FreightCar America's (RAIL) CEO Joe McNeely on Q1 2014 Results - Earnings Call Transcript

May. 5.14 | About: FreightCar America, (RAIL)

FreightCar America, Inc. (NASDAQ:RAIL)

Q1 2014 Earnings Conference Call

May 5, 2014 11:00 ET

Executives

Chip Avery - Chief Financial Officer

Joe McNeely - President and Chief Executive Officer

Ted Baun - Senior Vice President, Marketing and Sales

Analysts

Michael Gallo - C.L. King

Justin Long - Stephens

Sal Vitale - Sterne Agee

Matt Brooklier - Longbow Research

Doug Dyer - Heartland Advisors

Mike Baudendistel - Stifel

Operator

Welcome to FreightCar America’s First Quarter 2014 Earnings Conference Call and Webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today’s prepared comments. Please note, that this conference is being recorded.

An audio replay of the conference call will be available from 1 0'Clock P.M. Eastern Standard Time today until 11:59 P.M. Eastern Standard Time on June 5, 2014. To access the replay, please dial 1800-475-6701. The replay pass code is 325496. 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 call over to Chip Avery, Chief Financial Officer of FreightCar America.

Chip Avery - Chief Financial Officer

Thank you and welcome to FreightCar America’s first quarter 2014 earnings conference call and webcast. Joining me today are Joe McNeely, President and CEO, Ted Baun, Senior Vice President, Marketing and Sales and Sean Hankinson, Vice President of Manufacturing Operations.

I’d like to remind everyone that statements made during this conference call relating to the company’s expected future performance, future business prospects, or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Participants are directed to FreightCar America’s 2013 Form 10-K for a description of certain business risks, some of which may be outside of the control of the company that may cause actual results to materially differ from those expressed in the forward-looking statements.

We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. Our 2013 Form 10-K and earnings release for the first quarter of 2014 are posted on the company’s website at freightcaramerica.com.

Let me now turn the call over to Joe McNeely.

Joe McNeely - President and Chief Executive Officer

Thank you, Chip. We had a disappointing start to 2014 with a harsh winter weather significantly impacting operations at all of our facilities. The inclement weather led to a shutdown at our plans for more than 20 shifts and caused supply disruptions and production and efficiencies. This combined with production line changeovers resulted in railcar deliveries that were 30% lower than we had planned in the first quarter. This severe winter weather also had a significant unfavorable impact on our Services segment. The harsh weather led to a higher coal train utilization which reduced the number of coal trains released for maintenance across the industry. This lowered volume through our shops and sales of repair parts.

We do expect a rebound in repair and parts demand as the railroads improved our operating performance and coal trains to come available for maintenance. Our financial results for the quarter reflect these issues and Chip will provide further details on that shortly. On a positive note we received a significant order for new Eastern service coal cars during the quarter. Given Roanoke’s backlog this additional demand was a necessity resuming production at our Danville facility this summer in order to meet customer delivery requirements. Ted will discuss the railcar and the coal industries in more detail along with the dynamics of the Eastern and Western coal car fleets and the impact of the winter weather on the coal market.

For our Manufacturing segment our product diversification strategy continues to progress as planned. We have a broad range of car types in our backlog and the ramp-up at Shoals continues as scheduled. We’re currently operating two production lines at Shoals and we continue to invest in running out the production capabilities that will allow us to build a whole range of freight car types including covered hoppers and intermodal railcars.

Our backlog is strong and increased to 7,700 railcars at quarter end including nearly 2,900 non-coal cars. With Shoals to coming fully operational and the restart of Danville, we continue to expect to deliver around 7,000 railcars this year. For the remainder of 2014, we’re focused on executing our strategic priorities which included continuing to diversify our railcar offerings, maintaining our coal car leadership position, growing value from our services business and maintaining the strong balance sheet.

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

Ted Baun - Senior Vice President, Marketing and Sales

Thank you, Joe. We’ve seen broad interest in freight cars in the first quarter of 2014 with 1,650 railcars ordered, 1,500 of which were new coal cars. This compares to 274 units ordered in the first quarter of 2013 and 800 railcars ordered in the fourth quarter of 2013. First quarter 2014 deliveries of 753 railcars included 363 new and 390 rebuilt railcars. 75 of the new railcar deliveries went through our JAIX Leasing subsidiary.

1,073 railcars were delivered in the first quarter of 2013 including 448 new cars and 625 rebuilt railcars. There were 1,101 railcars delivered in the fourth quarter of 2013 of which 190 were new, 99 were used, and 812 were rebuilts. As Joe mentioned our order backlog at March 31, 2014 was 7,727 railcars which was up from 2,082 railcars at March 31, 2013. Our backlog at December 31, 2013 was 6,826 railcars. Industry wide 24,050 units were ordered and 13,954 units were delivered in the first quarter of 2014.

