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Executives

Kevin Bagby – VP of Finance, Treasurer, CFO and Secretary

Chris Ragot – President and CEO

Analysts

Kevin Sterling – Stephens Inc.

Kim Burkhart [ph] – Burkhart Research [ph]

Michael Gallo – C.L. King

Joe Radigan – KeyBanc Capital Markets

FreightCar America, Inc. (RAIL) Q3 2008 Earnings Call Transcript October 30, 2008 11:00 AM ET

Operator

Ladies and gentlemen, good morning and welcome to the FreightCar America third quarter 2008 earnings conference call.

(Operator instructions) An audio replay of the conference call will be available beginning at 1 p.m. Eastern Daylight Time today until 11:59 p.m. Eastern Daylight Time on November 6, 2008. To access the replay, please dial 800-475-6701. The replay pass code is 965694. An audio replay of the call will be available on the company’s website within two days following the earnings call.

I would now like to turn the conference over to Kevin P. Bagby, Vice President of Finance and Chief Financial Officer of FreightCar America. Mr. Bagby, please go ahead.

Kevin Bagby

Thank you Anna. Before we begin, I would like to remind everyone that statements made during this conference call relating to the company's expected future performance or future business prospects, events, and plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties may cause forward-looking statements to differ from actual results including, among other things, the cyclicality of our business, adverse economic and market conditions, fluctuating costs of raw materials including increase in surcharges and additional risk factors described in our earnings release for the third quarter of 2008 and in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Forward-looking statements represent our estimates and assumptions only as of the date of this call. 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 earnings release for the third quarter of 2008 is posted on the company's website at www.freightcaramerica.com.

I would now like to turn the call over to Chris Ragot, our President and CEO.

Chris Ragot

Thank you, Kevin, and good morning. I would like to welcome you to FreightCar America’s third quarter 2008 earnings all. Before we discuss the quarter, I would like to note that this will be Kevin’s last earnings call with us as CFO. On behalf of the Board and rest of the management team, I would like to thank Kevin for his considerable contributions over the years and wish him luck with his future endeavors. We have initiated search for a new CFO and we will keep you apprised of that situation.

Now on the business in hand, I am going to discuss the highlights of the company’s performance in the third quarter. Then, Kevin will provide a detailed review of our financial performance.

While the macroeconomic trends and specifically the performance of the railcar sector has had an impact on our performance on both year-over-year and sequential comparison, we are pleased with our financial results for the third quarter. Total sales revenues in the third quarter of 2008 were $238 million while we incurred a net income of $7.4 million or a net income of $0.62 per diluted share.

Despite the pressure of this difficult operating environment, our strong balance sheet combined with our continued focus on strategic initiatives towards cost reduction and improving our manufacturing capacity has positioned us to weather the current industry cycle.

Regarding the railroad market, US and Canadian commodity rail loadings for the third quarter of 2008 were down 1.9% when compared with the third quarter of 2007 levels, yet coal car loadings for the quarter were above 2007 level by 4%, record loadings of Powder River Basin Coal by Western Rails, as well as export driven loadings for Eastern Rails continued or contributed to this significant year-over-year growth for the quarter.

Sea borne movement of US coal is continuing to increase the US coal export, increasing by 13.4 million tons or 36% year-to-date through August 2008 over export totals for the same period of 2007. This trend in export activity is expected to continue into 2009. Increased demand is being driven by several factors including increased industrialization and attendant demand for coal-fired electricity generation in emerging markets including India and China.

Coal inventories at electric power plants remain high, but have eased from their recent levels. As increased inventories for utilities in Southwestern and Mountain States have been offset by significant declines in inventory levels for utilities in the Midwest, mid-Atlantic and Southeastern states. In fact, the upward trend in overall inventory levels have started to reverse itself as recently published electric power sector inventory data indicate that both June and July 2008 ending coal inventories fell short of June and July 2007 ending coal inventory levels respectively.

In general, while global economic headwinds are generating uncertainty in the near term, we believe that long-term fundamentals of coal demand are strong. In the near term, we expect the overall market for coal car deliveries to be favorable. While our order cycle remains lumpy, we expect our order activity to improve in the subsequent years.

On the intermediary horizon, we expect coal to remain strong as the primary fuel source for electricity generation. We expect that coal will continue to provide roughly half of the projected fuel source for total electricity generated during the foreseeable future.

