FreightCar America, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Welcome to FreightCar America's Third 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

[Charles Avery:]

Thank you, and welcome to FreightCar America's third quarter 2015 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO and Ted Baun, Senior Vice President, Marketing and Sales. 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 third quarter of 2015 are posted on the Company's Website at freightcaramerica.com. Let me now turn the call over to Joe McNeely.

[Joseph McNeely:]

Thank you, Chip and good morning everyone. I am pleased to report earnings for the third quarter increased significantly year-over-year and had a sequential basis. The increase reflects the higher number of railcars delivered improved productivity within our manufacturing segment and the gain on sale of repair and maintenance services business. Excluding the gain on sale third quarter earnings per share of $0.96 mark the company is highest quarterly earnings figures since 2008. As previously announced we completed the future sale of our railcar repair and maintenance services business to Appalachian Railcar Services for an aggregate purchase price of $20 million. We believe that this was an opportunity time to exit this business given the strength of the railcar repair market and have the target to focus on growing a core railcar manufacturing parts and leasing operations. Additionally, in august we entered into a settlement agreement with the United Steelworkers Union in the former employees represent in connection with the long running dispute related to retiree medical and life insurance benefits. On the settlement agreement still need final court approval we’ll believe that settlement allows the former employees the ability to acquire health and life insurance coverage they need and move to significant contingency from our box. Chip will provide further details in his comments. Looking forward we expect our full year 2015 deliveries to be between 9,000 and 9,500 railcars. The Company is well positioned with the backlog it just over 12,000 railcars which consist almost exclusively of on non-coal cars. Supported by orders in the backlog, we are planning deliveries of between 7,000 and 8,000 railcars in 2016, as we do not see any meaningful coal car orders in the near-term to replace the coal car rebuild program that is concluding this year. Ted will now give you an update on our markets and commercial activities.

[Theodore Baun:]

Thank you, Joe. To recap order activity for the period, 1,008 railcars of various types were ordered in the third quarter of 2015, all of which were new cars. Orders levels this quarter compared to 7,375 units ordered in third quarter of 2014, and 1,618 units ordered in the second quarter of 2015. Deliveries for the third quarter of 2015 totaled 2,846 railcars, which included 2,076 new, and 770 rebuilt railcars. This compares to 2,354 railcars delivered in the same quarter of 2014, which included 1,554 new, 800 rebuilt railcars. There were 2,611 railcars delivered in the second quarter of 2015, of which, 1,861 were new, and 750 were rebuilt. As Joe mentioned, our order backlog at September 30, 2015 was 12,237 railcars with the sales value of approximately $1.1 billion compared to a backlog of 13,514 railcars at September 30, 2014 and 14,075 railcars at June 30, 2015. Industry-wide 7,374 units were ordered and 20,476 units were delivered during the third quarter of 2015, while order levels are below those at recent quarters, industry-wide backlog consist about 122,591 units at the end of September, which represents approximately six quarters of backlog. Order levels for FreightCar America and the industry have softened over the past few quarters, while we are still receiving inquiries from existing and prospected customers, the volume is not as robust as it had been in recent quarters and customer inquiries have shifted away from energy markets to other end markets. We believe that the slowdown in order activity is partly attributable to the prolonged weakness in oil prices and other commodities, commodity loading is on U.S. railroads in the third quarter of 2015 were down 5.4% when compared to the third quarter of 2014. Coal, metallic ores, crush stone, sand and gravel have all weakened year-over-year. However grain loadings exhibited growth increasing by 7.5% in the third quarter from the third quarter 2014 levels. Intermodal container loadings also grew 3.2% over the same time period. Lastly as others in the industry have noted we two have had conversations with customers with respect to orders in our backlog, which have resulted in various production schedule shifts and substitutions of railcar types, this activity has reflected in the company backlog figure that we have provided. To date we have been successful in finding mutually beneficial solutions with our customers and no outright cancellations of orders have occurred. Now I would like to turn the call over to Chip to address our third quarter financial results.

