FreightCar America, Inc.
Q4 2015 Earnings Call Transcript

Published: 23 Feb 2016

[Operator:]

Welcome to FreightCar America’s Fourth Quarter 2015 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

[Mike Cieslak:]

Thank you and welcome to FreightCar America’s fourth 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 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 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 fourth quarter and full year of 2015 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, Mike and good morning everyone. I am pleased to report another strong quarter of results. Fourth quarter net income of $11.7 million or $0.94 per diluted share was up substantially versus last year largely driven by stronger manufacturing margins. These results contributed to full year 2015 diluted earnings per share of $2.58 or $2.32 when excluding the gain on sale of the repair and maintenance business, which we sold in the third quarter. This marks the highest annual EPS for the company since 2006. The success of our railcar diversification strategy and continued operational progress at our Shoals facility where we completed the build-out of our manufacturing capacity were major factors in the achievement of strong earnings in 2015. Notably, approximately 62% of our 2015 deliveries were non-coal cars, up from 43% and 32% of deliveries in 2014 and 2013 respectively. This trend will continue in 2016 as our backlog is almost entirely comprised of non-coal cars. On the topic of backlog, we ended the year with 9,800 railcars valued at more than $920 million, which provides us with a solid base of business as we entered a lower, but more typical demand environment. Looking forward, we now anticipate full year 2016 deliveries to be between 6,000 and 7,000 railcars with the balance of the backlog extending into 2017 and beyond as a result of various customer-driven factors that Ted will provide some details on in a moment. Separately, given the coal car market’s ongoing challenges coupled with the completion of our coal car rebuilt program, we made the decision to significantly curtail operations at our Danville, Illinois facility. During this period, however, the sales team continues to actively market orders that may be suitable for Danville. Moving on to an update of our long running retiring medical benefits litigation, the Court gave final approval of the settlement agreement with United Steelworkers union and other plaintiffs on January 19. On February 17, certain plaintiff class members requested a 30-day extension to file an appeal, which the Court denied yesterday. Further settlement agreement, we expect to make the cash settlement payment of approximately $33 million in accordance with the terms of the settlement agreement. This will result in a one-time cash gain of approximately $12 million, which we expect to be recorded in the first quarter of this year. This settlement removes a significant contingency from our books and further allows us to remain focused on the execution of our strategic priorities. Finally, in late January, we appointed Matt Kohnke as Vice President, Finance, Chief Financial Officer and Treasurer of our company. He has 25 years of finance and accounting experience and joins us from Dorman Products, Inc., a publicly traded supplier of replacement parts and fasteners to the automotive aftermarket. He has been with Dorman since 2002 and he has been its CFO since 2011. We feel that his background as the public company CFO in the industrial space, coupled with his 10 years of public accounting finance at Arthur Andersen will serve us well as we continue to reshape our company and execute against our strategic objectives. On behalf of the company, I would like to thank Chip Avery, our former CFO, for all his hard work and contribution and wish him well on his future endeavors. Ted will now give you an update on our markets and commercial activities.

[Ted Baun:]

