FreightCar America, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America’s Third Quarter 2013 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 that this conference is being recorded. An audio replay of the conference call will be available from 1 PM Eastern Daylight Time today until 11

[Chip Avery:]

Thank you and welcome to FreightCar America’s third quarter 2013 earnings 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 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 third quarter of 2013 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, Chip. I’d like to take a moment to address certain organizational changes that had been announced over the past few weeks. First, I want to thank Ed Whalen for his numerous contribution to FreightCar during his tenure as President and Chief Executive Officer. Ed served with the company in 1991 and served as Chief Executive Officer from 2009. Ed successfully held the company through the recent severe economic downturn and resolved the diversification of our business while maintaining the company’s financial strength. We are grateful for his tailored efforts and commitment to the company and we wish him well in his retirement. In addition, as you are aware last week we announced a number of changes to our leadership team. While these changes are important to our success there is one change I’d like to highlight. The introduction of new railcars to our product portfolio is critical to the long-term success of a broader diversification strategy. To ensure we are developing the railcars that market desires entailed a proper accountability across the organization reestablished a cross-functional new product development team reporting to me that will lead by Greg Josephson. Greg has an 18 year track record of working with customers in a cross-functional lines in developing innovative railcars for FreightCar. With this railcar knowledge product development expertise and ability of our closely with our customers we’ll be able to continue with introduction of new railcars that are customer’s desire. Turning to our performance, we believe the third quarter was an inflection point for us. While the quarter produced a net loss we did see sequential improvements and orders, deliveries, backlog, revenue and margin. While the broader coal market remains under pressure we are encouraged by the continued replacement at the Eastern coal car fleet as evidenced by a large rebuild orders we received during the third quarter. We remain focused in the execution of our product diversification strategy that startup by the whole facilities on track one production line is operational and we are progressing on the build out of our remaining production capacity. Our initial orders are about to complete and will be shipped shortly. In addition, we have begun production of our first double-stack intermodal railcar with orders for several other car type scheduled for 2014. We are pleased with the efficiency of the facility, the responsiveness of our suppliers, the skill of our workforce and the team we have assembled to operate the facility. For the full year with the Shoals production and few are production line changeovers in the fourth quarter we estimate 2013 deliveries be around 4,000 railcars. On the Services side of the business we continue to see positive results from the improvement efforts we began last year. Revenue and operating income both increased over the same quarter in 2012 and we expect to see the trend continue and have through year end and into 2014. Finally, corporate costs for the third quarter decreased both sequentially and versus the same period of the prior year and Chip will have a comment on this in a moment. Our [monetary lead] FreightCar during this important time in our history with our new leadership team I am confident we are well positioned to respond quickly to changes in our markets including to the new product for customers, growing the value of our Services platform and achieving the main structure of that will provide clear ones aside and achievement of these goals all of which will drive increasing value for our customers, shareholders and employees. Ted will now provide an update on our markets and commercial activities.

[Ted Baun:]

Thank you, Joe. To recap order activity for the period, 6001 railcars of various types were ordered in the third quarter of 2013. This compares to 225 units ordered in the third quarter of 2012 and 693 railcars ordered in the second quarter of 2013. Third quarter orders include approximately 4,000 previously mentioned rebuilt cars in addition to various other car types. Third quarter 2013 deliveries of 937 railcars included 194 new and 743 rebuilt railcars. This compares to 1,618 railcars delivered in the third quarter of 2012 including 998 new cars and 620 rebuilt cars. There were 710 railcars delivered in the second quarter of 2013, of which 160 were new and 200 were leased and 350 were rebuilds. Our backlog of unfulfilled orders at September 30, 2013 increased significantly to 7,129 railcars compared to 3,716 railcars at September 30, 2012 and 2,065 railcars at June 30, 2013. Industry-wide 12,753 units were ordered and 12,647 units were delivered in the third quarter of 2013. Orders were down from the third quarter of 2012 as well as the second quarter of this year but deliveries were up when compared to both the prior year period and sequentially. Industry-wide backlog increased to 73,848 units at the end of September, up from both June of 2013 and the year ago. Orders, deliveries and backlogs were once again heavily driven by continued strength in the tank car demand. Non-tank car demand remained below average by historical standards with 7,600 units ordered in the third quarter compared to 7,900 in the second quarter of this year. Non-tank car deliveries also decreased to 5,100 units from 5,600 units in the second quarter. The after mentioned industry figures do not include our rebuild order and delivery activity. The overall number of railcars in storage decreased to roughly 297,000 as of September 30, 2013, a decrease of 3,000 railcars when compared to June 30, 2013. We estimate that the number of coal cars in storage remained relatively high at 21,000 coal cars about the same as the end of second quarter. The U.S. commodity loadings in the third quarter of 2013 were essentially flat when compared to the third quarter of 2012. While railcar loadings of certain commodities such as petroleum products, crushed stone, sand and gravel and non-metallic minerals exhibited growth, coal loadings continued to be challenged decreasing 3% versus the third quarter of 2012. Intermodal container loadings remained strong for the quarter increasing by 4.1% 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 35% above year-ago levels. This has contributed to a decrease in utility coal stockpiles to 156 million tons, 12.2% below the year-ago stockpile levels. However, U.S. coal production is down 2.1% versus 2012 levels and U.S. coal exports through July were down 9.6% to 70 million tons, but are still at historically strong levels throughout the first half of the year. Year-to-date total electricity generation in areas where coal competes was down 0.6% when compared to 2012. Now I would like to turn the call back to Chip to address our third quarter financial results.