[Charles Avery:]

Thank you, Ted. For the third quarter of 2015, consolidated revenues were $241.1 million, compared to $190.3 million in the third quarter of 2014, and $235.6 million in the second quarter of 2015. Net income for the third quarter of 2015 was $14.8 million or $1.20 per diluted share of which $0.24 per diluted share related to the sale of the railcar repair and maintenance service business. These results compared to net income of $6.4 million or $0.53 per diluted share for the third quarter of 2014 and net income of $7.4 million or $0.60 per diluted share for the second quarter of 2015. The significant improvement in earnings during the third quarter of 2015 was driven by higher margins most notably within our manufacturing segment which contributed to a consolidated gross margin of 12%, this compares to consolidated gross margins of 9.9% in last year's third quarter and 9.3% in the second quarter of 2015 Higher year-over-year and sequential gross margins were driven by increased delivery volumes, favorable product mix and improvement in production efficiencies. Manufacturing segment revenues for the third quarter of 2015 were $233.3 million compared to $181.5 million in the third quarter of 2014 and $227 million in the second quarter of 2015. Manufacturing segment operating income for the third quarter of 2015 was $25.8 million compared to $16.2 million in the third quarter of last year and $17.2 million in the second quarter of 2015. The services segment had revenues of $7.8 million in the third quarter of 2015 compared to $8.8 million in the third quarter of 2014 and $8.6 million in the second quarter of 2015. The services segment operating income was $5.2 million in the third quarter of 2015 compared to $1.6 million in the third quarter of last year and $1.5 million in the second quarter of 2015. Services segment operating income in the third quarter of 2015 included a pretax gain of $4.6 million related to the sale of the railcar repair and maintenance services business, while the service assignment income in the third quarter of 2014 included a pretax gain of $1.1 million related to the sale of the Clinton, Indiana repair facility. Corporate costs for the third quarter of 2015 were $8.1 million, compared to $6.5 million in the third quarter of 2014, and $7.8 million in the second quarter of 2015. The increase in the 2015 corporate costs was driven by legal cost associated with our retiree settlement agreement and ongoing patent litigation as well as by increases in incentive compensation expense. Turning to our balance sheet; our financial position remains strong with no outstanding debt, and $131.9 million in cash and short-term investments at September 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 partially offset by the receipt of net cash proceeds of $17.6 million related to the sale of our railcar repair and maintenance services business, as well as $15.7 million of Alabama state and local incentives. We are pleased with our strong financial position and with the flexibility that it provides. Following up on Joe's comments, we are pleased to have reached the settlement agreement with the United Steelworkers in connection with the retiree benefits and legal proceedings. As we have previously announced under the terms of the settlement agreement FreightCar America will make one-time cash payment of $32.750 million in exchange for full and final resolution of the matter. The settlement agreement is subject to final court approval which is currently scheduled for early 2016. Capital spending for the third quarter of 2015 was $6 million of which $3.6 million related to the Shoals facility. Year-to-date capital expenditures were $16 million. We now expect capital spending will be approximately $18 million for the full year of 2015. At this point, I would like to turn the call over to Joe for concluding remarks.

[Joseph McNeely:]

Thanks Chip. We are pleased with the continued progress in our manufacturing operations which is evident in the strong results. We will continue to aggressively work towards driving further improvements throughout all aspects of our organization. As we look through 2016, we are favorably positioned with the good backlog. At the same time however, we are closely monitoring our activity across the industry and other industry churns for developments that could impact us. With the financial stability provided by the [indiscernible] obligation in the sale of our repair and maintenance business. We are confident in our ability to adapt to changing business conditions and we believe that our strong balance sheet rest of railcar products, flexible manufacturing capacity and talented team provide us with the ingredients to generate long-term shareholder value. This ends our prepared comments. We are now ready to address your questions.