While total railcar orders were flat year-over-year, non-tank car demand improved significantly. This share of non-tank car orders increased from 20% to 80% when compared to the same period in 2013 with 19,281 ordered in the first quarter of 2014 compared to 4,634 ordered in the first quarter of 2013. Non-tank car orders totaled 9,949 units in the fourth quarter of 2013. A majority of the first quarter’s orders were for covered hopper cars with this car type accounting for 77% of non-tank car orders for the quarter.

Deliveries were up 17% when compared to the same period in 2013 but deliveries for non-tank cars decreased from the 7,336 units delivered in the fourth quarter. Industry wide backlog was 81,927 units at the end of March up approximately 12% from the end of December. 61% of the current backlog consists of tank cars, while another 23% of the backlog is made up of covered hoppers. Please note that these industry figures do not include orders or deliveries or rebuilt railcars. Commodity loadings on U.S. railroads in the first quarter of 2014 were essentially flat when compared to the first quarter of 2013. Intermodal container loadings exhibited continued growth for the quarter increasing by 3.2% versus the same quarter in 2013.

While railcar loadings at certain commodities such as non-metallic minerals, grain, grain mill products and petroleum products exhibited growth, coal loadings remained relatively flat versus the first quarter of 2013. The coal market continues to show mixed results. As of the end of February utility coal stockpiles decreased to 119 million tons, 18% below the 10 year average level and 33% below February 2013 levels. Furthermore in areas where coal compete as fuels total electricity generation through March 2014 was up 6% when compared to 2013.

However U.S. coal production in the first quarter was down 1.2% versus 2013 levels and U.S. coal exports while still trending above historical averages are forecasted to decrease by 25% in 2014 versus the prior year. Lower railroad productivity and increased burn triggered by the cold winter led to decreased coal cars in storage as well as strengthening lease rates. We estimate that the number of coal cars in storage declined to about 9,000 railcars at the end of the first quarter compared to 16,500 railcars at year end. This is the lowest level since December of 2011. While there has been an uptake in demand for Western (side) of coal cars to-date that demand has been met with existing equipment.

Now I’d like to turn the call over to Chip to address our first quarter financial results.

Chip Avery - Chief Financial Officer

Thank you, Ted. For the first quarter of 2014 consolidated revenues were $56.1 million compared to $87.6 million in the first quarter of 2013. The net loss for the first quarter of 2014 was $6.9 million or a loss of $0.58 per diluted share. The net loss for the first quarter of 2013 was $2.6 million or $0.22 per diluted share. Manufacturing segment revenues for the first quarter of 2014 were $0.48 million compared to $77.7 million in the first quarter of 2013. The year-over-year decrease in revenues reflects the lower number of cars delivered.

The operating loss for the Manufacturing segment for the first quarter of 2014 was $5 million. Costs associated with the continued ramp-up of production volumes at our Shoals facility and the carrying cost associated with the Danville facility totaled $2.9 million in the quarter. As Joe mentioned the harsh winter also impacted operations in the form of lost production days and supply disruptions. We estimate the margin impact of the multiple weather related production shutdowns, supply disruptions and the related inefficiencies to be $1.9 million for the quarter.

The Manufacturing segment operating income was $2.1 million in the first quarter of last year and was a loss of $8.7 million including a $7.6 million impairment charge in the fourth quarter of 2013. The Services segment had revenues of $8.1 million compared to revenues of $9.9 million in the first quarter of 2013 and $7.7 million in the fourth quarter of 2013. The operating loss for the Services segment was $340,000 in the first quarter of 2014. This compares to operating income of $1.3 million in the same period of the prior year and an operating loss of $2.4 million in the fourth quarter of 2013.

The fourth quarter operating loss included $1.9 million in pre-tax restructuring and impairment charges. This significant year-over-year decreases in revenues and earnings reflect lower repair volumes caused by increased utilization of trains and a less profitable mix of part sales and repair services in the first quarter. Corporate costs for the first quarter of 2014 were $6.2 million compared to $2.8 million in the first quarter of 2013. Corporate costs for the first quarter of 2013 included a $3.4 million pre-tax net benefit resulting from a litigation settlement. The effective tax rate for the first quarter of 2014 was 41.1%.