[Chip Avery:]

Thank you, Ted. For the third quarter of 2013, consolidated revenues were $76 million compared to $161 million in the third quarter 2012 and $47 million in the second quarter of this year. The year-over-year decrease in revenues reflects a lower number of cars delivered of the sequential increase reflects an increase in cars delivered. Net loss for the third quarter of 2013 was $900,000 or a loss of $0.08 per diluted share reflective of the lower deliveries. Net income for the third quarter of 2012 was $4.8 million or $0.40 per diluted share and with a net loss of $3.4 million or a loss of $0.29 per diluted share in the second quarter of this year. Manufacturing segment revenues for the third quarter of 2013 were $67 million compared to $152 million in the third quarter of 2012 and $37 million in the second quarter of this year. Again, the year-over-year decrease in revenues reflects a lower number of cars delivered of the sequential increase reflects an increase in the cars delivered. Operating income for the Manufacturing segment for the third quarter of 2013 was $4.3 million which is about $10 million lower than the third quarter of last year but approximately $5 million higher than the second quarter of this year. As compared to the prior year, Manufacturing segment operating income for the current quarter reflects the lower volume and $3.3 million of Shoals startup and Danville carrying costs. Our Services segment had revenues of $9 million compared to revenues of $8.1 million in the third quarter of 2012 and $10.1 million in the second quarter of this year. Operating income for the Services segment was approximately $700,000 in the third quarter of 2013 compared to $600,000 in the same period of the prior year and $1.6 million in the second quarter of this year. The sequential decrease reflected a lower volumes of part sales as car owners appeared to have slowed the pace of large program work. Corporate costs for the third quarter of 2013 was $6 million, a decrease of $600,000 from the third quarter of 2012 and $200,000 reduction from the second quarter of this year. Corporate costs for the third quarter of 2013 included $400,000 related to the startup of the Shoals facility which was offset by lower compensation and consulting costs. The effective tax rate for the quarter was 20.8% which reflects a reduction of the full year effective tax rate excluding discrete items to 40.1%. At September 30, 2013, we had approximately 750 leased railcars with the book value of $53 million. Our financial position is strong with no outstanding debt and $102 million on cash and short-term investments at quarter end. The decrease in cash and investments from $155 million at the end of 2012 was driven by the investment in the Shoals facility, changes in working capital and additions to the lease fleet. During the quarter we entered into a new three year $50 million revolving credit facility replacing the existing $30 million credit facility. The new credit facility has favorable terms and will give us the liquidity and flexibility needed as we grow the business. This ends our prepared comments and we are now ready to address your questions.

[Operator:]

Operator Instructions). And first one from Michael Gallo with CL King. Please go ahead.

[Michael Gallo:]

Hi, good morning.

[Unidentified Company Representative:]

Good morning, Mike.

[Michael Gallo:]

Congratulations on the improvement.

[Unidentified Company Representative:]

Thank you.

