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Edited Transcript of ARII earnings conference call or presentation 30-Oct-18 2:00pm GMT

Q3 2018 American Railcar Industries Inc Earnings Call

ST. CHARLES Nov 6, 2018 (Thomson StreetEvents) -- Edited Transcript of American Railcar Industries Inc earnings conference call or presentation Tuesday, October 30, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John R. O'Bryan

American Railcar Industries, Inc. - President & CEO

* Luke M. Williams

American Railcar Industries, Inc. - Senior VP, CFO & Treasurer

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Conference Call Participants

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* Brian Lee Colley

Stephens Inc., Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning. My name is James, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q3 2018 American Railcar Industries, Inc. Earnings Conference Call. (Operator Instructions) Please note that this call is being recorded today, October 30, 2018.

I'd now like to turn the call over to Senior Vice President and CFO, Luke Williams. Please go ahead.

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP, CFO & Treasurer [2]

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Thank you, James. Good morning. I would like to welcome you to the American Railcar Industries Third Quarter 2018 Conference Call. I am Luke Williams, our Chief Financial Officer, and I would like to thank you for joining us this morning. For those who are interested, a replay of this call will also be available on our website, americanrailcar.com, shortly after this call ends.

Joining me this morning are John O'Bryan, our President and Chief Executive Officer; and Yevgeny Fundler, our General Counsel. Our call today will include comments about the railcar industry, our operations and financial results. Following these remarks, we will have a question-and-answer session.

This conference call will include forward-looking statements, including statements as to estimates, expectations, intentions and predictions of future financial performance based on currently available information. Participants are directed to our SEC filings and press releases for a description of certain business issues and risks, a change in any one of which could cause our actual results or outcomes to differ materially from those expressed in the forward-looking statements. Also, please note that the company does not undertake any obligation to update any forward-looking statement made during the call.

EBITDA and adjusted EBITDA are non-GAAP financial measures we will discuss today that are reconciled to net earnings in our press release that was issued this morning. The press release is available through the Investor Relations page of our website as is a supplemental information presentation.

Now it's my pleasure to introduce John O'Bryan.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [3]

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Thank you, Luke, and good morning. Thanks for joining us this morning. The North American railcar market has continued to show signs of recovery, including carload growth driven by a variety of commodity types and a continued decline in railcars in storage. The industry reported quarterly orders of nearly 25,000 railcars, which represents its highest point since the fourth quarter of 2014. The pricing environment is slowly recovering, but remains competitive.

During the third quarter of 2018, we received orders for 8,482 railcars and delivered 654 railcars. Our orders were for direct sale and lease for a variety of hopper and tank railcars, including 7,650 railcars ordered through the agreement with GATX. This increased our backlog to 11,215 railcars at quarter-end, and we currently expect 13% of that will go to our lease fleet.

Consistent with our guidance last quarter, we expect all -- our overall shipments for 2018 to come in below 2017 levels.

Last week, we announced a merger agreement whereby our company will merge with a subsidiary of ITE Rail Fund. We currently expect to complete the merger in the fourth quarter of 2018. Completion of the merger is subject to various conditions, and it is possible that factors outside of the parties' control could result in the merger being completed at a later time or not at all. As we work with the ITE team to complete the merger, we continue to focus on our vision of aligning people, process and tools to deliver world-class results in safety, quality and service.

We have filed documents with the Securities and Exchange Commission regarding the merger. And when completed, a definitive information statement containing information with respect to the merger required by applicable securities laws will be mailed to the company stockholders. Investors are urged to carefully read the definitive information statement regarding the proposed merger and any other relevant documents in their entirety when they become available because they will contain important information about the proposed merger.

In light of the information contained in our securities filings and including the information that will be contained in our definitive information statement once it is complete, we will not be discussing the pending merger further at this time. Rather, this morning's call will focus on our quarterly financial results.

I now turn it back to Luke for a discussion of our third quarter financial results.

