FreightCar America, Inc. (RAIL) Q4 2011 Earnings Report, Transcript and Summary

Welcome to the FreightCar America's Fourth Quarter 2011 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 1 PM Eastern Standard Time today until midnight Easter Daylight Time on March 17, 2012. To access the replay, please dial (800) 475-6701. The replay pass code is 236318. An audio replay of the call will be available on the company's website within 2 days following this earnings call. I would now like to turn the call over to Joe McNeely, Chief Financial Officer of FreightCar America.

Thank you, and welcome to FreightCar America's fourth quarter 2011 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. Ed will begin by providing you an update on the company and the market in which we're operating, I will briefly review the consolidated results for the fourth quarter of 2011 and the financial results for each of our segments. Lastly, we'll open up the call to your questions. Before we begin, I'd like to remind everyone that statements made during this conference call relating to the company's expected future performance, future business prospects or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.Participants are directed to FreightCar America's 2010 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 2010 Form 10-K and earnings release for the fourth quarter of 2011 are posted on the company's website at www.freightcaramerica.com. I'd now like to turn the call over to Ed Whalen, our President and CEO.

Thank you, Joe. Good morning and welcome to FreightCar America's fourth quarter 2011 earnings call. I am pleased to report that our business continued to improve and we produced the fifth sequential quarterly increase in railcar deliveries, revenues and operating income. Our fourth quarter results reflect improved railcar demands, partially offset by lower service volumes. To recap order activity in the quarter, 4,481 railcars were ordered in the fourth quarter of 2011 compared to 2,840 railcars ordered in the third quarter of 2011 and 331 cars ordered in the fourth quarter of 2010. Fourth quarter orders include 3,300 rebuilt units. Revenue contribution from these cars will be lower than would be for the case for new cars as many parts will be reutilized. We delivered 2,489 railcars in the fourth quarter of 2011, which compares to 1,515 railcars delivered in the third quarter of 2011 and 694 rail cars in the fourth quarter of 2010.Our backlog of unfulfilled orders at December 31, 2011 was 8,303 railcars compared to 6,311 railcars as of September 30, 2011. Our backlog of unfulfilled orders at December 31, 2010 was 2,054 railcars. Industry wide there were 16,434 railcars ordered and 16,693 railcars delivered in the fourth quarter of 2011. And as a result, industry-wide backlogs decreased to 64,575 railcars at the end of 2011. For the year as a whole the nation's railroads continued their strong performance with many announcing record revenue and operating results. North American commodity loadings exhibited positive year-over-year growth in each quarter of 2011 reflecting a pace of growth, which accelerated in the fourth quarter of 2011 relative to the two prior quarters. Total rail commodity loadings in the fourth quarter of 2011 increased 3.8% versus the same quarter in 2010, with many commodities showing more than a 10% quarter-over-quarter increase. Total loadings increased by 2.7% and intermodal loadings increased by 5.5% for the fourth quarter of 2011, when compared to the fourth quarter of 2010. Coal demand increased in the fourth quarter as utilities work to replenish coal stockpiles depleted by the hot summer and the floods that impacted the Midwest early in the year. For the full year however, coal consumption declined as US electricity generation in 2011 was down 0.9% when compared to 2010 and as natural gas utilization increased. Coal share as a fuel for US electricity generation was 42.5% in 2011 which is down from 44.8% in 2010. Coal stockpiles have continued their downward trend relative to recent historically high levels with November 2011 figures 7.9% below last year's level for the same time period and 3.5% below the average November levels for the last five years. Export activity was strong throughout 2011 reaching 107 million tons for the full year which is a 31% increase versus 2010 and the highest level since 1991. Industry wide the number of railcars storage reached roughly 273,000 as of December 31st, 2011, an increase of approximately 13,000 railcars when compared to the end of September 2011. We estimate that the number of coal cars in storage also increased from about 3,000 railcars at the end of the third quarter to approximately 9,000 at the end of 2011. We believe the increase in coal cars and storage was largely due to the decreased coal rail transit times in the fourth quarter. For our service segment, fourth quarter repair volumes were negatively impacted as coal car operators delayed scheduled maintenance. We expect repair volumes to normalize as utilities stockpile replenishment efforts have largely ended. We continue to focus on optimally operating our repair shops to meet the changing demand. As I look back on 2011, FreightCar America benefited from a much improved railcar manufacturing market. I'm pleased that our management efforts have translated into improved earnings for both fourth quarter and full year 2011. I'm also pleased that given our improved results, our Board of Directors has reinstated our regular quarterly dividend as separately announced today. While most market indicators were favorable in the fourth quarter of 2011, some have started to show signs of weakness as we have entered into 2012. Average weekly railcar loadings and ton-miles for the first 6 might weeks of 2012 are down from the fourth quarter 2011 averages. Thus far in 2012 coal loadings have decreased relative to 2011 levels as continued strength in exports has been more than offset by soft demand from utilities due to the unusually mild winter combined with ongoing low industry power consumption. The number of railcars and storage have continued the trend upward in 2012. At the end of January the Association of American Railroads reported roughly 283,000 railcars in storage. We estimate this includes approximately 23,000 coal cars in storage, up significantly from the end of 2011. While we remain optimistic for 2012 given our backlog and continuation of eastern coal car replacement cycle, we continue to carefully monitor these industry trends. Nonetheless, we will continue to manage the business to maximize overall income in 2012 and beyond, while also continuing to look for strategic growth opportunities. Now I would like to turn the call over to Joe McNeely to address our fourth quarter financial results in more detail.