Thank you, Joe. Overall, railcar demand has softened from its peak over the past couple of quarters due to the continued weakness in oil prices and commodities in general as well as a reduction in manufacturing. These factors have collectively impacted railcar loadings. Commodity loadings on U.S. railroads in the fourth quarter of 2015 were down 11.3% when compared to the fourth quarter of 2014. Coal, grain, metallic ores and crushed stones, sand and gravel loadings all weakened in the fourth quarter of 2015 from fourth quarter 2014 levels. Intermodal container loadings, however, grew slightly by 0.5% over the same period. Deliveries for the fourth quarter of 2015 totaled 2,464 railcars, which included 1,692 new, 672 rebuilt and 100 leased railcars. This compares the 2,360 railcars delivered in the same quarter of 2014, which included 1,260 new and 1,100 rebuilt railcars. There were 2,846 railcars delivered in the third quarter of 2015, of which 2,076 were new and 770 were rebuilt. Our order backlog at December 31, 2015 was 9,840 railcars with the sales value of approximately $926 million, down from a backlog of 14,791 railcars at December 31, 2014 and 12,237 railcars at September 30, 2015. The backlog reflects the receipt of net orders of 67 railcars in the fourth quarter of 2015. Order levels for the fourth quarter of 2015 compared to 3,637 units ordered in the fourth quarter of 2014 and 1,008 units ordered in the third quarter of 2015. Order activity in the fourth quarter of 2015 reflects the current demand environment and included the substitution of railcar types, deferrals in the production schedule and cancellations. These cancellations have all been related to substitutions into other car types where we received other net economic benefits. It is important to note that we worked with our customers to find mutually beneficial solutions and as a result to-date, there have been no adverse changes to our backlog other than the timing of their production. Given current and expected industry conditions, we continue to have discussions with some of our customers regarding certain orders in the backlog. As these discussions progress, we will continue to strive to reach mutually beneficial solutions with our customers. Industry wide, 9,169 units were ordered and 20,296 units were delivered during the fourth quarter of 2015. Industry wide backlog consisted of 1,000 – 111,019 units at the end of December 2015, down from 142,837 units at the end of 2014. Please note that these industry figures do not include orders, deliveries or backlog totals for rebuilt railcars. Now, I will turn the call over to Joe.

[Joe McNeely:]

Thank you, Ted. Since Matt will not join us until next week, I will cover the review of our financial results. At this point, I assume all of you have read our earnings release and saw the strong results we achieved in the fourth quarter and full year 2015. I won’t repeat what was included in release, but I would like to highlight a few items. With the third quarter sale of our railcar repair and maintenance business, we changed our reporting segments. The Manufacturing segment continues to include our railcar manufacturing and leasing operations. FreightCar America’s other operations are included in Corporate and Other segment, which includes our parts business, administrative activities and all other non-operating activities. For the fourth quarter of 2015, our manufacturing revenues were $200.3 million compared to $204.5 million in the fourth quarter 2014 and $233.3 million in the third quarter of last year. Parts sales revenue, which are now included in Corporate and Other segment were $3 million for the fourth quarter of 2015, compared to $2.5 million in the fourth quarter of 2014 and $2 million for the quarter of last year. During the fourth quarter of 2015, the company had no revenues related to the railcar repair and maintenance business compared to $5.5 million in the fourth quarter of 2014 and $5.8 million in the third quarter of last year. Notwithstanding the slightly lower revenue in the fourth quarter as compared to last year, earnings grew considerably on a year-over-year basis primarily as a result of significantly higher manufacturing margin, which contributed consolidated gross margin of 13.4%. This margin reflects strong pricing on certain orders in addition to amortization of state and local incentives received in 2015. Selling, general and administrative expenses for the fourth quarter of 2015 were $11.2 million compared to $9 million in the fourth quarter of 2014 and $10.7 million in the third quarter of last year. The increase on a year-over-year basis was attributable to higher legal costs associated with the retiree medical benefits and ongoing patent litigation as well as to higher incentive compensation expense related to higher 2015 earnings. Our effective tax rate was 27.3% for the fourth quarter of 2015 and was favorably impacted by an R&D tax credit and domestic manufacturing tax benefit. The tax rate for the full year of 2015 was 31.8%. For the full year of 2016, we currently anticipate an effective tax rate of approximately 34%. Turning to our balance sheet, our financial position remains strong with no outstanding debt and $170 million in cash and short-term investments at the end of the year versus $168 million at the end of 2014 which included $43 million customer deposit. The 2015 ending cash and short-term investment balance reflects an increase in working capital to support production requirements, partially offset by the receipt of cash proceeds of $17.6 million related to the sale of our railcar repair and maintenance business as well as $15.7 million of incentives related to our Shoals facility. We are pleased with our strong financial position and with the flexibility this provides. Capital spending for the fourth quarter of last year was $500,000, while our full year 2015 capital expenditures were $16.7 million. We currently expect capital expenditures to be approximately $12 million for 2016. In conclusion, 2015 was a successful year for the company as we achieved strong financial results while accomplishing a number of key objectives. We refocused the company on its manufacturing, parts and leasing businesses through the strategic sale of our railcar repair and maintenance business. We introduced a number of new car types to the market. We completed the build-out of our Shoals production capabilities and settled our retiree medical litigation. As we entered 2016, it’s important to be mindful of our anticipated lower delivery volumes and the associated reduction on operating leverage and margin as well as the current economic and competitive environment we are in. With the diversified backlog of railcars and another year of experience at Shoals, we feel we can continue to be competitive on our new car types. Further, with a solid balance sheet, we have a strong foundation to continue strategically investing in our future while working to create long-term value for our shareholders and our customers and our employees. This ends our prepared comments and we are now ready to address your questions.