[Michael Gallo:]

Yeah I was wondering if you could elaborate you know I know you highlighted certainly third quarter in a lot of areas seemed to be in an inflection point for the company I was wondering if you can elaborate on some of the traction that you’re seeing among other car types certainly out of what was ordered industry-wide you did very well kind of from the standing star even excluding the coal rebuilt. So, I was wondering if you can elaborate on where are you seeing traction in car types whether that continues in the fourth quarter and then also if you can give us any commentary on whether you think you will see more Eastern coal fleet replacement as we look at say the next 12 months. Thank you

[Unidentified Company Representative:]

Actually I’ll turn it over to Ted to answer.

[Ted Baun:]

Yeah hey, Michael. What we saw is a general mix of steel open top hoppers gone dollars in flat cars other than the rebuild that you mentioned. So pretty broad look when you take a look at what we’ve got we’re seeing a broad mix of everything coming in right now albeit lower volumes. With respect to the Eastern coal demand we continue to reiterate that there were still significant replacement cycle that’s left with the Eastern class ones and so that remains our focus as well.

[Michael Gallo:]

And in terms of just what you’re seeing so far in the fourth was it just continue to see an increase and demand have you seen anything picking back up in terms of be at automotive racks or anything on that front? Thanks

[Ted Baun:]

Yeah we’re not involved in automotive racks so I would hoard comment on that but off the car types we’re involved in I would say that the increase are stable you know, they’re the same as they were in the second quarter. We’re still seeing some interest across these different car types and it still remains to be seen though what stage in our customer’s CapEx plans for next year. We’ll have more visibility on that in the first quarter I believe.

[Michael Gallo:]

Thank you.

[Operator:]

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

[Unidentified Analyst:]

Hi guys this is actually [Brian Collins] filling in for Justin today, thanks for taking my questions and congrats on a strong quarter. So you’ve talked about your focus on growing the Services business going forward, could you provide any color on how those efforts are progressing and what’s the realistic timeframe for us to expect some of these strategic efforts begin to materialize?

[Joe McNeely:]

Hey Brian this is Joe, I’ll handle that. In terms of the strategic efforts let me cover that and when we look at new product development we’re actually seeing that going on the Shoals facility startup is on track you know we’re getting the production built out, we’ve got orders being build there now and we have orders to be built there next year so that part of the strategy we’re executing on. In the Services, what we continue to believe is, we like the all programs that we made over the last year and those are very improved at results on a year-to-date this year. As I think we said on the last call that we want to make sure that those are sustainable so that we can take that model and then grow that. so you know that’s still probably a year or two out as we look at that.

[Unidentified Analyst:]

Okay, that’s helpful. And you know from the margin expansion that we saw in this quarter, if you take out the one-time carrying costs it looks like gross margins were actually 12.5% and I was just wondering if will this mainly a result of the positive mix or just if you could elaborate on that?

[Joe McNeely:]

It really comes down to the mix of the different car types that we did once you take out those carrying cost.

[Unidentified Analyst:]

And as we think about your efforts to further penetrate you know the non-coal markets where Shoals, you already have designs for all car types as of tank I’m guessing – I guess I’m just trying to understand what car types you can take an order for today and start building versus other car types where you might need more time to allocate its R&D before you get to the point of the accepting orders?

[Ted Baun:]

Yeah Brian well, this is Ted. We are – we’ve got a pretty solid design portfolio there are few other car types that we’re looking at getting into that were not into today, but I would say intermodal we’ve got a few more things to do there but we’re ready for orders on intermodal, we’re ready for orders on all the other miscellaneous open top condolers, hoppers, et cetera.

[Unidentified Analyst:]

Okay. That’s all from me, thanks for the time.

[Unidentified Company Representative:]

Thanks Brian.

[Operator:]

And next to Steve Barger with KeyBanc Capital Markets. Please go ahead.

[Tejas Patel:]

Hey, this is actually Tejas filling in for Steve, how are you guys?

[Ted Baun:]

Good, Tejas.

[Tejas Patel:]

Just a couple of questions from me. I know in the past you’ve provided some detail on the rebuilds just out of curiosity what is the expected life of rebuilt car is it you know less than the traditional in any car?

[Ted Baun:]

I’ll touch on that Tejas. This rebuild essentially is going to allow you to extend the car to its original life. So if it’s a 50 year car you’re essentially rebuilding it to may be in your 20 or your 30 just still get to that 50 year cycle.

[Tejas Patel:]

Got it, got it. So, I guess just a follow-up when we see all those industry stats you know the cars that are shown for you know 40 plus years does that include the rebuilds or the rebuild is then falling back into you know the 20 year or whatever the number may be?