Thank you, Ed. Consolidated revenues were $187 million in the fourth quarter of 2011, which were $57 million higher than the previous quarter and $136 million higher than the fourth quarter of 2010. The increases in revenue reflect the higher numbers of railcars delivered, the inclusion of the services business and higher revenue per car. Net income for the fourth quarter of 2011 was $8.5 million or $0.71 per share compared to a net loss for the fourth quarter of 2010 of $2.5 million or $0.29 a share. Our manufacturing segments revenue for the fourth quarter of 2011 rose to $179 million compared to $122 million in the third quarter 2011 and $45 million in the fourth quarter 2010. These increases reflect higher railcar deliveries and increased revenue per car due in part to products mix changes and higher material costs. Operating income for the manufacturing segment was $16.5 million in the fourth quarter or 9.2% of revenues which was $9.6 million or 3.5% higher than the prior quarter and $18 million higher in the fourth quarter of 2010. The increase in operating income reflects the increase in deliveries, product mix and better utilization of manufacturing capacity. Services segment revenues for the fourth quarter 2011 were $7.8 million which were essentially flat with the third quarter of 2011 but $1.8 million higher than the fourth quarter 2010. The year-over-year increase in the services revenue reflects the inclusion of FreightCar Rail Services for the fourth quarter ended December 31st, 2011 versus only 2 months in the fourth quarter of 2010 and also reflects higher parts sales. Operating income for the services segment was $0.5 million in the fourth quarter 2011. This was $0.6 million lower than our prior quarter due to lower margin parts sales and repair work mix. Operating income for the services segment in the fourth quarter of 2010 was $1.0 million reflecting higher margin part sales partially offset by lower repair income due to the inclusion of FreightCar Rail Services for only 2 months. Corporate costs for the fourth quarter of 2011 were $7.6 million. These costs were up $1.4 million from the third quarter of 2011 due primarily to compensation and other costs incurred in the quarter. Corporate costs for the fourth quarter of 2010 were $5.8 million. The effective tax rate of 9.1% in the fourth quarter of 2011 included a $1.3 million benefit due to the change in our estimated state tax apportionment on a deferred tax asset balances and tax deductible goodwill. The full year effective rate of 6.7 includes the taxable goodwill reduction benefit of $0.6 million and a benefit of $1.7 million related to the change in certain statutory state tax rates and change our estimated state tax apportionment on our deferred tax balances. The value of railcars under lease was $54.7 million as of December 31, 2011 which was down $2.5 million from the end of September 2011 due primarily to sales of railcars on lease. Interest in the secondary market for railcars and leases remain strong and we continue to look for potential remarketing opportunities for certain of our leased railcars. Our financial position continues to be strong with no outstanding debt and cash on hand at the end of December 2011 of $104 million up $37 million from the end of September 2011. Working capital excluding cash decreased $25 million from the end of the third quarter as the increase from receivables resulted from the timing of railcar shipments was more than offset by decreases in inventories and receipt of customer deposits. We have no current plans to draw upon our revolving credit facility. Lastly as Ed had mentioned earlier, our Board of Directors have declared a regular quarterly cash dividend of $0.06 per share to be paid on March 5, 2012 to shareholders of record at the close of business on February 27, 2012. This ends our prepared comments and we are now ready to address your questions.

