FreightCar America, Inc.
Q4 2014 Earnings Call Transcript

Published: 18 Feb 2015

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America’s Fourth Quarter 2014 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today’s prepared comments. Please note this conference is being recorded. An audio replay of the conference call will be available from 1

[Chip Avery:]

Thank you, and welcome to FreightCar America’s fourth quarter 2014 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO; Ted Baun, Senior Vice President, Marketing and Sales; and Sean Hankinson, Vice President, Manufacturing Operations. I’d like to remind everyone that statements made during this conference call relating to the company’s expected future performance, future business prospects, or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to FreightCar America’s 2013 Form 10-K for a description of certain business risks, some of which may be 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 2013 Form 10-K and earnings release for the fourth quarter and full year of 2014 are posted on the company’s website at freightcaramerica.com. Let me now turn the call over to Joe McNeely.

[Joe McNeely:]

Thank you, Chip. Favorable market conditions and continued progress and diversification strategy have led to solid fourth quarter orders of over 3,600 railcars, raising our backlog to over 14,700 railcars at the end of 2014 which includes over 11,000 non-coal cars across a broad range of car type. We met our projected 2014 deliveries at 7,000 railcars and we continue to expect our 2015 deliveries to be between 9,000 and 10,000 railcars. As previously announced, we’re in a process of investing in and building additional production capacity at our Shoals facility which is expected to be operational by the middle of this year. Total capital investment for the expansion will be approximately $10 million and we’ll add between 150 and 200 employees to our operations there. Further, when fully operational, the facility will have the capacity to build approximately 6,000 to 8,000 railcars per year. While we are pleased with the progress we made on our strategic initiative, unfortunately these actions do not translate into improved profitability as compared to the third quarter of 2014. While manufacturing revenue increased over the third quarter, its operating income did not due to changes in product mix, operating inefficiencies and costs related to our Shoals expansion. Chip will provide further details on these shortly. Finally, the high utilization of coal cars by railroads and utilities that unfavorably impacted volume through our repair shops and sales of repair parts for much of 2014 as moderated. Services strong fourth quarter results reflect the increase in repair volumes and higher level of program work. As we enter the first half of 2015, our service business is well positioned with a solid backlog of program work. Ted will now give you an update on our markets and commercial activities.

[Ted Baun:]

Thank you, Joe. The interest in freight cars continues to be strong. In the fourth quarter, we received orders for 3,637 railcars all of which were new cars. This compares to 800 units ordered in the fourth quarter of 2013 and 7,375 units ordered in the third quarter of 2014, of which 2,210 were rebuilds. Deliveries for the fourth quarter of 2014 totaled 2,360 railcars which included 1,260 new and 1,100 rebuilt railcars. This compares to 1,101 railcars delivered in the same quarter of 2013 which included 190 new, 99 used and 812 rebuilt railcars. There were 2,354 railcars delivered in the third quarter of 2014, of which 1,554 were new and 800 were rebuilds. As Joe mentioned, our order backlog at December 31, 2014 was 14,791 railcars with an estimated sales value of $1.3 billion which is up from 13,514 railcars at September 30, 2014 and 6,826 railcars at December 31. Industry-wide 37,431 units were ordered and 18,941 units were delivered during the fourth quarter of 2014. These figures represent significant increases over the same period of the prior year in which 14,865 units were ordered and 15,776 units were delivered. Non-tank car orders as a percentage of total orders increased to 60% for the fourth quarter, with covered hoppers accounting for 59% of fourth quarter non-tank car orders. We expect this general interest in a wide variety of non-tank cars to continue. The ongoing strong order activity increased the industry-wide backlog to a record 142,837 units at the end of December 2014, up approximately 15% from the end of September. 42% of this backlog consists of covered hoppers while 41% is comprised of tank cars. Please note that these industry figures do not include orders, deliveries or backlog totals for rebuild rail cars. Commodity loadings on U.S railroads also strengthened in the fourth quarter of 2014 and were up 3.9% when compared to the fourth quarter of 2013. Intermodal container loadings continued to grow during the fourth quarter, increasing 3.9% versus the same quarter in 2013. Railcar loading, of metallic ores and crushed stone, sand and gravel, each exhibited growth of 17% or higher while grain loadings grew by just over 5% versus the same prior year quarter. Coal loadings grew 4% in the fourth quarter versus the same quarter of 2013, and increased for the full year versus 2013. Further on coal, utility stockpiles remain at relatively low levels while electricity demand has increased slightly. As of the end of November 2014, utility coal stockpiles were at 142 million tons or 60 days of consumption, which is 9% below November 2013 levels and 21% lower than the previous five-year average for November. Furthermore, in areas where coal competes as a fuel, total electricity generation for 2014 was up 0.8%, compared to 2013. Despite these factors, the coal market continues to be challenging. U.S coal production in 2014 was flat versus 2013. U.S coal exports decreased 17% in 2014 versus 2013. Relatively lower rail velocities and the need to replenish stockpiles has led to a decrease in the number of coal cars in storage to approximately 6,000 units at the end of 2014 compared to approximately 17,000 cars at the end of 2013. However, as compared to 2,000 units in storage at the end of the third quarter of 2014, there were approximately 4,000 additional coal cars taken offline and put back into storage at the end of 2014. As a result, we do not expect to see meaningful orders for coal-cars in the near term. Now, I would like to turn the call over to Chip to address our fourth quarter financial results.

