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FreightCar America Inc. (NASDAQ:RAIL)

Q4 2012 Results Earnings Call

February 20, 2013 11:00 AM ET

Executives

Joe McNeely - Chief Financial Officer

Ed Whalen - President and CEO

Ted Baun - Senior Vice President, Marketing and Sales

Analysts

Michael Gallo - C.L. King

Justin Long - Stephens

Steve Barger - KeyBanc

Peter Nesvold - Jefferies

Sal Vitale - Sterne Agee

Mike Baudendistel - Stifel

Matt Brooklier - Longbow Research

Matthew Dodson - JWest, LLC

Operator

Welcome to FreightCar America's Fourth Quarter 2012 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 p.m. Eastern Standard Time today until 11:59 p.m. Eastern Daylight Time on March 20, 2013. To access the replay, please dial 1-800-475-6701. The replay pass code is 281877. 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, Chief Financial Officer of FreightCar America.

Joe McNeely

Thank you. And welcome to FreightCar America's fourth quarter 2012 earnings conference call and webcast. Joining me today are Ed Whalen, President and CEO; and Ted Baun, Senior Vice President, Marketing and Sales.

Before we begin, 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 2011 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 2011 Form 10-K and earnings release for the fourth quarter of 2012 are posted on the company's website at www.freightcaramerica.com.

I’d now like to turn the call over to Ed Whalen, our President and CEO for some opening remarks.

Ed Whalen

Thank you, Joe, and good morning. Before we discuss our fourth quarter and full year 2012 results, I would like to address an important event for FreightCar. Yesterday we announced a long-term lease of a new railcar manufacturing capacity in the Shoals region of Northwest Alabama.

This facility will enhance our capability, efficiency and cost competitiveness in the railcar manufacturing segment for years to come. When I return three years ago, I knew we had to expand our product offerings to lessen our reliance on coal cars. Over the last two years we introduced several new products including intermodal railcars, non-intermodal flat cars and various open-top and gondola cars.

In order to produce these new types of railcars efficiently, we need to plan footprint with expanded capabilities. The Shoals facility will allow us to produce over 7,000 railcars per year when fully operational, and we’ll be our primary facility for manufacturing non-coal car products.

To meet the facility operational we will invest approximately $23 million in equipment and tooling. We believe the efficiency afforded by this facility along with the cost saving to be realized from on-site large fabrication and product support services to be provided by Navistar will improve our long-term competitiveness.

We are working to make the facility fully operational so that we can begin production of railcars in the middle of this year. A team has been created to manage the facility start-up and is preparing it for production. We look forward to working with Navistar, the State of Alabama and the counties and communities in the Shoals area.

I would like to -- now like to turn the call over to Ted Baun to give you an update on our markets and commercial activity.

Ted Baun

Thank you, Ed. Good morning. To recap 473 new railcars were ordered in the fourth quarter of 2012, compared to 4,481 units ordered in the fourth quarter of 2011, of which 3,300 were rebuilds. 225 new railcars were ordered in the third quarter of 2012. For the full year 2012, 2,903 railcars were ordered, as compared to 2,437 railcars ordered in 2011.

As expected, deliveries declined in the fourth quarter of last year to 1,308 railcars, which included 528 new and 780 rebuild railcars. This compares to 2,489 railcars delivered in the fourth quarter of 2011, of which 2,153 were new railcars, 62 were used and 274 were leased.

There were 1,618 railcars delivered in the third quarter of 2012, of which 998 were new and 620 were rebuild. We delivered 8,325 railcars in 2012, which was an increase of 2,137 railcars from 2011.

Our backlog of unfulfilled orders at December 31, 2012 was 2,881 railcars, compared to 8,303 railcars at December 31, 2011, and 3,716 railcars at September 30, 2012. Our current backlog includes a mix of coal and non-coal cars.

Industry-wide 11,066 units were ordered and 11,815 units were delivered in the fourth quarter of 2012, which were down from both the third quarter of last year and the fourth quarter of 2012.