Turning to our balance sheet. Our financial position is strong with no outstanding debt and $143 million in cash and short term investments at quarter end. The decrease in cash and investments from $192 million at the end of 2013 was driven primarily by an increase in working capital including a $26 million increase in inventory and inventory on lease as well as funding of first quarter operations. At March 31, 2014 we had 823 leased railcars with a book value of $62 million compared to 748 railcars with a book value of $53 million at the end of 2013. The lease fleet was 100% utilized at the end of the first quarter.

This ends our prepared comments. And we are now ready to address your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question we’ll go to Michael Gallo with C.L. King. Please go ahead.

Michael Gallo - C.L. King

Hi, good morning.

Joe McNeely

Good morning, Mike.

Michael Gallo - C.L. King

A couple of questions. The production issues you cited in the first quarter, did those spillover at all into the second quarter than those that are completely behind you at this point?

Joe McNeely

There is a little bit of spillover, but now the winter weather is behind us in both our production and our suppliers are back up to speed, we shouldn’t see what we saw in the first quarter.

Michael Gallo - C.L. King

So pretty much we expect the units you would have expected to ship in the first quarter probably ship in the second quarter?

Joe McNeely

Sure, is your question, do you mean is they push out into the second quarter.

Michael Gallo - C.L. King

Yes.

Joe McNeely

Yes. That was just the way we delivery on those.

Michael Gallo - C.L. King

Right, okay. So I guess there is a sort of frame as we started to get into the second quarter, really should get to more normalized and we should start to see normalized levels of deliveries based on your 7,000 units outlook or there’s still some spillover and you wouldn’t be more back-end loaded?

Joe McNeely

Well we’re definitely when you look at the year, second half is going to be from a production to delivery standpoint better than the first half with Q3 being kind of the strongest quarter given that Danville be up and running by then and Q3 doesn’t have the holiday shutdowns that the Q4 has.

Michael Gallo - C.L. King

Right, okay, right. Okay, great. Second question just on the bookings, obviously nice coal car order, you are starting to see things come down in terms of cars in storage. You’re restarting Danville. So help us a little with what you’re seeing on the coal car side. It seems like the replacement cycle should kick in at some point and then a lot of that stuff has been pushed out for a few years. Do you see just more potential replacement demand as we go forward or should we still expect to kind of lumpy and bumpy of seeing an order here and then you may not see anything for some time?

Ted Baun

Hey Michael, it’s Ted. I will address that. We’ll separate the market like we’ve done in the past between Eastern coal and Western coal style coal cars. In the East we still see the same level of replacement that we’ve talked about in the past over the next several years yes that will still be lumpy as we move forward, but we still very much feel that, that’s going to continue.

On the Western coal demand, obviously the cold winter, the service disruptions, higher natural gas prices that has all meant to good things for absorbing the existing cars that we’re in service. Those have come a long way to come out of storage and back into service. So that’s the necessary first step toward the Western coal market recovery. But we’ll have to just see how long-term that is versus just the winter weather trying to replenish from the harsh winter that we saw.

Michael Gallo - C.L. King

Alright, okay. Thanks very much.

Operator

We’ll go to Justin Long with Stephens. Please go ahead.

Justin Long - Stephens

Thanks. Good morning guys.

Joe McNeely

Good morning, Justin.

Justin Long - Stephens

Could you talk a little bit more about the decision to reopen Danville? I was mainly curious, is that decision based on the backlog you have today and the coal car order you received this quarter or was that decision in light of future orders you anticipate just given your conversations with customers?

Joe McNeely

Justin, you may remember as we talked when we actually idled Danville that was going to remain available for coal car production. And we always look at placing orders where it makes the best overall sense in terms of current capacity, delivery requirements, cost etcetera. And with the order that we received in the quarter we definitely need to restart Danville to be able to meet those delivery requirements for this year. Going forward yes we’re still early this year to know what next year looks like.

Justin Long - Stephens

Okay. Fair enough. And will there be any costs associated with getting Danville kind of ramped up over the course of the next quarter or so? I think you said they start production in the third quarter? Is that right?

Chip Avery

Yes, it’s Chip, Justin. We’re looking at a modest about $500,000 start-up cost in the second quarter production starting sort of as we roll into Q3.

Justin Long - Stephens

Okay, great. That’s helpful. And then maybe one more. On the 2,900 or so non-coal railcars in the backlog today, could you give some more color on the main car types represented in that amount? And also I was curious if any of these cars are being exported outside of the U.S.?

Ted Baun

Sure. The backlog consists mainly of open top hoppers, open top gondolas and some flat cars and there are already a few international orders in there as well, that’s correct.

Joe McNeely

And some covered hoppers.

