FreightCar America, Inc.
Q2 2013 Earnings Call Transcript

Published: 5 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America's Second Quarter 2013 Earning 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 that this conference is being recorded. An audio replay of the conference call will be available from 1 PM Eastern Time today until midnight on September 5, 2013. To access the replay, please dial 800-475-6701. The replay access code is 298841. An audio replay of the call will be available on the company's website within two days following this earnings call. I would now like to turn the call over to Joe McNeely, President and Chief Operating Officer of FreightCar America.

[Joseph E. McNeely:]

Thank you and welcome to FreightCar America's second quarter 2013 earnings conference call and webcast. Joining me today are Ed Whalen, CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Chip Avery, Chief Financial Officer. Terry Heidkamp, Senior Vice President of Operations who is usually on this call is on vacation and will not be joining us today. 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 2012 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. Our 2012 Form 10-K and earnings release for the second quarter of 2013 are posted on the company's website at www.freightcaramerica.com. I'd now turn the call over to Ed Whalen for some introductory comments.

[Edward J. Whalen:]

Thank you, Joe, and good morning. This past quarter included some significant milestones for FreightCar. I'm pleased to report that the previously announced leadership transition is progressing as planned. Joe is now fully engaged with President and Chief Operating Officer and we recently announced that Chip Avery has joined us as our new Chief Financial Officer. We also began production at our Shoals facility and received our first order for our recently introduced five-unit intermodal railcar. Our freight car demand remains weak as we expected. We did receive several large orders in July including orders for rebuild Eastern coal cars. I firmly believe that the diversification of our product offerings as exemplified by the startup of the Shoals facility, prudent management of our cost, along with our capable leadership team will position FreightCar for success over the long term. I will now turn the call over to Joe and Ted to discuss last quarter's results in more detail.

[Joseph E. McNeely:]

Thank you, Ed. Before I begin, I would like to take a moment to introduce Chip Avery who joined us as our Chief Financial Officer last week. As you may have seen in our press release, Chip joins us from Federal Signal where he was Corporate Controller and Chief Information Officer. Chip's finance, business and IT experience will be a valuable addition to our leadership team. Chip is currently very busy transitioning into the CFO role and we are looking forward to meeting and talking with many of you in the coming weeks and months. Turning back to the business, we remain focused executing our long-term strategic priorities and to-date have made important progress on all of these. We are pleased with the startup at our Shoals manufacturing facility, production of railcars has begun and the first order should be delivered later this quarter. Once fully operational, this facility will provide us with the flexibility to produce diverse product offerings including production of an intermodal railcar later this year. Despite the continued drop in coal car loadings, the Eastern coal car replacement cycle continues as evidenced by the large rebuild orders we received post quarter end. Ted will comment on the intermodal and rebuild orders shortly. On the Services side of the business, we've continued to see positive results from the improvement efforts we began last year. Revenue and operating income increased over the first quarter levels which were already at the highest level since we acquired the service shops in late 2010. We continue to focus on improving and leveraging these important assets. Lastly, we continue to manage cost closely with SG&A expenses below last year's level when the Shoals startup costs are removed. As Ed indicated, the freight car market remains weak. It's across the halfway point of the year orders and deliveries from our tank cars were below historical averages. Based on the current backlog and the outlook, we continue to estimate 2013 deliveries in the 4,000 to 5,000 car range. Despite a slow first half, we should see some volume improvements in the second half of the year based on reductions and changeovers at our existing facilities and the startup at our Shoals plant. I will now turn the call over to Ted who will provide an update on our markets and commercial activities.

[Theodore W. Baun:]