Industry-wide backlog also decreased 60,244 units at the end of December. These decreases reflect a strong tank car market offset by weakness in other freight car types. Non-tank car orders of 4,227 units were 1,400 units lower than the fourth quarter of 2011 and 2,100 units lower than the third quarter of last year.

The overall number of railcars and storage increased to roughly 317,000 as of December 31, 2012, an increase 8,000 railcars when compared to September 30, 2012. We also estimate that the number of coal cars and storage increased from about 22,000 at the end of September to approximately 30,000 currently.

U.S. commodity loadings in the fourth quarter of 2012 were down 4.9% when compared to the fourth quarter of 2011. While railcar loadings of certain commodity such as chemicals, motor vehicles and equipment exhibited growth, coal loadings continue to be challenged decreasing 14.2% versus the fourth quarter of 2011.

Weakness in loadings for metallic ores and metals along with agricultural products also contributed to the overall decline in loadings. Intermodal container loadings remain strong for the quarter and increasing by 3.7% versus the same quarter in 2011.

The coal market continue to be mixed, low electricity demand, low natural gas prices and the start of another mild winter have reduced demand for thermal coal, which has resulted in an increase in utility stockpiles to 187 million ton, 8% above the year ago stockpile level.

This in turn has resulted in a decrease in coal loadings and when coupled with an increase in rail velocities cause the increase in coal cars and storages as noted previously. The coal export market had a very strong year with almost 126 million ton exported, a 17% increase from 2011.

Joe McNeely will address our fourth quarter financial results.

Joe McNeely

Thank you, Ted. Fourth quarter 2012 results reflect a number of challenges in both of our segments. On a consolidated basis, the net loss for the fourth quarter of 2012 was $1 million or $0.08 per diluted share, compared to net income for the fourth quarter of 2011 of $8.5 million or $0.71 per diluted share. Net income was $4.8 million or $0.40 per diluted share for the third quarter of last year.

Consolidated revenues were $117 million in the fourth quarter of 2012, which were $70 million lower than the fourth quarter of 2011 and $44 million lower than the third quarter of last year. The decreases in revenue were driven primarily by the lower number of railcars delivered.

For the full year 2012, consolidated revenues were $677 million, up $190 million or 39% from 2011 level. Consolidated net income of $19.1 million or $1.60 per diluted share was $14.2 million than 2011 consolidated net income of $4.9 million or $0.41 per diluted share.

The manufacturing segment was impacted by several factors in the fourth quarter of last year. First, the changeover and start-up of our production lines negatively impacted our results. In addition, as Ted noted earlier, railcar deliveries were down from both the fourth quarter of 2011 and the third quarter of last year.

As a result, the manufacturing segment revenues for the fourth quarter of 2012 were $109 million, down $70 million from the fourth quarter of 2011 and down $43 million from the third quarter of last year.

Operating income for the fourth quarter of 2012 was $6.5 million or 6% of revenue, which was $10 million or 3.2 percentage points lower than the fourth quarter 2011 and $7.4 million or 3.1 percentage points lower than the third quarter of last year. The decrease in operating income versus prior periods reflects the decrease in deliveries and the negative impact of the product changeover cost.

Our services segment also had difficult quarter, a decrease in repair volumes and continued shift in work to lower margin running periods had a negative impact on repairs and part sales results for the quarter. Services segment revenues for the fourth quarter of 2012 were $7.3 million, compared to $7.8 million in the fourth quarter of 2011 and $8.1 million in the third quarter of 2012.

Operating income for the services segment was approximately $100,000 in the fourth quarter of 2012. This was about $400,000 lower than the fourth quarter of 2011 and $500,000 lower than the third quarter of last year.

Corporate costs for the fourth quarter of 2012 were $6.6 million. These costs were $1 million lower than the fourth quarter of 2011 and lower consulting spending but flat with the third quarter of last year.

Income tax expense of $0.8 million in the fourth quarter 2012 included provisions to reduce deferred tax benefits due to enacted changes and certain state statutory rates and to reflect a reduction in our blended state effective tax rate. The full year 2012 effective tax was 49.9%.