Ted Baun

Yes. And covered hoppers. That’s right.

Justin Long - Stephens

Okay, great. And there is no way you guys can quantify the amount that you are exporting to other countries?

Joe McNeely

Yes. We usually don’t give that level of detail on the backlog.

Justin Long - Stephens

Okay. Fair enough. I think that’s all from me. I appreciate the time.

Joe McNeely

Thanks, Justin.

Operator

Thank you. We have a question from Sal Vitale from Sterne Agee. Please go ahead.

Sal Vitale - Sterne Agee

Good morning all.

Joe McNeely

How are you doing, Sal?

Sal Vitale - Sterne Agee

Good. So just a quick clarification. You mentioned the cost associated with both the Shoals ramp-up and the Danville startup. Is that what you mentioned was amounted to $2.9 million during the quarter?

Chip Avery

Yes. That’s correct.

Sal Vitale - Sterne Agee

Okay. And you said that the second quarter Danville cost would be about $500,000?

Chip Avery

Yes. Right, the start-up cost.

Sal Vitale - Sterne Agee

So how much of the $2.9 million I assume the Danville portion of the $2.9 million was probably less than 2Q’s $500,000? Is that fair to assume?

Chip Avery

Yes.

Sal Vitale - Sterne Agee

Okay. So that was mostly Shoals then.

Chip Avery

Yes.

Sal Vitale - Sterne Agee

So then how do we think about Shoals trending forward I guess to 2Q, 3Q into the end of the year?

Chip Avery

I’ll just – what we’ve talked about with respect to the – we’ll call them the Shoals and Danville idle. We continue to see those taper down through mid year until the build out is complete and we get the volumes at Shoals to a higher level. Again some of the costs are training, some of the costs are the things that you see in a ramp-up, so again that’s sort of our thought as continuing to taper through mid year.

Sal Vitale - Sterne Agee

Okay. So we should see a –without providing any numbers, you should see that $2.9 million being some number less than $2.9 million in 2Q and then continuing to decline sequentially throughout the year?

Chip Avery

That’s correct.

Sal Vitale - Sterne Agee

Okay. That’s helpful. Thank you.

Operator

Thank you. We have a question from Matt Brooklier from Longbow Research. Please go ahead.

Matt Brooklier - Longbow Research

Hey thanks. Good morning.

Joe McNeely

Hey Matt.

Matt Brooklier - Longbow Research

Hey, so just wanted to also clarify something. The decision to open or reopen the Danville plant that is just based upon the 1,500 orders that you received for new coal cars during 1Q?

Joe McNeely

Yes. I think as I mentioned that was needed to be able to meet the delivery requirements.

Matt Brooklier - Longbow Research

Okay. I mean should we think about Danville as just being able to produce 1,500 cars in 2013 or sorry in 2014 and then that number potentially moves up into 2015 or are we expected to do more than 1,500 cars at Danville this year? It just seems like a relatively low number to reopen that particular plant when I think the total capacity there is roughly 5,000 to 6,000 cars. So I’m just trying to get a sense for what additional orders and production we could see at Danville this year?

Joe McNeely

As I mentioned a little bit ago as we look into next year it’s still we’re early into this year to see how the order book looks for next year and where all the orders are needed. I think you remember from the last we said Roanoke was virtually full and if we had some significant new orders we would have to open up Danville and that’s what we did. And in terms of the kind of the start-up we’ve done as before in Danville and Roanoke both of those facilities we had very flexible operations there. In 2010 we’re running about a half a production line, in 2011 by the end of 2011 we’re running two-fold production lines. So we know how to start that facility up in pretty short order.

Matt Brooklier - Longbow Research

Okay. Are you able to talk to order activity thus far in 2Q specifically on the coal car side? And then also maybe talk a little bit if you can on the non-coal side and specifically, what potential incremental market share you’ve gained for the Shoals facility?

Ted Baun

We’re not going to comment on specific orders that we received since the end of the quarter. But I think if you take a look at just the improving market conditions out there for non-tank cars in general it’s pretty wide spread and it’s fairly optimistic and we expect to get our share of that.

Matt Brooklier - Longbow Research

Okay. And then, my final question. SG&A was up a good amount during the quarter. How should we think about that on a go-forward basis, I know there is some puts and takes with Danville coming back online, but if you have a sense for what that number potentially could look like this year that would be helpful? Thanks.

Chip Avery

You bet. The – again just to mention we did have a almost $3.5 million benefit in the prior year because of litigation settlements so that really suppressed the level of the SG&A. I would expect levels consistent with where we were in the first quarter of 2014 plus or minus.