[Chip Avery:]

Thank you, Ted. For the fourth quarter of 2014, consolidated revenues were $212.5 million compared to $79.7 million in the fourth quarter of 2013 and $190.3 million in the third quarter of 2014. Net income for the fourth quarter of 2014 was $4.8 million or $0.39 per diluted share. These results compare to a net loss of $12.3 million or a loss of $1.03 per diluted share for the fourth quarter of 2013. For the full year of 2014, consolidated revenues were $598.5 million compared to $290.4 million in 2013. Consolidated net income for 2014 was $5.9 million or $0.49 per diluted share compared to a loss of $19.3 million or loss of $1.61 per diluted share in 2013. Manufacturing segment revenues for the fourth quarter of 2014 were $204.5 million compared to $72 million at the fourth quarter of 2013 and $181.5 million in the third quarter of 2014. The increase in revenues in 2014 is compared to the same period in 2013, just primarily driven by increased railcar deliveries. Also note that fourth quarter 2014 revenue includes the sale of 274 leased units that are not included in the 2,360 fourth quarter delivery unit count. 200 of the leased units were delivered in 2013 and 74 of the leased units were delivered in the first quarter of 2014. Manufacturing segment, operating income for the fourth quarter of 2014 was $13.6 million, compared to an $8.7 million operating loss in the fourth quarter of last year. The 2013 results included a non-cash impairment charge of $7.6 million related to the Danville facility and $5.3 million related to the initial Shoals start-up, Danville carrying costs and a charge for projected cost in excess of the selling price for an order we delivered in 2014. Operating income for the manufacturing segment was $16.2 million in the third quarter of 2014. Manufacturing results for the fourth quarter of 2014 were negatively impacted by approximately $1 million of costs associated with the ramp-up of the additional production line as Shoals. In addition, product mix and a number of product line changeovers and start-ups had a negative impact when comparing results to the third quarter of 2014. Looking forward, we expect to incur additional expenses associated with the Shoals expansion through the second quarter of this year. The services segment had revenues of $8 million in the fourth quarter of 2014 compared to $7.7 million in the fourth quarter of 2013 and $8.8 million in the third quarter of 2014. The services segment, operating income was $1.2 million in the fourth quarter of 2014, compared to an operating loss of $2.4 million in the fourth quarter of 2013. 2013 results included a $1.9 million restructuring and impairment charge related to the closure of the Clinton Indiana Facility. Services segment operating income was $1.6 million for the third quarter of 2014 and included $1.1 million gain on the sale of the previously closed Clinton Indiana repair shop. Corporate costs for the fourth quarter of 2014 were $7.4 million which included a non-cash pension settlement expense of $1 million that was primarily recorded in cost of sales. Corporate costs were $7 million in the fourth quarter of 2013 and $6.5 million in the third quarter of 2014. The effective tax rate was 32.5% for the fourth quarter of 2014 and included the favorable impact of an R&D tax credit of approximately $800,000. The tax rate for the full year of 2014 was 30.3%. For the full year of 2015, we currently anticipate an effective tax rate of approximately 35%. Turing to our balance sheet, our financial position remained strong with no outstanding debt and $167.5 million in cash and short term investments at year end. $43 million of this amount represents a customer deposit we received in the fourth quarter of 2014. At December 31, 2014 we held 345 leased railcars with a book value of $23 million compared to 748 railcars with a book value of $53 million at the end of 2013. The leased fleet was 100% utilized at the end of 2014. During the fourth quarter of 2014, we recognized a gain of approximately $750,000 on the sale of railcars available for lease. Capital spending for the fourth quarter of 2014 was $3.6 million primarily associated with the build-out of the Shoals facility. Our full year 2014 total capital expenditures were $11.8 million of which $9.4 million relates to the Shoals facility. For the full year of 2015 we currently expect capital expenditures to be approximately $15 million. At this point, I will turn the call over to Joe for concluding remarks.