[Operator:]

[Operator Instructions] And our first question from Michael Gallo with CL King. Please go ahead.

[Michael Gallo:]

Hi, good morning.

[Joseph McNeely:]

Good morning, Mike.

[Michael Gallo:]

Just a couple of questions I guess given that the - you don’t plan to deliver any more of the refurb cars in 2016 I guess what are the plans for Danville at this point?

[Joseph McNeely:]

Yes, we’ve got a good backlog and we’ve got work that we can put in there, but those will depend on ultimately on what is the best economic answer and where customers wants car delivered from.

[Michael Gallo:]

Great, okay. The second question I have is just for Chip, I think you mentioned in the third quarter there were some legal costs related to the settlement, can you parse out how much that loss and how we should think about ongoing legal expenses, or is this something that sort of tapers off as we get to Q1 in the finalization of the settlement and we have to wait to the finalization before we see the taper off?

[Charles Avery:]

Yes, this is Chip. As we talked this last quarter a little bit, we haven’t parsed our or specifically identify the amount of legal costs that relate to the retiree settlement as well as the patent litigation that we mentioned last quarter, but because the settlement does the approval by the court in the first quarter of 2016. We would expect that the costs associated with the retiree settlement to rebate and frankly go to basically zero from that point forward after the settlements. So if things goes planned you'll see a reduction of that point.

[Michael Gallo:]

Great okay and then just final question for Joe I mean obviously for the energy market have been tough. At this point how much of the backlog would be in the Small Cube covered hoppers I mean I would suspected anything on the order front on that for a couple quarter. I want to if you could just pass out it all frame around kind of what is in the backlog at this point and obviously coals the minims so secure as we can give us similar number for Small Cubes? Thanks.

[Joseph McNeely:]

I call it Ted answer for that question.

[Theodore Baun:]

Hey, Michael. First I guess I will take your last question first the backlog consist of a light variety of car types, pretty much across all categories with the exception of tank cars. If we try to pullout what percentage of that is related to the energy market obviously we are talking about frac sand covered hoppers and while we don’t typically disclose what’s in our backlog I would say roughly maybe a quarter of it is sand cars.

[Joseph McNeely:]

Thank you.

[Operator:]

Our next question from the line of Matt Brooklier with Longbow Research, please go ahead.

[Matthew Brooklier:]

Hey thanks good morning. So my first question has to do with your you know the gross profit margin you guys posted at 12 there was a real nice step up from what you did in the second quarter. I am trying to get a sense for the components of the improvement there how much of the improvement was related just doing more volume how much of it was related to improved efficiencies at Shoals how much of that was function of mixed improvement?

[Joseph McNeely:]

Matt if actually it hard to pick up you know those individuals piece of because that a mix of all those there are definitely a product mix or definitely improved in Shoals. There is also improvement another facilities and now we got this long rebuild order going at one of the plans I mean that’s taking consistencies. So we had across the board. So it’s hard to pick out anyone of those and quantify each of those it actually blind of all of those including more deliveries in the quarter which that make it more productive.

[Matthew Brooklier:]

Okay. I guess some trying to get sense for if this is the new baseline of profitability for your manufacturing segment on the go forward basis. The removal the sale of your services business what is that mean in that realize if the smaller part of your total business but what is that imply for gross profits on a go forward basis.

[Charles Avery:]

So it’s Chip. In terms of the services segment I will start with that one, you have seen our parts business of the services segment is averaged about $12 million over the last three years or about $7 million year-to-date in revenues in the services segment for parts. So the transaction close at the transaction closed at the end of the third quarter. So what we will see is dropdown in that segment without the repair business. From a margin standpoint we have gotten into the split out of margins between the repair business and the services business, it is a good margin business but at this point time were not commenting on the dropdown.

[Joseph McNeely:]

Yes, I mean the parts business when you look at the normal 9 million the services business generates in revenue purchase a million of month of that and they typically a little bit higher margin than the services business that average but we give any specific margin.