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP, CFO & Treasurer [4]

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Thank you, John. Third quarter 2018 consolidated revenues were $100 million, down 17% versus $121 million for the same period in 2017. This decrease was primarily driven by a decrease in our manufacturing segment with lower railcar shipments for direct sale, partially offset by an increase in our railcar services segment.

Consolidated earnings from operations for the third quarter of 2018 were $22 million, up 12% compared to $20 million for the same period of 2017. Our consolidated operating margins were 22% for the third quarter of 2018 compared to 16% for the same period of 2017. These increases were primarily driven by increased earnings from operations in our railcar leasing and railcar services segments, partially offset by decreased earnings in our manufacturing segment.

Consolidated manufacturing revenues were $41 million for the third quarter of 2018 compared to $68 million for the same period in 2017. This decrease was primarily driven by lower railcar shipments for direct sale for both hopper and tank railcars, partially offset by higher selling prices due to the mix of railcars shipped during 2018 compared to 2017. We shipped 267 railcars for direct sale and 387 railcars for lease during the third quarter of 2018 compared to shipments of 618 railcars for direct sale and 338 railcars for lease during the third quarter of 2017. Railcars built for our lease fleet represented 59% of our total railcar shipments during the third quarter of 2018 compared to 35% for the same period in 2017.

Consolidated manufacturing revenues exclude estimated revenues related to railcars built for our lease fleet of $40 million for the third quarter of 2018 compared to $33 million for the same period in 2017. Consolidated manufacturing segment loss from operations was $4.5 million for the third quarter of 2018 compared to earnings from operations of $0.5 million for the same period of 2017.

Operating margin from our manufacturing segment was negative 11.1% for the third quarter of 2018 compared to 0.7% for the same period in 2017. These decreases were primarily due to decreased railcar shipments, higher fixed costs incurred based on lower production volumes, more competitive pricing for both hopper and tank railcars and certain inefficiencies encountered in our manufacturing facilities, including the direct and indirect costs associated with our efforts to hire, train and retain workers to meet current demand for both hopper and tank railcars. These earnings from operations excluded $2.6 million in estimated profits on railcars built for our lease fleet for the third quarter of 2018 and $3.3 million for the same period of 2017. The estimated profits on railcars built for our lease fleet are eliminated in consolidation.

Our railcar leasing revenues for the third quarter of 2018 were $32 million, down 3% from the same period in 2017. Our lease fleet has grown to 13,721 railcars at September 30, 2018, from 12,749 railcars at September 30, 2017. Although we continue to strategically grow our lease fleet, we continue to experience suppressed weighted average lease rates for new railcars for lease and existing railcars through lease renewals or reassignments. As of September 30, 2018, our lease fleet utilization was approximately 97%.

Railcar leasing segment earnings from operations on a consolidated basis for the third quarter of 2018 were $30 million compared to $22 million for the same period in 2017. This increase was primarily due to a gain of $10 million generated by an early termination of a lease with a customer and an increase in railcars in the lease fleet, partially offset by increased maintenance costs and lower lease rates. The railcars subject to the early lease termination were reassigned to another customer. Without the impact of this gain, railcar leasing earnings from operations on a consolidated basis would've been $20 million for the third quarter of 2018.

Our consolidated railcar services revenues for the third quarter of 2018 were $27 million, up 42% compared to the same period of 2017. This increase was primarily due to revenue generated from retrofit projects, partially offset by lower demand for traditional repair services.

Railcar services earnings from operations on a consolidated basis were $2.5 million or an operating margin of 9.5% for the third quarter of 2018 compared to $1.7 million or an operating margin of 9.2% for the same period in 2017. This increase in operating margin was primarily due to ramp-up of activity for retrofit projects, partially offset by lower demand for traditional railcar services.

Consolidated selling, general and administrative expenses increased $1.7 million in the third quarter of 2018 compared to the same period of 2017 due primarily to higher expenses for share-based compensation resulting from fluctuations in our stock price as well as other increased compensation costs, partially offset by decreased legal expenses.

Earnings from our joint ventures were $400,000 for the third quarter of 2018 compared to $200,000 for the same period of 2017. This increase was primarily due to continued profitability and lower interest expense at our Axis joint venture. Our Ohio Castings joint venture remains idled.