[Joe McNeely:]

Thanks Jeff. We made major strides on our strategic initiatives during 2014, through the continued successful introductions of our numbered new car types we significantly diversified our product portfolio and customer base while at the same time holding our market leadership position in coal cars. We returned to profitability for the year and maintained a strong balance sheet with no debt and approximately $124 million of cash when including customer deposits. Additionally, as recently announced, the company’s quarterly dividend was raised 50% to $0.09 per share. We are proud to be in a position to add additional shareholder value through this increase while still maintaining our strong balance sheet and providing the flexibility to execute our strategic initiatives. Looking forward, we are focused on continued execution of our strategy, completing our Shoals’ capacity expansion and improving on our operational execution in order to capitalize on our strong backlog and market fundamentals. In addition, given the robust industry deliveries forecast for 2015, effectively managing a flow of components and specialty supplies will also be important in achievement of our objective. This ends our prepared comments. We are now ready to address your questions.

[Operator:]

[Operator Instructions]. And first in line, Justin Long with Stephens. Please go ahead.

[Justin Long:]

Hi, thanks and good morning guys.

[Joe McNeely:]

Good morning, Justin.

[Justin Long:]

You touched a little bit on some of the items impacting manufacturing margins, but I was curious going forward, should we expect 4Q to be a good run rate for manufacturing margins over the next couple of quarters, given this whole ramp-up costs or should we see margins go back to where they were closer to where they were in the third quarter?

[Chip Avery:]

Yes, Justin, it’s Chip. We’re not giving forward guidance on our earnings but there are a number of things going on both in the first and second quarter. We do expect to see a number of start-ups and changeovers in the first quarter of 2015. And then we do continue to see costs associated with the Shoals build-out. We haven’t given numbers but the activity level is increasing versus the fourth quarter, so I would expect the number at this point to be higher than fourth quarter call-out. So, as you look at it, I think that’s really unless Joe has anything else, it’s kind of where we’re looking to get guidance on the first half.

[Justin Long:]

Okay, that’s helpful. So you saw the $1 million of start-up costs Shoals in the first quarter. And you’re saying it will be higher than that in both the first and second quarter of this year?

[Chip Avery:]

Yes, I expect it to be somewhat higher. And again, these are the trading costs. This is the space that’s being leased that’s not being utilized, and the other activities associated with that that add up, instead of going to the capital or to balance sheet end up getting expense. So, again, it’s more around the activity as accelerating through the second quarter.

[Justin Long:]

That makes sense. And as we think about your manufacturing segment, there is a lot of cyclicality, there is a lot of volatility. Can you just help us think about what you view as the normalized manufacturing, operating margins over the course of the cycle?