[Operator Instructions] And our first question comes from the line of Michael Gallo with C.L. King.

My question is on the rebuilds, obviously there are going to be lower ASP. My question is on the gross profit per dollars per car what we should expect relative to new cars?

The gross profit percentage shouldn't be very much different than a new car.

All right. Okay. In terms of just other car types, I know we spent a lot of time talking about coal, just some commentary on whether you see some other opportunities as you go through the cycle. I see the new intermodal design and a lot of other car types where some of your competitors are getting sold out and certainly trends and pricing appear favorable, so any thoughts on whether there is some opportunities in some other car types and if so, could you give us some further clarity on that? Thank you.

Sure, Michael. This is Ted Baun. In general, we're still seeing a number of inquiries out there in the market. Mostly non-coal car related at this point. I think coal is in a bit of a holding pattern given the events in the past 4 weeks and the mild whether we're seeing. But with respect to the non-coal cars, we're seeing a number of opportunities in open top cars, open top hoppers, and a variety of flat cars. As it relates to intermodal, we still continue our regulatory approval efforts and we're in front of a number of customers with our DynaStack 53 fourth intermodal car and those initial responses are very favorable. So we're continuing those efforts as well.

And our next question comes from the line of Sal Vitale from Sterne, Agee.

So just a follow-up on the question regarding the re-built cars. So you’re saying the gross profit percentage or the gross margin rather shouldn't be too different? Earlier you said the ASP would be different. Can we get a sense, is it 10% lower, will it be 20% lower? I'm not asking for specific numbers but just by order of magnitude, how much lower can it be?

Sal, again, normally we don't comment on specific orders but in this one I see it being tougher, because we don't know the various parts that will come off and have to be replaced. So it's difficult to give you a firm answer on that.

Okay. Just trying to get a sense for what the profitability of these cars could be. Can you give a sense for what the lead time on when these cars will be delivered, the 3,300 cars?

Our backlog goes out through '12 and '13. Again, we don't comment on specific orders, but our backlog again will be built over '12 and some in '13.

Okay. And then can you just refresh my memory, in the past have you done significant numbers of these rebuilt orders, of rebuilt cars?

Yes, Sal, we have. Over the course of the past 20 years we have done these cars before. We got experience and it's helping the customer also feel comfortable with us pursuing.

Okay. So is there any take away from the fact that you're getting an order like this. Does it speak to perhaps the level of confidence of the customer in terms of basically they are trying to save money by rebuilding an old car rather than ordering new cars, or is there something specific that drove this particular order?

This is Ed. I think the facts are that the customer is trying to maximize the value of his assets and he is doing it by rebuilding the car rather than substituting new cars.

Okay. That makes sense. And then just last question. Can you give us a ballpark estimate of what the size of the North American coal car fleet is currently? Is it still about 280,000 cars?

Yes. That's still accurate.

Okay. So then in terms of how many cars that are currently in storage, so that's about 23,000 cars. So that works out to a little less than 10% I guess. Whether it's absolute number of cars in storage or percentage of the overall fleet, what is a more typical number historically?

In general, Sal, the industry might see anywhere between 5,000 and 12,000 coal cars in storage. I know that's a wide range but it's a tough question to answer. So, I'll just give it to you in those terms. And in that situation that would be barely [indiscernible] . That's where we still see new car orders.

Okay. So then, if I look at the high end of that 5 to 12, how it compares to 23,000 that are currently in storage is that something you think that storage would be worked off in the short period?

It's tough to say. Obviously, the mild winter is not favorable. But I will say if you look historically, it isn’t uncommon. We've seen store trains well above this range and the industry has a tendency to turn on a dime, pretty quickly.