At December 31, 2012 we had 658 railcars on lease with the book value of $43 million versus 758 railcars on lease with the book value of $51 million as of September 30, 2012. The decrease in railcars on lease reflects sales of leased railcars in the quarter.

Lastly, our financial position continues to be strong with no outstanding debt and total cash and short-term investments on hand at the end of December 2012 of $155 million, which was $11 million higher than the number September 30, 2012 balances. We have no current plans to draw upon our revolving credit facility.

I will now turn the call back to Ed for some concluding comments.

Ed Whalen

Thanks, Joe. 2012 was a good year for FreightCar despite significant coal market headwinds. In addition to solid financial results those presented by Joe, a number of key objectives were accomplished. We delivered three new non-coal car types meeting our customer’s stringent delivery and quality expectations. We are successfully executing the largest rebuild order in the company’s history.

We completed investments to approve our ability to manufacture new railcar types. We made a number of improvements to our repair facilities and our operating systems. We strengthened our already strong balance sheet and very importantly, we position the company through the lease of the Shoals facility to efficiently produce our non-coal car products.

For 2013, we have two clear priorities. First, effectively manage the business in what will be a challenging year for our traditional coal car business. While I remain confident that the Eastern coal car fleet will continue to be replaced, it is becoming more apparent that the recovery of the Western coal market will take some time.

The addition of our Shoals facility will give us a solid platform from which to aggressively pursue a broad range of non-coal car business. However, with the reduced near-term outlook for the Western coal market and a lack luster market for several non-coal car types, we expect our 2013 railcar deliveries to be in the 4,000 to 6,000 car range. This will require us to closely manage our costs and maximize the efficiency of our facilities.

Second, we will advance our long-term strategic goals to further expand our non-coal car product offerings, grow our participation in the railcar parts and service business and continue our effort to obtain value for our expertise in the rail transportation of bulk materials in international markets.

Over the past three years, we have shown tremendous resiliency in the face of significant headwinds for coal. We remain well positioned to address the recovery in a coal car market when it occurs. I'm confident that with the addition of the Shoals facility, we will successfully achieve our strategic objectives and grow value for our shareholders.

This ends our prepared comments. We're now ready to address your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from the line of Michael Gallo of C.L. King. Please go ahead.

Michael Gallo - C.L. King

Hi. Good morning.

Ed Whalen

Good morning, Michael.

Joe McNeely

Good morning, Mike.

Michael Gallo - C.L. King

What kind of cars will you be able to produce out of Shoals, we able to produce tanks or just the intermodals and some of the other car types?

Ed Whalen

Presently, we are only planning to produce dry freight cars.

Michael Gallo - C.L. King

Okay. Second question I have is when would you be able to start taking orders for Shoals? Is that something we will have to wait till the second half of the year to see, or you currently have been in discussions with customers now or just help us just with the cadent?

Ed Whalen

We are ready to take orders immediately. And in fact, we are planning to commence production in the second half of this year.

Michael Gallo - C.L. King

Okay. Great. And then final question, how much was the changeover costs in the fourth quarter related to some underlying changeovers?

Joe McNeely

Mike, as you know we don’t give out a detail of those as you look at the March percentage absent those changeover costs, we would expect to margins to be in line with prior quarters.

Michael Gallo - C.L. King

Okay. That’s very helpful. Thanks very much.

Operator

We’ll go next to the line of Justin Long with Stephens.

Justin Long - Stephens

Hey. Good morning, guys.

Ed Whalen

Good morning, Justin

Justin Long - Stephens

Obviously just curious, what the driver to making the decision to expand capacity through this Navistar plant was versus just adjusting your two existing facilities to serve some of the non-coal railcar demand? Was it primarily driven by the location and some of the advantages from the supply side of the equation or something else?