[Joe McNeely:]

Justin, I think as we’ve talked kind of many times in the past, when you look at it, this business absent where we get peak demand like you see in tank cars where margins go well up to 20%. FreightCar margins through the cycle will average somewhere in the double-digit, usually in the low double-digits.

[Justin Long:]

Okay. And just to clarify with the Shoals’ capacity, I mean, does that change that view at all, and do you think there is more of a margin opportunity this cycle relative to last cycle or do you think the margins should be relatively the same?

[Joe McNeely:]

I think as we’ve talked in the past, with the change in the industry with some capacity going out, other capacity coming in, when you look at kind of the car type mix, especially for us at Shoals, it been a very efficient facility offset by a more competitive products that we’re in, we think that the margins should be pretty consistent with history.

[Justin Long:]

Okay, great. And I’ll sneak one more and then pass it on. But, I was wondering if you could provide any update on how much of your backlog is related to the oil and gas market, I guess it would primarily fall under the Small Cub Covered Hopper car type for frac sand? And secondly, have you had any customers for those car types where other oil and gas related market car types try to cancel orders or delay picking delivery?

[Joe McNeely:]

Justin, this is Joe, I’ll take that one. If you look at our backlog, again we’re not very exposed to the energy like some of the others because they don’t do tank cars. But if you look at our backlog, about 30% of it is in the small-cube covered hoppers. In terms of your specific question and had we had anybody approach us, yes, we’ve had, no we really haven’t. We had one small customer approach us but it was in a non-energy related car type.

[Justin Long:]

Okay, that’s very helpful color. I appreciate the time.

[Joe McNeely:]

Okay. Thank you, Justin.

[Operator:]

And next we’ll go to Matt Brooklier with Longbow Research. Please go ahead.

[Matt Brooklier:]

Yes, thanks and good morning. So, I wanted to hopefully get a little bit more color on the orders that you received in the quarter maybe if you could talk to the types of cars specifically that’s in that 3,600 order number for 4Q?

[Ted Baun:]

Hi Matt, it’s Ted. It was a fairly diverse quarter. We saw orders for gondolas, flat cars, intermodal well cars and covered hoppers.

[Matt Brooklier:]

Okay. And then I guess I’m trying to get a feel for, you made some comments earlier regarding maybe somewhat muted coal car future order activity just given what’s going on in the industry. So, I’m trying to get a feel for I guess how many coal cars are currently in the backlog and then maybe how much of, what percentage of the backlog coal car-specific is anticipated to be delivered? And that’s included in the 9,000 to 10,000 delivery guide that you guys reiterated?

[Ted Baun:]

Yes. Right now our backlog is over, just over 20% coal and the vast majority of those coal cars are rebuilds. Going forward, I think what we’ve said on prior calls still stands, the coal market continues to be challenged. It’s a story of the West versus the Eastern roads Eastern roads are more challenged than the Western roads because of their utility base as well as their export coal business being off. So, we still think long-term there is demand for coal cars but as we sit here today it’s probably a few years away.

[Matt Brooklier:]

Okay, I appreciate the color.

[Ted Baun:]

Sure.

[Joe McNeely:]

Thanks Matt.

[Operator:]

Our next question is from Sal Vitale with Sterne Agee. Please go ahead.

[Sal Vitale:]

Good morning gentlemen. So just a quick question, if I could just drill down a little deeper there, Joe, I think you said about 30% of your current backlog is small cube covered hopper. How much of that in particular would you say is for frac sand?

[Joe McNeely:]

That part, we really don’t know, where it all gets used and so I’ll leave it at that.

[Sal Vitale:]

Okay, fair enough. So then, just another question, can you give any sense for the trajectory of deliveries of your coal rebuilt orders that you have in your backlog currently?

[Joe McNeely:]

I think from a cadence what we said kind of in the path that those orders get built up pretty rapidly through this year.

[Sal Vitale:]

Okay. Fair enough. And then so, just one last question, in your earlier comments I think you’ve said that you, there were some sales of cars out of your lease fleet this quarter. Did I hear that right or were you comparing it to the year-ago quarter?