Okay. Just one more question on the margin, a very nice margin expansion. Sequentially it was up very nicely both on the manufacturing side. Is there any reason to think and I know you don't give margin guidance but I guess, what events could result in the margin decelerating from that 5% that you did in 4Q?

Sal, as we talked we got things that we look at and if you at what trends over time is, margins which really equates to a railcar pricing trends with the firmness of your backlog, the further out your backlog is, the firmer over time the bulk for us in the industry would see pricing increase.

And our next question comes from the line of Brad Delco with Stephens.

I wanted to ask the first question' when I think about the orders you guys received in the fourth quarter, a lot of them being for rebuilds, where do you have more confidence in the momentum going forward? Is it earnings performance, kind of like you've seen order activity, like you've seen or, I'm not asking for guidance, but what do you have more confidence in the current environment looking forward?

I think as Ed commented in his comments, we're still optimistic on '12 given where our backlog is at and where we continue to think the eastern coal car replacement cycles are at and that's going to continue for some time. Again as we talked, orders will be lumpy just the way the railroads and customers order. But I think it's still along those lines.

I guess where I'm getting at, I understand the low natural gas prices, mild winter weather, but I'm trying to get a sense of would that really change a customer's decision to buy a 30-year asset because of some unique events that have occurred over the last, say, 6 months or so? Any color on that?

Hey, Ted, you can chime in here. I think the long-term decision is no, because long-term it depends on what their long-term needs are. Short term it may change the timing of their need in placing orders, but over the long-term no we don't think so and as we've talked over the long-term, natural gas will put pressure on coal for power generation and we will take some share but again even with the information coming out from EIA [ph] indicate that coal is going to continue to grow and the amount of coal for power generation is still expected to grow even with the headwinds from natural gas.

That's great color. So it's probably more of a timing issue than anything. Okay. And then, finally, I know you guys are looking to get more involved in intermodal type cars. Any color on kind of what the order activity or what that market is looking like now let's say relative to other car types?

Yes, there was a lot of activity in intermodal about a year ago. That's why I think those folks that were out purchasing those cars are still digesting them. We are expecting further dialogue as we move forward here in '12. So those inquiries tend to be lumpy and larger in magnitude and so we're going to keep moving forward with our testing and get ready for those extra deals.

And our next question comes from the line of Steve Barger from KeyBanc Capital Markets.

This is actually Alex Walsh on for Steve. First off, as I think about the rebuilds, obviously takes probably less work to rebuild the new cars. I'm wondering just from a production standpoint is it possible to produce more of those with the same amount of capacity than for instance a new car. Just trying to think of the cadence of production.

I think we can expect fairly similar production rates because it is a very extensive rebuilding operation. So I would think they will be produced in a similar fashion to a new car.

Okay. And then with regards to the backlog, what percentage for delivery in 2012?

Well over half of it is in 2012, the carryover in '13.

And then, on new car pricing, given the dynamics that you guys are talking about in terms of cars in storage and just demand for coal cars, can you talk at least directionally about the economics how car pricing is trending and maybe the economics of the new car orders that you have in your backlog?

This is Ed. Even though enquiry levels and orders have been strong the market remains very competitive across all car types and it continues to be so. I think our improved margins are a function of somewhat improved price, but also an improvement in manufacturing efficiency.

And then, I know you talked about the long-term coal car replacement cycle still being intact. Of the customers that have multiyear coal car replacement programs out there, has there been any change in terms of the conversations that you guys are having? And is there any propensity to maybe rebuild instead of buy new?

Rebuild is a function of the availability of existing cars to re-manufacturer and once they are gone that opportunity is gone away. So that's fairly limited opportunity.

And our next question comes from the line of Peter Nesvold from Jefferies & Co..

It's Elliott Waller on for Peter. Congratulations on a strong quarter. A couple housekeeping questions, SG&A run rate for 2012; should that be similar to 2011 or a slight uptick over $30 million for the year?

It should be pretty similar. As we talked in the past you'd expect a little bit of salary increase in there as earnings have improved and normal raises are produced but there's nothing else unusual in the numbers that would change it either way.

