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FreightCar America, Inc. (NASDAQ:RAIL)

Q4 2013 Earnings Conference Call

February 19, 2014 11:00 AM ET

Executives

Charles F. Avery – Vice President Finance, Chief Financial Officer and Treasurer

Joseph E. McNeely – President and Chief Executive Officer

Theodore W. Baun – Senior Vice President, Marketing and Sales

Analysts

Michael W. Gallo – C.L. King & Associates, Inc.

Justin Long – Stephens, Inc.

Matt Brooklier – Longbow Research LLC

Salvatore Vitale – Sterne Agee & Leach Inc.

Doug Dyer – Heartland Funds

Michael James Baudendistel – Stifel, Nicolaus & Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to FreightCar America’s Fourth 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 Standard Time today until 11:59 AM on March 19, 2014. To access the replay, please dial 800-475-6701. The replay pass code is 318803. 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 Mr. Chip Avery, Chief Financial Officer of FreightCar America.

Charles F. Avery

Thank you and welcome to FreightCar America’s fourth quarter 2013 earnings conference 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 fourth quarter of 2013 are posted on the company’s website at freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Joseph E. McNeely

Thank you, Chip. 2013 was the transformational year for FreightCar America, as the Company completed several strategic initiatives the time to grow the long-term value of the Company.

The continued soft freight car demand and a number of accounting charges had a negative impact on our financial performance this past quarter. Despite financial results, which Chip will discuss some more details shortly, 2013 included a number of successes related to our future enquiry. The startup of our Shoals facility, expansion of our product offering, maintaining our status as a market leader in coal car manufacturing, improving the contribution of our services business and advancing our presence in select international markets.

As we’ve stated, expanding our product offerings is key to our long-term success and we made good progress on that front. The current backlog includes a variety of new car types including intermodal railcars, flat cars and covered hopper railcars. And our new product development team continues to work on designs for several other car types.

The Shoals facility, our primary plant for these new car types started up on time and is about to complete its third order. The build out and ramp-up will continue with the final build out expected to be completed by mid-year. While this will be an efficient facility once complete, margins as we ramp-up will respectively be lower than it will be at normal production volumes.

In our traditional market, 2013 was a difficult year for coal. With loadings, production and export all down compared to 2012. And we’ll have a few comments on this in a moment. With a continued pressure from natural gas, in an unfavorable regulatory environment our new coal-fired power plant, the outlook for newly manufactured Western Railroads cars looks to be soft for sometimes. However, the Eastern Railroads continue to replace their fleets and with their rebuild orders we received in 2013, our Roanoke plant is virtually full. Again, those plants however remains idle, but is available if more coal car capacity is needed. As I have stressed before, while we are focused on diversifying our product offerings, we remain committed to maintaining our leadership in the coal car market.

On the services side of the business, the changes we put in place for the last few years, help us improve revenue and operating income over the prior year. During the quarter, we took a hard look at the contribution from all of our maintenance and repair shops and made a decision to close an underperforming shop in order to improve overall return.

Chip will address the accounting impact of his decision in his comments. Our remaining maintenance and repair operations are focused on building momentum, achieved in 2013 and growing the value of this business. Internationally, we won several orders in 2013 for export. We will continue to seek opportunities abroad and plan to grow this part of our business over the long-term.

Our backlog at the end of 2013 was roughly 6,800 railcars, given we continue to ramp-up at the Shoals facility and given the weak coal car market outlook, we project that our deliveries for 2014 will be around 7,000 railcars. So far this year, all of our facilities had been negatively impacted by the severe winter weather experienced across most of the U.S. And as a result, deliveries from our first quarter of 2014 will be at a slower pace than the rest of the year.

For the fourth quarter and full year 2013 results fell below our expectations, I’m confident that we will successfully continue to diversify our product offerings, maintain our coal car market leadership, grow the value from our services business and expand on our international successes. I believe these efforts will bear our fruit in 2014 and for by long-term value for our customers, shareholders and employees.

Ted will now provide an update on our markets and commercial activities.

Theodore W. Baun

Thank you, Joe. To recap order activity for the period, 800 railcars of various types were ordered in the fourth quarter of 2013. This compares to 473 units ordered in the fourth quarter of 2012 and 6,001 railcars order in the third quarter of 2013. As some of you will recall, the third quarter included rebuild orders for approximately 4,000 railcars.