Ed Whalen

This was primarily driven by the physical configuration of our existing plans due to the nature of facilities. It would be very difficult to manufacture tall and long cars in those facilities. They are also geographically constrained and it would take considerable capital investment to modify those facilities to manufacture those cars. So it’s primarily driven by the physical capability of these other facility.

Joe McNeely

And we will not and we will not add -- the big driver of that, the other is the close proximity of suppliers in area, including having the relationship with Navistar there to provide stuff on-site and we think it helps to make that facility an efficient facility.

Justin Long - Stephens

Got it. That makes sense. And from a margin perspective, I know it’s obviously still very early but is there anything structurally in this new operation that would lead you to believe the gross margin would be outside of the 8% to 11% normalized range that you guys have talked about historically in your core business?

Joe McNeely

Yeah. Justin, as you know we don’t give guidance on margins but there is nothing in that facility that thinks that this would change our margin profile.

Justin Long - Stephens

Okay. Got it. And when you talk about the facility becoming fully operational and having capacity for about 7,000 units annually, what's the timeline on ramp? I know you're expecting the first deliveries to start in the middle part of this year, but when do you think you'll be in a position where you could operate near those capacity levels?

Ed Whalen

That could be -- take place over the next two years, but a lot will depend on where the order book is and where the railcar markets at.

Justin Long - Stephens

Got you. And maybe in terms of that, how is your visibility trended? I know it was a little bit cloudy when we talked to you last quarter, but we've been through the winter months now. Typically, you see some seasonal orders in those mines but how have inquiries levels trended and maybe both on the coal car side and for some of the non-coal cars?

Ted Baun

Yeah. Hi, Justin. This is Ted. I would say that the inquiries are about the same level as they were in the fourth quarter, so there hasn’t been much change. We are seeing some activity in the non-coal car arena. And as we know, the coal car area is a bit lumpier and right now it’s just wide.

Justin Long - Stephens

Okay. Great. That’s helpful. And I think my last question is maybe for Joe. In terms of the guidance for 4,000 to 6,000 railcar deliveries this year, how much of that guidance is from the Alabama plant? Does that include shipments from that plant and can you break that out?

Ed Whalen

It doesn't include shipments from the plant. I think we said in our press release, we expect to be delivering cars in the second half of the year but we don’t give out delivery specifics for any of our plants.

Justin Long - Stephens

Okay. Got you. And then also in terms of the lease payment, are you going to be disclosing what that amount is at any point?

Ed Whalen

We do not do that.

Justin Long - Stephens

Okay. Great. Well, I guess that’s all from me. I appreciate the time.

Ed Whalen

Thanks, Justin.

Operator

Thank you. We’ll go to next to line of Steve Barger at KeyBanc.

Steve Barger - KeyBanc

Hi. Good morning, guys.

Ed Whalen

Good morning, Steve.

Joe McNeely

Steve.

Steve Barger - KeyBanc

I know that Shoals facility is really world class in terms of its manufacturing infrastructure. Can you just give us in big buckets what the $23 million will be spent on? I think it was more like a turnkey when I had seen it.

Ed Whalen

The cost is really for production, tooling and equipment including purchasing some of the equipment that exists there today from Navistar.

Steve Barger - KeyBanc

I see. Okay. So you're actually going to take ownership of some, but you are leasing part of the facility.

Ed Whalen

The facility is been leased, the equipment that will be there that we are operating for the most part will be owned by us.

Steve Barger - KeyBanc

Got it. You said drive freight cars but do you intend to focus on covered hoppers because that’s obviously the biggest all-around segment, or are flat cars the focus to take advantage of our intermodal car design, are you agnostic and you are just kind of casting the net?

Ed Whalen

Our primary focus is going to be on intermodal flat cars, open-top cars of various types and gondola cars.

Steve Barger - KeyBanc

Okay. And I think you said, maybe I missed it, you don't have orders for those new cars types now, but you are ready to take orders today? Is that right?

Ed Whalen

Yeah. We have inquiries for car types and we are prepared to take orders for the plant right now.