[Operator:]

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

[Michael Gallo:]

Hi, good morning and congratulations on good performance in I know a challenging environment.

[Joe McNeely:]

Thanks Michael.

[Michael Gallo:]

Just a couple of questions, Joe how much would you expect OpEx to be down in ‘16 versus ‘15 between the reduction of legal expense as well as the idling of Danville?

[Joe McNeely:]

Well, the legal expenses, hard to predict on timing. We still have ongoing litigation. We do expect overall SG&A to be down in 2016 as compared to ‘15 given that as well as lower incentive comp giving ‘15 with such a strong year on earnings.

[Michael Gallo:]

I guess, just can you give us a range at all in terms of I mean how much you think you will save from idling of Danville as well as how much incentive comp was up in ‘15 versus ‘14?

[Joe McNeely:]

Mike as you know, we don’t give financial guidance at that level.

[Michael Gallo:]

Okay. Just some thoughts Joe, on working capital, I know you still had receivables, were still pretty high at the end of the year, certainly by historical standards, I would assume receivables should come down dramatically, what should we expect in terms of cash benefit from working capital overall in 2016 based on what you expect in orders?

[Joe McNeely:]

Yes. Good question. I think as we talked before in a period when production demand is increasing, working capital tends to go up, as you recall, we buy inventory per order. And then receivables are just a function of timing of when cars got shipped versus when they are paid. And I think as of right now, most of it is sitting on the balance sheet receivables that’s already been collected. But the bigger question as we got through the year, orders – typically delivers go down year-over-year, typically working capital amounts go down and current working capital gets turned into cash.

[Michael Gallo:]

Alright. So we would expect working capital certainly is going to be a source of cash from where it was at year end and potentially a meaningful source of cash, is that fair?

[Joe McNeely:]

It’s fair, but always in past, we have gotten this question or caution. It really comes down than at any quarter end, at year end. We are at a timing of buying inventory and paying for that for the next quarter [indiscernible] versus a year ago.

[Michael Gallo:]

Can you talk about just the – and this is final question, can you talk about the order environment at all, I mean do you see some orders out there for the large cube covered hoppers or intermodal or just walk us through what you see out there, obviously it’s competitive for what is out there, but are you still seeing orders broadly or should we expect – we won’t see much on the order front on the first half of ‘16? Thanks.

[Ted Baun:]

Yes. Hey, Michael, it’s Ted. I think in general, we see the inquiry levels are down and the commensurate order levels that follow are also down, but there is still activity. It’s not where it was for the past couple of years, but we still see activity in certain sectors. The ones you mentioned as well as construction materials such as aggregate and rock and that sort of things. So we are still keeping busy on the sales front trying to get out there and respond to customers’ needs.

[Michael Gallo:]

Thank you.

[Operator:]

Thank you. We will go next to the line of Justin Long with Stephens.

[Brian Colley:]

Hi good morning guys. This is actually Brian Colley taking the call Justin.

[Joe McNeely:]

Good morning Brian.

[Brian Colley:]

So, I know you guys haven’t given any margin guidance for 2016 and probably don’t intend to do so, but if I look at the implied ASP in the backlog today, about 94,000 per car, it would appear that mix should be a tailwind this year. Am I thinking about that correctly or are there cars allotted for 2017 and beyond that are skewing that number?

[Joe McNeely:]

You always get into a little bit of mix on that on ASP. I think your number have been 94,000 is about right, what we are looking at. Again, as you compare that to prior years, you have to be a little careful because of how the rebuilt, but no rebuilt in here, that’s a pretty good number.