Fourth quarter 2013 deliveries of 1,101 railcars included 190 new, 99 used and 812 rebuilt railcars. This compares to 1,308 railcars delivered in the fourth quarter of 2012, including 528 new cars and 780 rebuilt railcars. There were 937 railcars delivered in the third quarter of 2013, of which 194 were new and 743 were rebuilds. Our backlog of unfulfilled orders at December 31 2013, 6,826 railcars slightly down from 7,129 railcars at September 30, 2013. Our backlog at December 31, 2012 was 2,881 railcars. As Joe said, we have made good progress on our new product development efforts, and close to half of the current backlog is comprised as non-coal railcars.

Industry-wide 14,865 units were ordered and 15,776 units were delivered in the fourth quarter of 2013. Orders and deliveries were up from the fourth quarter of 2012 as well as the third quarter of 2013. Industry-wide backlog was 72,937 units at the end of December relatively flat compared to the end of September and up from a year ago. After a year dominated by strengthened energy market approximately 75% of the year-end backlog consists of tank cars. Non-tank car demand improved with 9,949 railcars ordered in the fourth quarter compared to 7,603 railcars ordered in the third quarter. A large portion of the fourth quarter orders were for covered hopper cars.

Deliveries for non-tank cars also increased slightly to 7,336 units, from 5,100 units in the third quarter. These after-mentioned industry figures do not include rebuilt order and delivery activity. The overall number of railcars in storage was roughly 278,000 as of December 31, 2013, a decrease of 19,000 railcars when compared to September 30, 2013. We estimate that the number of coal cars in storage declined to about 16,500 railcars, compared to 21,000 railcars at the end of the third quarter.

This is the lowest level since early 2012. While we may see further reduction due to severe weather impacts on rail velocities, coal burn and stockpiles, it is unclear if this will result in any near-term incremental coal car demand. U.S. commodity loadings in the fourth quarter of 2013 were essentially flat when compared to the fourth quarter of 2012. While railcar loadings of certain commodities such as petroleum products, crushed stone sand and gravel and non-metallic minerals continued to exhibit growth, coal loadings continued to be challenged decreasing 5% versus the fourth quarter of 2012.

Intermodal container loadings remained strong for the quarter increasing by 7.7% versus the same quarter in 2012. The coal market continues to show metric results, utility coal stockpiles decreased to 153 million tons, 17% below the year ago stockpile levels.

However, U.S. coal production was down 2.2% versus 2012 levels and U.S coal exports through November were down 6.5% to 108 million tons. 2013 total electricity generation in areas where coal compete as a fuel was flat when compared to 2012.

Now, I would like to turn the call over to Chip to address our fourth quarter financial results.

Charles F. Avery

Thank you, Ted. For the quarter of 2013, consolidated revenues were $79.7 million compared to $116.6 million in the fourth quarter of 2012. The net loss for the fourth quarter of 2013 was $12.3 million or a loss of $1.03 per diluted share. The net loss for the fourth quarter of 2012 was $1 million or $0.08 per diluted share.

Fourth quarter of 2013 results included several notable charges. We booked a total of $10.5 million of restructuring and non-cash impairment charges in the fourth quarter. Included in these charges was an impairment charge of $7.6 million to write-down certain assets at the Danville facility. This charge was taken based on the current industry outlook for the coal car market and does not indicate any plans to close that facility.

We also recorded a $1.9 million charge for the closure of our Clinton, Indiana maintenance and repair shop. Corporate costs included severance expense totaling $1.3 million. For the full year of 2013, consolidated revenues were $290 million compared to $677 million in 2012. Consolidated net loss was $19.3 million or a loss of a $1.61 per diluted share compared to net income of $19.1 million or income of $1.60 per diluted share.

The Manufacturing segment revenues for the fourth quarter of 2013 were $72 million compared to $109 million in the fourth quarter of 2012. Year-over-year decrease in revenues reflects a lower number of cars delivered and lower average revenue per car given the high number of rebuilds in 2013.

The operating loss for the manufacturing segment for the fourth quarter of 2013 was $8.7 million, including the restructuring and impairment charges previously mentioned. This compares to operating income of $6.5 million in the fourth quarter of 2012. The fourth quarter of 2013 results included a $1.7 million charge for projected costs in excess of selling price related to an order to be delivered in 2014. Customer lead-times on this order required us the source key components from higher priced suppliers in order to meet the customer’s delivery requirements.

