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FreightCar America, Inc. (NASDAQ:RAIL)

Q22012 Earnings Call

August 6, 2012 11:00 am ET

Executives

Joe McNeely - Chief Financial Officer

Ed Whalen - President, Chief Executive Officer, Director

Analysts

Michael Gallo - C. L. King

Peter Nesvold - Jefferies

Brad Delco - Stephens

Sal Vitale - Sterne, Agee

Matt Brooklier - Longbow Research

Matthew Dodson - Edmunds White Partners

Adam Peck - Heartland Funds

Steve Barger - KeyBanc Capital Markets

Operator

Ladies and gentlemen, welcome to FreightCar America's second quarter 2012 earnings conference call and webcast.

(Operator instructions) Please note that this conference is being recorded. An audio replay of the conference call will be available from at 1 p.m. Eastern Daylight Time today midnight Eastern Daylight Time, September 6, 2012. To access the replay, please dial 1-800-475-6701. The replay pass code is 255509. 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 conference over to Joe McNeely, Chief Financial Officer of FreightCar America. Please go ahead, sir.

Joe McNeely

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

Before we begin, I would 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 second quarter of 2012 are posted on the company's website at www.freightcaramerica.com.

I would now like to turn the call over to Ed Whalen, our President and CEO.

Ed Whalen

Thank you, Joe and good morning. I am pleased to report another strong quarter for FreightCar America as we registered year-over-year improvements in both our top and bottom line despite significant headwinds we have been experiencing in the coal market. Revenues and operating income decreased sequentially for the first time in several quarters. However we were able to build upon the efficiencies gained over the last two years to maintain solid financial results.

To recap order activity, 961 railcars were ordered in the second quarter of 2012, of which 600 were new, compared to 1089 new railcars ordered in the second quarter of 2011. In the first quarter of 2012, 1244 railcars were ordered of which 1163 were new. As a result of our product diversification efforts, our second quarter orders included a variety of car types with services other than coal including hoppers, gondolas and flat cars.

We delivered 2,786 railcars in the second quarter of 2012, which included 1,815 new, 361 used and 610 leased railcars. This compares to 1,309 railcars delivered in the second quarter of 2011, of which 1,219 were new. There were 2,613 railcars delivered in the first quarter of 2012, of which 2,146 were new.

Our backlog of unfulfilled orders at June 30, 2012 was 5,109 railcars compared to 4,986 railcars at June 30, 2011 and 6,934 railcars at March 31, 2012. Total industry railcar orders were 16,434 in the second quarter with tank cars accounting for 84% of all orders. 17,927 railcars were delivered in the second quarter of 2012 and as a result industry-wide backlog decreased to 58,674 railcars at the end of June.

The overall number of railcars in storage reached to roughly 318,000 as of June, an increase of 19,000 when compared to March 31, 2012. However we estimate that the number of coal cars in storage decreased from about 35,000 railcars at the end of March to approximately 33,000 at the end of June and continued to decrease further to 24,000 at the end of July.

While U.S. railcar loading for most commodities remained strong, coal continued to be challenged. When compared to the second quarter of 2011, commodity loadings in the second quarter of 2012 were down 3.2% driven by coal and agricultural products. Coal loadings decreased by 11.7% and intermodal container loadings increased by 6.3% in the second quarter versus the same quarter in 2011.

U.S. electricity generation where coal competes as a power generating fuel was down 2.6% in the first half of the year compared to the first half of 2011. Overall the U.S. coal production was down 6.2% in the first half of 2012 versus the same period last year.

Lower natural gas prices and lower electric power consumption continued to negatively impact coal demand. Efficiency of the railroads and the anemic economic recovery also impacted overall coal demand. The Energy Information Administration's latest estimate report stockpile as of May 2012 is 203 million tons approaching the record level of 2009, 35% above the 10-year average and 16% above the year-ago stockpile level.

Indications are that harder than normal summer is helping to reduce the absolute level of the utility coal stockpile, but it is difficult to say when the stockpile will return to historical average levels.