[Matthew Brooklier:]

Okay that’s helpful. And then the midpoint of your delivery guidance for 4Q what’s implied it looks like deliveries are potentially down sequentially yet in the past I think three or four years your deliveries have been up on a sequential basis. So I am just trying to get a sense for if there’s anything specific that would cause deliveries to be down in fourth quarter versus third quarter. There is plan line change over if there is delivery timing issues if there has been deferral in terms of the backlog and maybe pushing some energy related cars out into 2016 I am just try to get a sense for what 4Q could look like from a delivery perspective and if there are any headwinds that which we thinking about. Thanks.

[Joseph McNeely:]

This is Joe. I think when we look at Q4 what we see is the sequential drop as I think as we mentioned last quarter that fourth quarter would be lower than third quarter that’s pretty typical with another two big holidays in there, and then shutting down with yearend inventories. In addition as we look at the forecaster for the quarter on deliveries and actual product line changeovers and a timing of some of our railcar deliveries right at year end, that kind of gets us to that range. So that’s really what’s driving those two things.

[Matthew Brooklier:]

Okay, it’s helpful. Thank you.

[Operator:]

Our next question from Justin Long with Stephens. Please go ahead.

[Justin Long:]

Thanks, and congrats on the quarter.

[Joseph McNeely:]

Thanks, Justin.

[Justin Long:]

So, the demand environment in coal seems to be getting worse, if you aren't expecting an improvement anytime soon. I wanted to ask or there any structural or strategic changes you can make to help mitigate this headwind. I know Shoals with a big step in terms of diversifying the business. But I am just curious if there are any other levers that you can pull?

[Joseph McNeely:]

In terms of the business, in terms of coal cars, there is not much we can do there to generate demand because it really comes down to what it’s demand and need to be shipped. So there is little we can do there. And then in meantime what we are looking at is making sure we get the productivity improvements across the business, keep the diversification going we do have a couple of new cars types that we - it will be introduced in new building next year. So if that continued - diversification as well as looking at still our part business or leasing business, then what opportunities can be out there internationally.

[Justin Long:]

Okay, great. And you mentioned the order environment flowing and [inquiry] environment flowing. I wanted to ask, if you could share what you have seen in terms of new car prices, has that become a more competitive and environment in the last few months or have new car prices held pretty firm?

[Theodore Baun:]

Hey, Justin, it’s Ted. It’s has gotten competitive obviously with inquires softening a bit, things have, they always have been competitive and I would say they are continue to be competitive going forward.

[Justin Long:]

Is there anything in terms of the order of magnitude, you would be willing to share, maybe the percent decline you have seen in car prices across the board?

[Theodore Baun:]

No, I don’t think we’re going to get into that level of detail. But it’s and it depends on what car type we are talking about, there are lot of factors that affect pricing. So it’s - I will just generalize it, as saying that it’s generally competitive across the spectrum.

[Justin Long:]

Okay, fair enough. And maybe from my last one, I think you have previously said that Shoal's is a higher fixed cost facility because of some of the technology and the equipment there. Is there any way you could give us a sense for how the cost structure at Shoal's breakdown between fixed and variable costs and how that split compares to your other facilities?

[Joseph McNeely:]

Yes, your general statement is accurate, but in terms of a spilt of fixed variable or breakeven adjustment, we just haven’t gone there with our facilities to breakdown.

[Justin Long:]

Okay, fair enough. I’ll leave it with that. Thanks for the time guys.

[Joseph McNeely:]

Thanks, Justin.

[Operator:]

And we have a question from Mike Baudendistel with Stifel. Please go ahead.

[Michael Baudendistel:]

Thank you. Most of my questions are related to the services business and that’s the new development here. I guess I just want to first understand the revenue impact you saw that the services business on an annual basis was about $35 million and you said the parts business that remains with $7 million year-to-date, so call it $10 million on an annual basis and so the revenue that you divested was about a $25 million on an annual basis. Is that right?