There are currently 52 coal-fired plants, which are either under construction, near construction, or permitted for construction. These 52 plants are expected to add approximately 27,000 megawatts of coal-fired capacity requiring up to 20,000 coal cars. Of these, 29 plants are approximately 16,500 megawatts of capacity are under current construction.

Clearly, a long-term demand for our main products and services is healthy and we are confident that FreightCar America remains well positioned to capitalize on this increased demand.

I now would like to spend a few minutes discussing the company’s efforts to mitigate the current economic conditions. During the past few quarters, we have worked diligently on cost reduction initiatives to generate margin improvement. Since May 2008, we have provided variable price quotations, which provided for coverage of material price escalation as we saw to offset increases and input costs and competitive pricing in our industry.

As of late, surcharges on raw material components have begun to decrease from recent highs. Although, the surcharges are highly unpredictable and have adversely affected our profits, we are encouraged by this recent development. However, these are all factors that are largely beyond our control while we constantly seek to mitigate their impact wherever possible. We continue to focus on the items that are within our control specifically our cost control initiatives and growth strategy.

Using a disciplined approach, we are committed to reducing costs throughout the organization and improving our competitive position. We continue to support and measure our recently established cross-functional margin improvement teams, and our value engineering team, which have been charged with evaluating costs at every level of the organization. These teams remain focused on identification and elimination of ways in our processes in order to foster a continuous cost improvement culture.

Aside from the cost-reduction savings, we are working towards – we are also working towards – we are also executing several strategic growth initiatives in order to position FreightCar America for our long-term success.

We are moving forward with our plan to increase our participation in rail sector with updated and expanded product offerings. We are developing new designs for open-top hopper product offerings with respect to railcars for aggregate, ore, and taconite service. We believe once the market begins to normalize, our updated and expanded product offerings will help us to diversify our revenue stream.

We continue to explore strategies for revenue diversification including organic opportunities and acquisitions, both domestically and internationally. Early this year, we announced a joint venture with Titagarh Wagons Limited in Kolkata, India to develop freight cars for the Indian market. FreightCar America and Titagarh are initially developing prototype cars based on FreightCar America designs and assessing the market opportunities in India.

We are pleased to announce that our initial work with Titagarh has been very positive and productive. We have selected a Managing Director for the joint venture company. Railcar prototypes are expected to begin shipment in the first half of 2009, and we anticipate the joint venture will be accretive to earnings by 2010.

During the quarter, we have also continued to explore railcar-leasing market. In response to competitive market conditions, we are offering railcar leasing to our customers on a selective and limited basis. These transactions are been packaged and offered for sale to our leasing company customers. We believe our leasing activities will improve our ability to service our customers and compete effectively. Long term, we will continue to assess the impact of railcar leasing in our business model.

Regarding our effort to expand our revenue base, we have continued to explore after-market initiatives. One such effort we are currently making is in the refurbishment market where we continue to explore and evaluate new opportunities in this sector. There is a strong strategic fit with our overall portfolio of products and services. Over the long term, we believe we could enhance the value proposition to our clients by offering services that address the entire life cycle of the coal car.

While the general marketing conditions have adversely affected our sales volume and margin performance, this management team has established and adhered to its new strategic direction for the company by executing on the following initiatives. Lowering our break-even point in the face of rising material costs and a more competitive pricing environment by utilizing flexible manufacturing techniques, increasing our geographical presence with joint venture in India and continue to explore other international opportunities, expanding our revenue platform with the introduction of our new railcar designs, and developing the organization with the ability to execute on acquisitions and organic growth initiatives.

In summary, we continue to successfully implement our strategic initiatives and we focus on cost reduction activity in the face of the current industry environment. We believe that these initiatives will help us navigate these difficult times and will ensure the long-term success of the company for all of our stakeholders.

Now, I would like to return the call to Kevin to address our third quarter financial results in more detail.

Kevin Bagby

Thank you, Chris. I would like to add that while it was a difficult decision for me to leave the company, I know that FreightCar America’s management team will continue to build value going forward for all stakeholders.

Order activities in the third quarter were 2,329 units, which represent an increase of 893 units or 62% from the units ordered in the second quarter of 2008 of 1,436.

We expect order activity to remain uneven for remainder of the year as we continue to be challenged by this difficult market. Railcar deliveries totaled 3,082 units in the quarter, including deliveries of 2,712 cars sold and 370 cars leased. That compares to 1,921 units in the same period in 2007.