U.S. coal exports, however, remained strong in the second quarter. The latest data available indicate the U.S. coal exports were up 20% year-over-year to approximately 53 million tons as of the end of May. For the full year, coal exports are forecasted to remain strong and total approximately 112 million tons surpassing the 107 million tons exported in 2011 and matching the record high levels of 1981. On balance, we expect coal demand will remain challenged in the near term.

Turning back to our business, second quarter railcar volumes for our service segment improved over the prior quarter as maintenance activity increased and capacity improvements began to take effect. However, operating income remained flat with prior quarter due to higher operating costs at our rebuild facilities.

Our second quarter results for the manufacturing segment reflect the strong backlog we built in the second half of last year and improved operating efficiencies. With the low level of non-train car orders and the oppressed coal demand, we were pleased to obtain orders for current car types other than coal cars. The new car types we recently introduced have been well received by our customers, our new intermodal design was approved earlier this year and completing additional testing.

While our composite development outside of the coal market, I would overly reiterate what I said in the last call, we expect the second half of 2012 to be weaker than the first half. Manufacturing segment results will be impacted in the second half by a change in product mix as we begin to deliver rebuilt cars, the production of higher labor hour cars and to some extent, efficiency losses from shorter production run. We don’t anticipate significant coal car orders in the near term, however we still believe that the eastern coal car replacement cycle will continue and will provide a base demand for our coal car.

Under these less than ideal economic conditions, we are focused on optimizing our operational efficiency expanding our product offerings and delivering quality cars and services to our customers. Our financial position remains strong and we are well positioned to provide long term value to our shareholders,

Now I would like to turn the call over to Joe McNeely to address our second quarter financial results in more detail.

Joe McNeely

Thank you, Ed. Consolidated revenues were $181 million in the second quarter of 2012, which were $84 million higher than the second quarter of 2011, but $38 million lower than the first quarter of this year. The overall increase in revenue reflects the higher number of railcars delivered and higher average revenue per car. Revenues were lower than the first quarter of this year due to the lower number of new car delivery. Net income for the second quarter of 2012 was $5.6 million or $0.46 per diluted share, compared to a net income for the second quarter of 2011 of $200,000 or $0.02 per diluted share. Net income was $9.7 million or $0.81 per diluted share in the fist quarter of this year.

Manufacturing segment revenues for the second quarter of 2012 were $172 million, compared to $88 million in the second quarter of 2011, and $210 million in the first quarter of this year. The increase from 2011 reflects higher railcar deliveries and product mix changes. In the second quarter of 2012, operating income for the manufacturing segment was $15.3 million or 8.9% of revenues, which was $13.2 million or 6.5 percentage points higher than the second quarter of 2011 but $7.4 million or 1.9 percentage points lower than the first quarter of this year. The increase in operating income versus 2011 reflects the increase in deliveries, product mix, and better fixed capacity utilization.

Services segment revenues for the second quarter of 2012 were $9.4 million, compared to $9.3 million in the second quarter of 2011 and $8.6 million in the first quarter of 2012. Operating income for the services segment was $700,000 in the second quarter of 2012. This was $500,000 lower than the second quarter of last year, but flat compared to the first quarter of this year due to the factors previously noted.

Corporate costs for the second quarter of 2012 were $6.6 million, which were up $1.4 million from the second quarter of 2011 but down $800,000 from the first quarter of this year. The year-over-year increase reflects additional compensation costs and consulting related expenses.

The year-to-date effective tax rate for the six months ended June 30, 2012 was 39.3%. At June 30, 2012, we had 998 railcar assemblies valued at $57 million versus 648 railcar assemblies valued at $44 million as of March 31, 2012. Our financial position continues to be strong with no outstanding debt and cash on hand at the end of June over $124 million. This is down $20 million from the end of March 2012, primarily due to additional inventory on lease and reduction in accounts payable. We have no current plans to draw up our revolving credit facility.

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

Question-and-Answer Session

Operator

(Operator Instructions) The first question today comes from the line of Michael Gallo from C. L. King. Please go ahead.