Joe McNeely

Yes. I mean if you look at the first quarter. This is Joe. From 2013 and you add that back in we’re pretty flat on the G&A level, on the G&A front.

Matt Brooklier - Longbow Research

Okay. That’s helpful. Thank you.

Operator

We’ll go to Doug Dyer with Heartland Advisors. Please go ahead.

Doug Dyer - Heartland Advisors

Good morning guys. I’d like a little bit more elaboration on the inventory. Obviously, you had to have more inventory to handle orders, but where do you see inventory, let’s say six months out and how long does it take to consume the additional inventory that you’ve added and should we think of the current level as kind of being a normalized level now that it looks like orders might be coming through on a more sustainable basis?

Chip Avery

We’re continuing to ramp-up. It’s Chip here Doug. The challenge in answering that question at any given quarter end is going to be where we are in releasing from finished goods into the customers. We’re continuing to ramp-up. Danville is coming up. So I expect an increase at that level. As you know we buy inventory certain times forward to make sure that we’re locking in material cost. So again I would expect it to continue to increase somewhat and then plateau. It’s for Joe.

Joe McNeely

Yes. I think the only thing to add to that Doug is if you remember when we talked last quarter we had received significant customer deposit which we used by inventory and that’s some of what is sitting in the inventory at this level. And as Chip said that will kind of burned on over time, but what we don’t know is one of the orders do we have to you pre-buy on the put material. So our inventory level at any kind of point in time can bounce up and down just depending on where are at in the build cycle.

Doug Dyer - Heartland Advisors

Okay. Well, we’ve got orders up and you’re anticipating greater production going forward. Danville is opening up. You’ve mentioned improving conditions in the non-tank market. Where – is there room for things to get better? This feels pretty good right now?

Ted Baun

No, I think your comments are right, Doug. The market looks favorable going forward and I think from what we’re seeing from our customers they want to see how the restoration of service after the harsh winter weather has set everybody back and how that affects demand going forward. But I think everybody feels that the – everybody we’re talking to feels that better days are ahead for the non-tank freight car market.

Doug Dyer - Heartland Advisors

Alright. One last quick one. Can we expect backlog to continue to grow from here?

Joe McNeely

It’s going to be a subject of where orders come in and Doug as you know you’ve been following us for a while. The orders can be lumpy especially on the coal cars, but that will be just the function of where orders are at vis-à-vis our production.

Doug Dyer - Heartland Advisors

Alright. Thank you very much.

Joe McNeely

Thank you.

Operator

We have a follow-up question from Sal Vitale with Sterne Agee. Please go ahead.

Sal Vitale - Sterne Agee

Hi, Joe. Just a quick question. So on the deliveries guidance you kept that flat at 7,000 for the year. How do I think about I guess the timing of the deliveries of the new orders that you received? So the 1,600 orders you received during the quarter, should we expect them to be say back-half of 2014 or early 2015? And then I guess the follow-up to that would be in your original guidance that you gave on the fourth-quarter call was – were you contemplating sort of 1,500 plus orders for new coal cars?

Joe McNeely

Let me take the first one.

Sal Vitale - Sterne Agee

Sure.

Joe McNeely

That order is placed in the back half of 2014 and can carry over into next year. And in terms of the kind of the guidance on the fourth quarter call I mean there were a number of kind of placeholder orders in there of different car types not necessarily this one specific.

Sal Vitale - Sterne Agee

Okay. And then the – just a follow-up question for that is and I understand you don’t provide any pricing details but just directionally can you give a sense for the pricing on this new coal car order that you received? Is it directionally up from the last coal car order you – last new coal car order you received?

Ted Baun

Sal, you are correct and that we’re not going to comment on that.

Sal Vitale - Sterne Agee

Okay. Thank you very much.

Joe McNeely

Thank you, Sal.

Operator

And we have a question from Mike Baudendistel with Stifel. Please go ahead.

Mike Baudendistel - Stifel

Great. Thank you. Just wanted to ask on the intermodal cars, I don’t think that was one of the car types you mentioned for orders in the quarter. I just wanted to get any comments you have on sort of the outlook for that area?

Ted Baun

Sure. There were no intermodal orders in the quarter. You’re correct. We’re pursuing several promising inquiries going forward though.

Mike Baudendistel - Stifel

Great. That’s all from me.

Operator

(Operator Instructions) And at this time, there are no other questions in queue.

Chip Avery - Chief Financial Officer

This concludes today’s conference call. Thank you for joining. A replay of this call will be available beginning at 1 P.M. Eastern Time today at 800-475-6701, pass code 325-496. 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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