[Brian Colley:]

Okay. And would you expect that to be a tailwind in ‘16, the margins?

[Joe McNeely:]

In terms of margin percentage, I think I was trying to indicate in my comments, as you look with just lower deliveries, we are going to lose a little bit of operating leverage at some of our facilities. We do expect gross margin to decrease, but again we won’t give specific guidance on that.

[Brian Colley:]

That’s helpful. And just looking at your new delivery guidance for this year, could you speak to what drove the reduction versus the guidance you gave last quarter?

[Ted Baun:]

Yes. Brian, it’s Ted again. I think it just relates in general to what we have been talking about, softer environment. We have had some substitutions and deferrals and that sort of things, so just a general reflection of the overall economy and the railroad traffic that has seen a tremendous decrease over the last quarter or even last year.

[Brian Colley:]

That’s helpful. And just one last quick housekeeping question, could you provide what the number of coal cars in storage was at the end of this quarter and also if you have it handy, what that number was at the end of 3Q?

[Joe McNeely:]

Yes. It’s not an exact science, but we have the number pegged roughly around 30,000 coal cars in storage and that has been fairly consistent over the past several quarters. So it hasn’t really moved.

[Brian Colley:]

Thanks for the time.

[Joe McNeely:]

Thanks Brian.

[Operator:]

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

[Mike Baudendistel:]

Thank you. Good morning. Just wanted to get a clarification, I want to make sure I heard the comments correctly on the cancellations. I mean, it sounded like there were some – nothing was cancelled outright that was taken out of the backlog, but there were some units that were essentially pushed further into the future. Did I get that right?

[Ted Baun:]

Yes. Hey, it’s Ted. So, the customers – certain customers not a big number, but they look to get out of some firm order position. So, we either substitute into different car types or we defer outward. In some cases, we did see where the substitution wasn’t one for one and therefore, there were other economic benefits if you will that we were able to gain from the transaction still creating a win-win solution for both us and the customer who was looking to get out of their position.

[Mike Baudendistel:]

Okay. And was that – go ahead.

[Ted Baun:]

It’s mostly substitutions and some deferrals and a small number of cancellations.

[Mike Baudendistel:]

Okay. And was that the main reason for the 1,000 unit reduction in guidance?

[Ted Baun:]

No, we did not have cancellations anywhere near that number of 1,000 units. The reason for the reduction in guidance is just the overall softening market, inquiries were down, order intake is down and that’s reflective of our updated delivery numbers for this year.

[Mike Baudendistel:]

Sure. Okay, that makes sense. And then I guess with close to 10,000 units in backlog would think that close to – I mean, close to 6,000 to 7,000 units are already in your bookies that are in that backlog. I mean, is that a fair assumption that are scheduled to be delivered in 2016?

[Ted Baun:]

Yes, we still have pockets of availability, but that’s a fair statement.

[Mike Baudendistel:]

Okay. And then any comments on whether your 2016 deliveries be weighted towards the first half or the second half, I know sometimes you have some quarters where you deliver more cars than others?

[Ted Baun:]

Yes, we see those fairly level across all four quarters.

[Mike Baudendistel:]

Okay, great. And then just wanted to ask you, I mean, the manufacturing gross margins were strong in the last quarter, the fourth quarter, I know you said there is going to be some negative operating leverage going forward. I just wanted to check to see if there were any one-time items or events in the fourth quarter that caused that stronger than normal manufacturing gross margin?

[Joe McNeely:]

I think this is Joe, getting back to my comment again a lot of big portion of that was driven by several orders that we had really good pricing on that to be delivered in the quarter.

[Mike Baudendistel:]

Okay, great. That’s helpful. Thank you.

[Operator:]

Thank you. And at this time, there are no further questions in queue. I will turn it back to our management panel.

[Joe McNeely:]

This concludes today’s conference call. Thank you for joining us today. A replay of this call will be available beginning at 1 p.m. Eastern Time today at 1800-475-6701, passcode 386239. See you next quarter.

[Operator:]

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.