Thank you, Joe. To recap order activity for the period, 693 new railcars of various types were ordered in the second quarter of 2013. This compares to 961 units ordered in the second quarter of 2012 and 274 units ordered in the first quarter of 2013. We continue to see a fair number of inquiries for non-coal cars, despite the sluggish economy. During the quarter we received our first order for five-unit intermodal railcars which will be built in our Shoals facility later this year. As you may recall, this is an important part of our product diversification strategy that we have been focused on for the last three years. Second quarter 2013 deliveries of 710 railcars included 160 new, 200 leased and 350 rebuild railcars. This compares to 2,786 railcars delivered in the second quarter of 2012 including 1,815 new, 610 leased and 361 used cars. There were 1,073 railcars delivered in the first quarter of 2013, of which 448 were new and 625 were rebuilds. Our backlog of unfulfilled orders at June 30, 2013 totaled 2,065 railcars compared to 5,109 railcars at June 30, 2012 and 2,082 railcars at March 31, 2013. After the quarter ended, we received orders for over 5,500 railcars of various types which includes about 4,000 rebuilt coal cars for the Eastern market. Like our current rebuilders, work on these cars will be rather extensive with revenue per car about two-thirds of a similar new car. Production of the rebuilds will commence later this year and carryon throughout 2014. Industry-wide 14,850 units were ordered and 12,511 units were delivered in the second quarter of 2013. Both orders and deliveries were down from the same period of the prior year as well as the first quarter of this year. Industry-wide backlog increased to 73,706 units at the end of June, up from both March of 2013 and the year ago. Orders, deliveries and backlogs were once again heavily driven by continued strength in the tank car market. Non-tank car demand remained weak by historical standards but was higher as compared to the first quarter. 7,900 units were ordered in the second quarter, which were 3,300 units higher than the first quarter of this year. Non-tank car deliveries, however, decreased 300 units to 5,600 units or about a 25,000 annual pace, again well below historical averages. The overall number of railcars in storage was roughly 304,000 as of June 30, 2013, a decrease of 7,000 railcars when compared to March 31, 2013. We estimate that the number of coal cars in storage decreased from about 28,000 at the end of March to approximately 20,000 at the end of June due to seasonal demand for coal cars. The U.S. commodity loadings in the second quarter of 2013 were flat when compared to the second quarter of 2012. While railcar loadings of certain commodities such as chemicals, motor vehicles and non-metallic minerals exhibited growth, coal loadings continued to be challenged decreasing 1% versus the second quarter of 2012. Intermodal container loadings remained strong for the quarter, however, increasing by 2.7% versus the same quarter in 2012. The coal market continues to show mixed results, demand for thermal coal has increased as natural gas prices are about 24% above year-ago levels. This has resulted in a decrease in utilities, coal stockpiles to 178 million tons, 12% below the year-ago stockpile levels. However, U.S. coal production is down 4% versus 2012 levels and U.S. coal exports through May were down 2.5% to 52 million tons, but are still at historically strong levels. Year-to-date total electricity generation in areas where coal competes was flat when compared to 2012. Now I would like to turn the call back to Joe to address our second quarter financial results.

[Joseph E. McNeely:]

Thank you, Ted. Given that Chip started only three days ago, I'll cover the financial highlights. For the second quarter of 2013, consolidated revenues were 47 million compared to 181 million in the second quarter 2012 and 88 million in the first quarter of this year. The year-over-year sequential decrease in revenues reflects a lower number of cars delivered. Net income for the second quarter of 2013 was a loss of 3.4 million or $0.29 per diluted share reflective of the lower deliveries. Net income for the second quarter of 2012 was 5.6 million or $0.46 per diluted share and was a loss of 2.6 million or $0.22 per diluted share in the first quarter of this year. Manufacturing segment revenues for the second quarter of 2013 were 37 million compared to 172 million in the second quarter of 2012 and 78 million in the first quarter of this year. These decreases reflect lower railcar deliveries due to production line changeovers, the idling of our Danville facility and the startup of the Shoals facility. Operating income for the Manufacturing segment for the second quarter of 2013 was a loss of 1 million which was 15 million lower than the second quarter last year and 3 million lower than the first quarter of this year. The operating loss for the quarter reflects a decrease in deliveries and cost of 1.9 million related to the startup of the Shoals and Danville carrying costs. Our Services segment had another good quarter with revenues of 10.1 million compared to revenues of 9.4 million in the second quarter of 2012 and 9.9 million in the first quarter of this year. Operating income for the Services segment was 1.6 million in the second quarter of 2013 compared to 700,000 in the same period prior year and 1.3 million in the first quarter of this year. The increase in revenue and operating income reflects an increase in volumes, modest pricing improvement versus the prior year and prudent management of operating costs. Corporate costs for the second quarter of 2013 was 6.2 million, a decrease of 400,000 for the second quarter of 2012 and flat to the first quarter of this year after excluding the first quarter's litigation settlement benefit. Corporate costs for the second quarter of 2013 included 800,000 related to the startup of the Shoals facility which was offset by lower compensation and consulting-related costs. The effective tax rate for the quarter was 39.4% which compares to 40.3% for the same period of last year. At June 30, 2013, we had approximately 850 leased railcars with the book value of $60 million. Our financial position remains strong with no outstanding debt and 101 million of cash and short-term investments on hand at quarter end. The decrease in cash and investments from 155 million at the end of 2012 was driven by the investment in Shoals, changes in working capital and additions to the lease fleet. Working capital includes 9 million of railcars to be delivered and 26 million of materials purchased in advance for orders to be produced later this year. As I mentioned during the first quarter's earnings call, we had begun working on replacing our revolving credit facility. We have completed this effort in July and entered into a new three-year $50 million revolving credit facility and ended our prior revolving credit facility. The new credit facility has favorable terms and will give us the liquidity and flexibility needed as we grow the business. The new credit facility is undrawn and we do not have any current plans to draw on the facility. This ends our prepared comments and we are now ready to address your questions.