[Charles Avery:]

It’s somewhere between $20 million to $25 million dependent on a year, but that’s a range.

[Michael Baudendistel:]

Okay. And then can you talk about the fixed cost associated with the services business that you longer going to have or the impact on that, should have reduction in SG&A going forward with the smaller services business?

[Charles Avery:]

The SG&A portion, it was largely a standalone business, pretty self-contained and frankly pretty light footprint from an SG&A perspective. So I won’t expect a very significant impact on SG&A or fixed cost with that business going away.

[Joseph McNeely:]

Likewise, Mike when we bought, if you go back and look - big jump of an SG&A other than the SG&A that came with the business.

[Michael Baudendistel:]

Okay. And then maybe just at a high level, sort of why divest that portion of the services business now. I mean as always under the impression, that you sort of like that business, because it was much more - much less cyclical on the manufacturing portion of the business. I mean was it just an attractive price or view some of the end markets there, as there is secular decliners and you envision building out the services businesses again in the future?

[Joseph McNeely:]

If you look at the business, I think you said we like the business, we like the stability, but when you look at the overall market in terms of railcar repair market and I’ve now the good time there today and can get the value that we are comfortable so we can focus of better growth opportunities within our manufacturing parts and other parts of the business.

[Michael Baudendistel:]

Okay. And then the last one from me is just follow-on on the previous question about the gross margins in the quarter which are better than they have been. Maybe just ask in another way was there anything sort of one-time in nature propping that up in the third quarter that you are not going to have going forward?

[Charles Avery:]

I mean I’m going to go with the obligatory makes a difference of the railcar types are delivering in a given quarter and we don’t get into that, but there is nothing unusual no callouts as Joe said, we saw very good efficiencies throughout the quarter and that really did help the strength in some of - specifically some of the longer run jobs in the quarter where we’re positive. So nothing specific to callout and again the volume was up as well which helps.

[Joseph McNeely:]

I think there is question asked earlier just about the 12% is and I want to make sure and put a little color on whether nothing in there, as we look forward in the 2016 we are going to have the headwind of lower volumes and that will always drag down from operating efficiencies, but it’s hard to know is that where you are going to end up because now we continue to improve our productivity, as Chip said mix there is some pricing. So there is lot in the mix as it relates to what next year looks like at a margin level.

[Michael Baudendistel:]

It sounds good. That’s all I have. Thank you.

[Joseph McNeely:]

You bet.

[Operator:]

[Operator Instructions] We have a follow-up question from Michael Gallo with CL King. Please go ahead.

[Michael Gallo:]

Hi, just two follow-up. First, given the decline in the shipments you expect in the 2016 I was wondering what you think you can take out the working capital?

[Charles Avery:]

No dollar amounts, but it's a natural trend I mean we buy inventory to support jobs in the backlog that are currently queued up so the expectation from an inventory standpoint, Michael it will come down. We just haven’t been out there in terms of guidance of cash flow off the balance sheet, but it’s definitely a trend that you should expect to see in 2014.

[Michael Gallo:]

Great. And then question just in terms of the shipments for next year, is it completely in the backlog at this point, in another words this orders at some point pickup over the next three to six months, because it would be upside to that number or it’s pretty much all the swaps that it shows are pretty much full at this point for 2016 with backlog?

[Theodore Baun:]

Hey Michael, it’s Ted. Most of the backlog is set for 2016, there are some opportunistic slots here and there. And then to your other question if we see a pickup in one or - for more particular markets we have the ability to ramp up and deliver these as well. So we remained fairly flexible heading into next year.

[Michael Gallo:]

Great, thank you.

[Operator:]

At this time there are no other questions in queue.

[Charles Avery:]

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

[Operator:]

Ladies and gentlemen, you may disconnect. Thank you.