Michael Gallo - C. L. King

Question just, I thought it was encouraging you had some non coal cars booked and you mentioned obviously intermodal was going through some additional testing. Will the intermodal car type, at what point will that be ready? When will you be ready to take orders? Based on what you have seen in the testing is that car type, you think you should be able to get some meaningful orders?

Joe McNeely

Yes, so we are ready to take orders for those cars today and we are actively marketing those right now.

Michael Gallo - C. L. King

And those are just attached to the customer or you can give us any more detail on how widely those that are out there being tested and just what kind of feedback you are getting so far?

Joe McNeely

The tests have quite well and we expect to wind them up here this month.

Michael Gallo - C. L. King

Okay. So it sounds like, depending on how those go, you might be able to see something here on the intermodal front in the second half of the year.

Joe McNeely

Well, we are ready to start marketing.

Michael Gallo - C. L. King

Okay, great. Second question I have, when you look at coal cars, obviously coal had a very difficult period here for the last six months, although it appears to bottom out in May and it appears to be actually be showing signs of getting better. What level is it nice to see the cars in the storage come down? At what level of cars in storage do you think we might see replacement cycle start to kick in again? As we get back down in that 10,000 to 15,000 range or any thoughts on that?

Joe McNeely

I think you have to remember that the replacement cycle is geared primarily to the East Coast and those cars are fairly old and not in particularly good condition right now. So I would expect that that cycle is going to continue on somewhat independently of what's going on with the total number of railcars in storage.

Michael Gallo - C. L. King

Have you seen any just general pushing it out a quarter or two just from the weak coal environment? People just kind of refocus?

Joe McNeely

I think whenever you have an event like the one we have been through over the last six months, people step back and reevaluate but I think in the long term, the replacement cycle on the East Coast is going to happen.

Michael Gallo - C. L. King

Right. So it's just a question this maybe has changed the timing slightly but in your view nothing has changed towards the ultimate replacement of those cars.

Joe McNeely

Well, in my view, I think you are correct that there may be some hesitation as a result of what's happened in the general coal market but I believe that over the long term those cars are going to be replaced and you heard from my prepared comments that exports are approaching the record levels this year.

So I think that all bodes well for that activity.

Operator

And we do have a question from the line of Peter Nesvold with Jefferies. Please go ahead.

Peter Nesvold - Jefferies

Let's assume for the sake of discussion that the backlog continues to trend lower over the next several quarters. Can you walk through what kind of cost outs you can take out of the manufacturing facilities, SG&A or at the manufacturing level in order to minimize cash burn while we are going through this transition period right now for coal cars?

Joe McNeely

As you recall, Peter, we have been quite aggressive at managing our costs historically and our costs are very scalable. So as the backlog declines and the possibility arises that we have to reduce volume (inaudible) we will able to scale down the cost in the plants to commensurate with the reduction in volume.

Peter Nesvold - Jefferies

And I know that the mix is changing a lot in the last couple of quarters or so with the accommodation of new cars and used cars but is there any kind of framework for a breakeven point that we can think about?

Joe McNeely

As you know, we have not discussed breakeven points and forecasting financial performance.

Peter Nesvold - Jefferies

Okay, maybe a question or two on the railcar fleet then. Do you know off hand what percent of the coal car fleet is currently in storage?

Joe McNeely

Our coal car fleet?

Peter Nesvold - Jefferies

Of the industry's coal car fleet.

Joe McNeely

There is about 270,000 coal cars in service with 24,000 in storage, so about 8%.

Peter Nesvold - Jefferies

Okay, about 8%. If we were to get more mine closures over the next couple of years, so whether that’s EPA driven or whether it's economic driven from where nat gas stock prices are going, is there a supply overhang, in your view? How would the industry absorb those used cars coming back to market as opposed to buying new cars?

Joe McNeely

Well, I think if you look at recent projections of coal use, the projection is that coal will continue to supply about 40% of electricity generation going forward for the foreseeable future and so I think that would indicate that those cars could be absorbed rather quickly into the system.

Peter Nesvold - Jefferies

Okay, I will get back in queue. Thank you.