Danville carrying cost and under-absorption of overhead cost to the low startup volumes and costs associated with ramping up the labor force at Shoals totaled $3.6 million in the quarter. Lastly, the Manufacturing segment results in the fourth quarter of 2013 were negatively impacted by production inefficiencies and higher operating costs.

The Services segment had revenues of $7.7 million compared to revenue of $7.3 million in the fourth quarter of 2012 and $9 million in the third quarter of 2013. The operating loss for the Services segment was $2.4 million in the fourth quarter of 2013, including the restructuring and impairment charges. This compares to operating income of $100,000 in the same period of the prior year and $700,000 of operating income in the third quarter of 2013.

The sequential decrease in revenues and earnings reflects lower repair volumes caused by increased utilization of trains and lower margin running repairs versus program work in the fourth quarter.

Corporate costs for the fourth quarter of 2013 were $7 million, which were $300,000 higher than the fourth quarter of 2013. The fourth quarter of 2013 corporate costs included $1.3 million of severance expenses related to several organizational changes. These costs were partially offset by the reduction in incentive awards as we did not meet our annual financial objectives.

The effective tax rate was 33.4% benefit for the quarter and 22.3% benefit for the full year. The tax rate for the full year was impacted by a valuation allowance charge recorded as a result of idling the Danville facility and a change in the state tax apportionment factor.

Turning to our balance sheet; at December 31, 2013, we had 748 of leased railcars with the book value of $53 million compared to 648 railcars with the book value of $43 million at the end of 2012. The lease fleet was 100% utilized at the end of 2013.

Our financial position is strong with no outstanding debt and $192 million in cash and short-term investments at year end. The increase in cash and investments from $155 million at the end of 2012 was driven by an $89 million customer deposit we received late in the fourth quarter, partially offset by the investment in the Shoals facility, changes in working capital, and additions to the lease fleet. Our $50 million revolving credit facility remains undrawn.

This ends our prepared comments and we’re now ready to address your questions.

Question-and-Answer Session

Operator

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

Michael W. Gallo – C.L. King & Associates, Inc.

Hi, good morning.

Joseph E. McNeely

Good morning, Michael.

Michael W. Gallo – C.L. King & Associates, Inc.

Just had a couple of questions; I wanted to drill in a little bit on the gross margin line a little more on what happened there in the quarter, obviously you have this order that, you guys projected costs that are higher than, so more background there on kind of what happened whether we should view this as an isolated event and then also on that front how much was the Clinton facility losing and how much did you expect the closure of that to help from a margin standpoint going forward. Thank you.

Joseph E. McNeely

Let me take the first part and Chip can address the Clinton. As it relates to the manufacturing cost, the one item that Chip noted in his comments was in order where we had really tight deadlines and the work with the customers we had enforced, product where we normally wouldn’t. So I wouldn’t expect to see that repeat itself again.

Chip also mentioned that there were some other production and efficiencies in costs. In the quarter there were certain maintenance costs, operation and supply costs et cetera that were higher than we would have expected and higher than in prior quarters.

Michael W. Gallo – C.L. King & Associates, Inc.

I was going to say, just as a follow up on that first part, should we expect then more when you look at the way the backlog looks today and the production runs that we should see perhaps gross margin is at a more similar level what you saw in the third quarter obviously getting better as revenues move up?

Charles F. Avery

Again without giving specific financial guidance, margins probably go back to where we are seeing more of where they have in the past, but again that depends on the current mix that’s out there. Remember, in 2014 as Ted said, half of the backlog is our rebuilt which have a lower revenue number, but I got the same kind of margin percentage, the margin dollar could be lower.

Michael W. Gallo – C.L. King & Associates, Inc.

All right, and I understand that, but in just general. And then I guess the second part on Clinton?

Joseph E. McNeely

Sure. So the Clinton facility as we look at the sort of the drag in 2013, it’s a very small facility, top-line was about $2 million, the operating loss was slightly less than $1 million in 2013. So again we see that going away, the facility has held for sale and it has been written down as and a big part of the charge at year-end was an impairment or a write-down of the facility to book value. So, and sort of that’s a release during 2014.

Michael W. Gallo – C.L. King & Associates, Inc.

In terms of the $2 million, would you expect to be able to pickup any of that revenue in your other facilities, do you expect that revenue will go away?