Correspondingly, our total backlog of unfilled orders were 4,401 units at the end of the quarter compared with 4,917 units at the end of the second quarter of 2008, and 4,930 units at September 30, 2007.

Our sales revenue for the third quarter of 2008 was $238 million. That compares with $162.1 million for the third quarter in 2007. This increase of 47% is attributed primarily to higher demand for coal cars reflecting the macroeconomic issues addressed earlier, including shipments of export coal and increased coal car loadings on the Powder River Basin.

As a result of the competition and market condition, average selling prices declined in the third quarter of 2008 as compared with the third quarter of 2007. This reflects a shift in product mix, the car types with different material costs, and more importantly pricing pressures dictated by current market condition.

Our gross margin for the quarter was $18.4 million, and that compares to $19.4 million for the third quarter of 2007, a decline of $1 million. The corresponding margin rate was 7.7% compared with 12% generated in the third quarter of 2007. The change in margin rate reflects the impact of higher input costs specifically for aluminum and surcharges related to heaving castings.

In recent weeks, input costs for aluminum, steel, and related components have fallen significantly after increasing to unprecedented levels during the second quarter. These input prices remain volatile. In addition, our margin performance was adversely affected by the aggressive pricing environment. Favorably impacting the margin performance was the higher leverage related to volume increase and improved labor productivity.

We continue to focus on cost reduction activities in our manufacturing locations. The reduction of capacity that occurred during 2007 has significantly improved throughput costs. Moreover, the management team has increased our efforts on process improvement and cost reduction across the company.

We have challenged our management team to focus on all elements of the cost structure, the rationalization of our manufacturing capacity combined with the efforts of our margin improvement teams has resulted in a more competitive cost position. Management will continue to focus on the manufacturing process, product design, and material cost reduction to enhance our cost position.

Selling, general, and administrative expenses for the third quarter of 2008 were $7.2 million compared to $7.6 million for the same period of 2007. Higher investment in product development activities was offset by (inaudible) measures introduced during the second quarter. We will continue to fund product development activities to broaden our revenue base. In addition, in the third quarter, we launched an ERP system implementation to provide management with an additional tool for continuous cost reduction opportunities and to enhance our competitive position.

Net interest income for the quarter was $600,000. The income tax expense for the quarter was $4.2 million with an effective tax rate of 36.2%. This compares with an effective tax rate of 35.9% in the third quarter of 2007. The increase in the effective tax rate was due to production level in different locations.

Net income was $7.4 million for the quarter compared to net income of $8.7 million in the third quarter of 2007. Net income was impacted by the same factors that we addressed earlier.

The diluted earnings per share were $0.62 compared to net income of $0.73 per diluted share for the same period in 2007. The working capital balances reflect our effort to proactively manage the significant and unprecedented increases in input costs as well as provide additional services to our customer base.

At the end of the quarter, our accounts receivable balance was $68.3 million including interest bearing note receivable from an investment-grade customer of $54 million. This note receivable will be repaid in November.

At the end of the third quarter, our inventory balances of $114.4 million included work in process of $82.4 million and finished goods of $30.4 million. The finished goods inventory was shipped in the month of October. The work in process inventory includes forward inventory purchases of approximately $12 million that are intended to proactively manage price increases in the marketplace.

The inventory levels are expected to normalize by year-end as we ship completed orders and convert our raw materials. At the end of the third quarter, we entered into a new senior secured credit facility for $60 million through our leasing facility, JAIX Leasing Company. This facility will support our leasing initiatives in the short term.

Our cash balance of $128 million compared with available lines of credit provides us with strong liquidity during this uncertain economic environment. At this time, both the revolver and the warehouse facility are undrawn.

With respect to cash flow, we generated cash flow from operations of $15.9 million for the third quarter of 2008 compared to cash generated from operations of $21.3 million in the same period of 2007. Net cash used in investing activities was $36.6 million, reflecting the reclassification of railcars on lease.

We continue to actively market the railcars on lease; however, due to the uncertainty of the current credit markets, we reclassified the leased asset as the timing of the disposition may be longer than we originally anticipated. Net cash used in financing activities was $2.1 million.

In summary, we continue to focus on cost control and to improve the strength of our balance sheet through reduction of working capital to navigate through these uncertain economic times.