Operator

And we do have a question from the line of Brad Delco with Stephens. Please go ahead.

Brad Delco - Stephens

Good morning, gentlemen. Ed or may be Joe, can you just talk a little bit about, you had higher production, I know there are a few less new cars this quarter but you had higher production. What, may be, some of the puts and takes were on seeing the manufacturing margin decline a little bit on a sequential basis from the first quarter?

Ed Whalen

In terms of the production, we have the number of deliveries included used cars which had lower revenue per car and somewhat lower margins so that dilutes your overall margin percentage.

Brad Delco - Stephens

Got you, but I guess what we have seen thus far on the used deliveries, those aren’t the rebuilds that you guys got orders for in the fourth quarter of last year?

Ed Whalen

No, those are trade-ins that we took in and rebuilt them in the quarter.

Brad Delco - Stephens

Okay, so we should expect, I guess margins to be challenged a little bit as the mix of the business changes in the hack half of the year with more rebuilds. Is that kind of what I am picking up?

Ed Whalen

Well, Brad, as you know, we don’t give out guidance on the margins.

Brad Delco - Stephens

Got it, you suggested that those lower revenue per unit cars carry less margin there, right?

Ed Whalen

On the rebuilds, they did, yes.

Brad Delco - Stephens

Okay, and then more of a high level question for you, Ed, obviously there is a lot of challenges right now with, maybe, order increase in the coal market. You guys are certainly spending your product to your product portfolio with intermodal cars. Does it make a lot of sense for us to be adding additional capacities or car types? How does the board, or how do you think about what out there and given your cash balance what maybe some strategic alternatives can be for you and if you guys have done any of that or looked at any potential opportunities in the market?

Ed Whalen

The board regularly takes a look at ways, opportunities to enhance shareholder value. We are not adding capacity. We are basically utilizing the capacity we have in our existing system to produce different car types and there is a small amount of capital investment required to make those changeovers but our plan is not to add capacity to our basic business.

Operator

And we do have a question from the line of Sal Vitale from Sterne, Agee. Please go ahead.

Sal Vitale - Sterne, Agee

Good morning, gentlemen. Few questions. Maybe I can start on the corporate expense side. There was a nice sequential decline of $800,000. How do we think going forward? Is that $6.5 million roughly? Is that good run rate to be using quarterly?

Ed Whalen

Sal, as we talked before, we are pretty happy with the operating level where G&A is at and in the first quarter, if you remember back in the call, we had some higher consulting related expenses that didn’t repeat this quarter.

Sal Vitale - Sterne, Agee

Okay, good. Second question I have is, if just a few questions on the new orders you received on the new car types. You mentioned gondolas, flats and I think the other one was steel cars, was it?

Joe McNeely

Hopper cars.

Sal Vitale - Sterne, Agee

Hopper cars, yes, I am sorry. What commodities are those used for? Is it, I assume it is iron ore and some other type of asphalt, et cetera, et cetera?

Joe McNeely

They are non-coal commodities, but we are not prepared to get into a discussion on the specific commodities.

Sal Vitale - Sterne, Agee

Okay, did you give a breakdown of what percentage of the second quarter orders were coal cars as opposed to other types?

Joe McNeely

No, we have not done that but it is a majority.

Sal Vitale - Sterne, Agee

Majority as coal, you say?

Joe McNeely

No, non-coal.

Sal Vitale - Sterne, Agee

Non-coal, right. That makes more sense. Would you expect the next couple of quarters to be similar type of profile?

Joe McNeely

We really don’t give future guidance but I guess given the current condition of the coal market, one would expect it to be rather muted for the next several quarters.

Sal Vitale - Sterne, Agee

Right, okay and then just the last question I have is on the profitability side. If I look at gross profit per car, so that was about $6,700 n 4Q, popped up to over $9,000 in 1Q and then came down to about $6,000 in 2Q. Now there weren’t any of the rebuilt cars delivered during the quarter, so was the entire mix effect of the used cars which were 361 cars?