Joseph E. McNeely

I expect to go away. It’s in a different part of the country than our two Nebraska facilities, but I expect most of that goes away.

Michael W. Gallo – C.L. King & Associates, Inc.

All right, okay, thank you.

Operator

Next we will go to Justin Long with Stephens. Please go ahead.

Justin Long – Stephens, Inc.

Thanks. Good morning guys. I was wondering if you could talk about the marketing efforts for Shoals. I’m just curious how much of your efforts have been on the product development side versus going out in marketing these new products with some of the big customers and any detail you have on initial feedback from customers purchasing the railcars from this facility would be helpful as well.

Theodore W. Baun

Sure Justin, this is Ted. It’s an effort when we look to fill Shoals and develop products, it’s obviously outside sales, it’s marketing, and it’s a large part of engineering resources. So we’re moving ahead on all fronts. As we’ve said in the prepared remarks, it’s covered hopper cars, variety of different sizes, further intermodal flat cars they were looking to develop and ultimately put into that plant and I would say that customers have been very receptive to our design efforts, our end product and the prospects for the plant.

Justin Long – Stephens, Inc.

Thanks, Ted. That’s helpful. And – in terms of the increase for Shoals, what do they look like as it relates to size? Are you typically seeing increase in the hundreds of units or are they smaller than that?

Theodore W. Baun

I’m not going to comment on any particular size of enquiry, but I will say that on average, we are seeing enquiries about where they were through Q3 and Q4 and a slight uptick as we enter 2014. So we are seeing a bit of improvement across the Board with FreightCar enquiries. And obviously we will decide where to put those be it Shoals, Roanoke, or potentially Danville as we move forward.

Charles F. Avery

And just Justin, there is just one thing to elaborate a little more, I mean that car types are going into Shoals are different than our traditional coal car types which we had been ordered in about thousands. So, the expectation is the order lots are probably on average smaller than what we would have experienced in the past.

Justin Long – Stephens, Inc.

Okay, great. And, if you think about your guidance for about 7,000 railcars deliveries this year, is there a way to the break that out between what you expect to deliver in Roanoke versus Shoals?

Charles F. Avery

We don’t comment on specific plants, productions and backlog Justin.

Justin Long – Stephens, Inc.

Okay, fair enough. And I had one question on the balance sheet, if you could provide some detail on your CapEx expectations for this year and just given the current backlog what your expectations for the cash balance as we move throughout the year as well would be helpful?

Charles F. Avery

So, in terms of the 2014 CapEx, our expectations are around $10 million for the full year. We’re looking at between $6 million and $7 million for the final build-out of Shoals which basically takes us through mid-year. And then couple of million dollars in maintenance, capital and some of the product developments pending. So, those numbers are exclusive of any decisions we make in terms of build on the lease fleet. So those are just the sort of the internal – the internal ones per say.

Justin Long – Stephens, Inc.

Okay, perfect.

Charles F. Avery

And then in terms of the balance sheet we obviously have forecasts and so on with large deposit taken at year end, that will be used as you would expect to purchase inventory for that – that order. And we expect that to come down over the years. So, I mean, as we project out, I guess those are long-term as we’d like to be right in the $100 million range and again there will be a large consumption as we from the $192, as we buy in the inventory for the order.

Justin Long – Stephens, Inc.

Okay, great. So, excluding that customer deposit at cash balance, it doesn’t sound like it should change much?

Charles F. Avery

Don’t think so, because well you go to remember just a lot of depends on where you end up with your backlog and your plant production going into the next year and how much inventory you have to have on the ground and – and then pay for. So, that’s a long – long lookout at this point just with the caveat that can change a lot at any point in time.

Justin Long – Stephens, Inc.

Right, that’s understandable. And may be one last one. I was wondering if you’ve seen any significant orders subsequent to quarter end, listened of Norfolk Southern’s capital budget plans in their commentary for 2013. It sounds like they could be in the market for some new coal cars so I’m just wondering is that an opportunity at some point or if that could be reflected in the current – that’s reflected in the current backlog?

Charles F. Avery

Now, there is a number of opportunities I think that Ted talked about there is a lot of enquiries out there for a lot of different car types. At this point there is nothing subsequent to year end that we’re ready to discuss.

Justin Long – Stephens, Inc.

Okay, great. I’ll leave it at that. I appreciate the time this morning.