With that, I would like to turn the call back over to Chris.

Chris Ragot

Thank you, Kevin, and again I like to thank you for your contributions and wish you luck with your future endovenous. As we face a challenging macroeconomic environment and intensive competition, our management team is focused on improving our cost structure and our competitive position, which will benefit FreightCar America going forward.

In addition, our financial strength will enable us to navigate the challenging economic environment. In closing, I would like to thank you for your interest in our company and for participating on this call, and we look forward to updating you again during the next conference phone call.

We are now ready for questions Anna.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Kevin Sterling from Stephens Inc. Please go ahead.

Kevin Sterling – Stephens Inc.

Good morning Chris and Kevin.

Chris Ragot

Good morning Kevin.

Kevin Sterling – Stephens Inc.

Let me start with your orders for the quarter, may be you could share a little more color on the orders. Were these primarily from Class-1 rails, utilities et cetera? Could you share a little more color on your pretty significant growth in orders for the third quarter?

Chris Ragot

A combination of Class-1 utilities, and I would say, a smothering of the leasing companies.

Kevin Sterling – Stephens Inc.

Okay, was it primarily driven by the Class-1’s or it is essentially broken up?

Chris Ragot

I would say that was a healthy portion of it, yes.

Kevin Sterling – Stephens Inc.

Okay. What does the order trend look like for Q4, I know you guys said it would be lumpy, could you share a little color regarding your order trend for Q4?

Chris Ragot

You know, this last month here has been a very interesting month for a lot of us obviously, and it is hard to handicap the future, but I would say our quoting activity has remained in a good position here in the last 30 days and I am encouraged with this week, and we picked up several significant orders that we felt comfortable with. So, you know, today, I was encouraged with so many orders we booked this week.

Kevin Sterling – Stephens Inc.

Okay, thanks. What is your total annual manufacturing capacity right now with the two facilities in Roanoke and Danville?

Chris Ragot

We do not get into specifics around that Kevin. It is adequate to say that our capacity that we have right now will meet the requirements in the marketplace for the foreseeable future.

Kevin Sterling – Stephens Inc.

Okay thank you. Chris, maybe could you should a little color about your outlook for 2009? I know you may not want to get into specifics, but if you could help us how you are thinking about 2009, maybe, in particular the first half of 2009?

Chris Ragot

I cannot go too far into 2009, and listen – I look at it this way, the last 4 to 6 weeks have been very difficult. People have been adjusting their thoughts about the future in many different ways, not only as companies, but as individuals. I am encouraged though during the last couple of weeks that the customers are coming back to us and locking in on some orders as I said this week, and I am encouraged that the order quoting activity seems to be fairly robust, so I think we will know a lot more between now and year-end, so it is hard to handicap, it is hard to really take a look into 2009, but as of the last week or so, I have been encouraged.

Kevin Sterling – Stephens Inc.

Okay thank you, and one last question, Chris. Would you guys consider a stock buyback at the current level?

Chris Ragot

You know, stock buyback is always an option, and those are kind of things that myself and Kevin have dialog with the Board with. So, is it an option, absolutely. Is it something we are going to execute on, I do not know at this time. It is something that we will have discussions with, especially with the Board as we move forward.

Kevin Sterling – Stephens Inc.

Okay. Can I ask one more question? Do you have a timetable for completing the ERP system?

Chris Ragot

ERP system, right now I would say, we will complete it sometime in 2009.

Kevin Sterling – Stephens Inc.

Okay. Well, Chris thank you so much for your time. Kevin, thank you, and best of luck to you Kevin.

Kevin Bagby

Thank you Kevin.

Chris Ragot

Take care.

Operator

Our next question comes from Kim Burkhart [ph] from Burkhart Research [ph]. Please go ahead.

Chris Ragot

Good morning Kim.

Kim Burkhart – Burkhart Research

Good morning. Some of my questions were just answered, but I am wondering if you have got an idea how the falling of scrap prices for steel is going to affect the company’s decision to scrap older cars?

Chris Ragot

Well, I cannot speak on behalf of what our customers feel about that issue, but I am encouraged that the input costs have come down significantly here in the last 60 days, and I am not sure where that is going to trend for the future, but I would say, we are encouraged that input cost is coming down thus allowing us to be offering a price to our customers, but it has been lower than it was this past summer. The scrapping of cars – it is too early to say what decision would be made around that, but it is really a question for our customers more than us.