Joe McNeely

Two things. There definitely was the used cars in there and you have to make sure, I am not sure what number you are using in the total deliveries, but you have to take the lease cars out of that number also to get cars that were sold for revenue.

Sal Vitale - Sterne, Agee

Right, so you are saying the gross profit per car should exclude the 610 leased cars?

Joe McNeely

Yes.

Sal Vitale - Sterne, Agee

And the reason for that because the leased cars don’t fall to the gross profit line (inaudible)?

Joe McNeely

For those that have not been resold at the moment and I think as you go through my prepared comments the numbers of railcars inventory went up, those cars were manufactures, put on lease and have not sold yet, but do intend to sell within the 12 months.

Sal Vitale - Sterne, Agee

Got it, so you won’t see the gross profit from those 610 cars for some time, you are seeing?

Joe McNeely

Right.

Sal Vitale - Sterne, Agee

Right, okay, that makes sense. So that was part of it and then was there any other effect? I think you mentioned shorter production lines?

Joe McNeely

I made that comment, future looking comment as we move out into the second half of the year.

Sal Vitale - Sterne, Agee

Okay, fair enough. So would it be fair, and I understand you don’t future guidance but is there a way of getting a sense for the rebuilt cars that you have in your backlog? Over what time period they will deliver?

Joe McNeely

Yes, they will be delivering basically through the second quarter of next year.

Sal Vitale - Sterne, Agee

Okay, would the bulk of that in say, 4Q and 1Q? Is that fair to say?

Joe McNeely

No, it is pretty well spread out over the time period.

Sal Vitale - Sterne, Agee

Okay, and just a quick reminder, how many rebuild car are there in the backlog?

Joe McNeely

About 3,300.

Operator

And we do have a question from the line of Matt Brooklier from Longbow Research. Please go ahead.

Matt Brooklier - Longbow Research

I am not sure if you have already touched upon it but maybe you could talk a little bit about what you have seen thus far with respect to July and August demand?

Joe McNeely

Well, as you know we don’t give guidance and so I am afraid we can't comment on that.

Matt Brooklier - Longbow Research

Okay, fair enough. Looking at current coal cars in the storage, maybe you could walk us through how that process works as rails or other owners of those cars potentially look to taking cars out of storage and putting them into operation. When is the decision made with respect to bringing that new car it? I guess assessing the overall quality of that particular equipment. I am assuming a lot of those cars are older cars that they want to take out of service as they are looking to bring cars into service. When is that assessment made as to whether they use that existing car or they go out and they order a new car?

Joe McNeely

Well, first of all, a lot of those cars are not older cars. There is a fairly good part of that population that are relatively new cars that are very serviceable and as the demand improves those cars will come into service as we have see.

I have mentioned earlier that cars in storage have declined from about 35,000 earlier this year to about 24,000 at the end of July here. So there has been a fairly good number of cars ready to move back into service. Longer term, people will look at their long term needs and make decisions on new car acquisitions based on that.

The other thing you have to bear in minds is that there are really two separate markets. There is a Western market which is primarily in aluminum coal, steam coal market and then there is the Eastern market which is a mixture of steam coal and metallurgical coal export coal and the export side has been relatively stronger.

So there are several different markets operating here and they are operating on different cycles under different conditions.

Matt Brooklier - Longbow Research

Right. I was just trying to get a sense to see if it sounds like the cars in storage are actually of pretty decent age but seeing if maybe that would be of benefit if those cars are coming out of storage were a little bit older and then that potentially could simulate a little bit more demand for new orders.

Joe McNeely

Again, our view of the main source of demand is the replacement of the older car population in the East and as I mentioned earlier in the call we expect that trend to continue over the next quite a few years.

Operator

And our next question comes from the line of Matthew Dodson with Edmunds White Partners. Please go ahead.

Matthew Dodson - Edmunds White Partners

Can you talk just a little bit about pricing? So, obviously, coal is weak. Can you talk about pricing in the coal market and then you are breaking into these new markets and some of your competitors such as Trinity, et cetera are adding capacity. How are you being successful at garnering these new orders?

Are you being price aggressive? Or can you talk about pricing in the new markets that you are getting into? Thank you.

