comfortable with the 9500 cars delivered throughout the rest for the full year with the third quarter probably been a little bit higher on deliveries only because you get the holidays in the fourth quarter.

[Michael Gallo:]

Thank you.

[Operator:]

Our next question will come from the line of Mr. Justin Long of Stephens. Please go ahead.

[Justin Long:]

Thanks, and congrats on the quarter, guys.

[Joe McNeely:]

Thanks, Justin.

[Justin Long:]

So, as we think about your gross margins, we saw an uptick here in the second quarter. I know there's several moving pieces with Shoals costs, production ramping, changes in mix and I know you don't give specific guidance, but generally speaking, is the second quarter a good margin run rate to think about as we look out over the next few quarters or are any of those items that I mentioned you know going to cause us sequential move that's meaningful in either direction.

[Chip Avery:]

Yes. So Justin, it's Chip. As you mentioned, we don't give specific guidance, but a couple of factors, the experience that Joe mentioned in terms of the workforce and productivity should be positive. We have obviously good line of site in terms of delivery. So the delivery volume is up somewhat in the second quarter and third quarter versus the second -- I am sorry, the third and fourth quarter versus the second quarter. So again, we will get more operating leverage from that perspective. So I think we will see a move up, but in terms of very meaningful jump up, we are looking at some moderate increases, but not significant from our perspective.

[Justin Long:]

Okay, great. That's helpful, Chip. Then I'm just curious with the new capacity at Shoals. Have you started to see any repeat customers'? Have you had customers that took delivery of an initial order? Were pleased with the production and then they're coming back and placing a second order.

[Joe McNeely:]

Yes, we have.

[Justin Long:]

Okay. And it might be helpful, too -- you've mentioned several the car types that have been in the order book, but could you just review all of the different car types you've successfully built and delivered at Shoals thus far?

[Ted Baun:]

Justin, it's Ted. We are not going to get into a plant-by-plant list of car types that we have got, we delivered and the report that are in our backlog. But I will just say this, if you look at the six broad categories that the rail supply institute put out, one of which includes tanks. And as you know we don't participate in tanks. We've got five out of the six categories in our backlog. And those are spaced at between Shoals, Roanoke, and Danville.

[Justin Long:]

Okay. Thanks, Ted. And one last one if I could squeeze it in; you mentioned the coal market and we continue to see a deterioration, have you thought about strategic options for further diversification in the business beyond just what you're doing at Shoals whether it's a services acquisition, growing the lease fleet some other avenue? I'm just curious if you're actively evaluating some of those options given the current environment.

[Joe McNeely:]

Hi, Justin this is Joe. Again, we look at all options to continue to grow the business and increase shareholder value. As you know, the near term focus has really been here is working on the diversification and getting that complete, and then getting Shoals to a productivity level that we like.

[Justin Long:]

Okay, fair enough. I'll leave it to that. Thanks for the time guys.

[Operator:]

Our next question will come from the line of Mike Baudendistel of Stifel. Please go ahead.

[Mike Baudendistel:]

Thank you. You mentioned that you're increasing capacity as Shoal that's roughly complete. Can you quantify just what the capacity is or maybe give a range as it relates to those mix issues.

[Chip Avery:]

Yes. So what we have disclosed in, and you qualified the first one, mix issues, changeover, startups, a lot of different factors -- again, it's Chip here Michael. We publicly stated that the capacity on a normal basis is between six and 8000 units per year at an annualized basis at the Shoals facility itself. Again, there is a lot of factors that would dictate the utilization though.

[Mike Baudendistel:]

Okay. And yet the plastic pellet car order was encouraging. How long are your backlogs for covered hoppers? I noticed at your competitors have long backlogs may be they couldn't get those cars to customers that quickly.

[Ted Baun:]

Hey, Mike, it's Ted. In general, again, we are not going to get into plant-by plant detail. We obviously don't disclose that, but in general the covered hopper car backlog stretches into 17. There maybe some opportunistic space before then, but in general it goes out to 2017.

[Mike Baudendistel:]

Okay. That's helpful. And I guess just look at the industry data in a number of orders in their first steel open top hoppers and gondolas. Can you give us a sense and I know you don't give too much detail on your orders, but can you -- did get your fair share of those orders. It seems like those would be in your, you will have.

[Ted Baun:]

Yes, absolutely. We received orders for just about every category of car type in the second quarter.

[Mike Baudendistel:]

Okay, great. And the last one for me, it's a little bit -- surprise that the corporate costs and you said legal and consulting costs. Could you just explain exactly why that was?

[Ted Baun:]

Yes, in terms of the legal there is two matters, the ongoing post retirement, litigation that we are engaged in. So that's a portion of it. Another one we have a patent lawsuit that came up in the second quarter that we are in the process of defending. So those are the two sort of discrete items that we are going to talk about in terms of the quarter-over-quarter. The timing in terms of predicting those numbers in subsequent quarters frankly is pretty tough at this point in time.

[Mike Baudendistel:]

Okay. And who is the plaintiff on the patent lawsuit?

[Ted Baun:]

National Fuel Car.

[Mike Baudendistel:]

Okay. That's all for me. Thank you.

[Operator:]

[Operator Instructions] And ladies and gentlemen of the panel, there are no further questions in queue at this time.

[Chip Avery:]

This concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1