FreightCar America Inc (RAIL) 2019 Q4 法說會逐字稿

Welcome to the FreightCar America's Fourth Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this conference is being recorded. An audio replay of the conference will be available from roughly 2:00 p.m. Eastern today until 11:59 Eastern Time on February 27, 2020. To access the replay, please dial (866) 207-1041. The replay access code is 8502743. 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 Josh Littman, Investor Relations.

Thank you, and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Chris Eppel, Chief Financial Officer; and Matt Tonn, Chief Commercial Officer.

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 2018 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 2018 Form 10-K and earnings release for the fourth quarter of 2019 are posted on the company's website at www.freightcaramerica.com.

And with that, let me now turn the call over to Jim for a few opening remarks.

Thank you, Josh. Good morning and thank you for joining us today. I'm going to speak on our recent performance, where we are headed in general and our approach towards navigating our way through what will undoubtedly be a challenging 2020. We will then hear from our new Chief Commercial Officer, Matt Tonn; and finally, from Chris, who will provide detail on the fourth quarter numbers and delivery outlook for 2020.

We've spent the last 2 years executing our Back to Basics strategy, our plan to transform FreightCar America into a world-class manufacturer that offers all the right car types and on a fully competitive cost structure. Back to Basics has been all about getting our business fundamentals where they need to be in order to allow ourselves to start to grow again and to be profitable even in a future downturn. We made more progress in 2019. And over the last 2 years, we have completed the majority of the work needed to realize these goals. Before we can declare Back to Basics complete, however, we need to finalize a few outstanding product development efforts and complete the build-out of our new operations in Mexico. We expect these remaining steps to be completed within the next few quarters.

As a reminder of our Back to Basics efforts and progression, we first started by setting a manufacturing foundation for how our Shoals facility operates on a daily basis, derived from leading practices inside and outside the rail industry. The first phase of this work has been done for some time now, and Shoals is delivering substantially improved performance in safety, quality, productivity and cost.

As we have reported for a number of quarters now, we are operating at world-class levels for safety, a critical leading indicator for any manufacturing site. Beyond its face value, being world-class for safety speaks volumes for training, process adherence and the quality and maintenance of the physical plant. It is also a critical enabler for delivering superior product quality, which, in turn, is a critical and mandatory enabler for achieving superior productivity and cost. It all ties together. And of course, without those 4 elements, it's nearly impossible for a company in our business to be commercially successful and to grow. Thus, I'm happy to say we are now poised to finally realize the full potential of the Shoals' footprint, which, as many of you know, is the newest railcar production facility in the United States and possesses enormous potential.

As it relates to product quality, ours is every bit as good as what is coming from our competitors, but this is not nearly good enough for us. Like safety, we intend to lead the industry in product quality. Our approach is the same, by bringing in great new talent, adapting proven processes from other industries, and then focusing on continuous training, discipline and improvement. We have very big goals for where we expect to take product quality, and this will be an important part of our operational story in 2020.

Moving to plant productivity, or the direct labor hours per unit for building a car. We saw productivity gains in 2019 of over 20% per car. This improvement was largely attributable to the combination of our model changeover process, visual management and what is now a full year of training our team members in lean manufacturing principles. We are starting to excel at model changeovers, which is critical, given how we see our position in the industry, which I will touch on shortly.

We also continue to make great strides in our product material cost savings initiatives, reducing these costs by another $2,000 per railcar on average in 2019. This brings our 2-year material cost reduction total to more than $5,000 per railcar. We also expect to have another solid year of performance in 2020. Material cost reduction and plant productivity were major focus areas in need of improvement when I joined the company and are now both important company strengths.

Perhaps the most significant improvements to our operations over the past few years, however, have come in our manufacturing footprint. We made great progress in reducing our fixed cost and optimizing our footprint. This started when we exited 2 legacy coal manufacturing facilities. The second of these, the closure of the Roanoke facility, which we announced last summer, will complete on budget and in mid-March, a few weeks ahead of schedule. We now expect to save $5 million per year in fixed costs starting at the end of the first quarter, which is also a slight improvement from our original plan. And I again want to acknowledge all the great employees in Roanoke who gave so much to our company.

Also within this couple of years' time frame, we optimized our Shoals, Alabama facility by first taking complete control and becoming the sole tenant and then by working with our landlord to reduce our footprint, which will take effect in January 2022. Our new agreement will generate cash savings of $7 million also starting in January of 2022. So in total, we have all of our U.S. operations consolidated into the state-of-the-art Shoals facility while maintaining an ability to produce 4,000 to 6,000 units per year and annualized fixed cost reductions of $5 million per year starting next month, with an additional $7 million of annual cash savings starting in January of 2022.

The rest of our footprint story is the new JV in Castaños, Mexico. One might wonder why now is the appropriate time to build a new factory. The reality is we have to if we are going to compete, grow and make money in all business conditions. The fringed Mexico labor rate is approximately 20% of that in the U.S. That's a lot of extra gross profit on car types with inherently higher margins, and it's the difference between being in or out of business in car types with inherently lower margins. Our competitors moved there long ago, and we are going to level this playing field and then some.