[Operator:]

(Operator Instructions). Your first question comes from the line of Michael Gallo from CL King. Please go ahead.

[Michael Gallo:]

Hi. Good morning.

[Edward J. Whalen:]

Morning, Mike.

[Michael Gallo:]

Congratulations on the improved orders. A question for you when I look at the backlog at quarter end and the 5,500 or so orders subsequent to that, how many of those do you expect to ship in 2013 versus '14?

[Joseph E. McNeely:]

The majority of the orders that we got in the post quarter end were 14 deliveries.

[Michael Gallo:]

Okay. And then could you comment at all, I know you called out intermodal as an area where you picked up some orders. What are you seeing across some of the other non-coal types and whether there's some other orders in there for other types at the Shoals facility as well?

[Theodore W. Baun:]

Yeah. Hi, Michael. There are a number of other orders, flat cars, open top gons, open top hoppers and we may or may not put them in Shoals. Those are decisions we will make.

[Michael Gallo:]

Great, thank you.

[Theodore W. Baun:]

Sure.

[Operator:]

Your next question comes from the line of Matt Brooklier from Longbow Research. Please go ahead.

[Matt Brooklier:]

Thanks. Good morning.

[Edward J. Whalen:]

Hi, Matt.

[Matt Brooklier:]

So good to hear Shoals is up and running at this point. Can you provide a little bit of color in terms of anticipated production rates in the second half of this year?

[Joseph E. McNeely:]

As we talk – Shoals is in a startup mode. I think when we looked at – as I commented earlier, total deliveries will be in the 4,000 to 5,000 car range as a total company, but we don't give plans to fit the guidance.

[Matt Brooklier:]

Okay. And then as we're looking out with Shoals, I think you mentioned there was roughly $800,000 of startup costs. Are there any incremental startup costs or additional costs to be thinking about with Shoals as we move into the second half of this year?

[Joseph E. McNeely:]

Yeah, there will still be some continuing – I think as we said last quarter, we expect about total startup cost to be in the 2 million range; we still expect that.

[Matt Brooklier:]

Okay, and what have we done today?

[Joseph E. McNeely:]

The 800,000 that we mentioned earlier and about 500,000 plus that shows up in the manufacturing costs.

[Matt Brooklier:]

Okay, very good. Thank you for the time.

[Joseph E. McNeely:]

Thank you, Matt.

[Operator:]

Your next question comes from the line of Justin Long from Stephens. Please go ahead.

[Justin Long:]

Thanks. Good morning, guys.

[Edward J. Whalen:]

Good morning, Justin.

[Justin Long:]

A couple of questions on the Shoals facility, so production ramping in the third quarter, you've got some level of orders for that facility in the backlog. Would you say you expect Shoals to be profitable in the back half of this year or is that more likely to be a 2014 event just given some of the startup costs you've discussed?

[Edward J. Whalen:]

I think as we just said before, this is really a startup year for us as we're happy to have orders and including orders in there. So it's really going to be a startup. Profitability really depends on where total volumes are at and as we talked before, we won't be up to – have normal production rates at Shoals until next year.

[Justin Long:]

Okay, that makes sense. And maybe the follow-up on that, would you be building orders at Shoals or building cars that you've just received orders for year-to-date or do you expect to be running at a production rate that's higher than that?