Charles F. Avery

Thanks, Justin. Thanks.

Operator

And next with the line of Matt Brooklier from Longbow Research. Please go ahead.

Matt Brooklier - Longbow Research

Yes, thanks. Good morning. How should we think about Shoals startup costs moving out or, are we kind of all the way there in terms of getting the facility staffed up and ready to start cranking out railcars in 2014 or, is there still more cost than more work to kind of get up the curve and in terms of being fully add your all-in manufacturing capabilities?

Charles F. Avery

So, it’s Chuck. The – spending we’re really looking at CapEx just south of $7 million between – basically between now and in mid-year. So, in terms of the ramp-up both in terms of equipment and the lines in terms of staffing it’s on a pretty steep slope here in terms of being complete by mid-year. So, as you look at the – the startup costs that I mentioned sort of the – labor efficiencies as we bring new people on. We really expect to add to sort of pay per down to mid-year and basically go away at mid-year. But again what in that point in time it’s going to be surely subject to volume and orders and in the books. So, as we projected out that’s kind of looking at as fully – fully operational and staffed by mid-year.

Matt Brooklier - Longbow Research

Okay, so – it’s I guess a follow-up on that. Where are we from the staffing perspective and then it sounds like we’re going to see some startup costs in the first half of 2014, but may be not to the same degree that we saw in the second half of 2013, is that a fair way of thinking about it?

Charles F. Avery

Yes, so I’ll take the first half on the costs we do expect a tapering of those and also a reduction in Danville as well because of the write-down.

Matt Brooklier - Longbow Research

Okay.

Charles F. Avery

We haven’t split those two pieces out we’ve kept them together, but again we do see those decreasing and with the impairment at Danville.

Joseph E. McNeely

Yeah, in terms of the staffing side, now we continue to ramp-up now we had – we were fully staffed at one production line at the end of the year, and continue to start preparing the ramp-up second production line well that’s still on process and we’re still bringing people in today and given them train – hired and trained. So, we’re going to see those costs continue here. But, as we get fully staffed up here this spring that will then the training costs will just taper off.

Matt Brooklier - Longbow Research

Okay, and with two lines going and being fully staffed up, where you guys are kind of add max capacity at Shoals?

Joseph E. McNeely

Well, we’ll be at max capacity for the staffing levels again we’ve taken a pretty cautious view on production to make sure that we don’t overstretch ourselves and we produce good quality products for these new car types.

Matt Brooklier - Longbow Research

Okay, but – I guess my question being as, if the demand is there you’re ready to, you’re able to take all of those orders and produce something close to the maximum of what that facility potentially can do it from a delivery perspective?

Joseph E. McNeely

A lot of that’s going to depend on the customer fair design, how quickly everybody gets at full coal production and capacity in terms of they’re still down there. I think we’ll stick with for this year what the guidance I gave on the number of cars we think are going to get [ph] dealt and delivered.

Matt Brooklier - Longbow Research

Okay, it’s very helpful. Thank you.

Theodore W. Baun

Yes.

Operator

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

Sal Vitale – Sterne, Agee & Leach

Hi, good morning all.

Joseph E. McNeely

Good morning, Sal.

Sal Vitale – Sterne, Agee & Leach

So, just first of all just a clarification on what was said earlier in the call on maintenance that. Did you mention how many of the 700 non-coal car orders received in 4Q where for covered hoppers?

Charles F. Avery

We did not.

Sal Vitale – Sterne, Agee & Leach

Okay.

Joseph E. McNeely

We don’t break out that level of detail, Sal.

Sal Vitale – Sterne, Agee & Leach

Is that a significant number or is that just not a level at this point?

Charles F. Avery

It was a good position of the 700.

Sal Vitale – Sterne, Agee & Leach

Okay. And, is it fair to say that the margins on the covered hoppers as general higher than the coal cars?

Charles F. Avery

That – than coal cars, our margin is that as we talked about this year are going to be a lot of function of our startup downward Sal. Long-term we think as we said before for our new car types the margins to be comparable to coal over the long-term. But this year as I mentioned that we are going to have the drag at just the startup and pull our margins down.

Sal Vitale – Sterne, Agee & Leach

Right, but the actual contribution margin for the individual car you were saying is about similar to that the coal?

Charles F. Avery

We expect that over the long-term yes, when we are fully operational and have the number of these produced in our back pocket.