Joe McNeely

We really don’t discuss car pricing.

Matthew Dodson - Edmunds White Partners

So, I guess, how can we try to figure out what is going to happen to your margin if you don’t give us any kind of direction on pricing or what is going to go on (inaudible) difficult? Why are you public?

Joe McNeely

As you know we don’t give guidance and so.

Matthew Dodson - Edmunds White Partners

I am not asking you to give guidance. I am just asking you to talk about the trends that you saw in pricing.

Joe McNeely

Pricing information is part of the guidance. We don’t discuss pricing.

Operator

Your next question comes from the line of Adam Peck with Heartland Funds. Please go ahead.

Adam Peck - Heartland Funds

You might have mentioned this in the prepared remarks but you think we have seen a peak in the coal stockpile?

Joe McNeely

What? I didn’t catch that.

Adam Peck - Heartland Funds

You think we have seen a peak in the utility stockpiles?

Joe McNeely

It certainly appears so because in May, the stockpiles did decline. Unfortunately the data is lagging quite a bit and we haven’t seen much of the effect of the impact of the heat we have had in June, July and August here on the stockpiles but it appears that they are declining.

Adam Peck - Heartland Funds

Okay, do you think the drought and the effect it had on Mississippi is impacting car demand?

Joe McNeely

I believe so and the rivers are down to a fairly low level and there has been some impact on barge movement. So I would imagine that is having some positive benefit to the coal movement.

Adam Peck - Heartland Funds

Okay, how do you characterize the scrap environment?

Ed Whalen

The scrap environment?

Adam Peck - Heartland Funds

Yes.

Ed Whalen

In terms of pricing?

Adam Peck - Heartland Funds

Price, demand as well.

Joe McNeely

Scrap, you are speaking of scrap metal?

Adam Peck - Heartland Funds

Yes, scrap in cars.

Joe McNeely

Well, price of scrap has actually come off somewhat as have most commodities over the last two quarters here. I don’t know how much effect that is having on the scrapping process but commodity prices have, for metal, come down.

Adam Peck - Heartland Funds

We realize that the Eastern fleet is on replacement, is that 60,000 to 70,000, is that the number?

Joe McNeely

Yes, it is roughly the number.

Adam Peck - Heartland Funds

Okay, do you have any update on the West coast ports?

Joe McNeely

No I don’t have any update on what's going on with West coast ports other than activity still continues to allow additional coal exports off the Northwest to part of the U.S.

Adam Peck - Heartland Funds

Okay, $124 million roughly in cash, plus $60 million, $70 million in the lease fleet, how much cash do you guys need to operate the business?

Ed Whalen

Adam, as we talked we don’t give out any specifics on that. We maintain a strong balance sheet to support "long term stability" of the company, as well as, we have to reinvest in our business.

Adam Peck - Heartland Funds

Well, as long term shareholders, we certainly think the equity is certainly undervalued today if you include the lease fleet along with the cash, the enterprise value is roughly $30 million. So we would certainly advocate buyback. We realize you need the cash to last the cycle but a $6 million buyback would be roughly 20% of the enterprise value. So hopefully the board is listening. We would certainly back it.

Joe McNeely

We are aware of your views and the board considers that on a regular basis.

Operator

And we do have a question from the line of Steve Barger from KeyBanc Capital Markets. Please go ahead.

Steve Barger - KeyBanc Capital Markets

If I heard you correctly, you said, you deliver the rebuilds pretty evenly over the next year. Can you tell us the delivery cadence for the other 18,000 cars in backlog? Are they for 2012, or did some of that fall into '12?

Joe McNeely

Those are a mix of cars that are going to be delivered this year and into the first quarter of next year.

Steve Barger - KeyBanc Capital Markets

Okay, did you say are there other leased cars in backlog right now? Cars that are for lease?

Ed Whalen

No, we haven’t commented on that and don’t.

Operator

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

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 PM Eastern time today at 1-800-475-6701, passcode 255509. Thank you and good day.

Ed Whalen

Thank you.

Operator

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

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