[Edward J. Whalen:]

Well, again, I think production rates really depend on where we're at in total orders and what is assigned to each plant based upon customer delivery preference, capabilities of the plants. So it's really hard to comment where we're going to be at in terms of delivery pace until we know where 14 orders are going to come out.

[Justin Long:]

Okay. And I guess I was just wondering if you would build cars on spec in that facility, or if you're just going to be building for the orders you've received?

[Edward J. Whalen:]

We generally build for orders received. If we build anything on spec, it's usually because we think there is orders that are following on right behind it.

[Justin Long:]

Got you. And could you tell me how many cars were in the leased fleet at the end of the quarter? And going forward, what's the right way to think about the level of railcar sales versus lease builds, and just how the overall size of that fleet should progress?

[Joseph E. McNeely:]

There are about 850 cars at the end of the quarter and that's about 200 up from where we were at the end of last quarter. And I think as we've talked in the past, our leased fleet will fluctuate up and down as that is really a vehicle for us to win the manufacturing sale. The idea is we want to flip those. So we expect the number of railcars to bounce around somewhere to 1,000 cars plus or minus depending where we're at in the cycle.

[Justin Long:]

That's helpful, thanks. I think my last question; there's been some noise recently regarding litigation with one of the unions and your pension liability. Could you just give us an overall update on that process? Any potential timing on when we could see a resolution, and maybe looking at a best-case scenario and a worst-case scenario, financial impact on your operations?

[Joseph E. McNeely:]

Yeah. Justin, again, we're – given this is litigation, we're not going to comment on any specifics of the litigation and timing. That will all proceed to the courts as the courts dictate. In terms of the exposure, the financials include a liability for pension and post employment benefits and a big portion of that is related to this situation. That liability reflects our – an estimate of what the costs are. Assuming the previous settlement agreement continues, as we are in litigation, that amount may increase or decrease as we go forward.

[Justin Long:]

That's fair. I appreciate the time today. Thanks, guys.

[Joseph E. McNeely:]

Thanks, Justin.

[Operator:]

Your next question comes from the line of Sal Vitale from Sterne, Agee. Please go ahead.

[Sal Vitale:]

Good morning, gentlemen.

[Edward J. Whalen:]

Morning, Sal.

[Sal Vitale:]

Just a quick housekeeping question, just want to make sure I understand the startup costs. I think you mentioned about $1.9 million of costs related to Shoals. Now was that for the current quarter?

[Joseph E. McNeely:]

The 1.9 was Shoals startup related and Danville carrying costs that show up in the manufacturing costs.

[Sal Vitale:]

Okay. And so of the 1.9, I guess the Shoals pieces, you said what, 800,000?

[Joseph E. McNeely:]

The 800,000 shows up in the general and administrative line.

[Sal Vitale:]

Right. And then 500,000 in the manufacturing?

[Joseph E. McNeely:]

About, yeah.

[Sal Vitale:]

So that's 1.3 of the 1.9. Okay, so I think I got a handle on that. And then just on the coal car spare capacity, you said it was 20,000 at the end of June, down about 8,000 sequentially. Any read – I'm not sure if the statistic is out yet, but maybe even anecdotally, any read on month of July if that's come down further?

[Edward J. Whalen:]

We do not have any update for the month of July, Sal.

[Sal Vitale:]

Okay. And then just turning back to the rebuilt cars, you mentioned earlier that we should expect the revenue per car to be about two-thirds of the ASP for similar new cars. I think you've said in the past that we should be modeling that the gross margin percentage should be about the same as for a new car. Is that still current?

[Joseph E. McNeely:]

Yeah, that's what we said. We expect our margin percentage on rebuilds to be in line with new cars.

[Sal Vitale:]

Okay. And then what are you – well, actually post quarter, since the end of the quarter, did you receive any new coal car orders?

[Edward J. Whalen:]

Yes, Sal. Since the third quarter of the 5,500 that we announced, the majority of those were rebuilt coal cars.

[Sal Vitale:]

Correct, but – so were there some new coal car orders received at all?

[Edward J. Whalen:]

No.

[Sal Vitale:]

Okay. What would you say is – just based on the latest, I'm not sure if you want to provide the pricing on new coal cars. I don't think you're in the habit of doing that. But what is – how should we think about the pricing on that? I mean I assume that that's weakened, say sequentially from 1Q. Any commentary on that?