Sal Vitale – Sterne, Agee & Leach

Okay. And then the – just looking at the breakdown of the $5.3 million in costs that was identified, I think you said $3.6 million was, was that purely of Shoals startup costs I may have missed that?

Charles F. Avery

Yes, now that was a combinations but we haven’t broken out and we’re not breaking out the Danville call it, the Danville is idle currently, the Danville carrying cost as well as the Shoals startup cost. We haven’t broken those out, but of the $5.3 I think it was $3.6 in total for those two items. And the Shoals’ items the larger of that two and as I said, the Danville one drops pretty diametrically with the asset write-down, the impairment that you’re at.

Sal Vitale – Sterne, Agee & Leach

Right. And then – so that remaining $1.7 million what was that again?

Charles F. Avery

So, that’s the one Joe had discussed in terms of the lead-times on the material. So the $1.7 was fundamentally, it’s 2014 production. But in terms of the lead-time requirements we have to go – we had to buy materials at prices that were substantially higher than sort of a normal lead-times. And so fundamentally we booked the charge in 2013 for that difference.

Sal Vitale – Sterne, Agee & Leach

Okay. And then, just to drill down a little bit on that particular order. So – are the contractual terms of that particular order are they any different than the rest of your contractual terms, I guess what I’m getting at is, is this something that could reoccur in the future?

Charles F. Avery

Sal I think I’ve said before, this was a unique situation driven by a customer demand there is nothing unique I would say in the contract that we’d expect to see this again.

Sal Vitale – Sterne, Agee & Leach

Okay, that’s fair. And then, just the last thing is looking at your guidance so, if I look at the other backlog of 6,800 cars I assume that’s all are slated for 2014 delivery at this point?

Joseph E. McNeely

Sal, yes, the majority of it is.

Sal Vitale – Sterne, Agee & Leach

The majority of it is, okay. So then Joe, earlier you mentioned that in your conservations at the Eastern Railroads that there is still intention to replace the ageing coal car fleet on the re-bodied side or on the rebuild side rather. So, I guess if we look you’ve received an order for 4,000 cars on 3Q, would do you expect to receive some more significant size orders in throughout the various quarters of 2014?

Theodore W. Baun

Yes Sal, this is Ted. We’re not going to comment on future specific orders, but what we will say is that we continue to believe in the eastern replacement story that is going to continue. And we’re just limited [ph] at that.

Sal Vitale – Sterne, Agee & Leach

Okay. And then just if I look beyond 2014…

Charles F. Avery

Hey, John I think there is some background on the call.

Unidentified Company Representative

When you put to one-on-one.

Charles F. Avery

Sal, you still there?

Sal Vitale – Sterne, Agee & Leach

Question I apologize. So if I look, I see your guidance for 2014 and I understand you don’t provide any guidance at this point for 2015, but assuming that your order flow for in your Shoals facility for your non-coal car types continue to accelerate, is it reasonable to assume that you’re willing to have more than 7,000 deliveries in 2015?

Charles F. Avery

Sal, we’re not going to comment on that, that visibility that far out is tough as you know especially on the coal car side our orders come in big lump and as we talked in the past, as we can go a year without a big order and then get a year like that we did last year with multiple big orders. So, that visibility past right now in the 2015 is unknown.

Sal Vitale – Sterne, Agee & Leach

Okay, fair enough. Thanks.

Joseph E. McNeely

Thank you.

Operator

And next we have from Doug Dyer with Heartland Funds. Please go ahead.

Doug Dyer – Heartland Funds

Good morning, everyone.

Charles F. Avery

Good morning, Doug.

Doug Dyer – Heartland Funds

Could you please have a brief discussion as to where you think that maybe capacity to deliver cars on a quick turn, who would have that capacity now if anyone does?

Charles F. Avery

You mean in the industry overall?

Doug Dyer – Heartland Funds

Yes.

Charles F. Avery

Again, without knowing the order books though, one of my competitors I know I think outside, their backlogs are well out. I think we heard and take their comment anecdotally some of the covered hoppers is out a bit, but there is capacity this year. We – as we talked about we have capacity in our Danville facility for certain car types of course. So, there is some capacity out there. But again quick as a relative term as lead-times are three to six months depending on the car type for materials.

Doug Dyer – Heartland Funds

Okay. It seems likely the train system and the network has become a little bit congested lightly, obviously some of that’s whether, do you think there is a little bit more of work to net is, are you kind of running at a high capacity rate on the rails or is it everything from what you can see just weather-related as of now?