[Ted Baun:]

Yeah without getting into a lot of detail the car will expire you know if it was built before 1974 it will expire when it gets to 40 years of life if it was built after ‘74 it will expire when it gets to a 50 year life regardless of whether it was rebuilt or not it’s not like the clock starts to – the clock doesn’t start over at the point in time in which rebuilt.

[Tejas Patel:]

Got it, got it. And then, just to the a question on Shoals facility it seems like you guys had your first delivery you had about that facility in the quarter can you just kind of talk about how that’s progressing or is that ahead of the plan inside you know at plan or a little behind?

[Joe McNeely:]

We’re this is Joe, that we’re on track as I said you know we will get the one production line you know the, our initial orders are just about to complete and ready to be shipped like there was no shipments in the quarter out of the facility. But in terms of building it out, staffing, getting people trained that we’re right where we’re on track.

[Tejas Patel:]

Got it, got it. And then just lastly it seems like you guys have a lot of credit here I think about 180 if you include the credit facilities and the cash, any idea on or any thoughts on the packing order of how you may choose to deploy that?

[Joe McNeely:]

Yeah we’ve been pretty consistent as we look at where our business being the cyclical rail business where we’re at in the execution of our strategic priority. We’re going to maintain you know conservative balance sheet and a strong cash position.

[Tejas Patel:]

Got it, thanks guys.

[Operator:]

(Operator Instructions) And we go to Barry Haimes with Sage Asset Management. Please go ahead.

[Barry Haimes:]

Thanks very much. I have a question related to all the non-coal car types. What’s the right way to think about what sort of annual volumes you need to break even on that activity so ex-corporate overhead, ex-coal you know if you’re just looking at all the rail delivery new car types of the non-coal car types what’s the right way to think about you know given Shoals et cetera what sort of breakeven you know as you need to? Thanks

[Joe McNeely:]

Barry, this is Joe I mean we don’t give out that about kind of the level with details what we kind of guide people to is go back and what that our history of the different volumes and given a statistical business you’ll see our volumes go up and down and you can see what kind of possibility the business produces that differ any given volume.

[Barry Haimes:]

Okay, well just one quick follow-up. Given that you know historically used on a largely coal you know if you’re looking it grows our operating margins across history what’s the right way to think about you know the margin profile of the new car types versus the traditional coal cars?

[Joe McNeely:]

Good question, Barry you know as we’ve looked at this and I think we’ve indicated in the past when we look at the Shoals facility yeah we expect that given the efficiencies there but with the car type you plan to build there that margin should be consistent with history as you know lot of car types a little different than the coal cars where we had a market dominant position.

[Barry Haimes:]

Okay, thanks.

[Joe McNeely:]

Thank you.

[Operator:]

We do have a follow-up from Michael Gallo. Please go ahead.

[Michael Gallo:]

Hi, good morning just a couple of follow-up questions. How much you expect in startup costs related to Shoals in the fourth quarter?

[Ted Baun:]

Say that again Mike?

[Michael Gallo:]

How much you expect in startup costs related to Shoals in the fourth quarter?

[Ted Baun:]

We’re still going to be in the startup mode in terms of you know the cars that go through although as we continue to ramp up you know we should get both these some improvements and the efficiency and better utilization of that overhead capacity there. So there is going to be cost going through by it’s probably going to be a little you know slightly at lower levels than we saw in the third quarter?

[Michael Gallo:]

Okay and then how much more CapEx do you think you have to spend I think that shows you know fully up and going?

[Ted Baun:]

Yeah we’re still thinking it’s in that $23 million range and this year we should be you know somewhere you know in the high-teens with the rest going over in the 2014.

[Michael Gallo:]

And how much has been spent through the first three quarters?

[Ted Baun:]

We spent about $16 million in CapEx for the first three quarters and most of that is in Shoals.

[Michael Gallo:]

Okay, so probably a couple more in Q4?

[Ted Baun:]

Yeah.

[Michael Gallo:]

Okay, thank you.

[Ted Baun:]

You’re welcome.

[Operator:]

And at this time that we have no further questions in queue.

[Ted Baun:]

Ed?

[Operator:]

This concludes today’s conference call. Thank you for joining. A replay of this call will be available beginning at 1 PM Eastern Time today at 800-475-6701, pass code 306164. Good day.

[Unidentified Company Representative:]

Thank you.