Steve Barger - KeyBanc

Okay. I know you didn’t want to talk about gross margins what they might look like coming out of the Shoals plant. But just how should we think about the return on investment in the near-term? Is there anyway for us to frame up, how you're thinking about the return on the $23 million that you are spending?

Ed Whalen

In terms of the return, we are not going to get into specifics on that, although we do feel we have the positive return and is positive for our business for the long-term.

Steve Barger - KeyBanc

Right. Okay. So you are just looking at facility really as being a more efficient way to make those specific car types and as you think, you model out the mix of cars that you could ship and where you think you can put the economics you think it justifies the $23 million?

Ed Whalen

Absolutely.

Steve Barger - KeyBanc\

Okay. And sorry if I missed this, how long is the agreement for in years for the lease?

Ed Whalen

It’s a nine-year lease with an option to renew.

Steve Barger - KeyBanc

Got it. Okay. I think that’s all I have. Thanks.

Ed Whalen

Thank you.

Operator

Thanks. We’ll go to next to line of Peter Nesvold with Jefferies.

Peter Nesvold - Jefferies

Good morning, guys.

Ed Whalen

Hey, Peter.

Peter Nesvold - Jefferies

So, I guess I just want to clarify. It sounds like you don’t have anything in the backlog yet for the Shoals facility. Am I reading into it too much? It sounds like you have commitments that are closed and that’s what put you over the line to the final lease.

Ed Whalen

At this point, we have not assigned any work to the facility. We are out there actively seeking work for all of our plants right now and we expect to have and work to assign there shortly.

Peter Nesvold - Jefferies

Okay. I’m going to illustrate my ignorance here. You mentioned dry freight but then you just talked about open-top hoppers and gondolas. I mean, is that for dry freight where I would have thought that that’s not for dry freight?

Ed Whalen

That’s for dry -- I mean non-tankers. Yeah.

Peter Nesvold - Jefferies

Non-tankers. Okay. Let’s see. You mentioned that it’s a 7,000 a unit capacity facility, is that just the 25% that you are leasing right now, or does that assume you take over the entire facility?

Ed Whalen

That is just the portion that we are leasing.

Peter Nesvold - Jefferies

Okay. Okay. I think that’s it from me then. Thank you.

Ed Whalen

Thank you, Peter.

Ed Whalen

Thank you.

Operator

We’ll go next to line of Sal Vitale of Sterne Agee. Please go ahead.

Sal Vitale - Sterne Agee

Good morning, gentlemen.

Ed Whalen

Good morning.

Joe McNeely

Hi, Sal.

Sal Vitale - Sterne Agee

So just a quick question, Joe, I know you mentioned that you can't give too much additional color on the product changeover costs. But in your response and I apologize if I missed it, you said just to look at prior periods percentage of something or other. Was it prior period’s margins you said that we should assume going forward?

Joe McNeely

Yeah. What I said is, absent those we expect the margin percentages to be comparable to prior quarters.

Sal Vitale - Sterne Agee

Okay. So in other words, should we think about that the product changeover being a one quarter phenomenon and it’s pretty much straight through?

Joe McNeely

Yeah. As a matter of fact, the subsequent following-on orders that we have started up in that facility, we are operating within our budget expectations.

Sal Vitale - Sterne Agee

Okay. That's fine. Now, in terms of getting ramping up the new facility, the Shoals facility, should we also expect I guess in 2Q or 3Q, should we expect some start-up costs to impact the margin?

Ed Whalen

That would be a fair expectation, yeah.

Sal Vitale - Sterne Agee

Okay. Do you think it might be of the same order of magnitude is what happened in 4Q or -- any clarity?

Ed Whalen

The start-up costs in the 4Q was specifically related to three orders that we had and not entirely related to the start up of the facility in terms of the activation of equipment and that type of things. So, I would not expect to repeat our experience in the fourth quarter.