Net earnings for the third quarter of 2018 were $13 million or $0.69 per share compared to $9 million or $0.46 per share for the same period in 2017. This increase was driven largely by the gain recorded on an early lease termination, which had a positive impact of $7.4 million net of tax or $0.39 per share; and lower income tax expense as a result of the Tax Cuts and Jobs Act enacted in December 2017, decreasing the federal income tax rate from 35% to 21%, partially offset by a decrease in earnings from operations, excluding the previously mentioned gain.

EBITDA, adjusted to exclude share-based compensation expense and income on short-term investments, was $39 million for the third quarter of 2018, representing an increase of 14% compared to the same period in 2017. The increase resulted primarily from the early lease termination payment, partially offset by decreased earnings from operations, excluding this payment, as discussed previously.

Our earnings contributed to positive cash flow from operations of $91 million during the first 9 months of 2018, and we ended the quarter with net working capital of $147 million, including $74 million of cash and cash equivalents. As of September 30, 2018, we had $527 million of debt outstanding under our January 2015 lease fleet financing facility.

At this time, I'd like to turn it back to John for some additional comments.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [5]

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Thanks, Luke. In our view, the railcar market is continuing the slow improvement that we saw during the first half of the year, and we are encouraged by recent trends. However, current market pricing remains below long-term averages, and we expect to maintain a disciplined strategy that optimizes volume, price and service.

We will continue to work diligently to resolve the inefficiencies at our manufacturing plants, including the direct and indirect costs to hire and train new team members and ramp up production. The entire ARI team is committed to the journey of continuous improvement and innovation as we focus on aligning people, process and tools to deliver world-class results in safety, quality and service.

I would like to thank the ARI team members for their hard work and support in serving our customers, shareholders and industry partners. During the third quarter of 2018, we worked diligently to finalize the merger agreement. I would like to thank ARI's Chairman and Board Members for their wise counsel and support.

Now we'll turn the call back over to the operator, and we'll be happy to take your questions. However, as I stated earlier, we do not intend to address the merger further at this time. For information about the merger, we direct investors to the filings that we have made and will make with the SEC.

Operator, would you please explain how participants can register their questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Brian Colley from Stephens.

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Brian Lee Colley, Stephens Inc., Research Division - Research Associate [2]

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Congrats on the merger.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [3]

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Thanks, Brian.

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Luke M. Williams, American Railcar Industries, Inc. - Senior VP, CFO & Treasurer [4]

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Thank you.

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Brian Lee Colley, Stephens Inc., Research Division - Research Associate [5]

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So just wondering if you could comment on both lease rates and inquiry levels in terms of how they trended throughout the third quarter and maybe if you've seen any material change so far in October.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [6]

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We've continued -- this is John. Good question, Brian. First of all, on the inquiry and demand side, we continue to see a robust level of inquiries, particularly on the tank cars and some of the hopper car family. We've seen a slight improvement in lease rates, but as we mentioned, it's still a competitive marketplace.

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Brian Lee Colley, Stephens Inc., Research Division - Research Associate [7]

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Okay. Got it. And then could you just talk about what you're seeing in terms of crude tank car demand? And is it possible to share how many crude tank cars are in your backlog today? And how many you're thinking you could -- or I guess, how are you thinking about the potential from incremental orders and deliveries for that car type moving forward?

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [8]

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Sure. From a market perspective, we have seen an uptick in inquiries for crude tank cars, particularly for the crude-by-rail market in Canada and a little bit of the market in the U.S. We don't comment at the detail in our backlog at this time, but I think, as you've heard on some of the other calls in recent times, we have seen an uptick in the market, particularly the Canadian crude-by-rail opportunities.

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Operator [9]

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(Operator Instructions) And there are no further questions at this time. I'll turn the call back over to our presenters.

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John R. O'Bryan, American Railcar Industries, Inc. - President & CEO [10]

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Thank you. That concludes our conference call this morning. Thank you to everyone that participated. Have a good day.

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Operator [11]

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This concludes today's conference call. You may now disconnect.