And then how should we think about the tax rate for 2012?

Again, given the nature of the goodwill and other kind of permit deductions as you have low levels of income, as you get to more normal levels of income, that rate changes and again the number was benefited because we had a change in our apportionment estimate which was part of deferred taxes. Again that number is pretty volatile around kind of where forecasted income is and given that we only guidance out and we don't give our forecasted tax rates either.

Okay that's fair. And you mentioned, it sounds you're replenishment, the coal cycles is coming to an end and you would expect service revenues to start picking up again. Should we expect to see that in the first quarter of this year?

I think we would expect to see it start to improve in the first quarter and gradually improve as we move out through the following quarters.

And finally, any issues on the supply side for either parts or castings, anything in that category?

We still watch that very closely and we manage that very tightly, but as of right now we have adequate materials to make the cars within our backlog.

And our next question comes from the line of Kristine Kubacki from Avondale Partners.

Hopefully I didn't miss this, but I just was wondering if you give us a little bit about the cadence of deliveries through the year. And given what's in storage, is there going to be some seasonality in terms of deliveries that we should think about as we go back into our models?

There's really no seasonality to the delivery pattern. The deliveries are based on the individual customer requirements. So there isn't much I can help you with there.

And then just a little longer-term question. You talked about strategic growth opportunities. I was wondering, if you could give us a little color on what you're searching for there and given the cash on the balance sheet would this be via acquisition and kind of what the acquisition environment looks like and are there opportunities to grow organically?

Well, we certainly intend to continue to grow the service business organically and we have significant opportunities at our existing facilities. In addition, as we've mentioned in the past, we are interested in growing a service side of the business and we're continuing to pursue that and we'll take advantage of opportunities in that area as they present themselves.

Would you say that the pipeline is full of opportunities out there?

I don't know that I can comment on that.

[Operator Instructions] And we have a follow-up question from the line of Steve Barger from KeyBanc Capital Markets.

Hey, just one more on the tax rate, I know you guys don't provide explicit guidance on it but under inter period tax accounting, I know you previously had talked about using the year-to-date tax rate for the quarterly tax rate, but given that we're going into 1Q there really is no year-to-date tax rate. What's a reasonable starting point?

A reasonable starting point is as you look for adjustment after statutory rates, the tax deductible goodwill benefit will repeat, but again absent something else that's benefited in the fourth quarter on the change in estimate on the state apportionment probably should not.

So, then, directionally you are talking below statutory?

Given the goodwill deduction, yes, that's what happens.

And we have a follow-up question from the line of Peter Nesvold from Jefferies & Company.

Just want to get your thoughts, how we should think about gross profit per car. When we look back to the peak of '06, '07, we were in the $12,000 and $13,000 range and it looks like we finished this year around the $5,000 range. How should we think about that going forward? Obviously there is a large gap there and it feels like we're starting to march towards industry orders that they're improved significantly as we move into the next few years?

Yes, Peter, as you know we don't give specific guidance, but I think we've been pretty fair in the past, saying 2006 was a basic year that had a lot of unique factors that went into it, that drove backlogs out quite a bit and pricing up quite a bit and repeating that level of deliveries and profitability would be pretty difficult to achieve; hard to foresee that happening again. I think what we said from a color standpoint is if we look back to our margins and our income kind of around that peak, those are probably the right things to expect going forward.

And we have a follow-up question from the line of Sal Vitale from Sterne, Agee.

Just a follow-up question; really a clarification on something you may have said earlier. I apologize. Did you give any color on the, if I look at sequentially the ASP on the manufacturing side, is up about I think 7%. Can you give a sense for how much of that is pure price as opposed to materials cost or other factors?

Sal, we don't disclose that level of detail. It is a function of both on the average selling price at mix of commerce comprising and then also the underlying material component in our pricing structure.

Okay. So it's fair to say that your pricing is improving sequentially then?

It's fair.

At this time, there are no other questions in the queue.

Okay. Well this concludes today's conference call. Thank you for joining. A replay of this call will be available beginning at 1:00 p.m. Eastern Time today at 1 (800) 475-6701 passcode 236318. Good day.

Thanks a lot everyone.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.