Sal Vitale - Sterne Agee

Okay. Got it. That make sense. And then just looking at the guidance of the range of 4,000 to 6,000 -- I guess, what is the variable that could cause that difference, that I think could account for that 2,000 car difference? Is it basically just the coal market recovering, and you’re getting additional orders in the first couple of quarters of this year. Are there -- how much of that range is due to the number of orders for cars that you get for new facility?

Ed Whalen

I think the range is primarily driven by the amount of uncertainty and what’s happening in the general economy. If you look at car loadings as Ted pointed out in various commodities, some are stronger than others. And there isn’t a very demonstrable trend right now in any of those product areas. And so the range is a function of the uncertainty in what’s going to happen to loadings and the general economy at those points.

Sal Vitale - Sterne Agee

Okay. And then just a last question on the -- what you said about the types of cars that you expect to produce at the Shoals facility. I think you mentioned nine intermodal flats, open-tops and gondolas. So those are the types -- those are car types that you do not currently produce, correct?

Ed Whalen

Well, we have produced -- we've recently produced some here in the fourth quarter. But we have not produced large quantity of those cars in recent years. No.

Sal Vitale - Sterne Agee

Okay. So it’s more basically being able to produce those types of cars on a larger scale?

Ed Whalen

And in a more efficient -- on a more efficient basis.

Sal Vitale - Sterne Agee

And more efficient.

Ed Whalen

In Canada, our existing facilites.

Sal Vitale - Sterne Agee

Right. Okay. I guess, just one other question, Joe. I’m not sure, if you can answer this but on the $23 million investment, I think you said a portion of that will be to purchase new equipment. Can you give us a sense for what the depreciation expense on that would be annually?

Joe McNeely

It will be -- I mean, this is all fairly new equipment. So it would be amortized over choice and our policy as we amortized straight line sales. Depending on detail of the equipment, that’s going to be anywhere from three to 15 years.

Sal Vitale - Sterne Agee

Okay. Thank you very much.

Joe McNeely

You’re welcome.

Operator

And we’ll go next to line of Mike Baudendistel with Stifel. Please go ahead.

Mike Baudendistel - Stifel

Thanks. Good morning.

Ed Whalen

Good morning.

Mike Baudendistel - Stifel

Just wanted to ask on the -- the new facility. Does that increase the -- sort of, ongoing capital requirement, sort of, on an annual basis, after you get past the $23 million initial investment?

Ed Whalen

It should, I mean, there is always capital required to run the facility. But this is a very new facility. So in terms of what our typical CapEx in terms of maintenance capital, it should be a lot less than historical levels.

Mike Baudendistel - Stifel

Okay. Ed, how many production lines do you anticipate running on that facility?

Ed Whalen

We are -- we expect to operate two production lines in that facility.

Mike Baudendistel - Stifel

Okay. Two production lines at any one time. And then just in early 2013, I guess the follow-up on one of the last analyst question. Should we expect with the change-over activities behind you that the rate of production will sort of revert back to where it was through most of 2012 than mid 2012?

Joe McNeely

In terms of rate of production, we don’t give up specifics on cadence of orders although our backlog will be built out through the third quarter of this year.

Mike Baudendistel - Stifel

Okay. Great. And then maybe one last question, the 473 units ordered in the fourth quarter, could you just give us a sense of how many of those were coal cars and how many were the other types of cars that you discussed?

Ed Whalen

Mike, the vast majority of those were non-coal cars.

Mike Baudendistel - Stifel

Okay. Great. Those were the questions I have. Thank you.

Ed Whalen

Okay.

Operator

Thank you. We’ll go next to line of Matt Brooklier at Longbow Research. Please go ahead.

Matt Brooklier - Longbow Research

Hey, thanks. Good morning.

Ed Whalen

Good morning.

Joe McNeely

Good morning, Matt.

Matt Brooklier - Longbow Research

So if we’re increasing production with the new facility, two new production lines. How should we think about the production lines at your two existing facilities at this point in time if we’re in a period of kind of lower historical coal car demand and we’re getting into some other equipment type? Just curious, what your manufacturing footprint potentially looks like in 2013 all in?