Kim Burkhart – Burkhart Research

Okay, well thanks a bunch.

Chris Ragot

Yes, thank you.

Operator

Our next question is from Michael Gallo from C.L. King. Please go ahead.

Michael Gallo – C.L. King

Hi, good morning.

Chris Ragot

Good morning Michael.

Michael Gallo – C.L. King

My question is on the Danville facility; I believe the labor contract is up at the end of this week. I was wondering if you can give us any commentary on that?

Chris Ragot

We have been engaged with that now, you know, for the last two months and the talks are going well. Everybody is in good spirit. The cooperation level is exactly where I thought it would be. It is high, and so, I am encouraged that everything is moving along in a very positive fashion there right now.

Michael Gallo – C.L. King

Okay great, that is helpful. And then second question, and I guess it comes back to your commentary on quoting activity, I was wondering what the significant recent decline in aluminum and steel prices – whether it might cause some of your customers to actually look to accelerate orders, as obviously, a lot of the surcharges would have gone down and certainly it seems like from what we hear out of most of the coal companies anyway, they tend to be contracted for 2010 with expectations that things are going to be up or through most of 2010, that things are going to be up from the levels that they are at in 2008?

Chris Ragot

You know, we are encouraged with the input costs coming down here related to surcharges. It has been a major change from what it was at the peak of July of this year. So, I think the net effect of that is that pricing is going to be something that our customers will be encouraged by, and so we will increase activities for 2009, we are hoping so.

Michael Gallo – C.L. King

Okay great. That is helpful, thank you.

Operator

And our next question comes from Steve Barger from KeyBanc.

Chris Ragot

Hi Steve.

Joe Radigan – KeyBanc Capital Markets

Hi, good morning. This is actually Joe Radigan on the line for Steve.

Chris Ragot

Okay Joe.

Joe Radigan – KeyBanc Capital Markets

Just a follow-up to the manufacturing capacity, if you saw deliveries, if they look like they are going to drop in the $4,000 to $5,000 range on a run rate basis, would you consider idling another plan or what actions would you take to maintain margins?

Chris Ragot

Are you talking about 4,000 to 5,000 units?

Joe Radigan – KeyBanc Capital Markets

Yes.

Chris Ragot

You know, we have been all along adjusting our manufacturing footprint and our capacity when we feel it is needed. We have been doing that ever since I have been on Board, and to answer your question, if there are additional changes to be made regarding our footprint and our capacity – line capacity, we will make those.

Joe Radigan – KeyBanc Capital Markets

Okay, and then can you talk about the fall – the recent fall in coal prices? Do you guys look at that as a leading indicator of coal car orders or why would not that be a leading indicator for coal car orders?

Chris Ragot

I do not focus a lot of our time and attention on that, but I do keep an eye on it, I do know Kevin if you want to –?

Kevin Bagby

I think coal car loading is a better indicator of where coal car activity is going forward, not necessarily the price of coal.

Chris Ragot

Yes, but I have been encouraged with the loadings here, obviously this year, and they seem to continue to be strong, and I think that will continue during the fourth quarter also.

Joe Radigan – KeyBanc Capital Markets

Right, okay, and then last question. In terms of CFO – your CFO search, can you a talk a little bit of how far long are you and what characteristics – kind of define the candidate that you are seeking and would you wait to make an acquisition until a new CFO is in place or is that not going to be an issue?

Chris Ragot

Well, first of all, we are well into the process. Second thing, I do not think it is appropriate for me here on this call to talk about the characteristics per se, although clearly I am looking for a candidate that has all the requirements needed to be a CFO of a public company. Beyond that, I would say that we have the staff in place that will allow us to execute on those opportunities if those opportunities come up in the next month or two, then we will be able to execute on that with the folks that we have in our organization and with the members that we have on our Board, but I will say – emphasize again, we are well into the search process right now.

Joe Radigan – KeyBanc Capital Markets

Okay, very good. Thanks a lot.

Operator

(Operator instructions) And there are no questions in the queue at this time.

Chris Ragot

All right, well, Anna, I want to thank you very much. Again, I would like to just say thank you for Kevin for all his hard work in this organization. We wish him well, and thank you again for participating in this call. Look forward to our future calls.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and you may now disconnect.

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