Joseph E. McNeely

Doug I think it’s, if you listen to the Class 1s they’re going to tell you that they see a pickup in economic activity and they’re also tell you that, that this first six weeks of this year has been tough from a network operation standpoint. So, it’s a little bit of both, but I think they tend to be more optimistic for 2014 then maybe they have been in the past. So that’s – we look at that as a positive event obviously.

Doug Dyer – Heartland Funds

Sure, okay. You addressed your cash, you were saying that without that customer deposit, you think that your number will kind of be fairly stable throughout the year. It seems to me like there would be some cash available to do some share buybacks. I think that would be an opportune time to do so if it looks like we’re going into a business I’m sorry, a mode of business here where things are improving and it looks like improving rather well if you listen to the Class 1s?

Joseph E. McNeely

Doug, we understand that and understand your honest decision on that. I think, where we’re at, we’re still in our strategic initiatives, now we’re still need to finish out the Shoals, we still need to invest in new product development and still need to invest in growing the value of our services business. So we discussed this at the Board meetings on a regular basis, but right now again we’ll maintain a considerable position on our cash.

Doug Dyer – Heartland Funds

Okay. All right, one last one. your leased fleet, what is that consist of, is that all coal cars?

Theodore W. Baun

The vast majority of it is coal cars.

Doug Dyer – Heartland Funds

Is there more interest in that as we’ve got cars coming out of storage?

Theodore W. Baun

I would say that the cars coming out of storage is a recent phenomenon and we’re tracking it. Obviously that’s good news as well, we’re hoping that it’s sustainable and not just a function of the cold winter much of the U.S. is seeing. So, certainly a positive turn of events that will, if that continues it will help renewal rates and term getting the lease terms extended outward.

Doug Dyer – Heartland Funds

Do you have many of those coming up for renewal this year?

Theodore W. Baun

I would say no more than normal. There – there is usually the average 15% to 20% renewals that take place on a year-over-year basis.

Doug Dyer – Heartland Funds

All right. Thank you very much.

Operator

(Operator Instructions) And we will go to Michael Baudendistel with Stifel. Please go ahead.

Michael James Baudendistel – Stifel, Nicolaus & Company

Thanks. With the closure of one of the repair shops, is there more to do there with additional shops that you would close?

Charles F. Avery

No, now I think our strategy is going to remain in at the same in growing that. The facility we closed has been a different geographic, it didn’t have the dynamics, of being on a high volume quarter like our shops out in the Nebraska are. So it is just a different decision, I think, there are other shops so we still like to still see an opportunity to grow our value from those.

Michael James Baudendistel – Stifel, Nicolaus & Company

Yes, it’s good detail. And then the covered hopper orders and the covered hoppers a lot of different sizes moving the large different types of the freight, which markets are being targeted there?

Charles F. Avery

If you look at where the lion share of covered hoppers ran in the other and the small capacity for cement and sand and medium capacity for grain and larger in some plastics where I think Ted commented on the enquiries we’re seeing enquiries kind of for all three of those as you get now out in the future.

Michael James Baudendistel – Stifel, Nicolaus & Company

Okay. And then, I just want to make sure interpreting some of your earlier comments correctly with the 7,000 units delivered in 2014, already you have 1,600 in backlog. So, I guess to one of the earlier questions, the reason you’re not expecting more orders that come in, in 2014 that you can deliver in 2014 as because most of those orders would be outside of coal in Shoals. Shoals is already a full capacity which is somewhere in the neighborhood of 3,500 because as half of the 7,000 you expect to be delivered, are all those things sort of roughly correct?

Charles F. Avery

Yes, I think definitely roughly correct and when we look at the coal market that’s where Danville would be the type of cars that would go in there, and the visibility there just isn’t there and Shoals were being cautious on what we can expect there given we’re in startup mode still.

Michael James Baudendistel – Stifel, Nicolaus & Company

Okay, great. That’s all I have this morning. Thank you.

Joseph E. McNeely

Thanks Mike.

Operator

And we have no additional questions in queue.

Joseph E. McNeely

Right. This concludes today’s conference call. Thank you for joining. A replay of this call will be available beginning at 1 PM Eastern, today at 1800-475-6701, pass code 318803. Thanks.

Operator

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

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