Ed Whalen

As we’ve said in the past, we essentially operate our facilities to meet our customer’s delivery requirements and we’re going to do that. So we’re aggressively seeking orders for all of our facilities whether they’re coal or non-coal cars and that process will continue this year.

Matt Brooklier - Longbow Research

Okay. So, I guess, the question is your sense is you’re going to maintain kind of current capacity at your two existing facilities. Hopefully, we get a rebound on the coal side and then we’re also getting incremental orders on the non-coal side. Is that how we should be thinking about it?

Ed Whalen

Well, I think as we’ve mentioned in the past, we size our facilities to the orders that we have. And if we don’t receive orders, we’re going to reduce our capability at the given facilities depending on cost and customer delivery requirements and so forth.

Matt Brooklier - Longbow Research

Okay. Got you. And then maybe what are some of the other potential cost reduction buckets that you’re focused on as we move through this year?

Joe McNeely

Well, of course, we’re aggressively looking at our SG&A to make sure we keep that lowest level possible. And we’re going to continue to manage our facilities that are operational at the lowest cost possible. I mean, it’s a continual challenge to address operational cost for this business and that’s what we’ve done and that’s what we’re going to continue to do.

Matt Brooklier - Longbow Research

Okay. Very good. Thank you for the time.

Joe McNeely

Thank you.

Ed Whalen

Thank you, Matt.

Operator

We’ll go next to line of Matthew Dodson with JWest, LLC. Please go ahead.

Ed Whalen

Good morning, Matthew.

Matthew Dodson - JWest, LLC

Hi. Can you talk just -- I’m trying to understand whether you said that you haven’t put any work or haven’t received orders for the new facility, but the 473 cars were not coal cars. So you’re actually building things besides coal cars in your existing footprint?

Ed Whalen

That’s we are. Yeah. Actually, we built some in the fourth quarter and we’re continuing to build some today.

Matthew Dodson - JWest, LLC

Got it. So now I just understand this win, this facility comes up in the second half. Then if you got those 473 orders that were for the fourth quarter, would they be going to that new facility then?

Ed Whalen

Our assignment of products at that facility are based on the cost of production of that particular car type of that facility. The customers, the delivery requirements, and essentially transportation cost. So depending on those factors, we will assign the production to the appropriate facility at the time we receive the order.

Matthew Dodson - JWest, LLC

Okay. It helps me understand that better. The $23 million that you talked about, you basically said, it differentiates between the equipment but if I just did the 15 year straight lines, that’s about $1.5 million as added cost to the P&L going forward. Is there any thing more that we should think about when that facility comes on from a D&A standpoint? Are there any other costs that you have besides the variable cost of the employees that are fixed cost that has to come on?

Ted Baun

Our cost pressure is usually pretty variable around -- in the biggest component of our cost pressure is the railcar production cost itself, the material and the labor, that were just variable cost.

Matthew Dodson - JWest, LLC

Right. Exactly but you don’t have to hire new sales guys to sell these type of cars as opposed to coal cars. Is that fair?

Joe McNeely

No. Our existing sales force is currently marketing on the coal and non-coal products.

Matthew Dodson - JWest, LLC

So is that $1.5 million to $2 million a good range for the D&A or fixed cost that are going to differentiate the P&L because of the new plant or do you not want to talk about that?

Joe McNeely

Yeah. I prefer not to talk about that.

Matthew Dodson - JWest, LLC

Yeah. I figured. Okay. And the next question I have for you is can you just talk a little bit about when you’re going into these new products, I mean, how are you competing because there is already people that make those type of products. Are your products just better? Are you competing on price or how do you break into a business like that, I guess, when you have entrenched competitors?

Ed Whalen

We compete in our markets on quality, price and delivery.

Matthew Dodson - JWest, LLC

Okay. Got it. And then, the last question I have for you the $23 million, what else do you have in CapEx this year?

Joe McNeely

In total, I got that for the other facility, $4 million to $5 million, I believe.