[Joseph E. McNeely:]

Sal, we don't have a specific plan on pricing and if you go back at look at history of our ASPs that will give some guidance. In terms of where pricing's at, our market has been and continues to remain pretty competitive on the freight car side.

[Sal Vitale:]

Okay. Thank you very much for your time.

[Edward J. Whalen:]

Thanks, Sal.

[Operator:]

Your next question comes from the line of Steve Barger from KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi. This is actually [Tej] just filling in for Steve. Good morning. So a lot of my questions have already been taken, but just few others here. Margins in the Services business came in quite well. Just kind of wondering was there any one-time things in there or is that sustainably above 15 now?

[Joseph E. McNeely:]

There was nothing one-time issue in the quarter.

[Unidentified Analyst:]

Okay. And then just with regards to the orders, if I could ask one more on that, so good orders subsequent to the quarter end. Just kind of wondering what was the interaction with customer? And just if you could provide some more color there. And then just a view going forward, is this the beginning of that Eastern coal car fleet just being unlocked here?

[Joseph E. McNeely:]

Let me – just to start out, I think we have to keep in mind that orders on our railcars are typically lumpy and this is another quarter where we see that. And on the Eastern coal car that replacement cycle has begun a couple of years ago and continues although the orders come in, in kind of big chunks as we said in the past. Aside from that, maybe Ted can just comment a couple more on what customer reactions are?

[Theodore W. Baun:]

Sure. I think it remains the same for the Eastern coal car business. And beyond that I think the customer interactions are – there seems to be a trend in increased inquiry for non-coal car types.

[Unidentified Analyst:]

Great. And then just with regards to your capacity, any reason why you can't get to 1,500 per quarter again?

[Joseph E. McNeely:]

Well that would really depend on where the freight car market's at. And I think as we said through the first half of the year, orders and deliveries on the freight car side have been well off on historical norms or averages. And I think it will really depend on where the freight car market's at going forward.

[Unidentified Analyst:]

All right, well great. Thanks, guys. That's all I had.

[Joseph E. McNeely:]

Okay.

[Operator:]

Your next question comes from the line of Barry Haimes from Sage Asset Management. Please go ahead.

[Barry Haimes:]

Hi.

[Edward J. Whalen:]

Good morning, Barry.

[Barry Haimes:]

Thanks for doing the call. A quick question; of the 1,500 orders that came after the quarter that weren't the rebuilt cars, could you characterize what kind of car types those were for, and whether any of those were for your lease fleet? Thanks.

[Edward J. Whalen:]

Yeah, we generally don't comment on specifics. I think suffice it to say it's along the lines of what we said before; other non-coal hoppers, non-coal gondolas and/or flat cars.

[Barry Haimes:]

And was any of that for the lease fleet?

[Edward J. Whalen:]

No.

[Barry Haimes:]

Great. Thanks a lot. Appreciate it.

[Operator:]

Your next question comes from the line of Mike Baudendistel from Stifel. Please go ahead.

[Mike Baudendistel:]

Thank you. Just wanted to ask with all the rebuilds in the quarter for those orders, how is the throughput on the rebuilds as compared to the new cars? Are they higher throughput or lower throughput when thinking about the cadence of deliveries?

[Joseph E. McNeely:]

Cadence of deliveries, these are pretty extensive rebuilds, so the cadence of delivery is like a new car.

[Mike Baudendistel:]

Okay, similar to a new car. And just wanted to also ask, do you have a sense whether those rebuilds were for the export coal markets or the domestic coal markets?

[Edward J. Whalen:]

We generally don't have a sense. We firmly believe it's to supply the Eastern Class 1 railroads with an aging fleet that's falling out. And so what they do with those cars, we believe it's across the board, it's for export and domestic business.

[Mike Baudendistel:]

Okay. And are those the hybrid cars that are steel and aluminum?

[Edward J. Whalen:]

It's a mixture of hybrid, steel and aluminum as well as just regular stainless steel cars.

[Mike Baudendistel:]

Great. Those were all the questions I had. Thanks.

[Edward J. Whalen:]

Thanks, Mike.

[Operator:]

At this time, there are no further questions.

[Joseph E. McNeely:]

Thank you. This concludes today's conference. Thank you for joining. A replay of this call will be available beginning at 1 PM Eastern Time today at 1800-475-6701, pass code 298841. Good day.

[Operator:]

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