[Chip Avery:]

It’s Chip, yes. There were 274 units in the fourth quarter that were sold. So, the point of that is the delivery numbers of 2,360 did not include those 274, although the revenue did include the related sales.

[Sal Vitale:]

Okay.

[Chip Avery:]

So, when you’re looking at the ASP, you got to make sure you account for the 274 units.

[Sal Vitale:]

Sure, okay. Because otherwise the ASP looks like it was up over 10% sequentially?

[Chip Avery:]

Yes, I mean, if you just do the simple math, it’s just basically flat. Although there is a mixed-shift, it’s basically flat over Q3. If you do the math at the end of the fourth quarter of 2003, it’s quite a bit lower. But I think roughly 80% I think of the backlog was, or of the volume delivered in Q3 of 2013 was rebuilt, were rebuilds. So we got a pretty big mixed shift versus last year.

[Sal Vitale:]

Just to be clear, the 274 cars that was not mentioned in the earnings release or was it, maybe I just missed it?

[Chip Avery:]

It was not.

[Sal Vitale:]

Okay. So then just the last question on the, you mentioned product mix and inefficiencies were also a drag on margin in 4Q. How do we think about that for 1Q and 2Q? I know you mentioned what the Shoals cost could be in 1Q and 2Q. Could product mix be a drag again in 1Q and 2Q?

[Chip Avery:]

More so on Q1, we do have a number of changeovers and startups in Q1 kind of at a similar pace to Q4. But then you will have the Shoals’ call it cost associated with the build-out of the line both for Q1 and Q2.

[Sal Vitale:]

Right. And then just last question is really a clarification. Joe, when you said earlier I think low double-digit margins, were you referring to manufacturing operating or gross margin in total?

[Joe McNeely:]

Generally gross margin is what we’ve talked about in the past.

[Sal Vitale:]

Okay, great. Thank you very much.

[Operator:]

[Operator Instructions]. We’ll go to Doug Dyer with Heartland Advisors. Please go ahead.

[Doug Dyer:]

Yes, good morning gentlemen.

[Joe McNeely:]

Good morning, Doug.

[Doug Dyer:]

With regards to the customer deposits, is it roughly the same per type of railcar?

[Joe McNeely:]

I’m not sure I followed the question Doug.

[Doug Dyer:]

What I’m asking is when somebody makes a deposit on your railcars, is it the same amount of money that you deposited on a coal car versus a flat car versus a grain car?

[Joe McNeely:]

No, I mean, that’s going to vary, and it really depends on how much the customer wants to prepare. Again, that’s not necessarily a requirement on our standpoint but as we’ve talked in the past, to mitigate commodity risk, we either pass through price fluctuations or customers give us deposit that allows us to pre-buy material.

[Doug Dyer:]

Okay. And are there any cancellation fees, built into that?

[Joe McNeely:]

There is no cancellation fees built into deposit, but all of our contracts do have cancellation provisions.

[Doug Dyer:]

Okay. And then taking a look at your order book as it shapes up now would it indicate that the backlog will make any significant changes here or in the next few months?

[Joe McNeely:]

I think, this is Joe again Doug. I think that depends a lot on where future orders come in vis-à-vis our production cadence. And again, as we talk, a lot of our car types still have some pretty lumpy orders. So it’s hard to predict where our backlog will be at any quarter end.

[Doug Dyer:]

All right. Thank you.

[Joe McNeely:]

You’re welcome.

[Operator:]

And we do have a follow-up from Sal Vitale. Please go ahead.

[Sal Vitale:]

Hello, can you hear me?

[Joe McNeely:]

Yes, Sal.

[Sal Vitale:]

So, just the other question I had was on your current backlog of what is it a 14,800. Are your deliveries guidance as your deliveries guidance of 9,000 to 10,000. Is that all come from the current backlog?

[Joe McNeely:]

For the most part, yes.

[Sal Vitale:]

Okay, great. Thanks.

[Operator:]

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

[Chip Avery:]

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