Matthew Dodson - JWest, LLC

$4 million to $5 million. Okay. Got it. And then I do have one last and you probably won’t answer this one. But at the low end of your range on a delivery with the 4 million -- 4,000 cars, did you burn cash. And I assume, you don’t make any money at 4,000. Is that right or can you bring the cost down at your other facility enough to stop the red ink or the burn?

Joe McNeely

Matthew, that we don’t give guidance and also I would not respond to that.

Matthew Dodson - JWest, LLC

Okay. All right. Thank you.

Ed Whalen

You’re welcome. Thank you.

Joe McNeely

Thank you.

Operator

And we’ll go next to the line with the follow-up from Peter Nesvold of Jefferies.

Peter Nesvold - Jefferies

Hey guys.

Ed Whalen

Hi Peter.

Peter Nesvold - Jefferies

I knew there was another one, I’d like to ask. I’m going to ask the question I hope you can answer and then maybe you can rephrase it, if you don’t like the way I ask it. I think a lot of people are just trying to get a sense for the break-even point here, both on, kind of, an operating income basis and a cash flow basis because it look like, you’re sort of, break-even on both terms in this quarter on this production run rate.

In this production run rate, if I just kind of annualize that it was kind of the midpoint of the forward range. Is there anything unusual about the seasonality of 4Q or any other factors. I think you mentioned the couple of start-up costs on three contracts. Any thing that’s unusual about this particular quarter that we should keep in mind as we strain out 2013 estimates and kind of keeping in mind that the production numbers in this quarter are kind of the production numbers you have for the year?

Joe McNeely

Not going to comment on that other than say in terms of the quarter, there was nothing unusual going on other than what Ed had talked about on the production start-up cost.

Peter Nesvold - Jefferies

And so there isn’t any kind of unusual seasonality. Did you get a lot of shutdowns around Christmas and Thanksgiving or is that not really a factor outside of the other three quarters?

Ted Baun

There was a normal shutdown around Christmas but it’s not going to have a significant impact for your purposes.

Peter Nesvold - Jefferies

Okay. All right. Thank you guys.

Ed Whalen

Well, thank you.

Ted Baun

Thank you.

Operator

And we have a follow-up from the line of Steve Barger with KeyBanc. Please go ahead.

Steve Barger - KeyBanc

Hi. Sorry, if I missed this. Did you say what the incremental SG&A related to Shoals is?

Joe McNeely

No, we did not. And you won’t -- I think the question was asked that do we need to step-up sales people and alike and Ed responded that our existing sales team can handle and currently market these car types.

Steve Barger - KeyBanc

Got it. Thanks, Joe, Ed.

Joe McNeely

Thanks, Steve.

Operator

And we have a follow-up from the line of Sal Vitale with Sterne, Agee. Please go ahead.

Sal Vitale - Sterne, Agee

Just a quick follow-up question. Did you mention on your current backlog of 2,881 cars. How much of that is rebodied?

Ed Whalen

We did not but that number is 1900 of that total.

Sal Vitale - Sterne, Agee

Okay. And then just if you could refresh my memory, I know we discussed this at some point during 2012. Can you give us a sense for what the gross margin is on rebodies or if you can -- you gave some kind of indication on the gross margin or the gross profit dollars are actually some more to the new cars?

Joe McNeely

Well, we said as the gross margin percentages are similar to existing new cars.

Sal Vitale - Sterne, Agee

Okay. And is there any change to that since -- you said there was…

Joe McNeely

No.

Ed Whalen

No.

Joe McNeely

As I mentioned earlier, we have successfully -- we are successfully executing the rebuilt project?

Sal Vitale - Sterne, Agee

Okay. Thank you.

Operator

(Operator Instructions) And gentlemen, at this time, there are no further questions in queue from the phones.

Joe McNeely

Thank you. This concludes today’s conference call. Thank you for joining. A replay of this call will be available beginning at 1:00 p.m. Eastern Time today at 1-800-475-6701, pass code 281877. Good day.

Ed Whalen

Thanks everybody. Have a good day.

Operator

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

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