As said on prior calls, Mexico has been part of our Back to Basics strategy since early on, but we knew it was critical to find the right partner. And we found a terrific partner. This partner helped our competitors build their presences in the region and has deep and tested expertise that assure success. The build-out of the physical facility is on track and expected to be completed in early summer. And when done, we will have the newest purpose-built railcar facility in Mexico, just as we already do in the U.S. In an industry like ours, having the newest plants, coupled with the best operating systems, is bedrock to becoming the industry's most efficient and highest-quality producer, and this is the "then some."

As we made progress with our operations, cost and overall footprint strategy, we also invested in the portfolio, focusing on having the right products on the right cost structure. As we spoke about last quarter, FreightCar was competitive in roughly 1/3 of the North American non-tank car market when I joined in the second half of 2017. The portfolio enhancements we are implementing will allow us to be -- will allow us to build for customers in approximately 2/3 of the market within just a few more quarters.

Let me now pivot and speak to the market and our cash position. As all of you know, the current market environment is very challenging. Said more plainly, we are in one of the industry's infamous downturns. Per the Rail Supply Institute, Q4 2019 industry backlog is down 12% relative to third quarter of 2019 and stands at 51,000 units, the lowest level since 2011. As of year-end, roughly 400,000 cars or approximately 24% of the total fleet is in storage. While this is certainly unwanted timing, this happens in our industry. And as history has proven time and again, the moving of goods by rail will continue to be a preferred reliable mode of transportation for shippers. It will come back. And more times than not in the past, it has surprised us by the strength and speed of the comeback. In the meantime, the present industry conditions make everything we are doing all the more challenging. We need to finish our work, including the build-out of Mexico, while also managing a comfortable cash balance.

Our cash position remains strong, despite these challenges. As Chris will discuss in greater detail, we ended the fourth quarter with $70 million of cash, up $10 million from the end of the third quarter. We will continue to maintain strong liquidity as we finish transforming the company and navigating these harsh industry conditions in 2020. This is not an either/or situation. We need to do both, and we will do so in consideration of all tools in our possession. We cannot change market dynamics, and we cannot change what we do not control. What we can do and are doing is finishing the job of retooling this company so that we will be ready to compete profitably as we enter the next upturn in the cycle.

As we prepare to bring our Back to Basics initiatives to conclusion, one of the items you have not heard us talk a lot about is our commercial positioning. It was clear from the beginning that we first needed to get our operations and costs in order and then our products and positioning. While we believe strongly in our ability to now compete toe-to-toe, and we know our customers value our position as a third U.S. supplier, these alone are not enough.

What we are also building at FreightCar America is a meaningfully differentiated position in the market. Our position as a pure-play manufacturer, combined with our excellent newer capabilities for making efficient changeovers and long-established track record for executing conversion programs, make us an ideal partner for all the major rail customers. This is particularly true for all the pure-play leasing companies out there. Many of these leasing companies, all things equal, see value in partnering with a builder whose primary business is not that of a lay competing lessor. Many of these companies place smaller to medium-sized orders, requiring the changeover skills that we now have. And many of these companies also own a significant number of cars that are or will eventually be conversion candidates. Our position as a pure-play manufacturer that is particularly well equipped to efficiently execute medium-sized production runs, combined with our conversion expertise, which is the deepest in the industry, is what customers have been asking of us. This is where we will play, and this is where we will win.

Last quarter, we announced that Matt Tonn joined our team as Chief Commercial Officer, and we're excited to have him. Matt brings exceptional knowledge and depth to the company. Now that he has had some time to familiarize himself with FreightCar, we thought he could share a few words with everyone.

Thanks, Jim. I'm really excited to be part of this team and at such a pivotal point. I thought I would take a moment and share why I thought now was the right time to choose FreightCar.

I have over 30 years of experience, most of that in rail, and most of that involved working in challenged markets and as part of turnarounds. I understand how to navigate difficult markets from a commercial perspective and produce real results.

As a former supplier, I held a multi-decade working relationship with FreightCar and many of its employees. Obviously, FreightCar has a long-term historical reputation as a premier railcar builder. Looking back 3 to 4 years ago, it would have been a tough decision for me to join this organization as the company's competitive position was growing weaker. Given my position in the supply chain, I've been able to keep a keen eye on what Jim and his team have been doing. I saw firsthand the tough decisions that were being made, the reset in the culture and the way things were changing down to the smallest task. It is important to me that FreightCar focuses on being the highest quality producer, and that helped me make my decision a lot easier. I'm also truly excited about what this organization can do with what will be the 2 newest state-of-the-art manufacturing facilities in the U.S. and in Mexico. It is clear to me that this is not the old FreightCar, and the changes Jim and his team have made are why I want to be part of the future. I have been through market cycles before, and I am completely optimistic in the rail market recovery and FreightCar's value proposition as a pure-play manufacturer.

Since the start of my role, I've had the opportunity to meet with several of our key leasing, railroad and shipper accounts. The feedback on FreightCar's path improved -- path towards improved quality and expanded product portfolio has been positive. While we are fortunate to have key customers that are true partners, our ability to execute will be what sets FreightCar apart from its competition. As Jim noted earlier, all of our customers are facing an equally challenged market landscape. Looking ahead and over the next few months, I will be focused on strengthening customer engagements with an emphasis on solutions development.

Before I turn the call over to Chris, I will walk through our backlog and delivery figures for the fourth quarter. Our order backlog as of December 31, 2019, consisted of 1,650 railcars compared to 1,704 railcars at the end of the third quarter. Our backlog has an estimated sales value of approximately $206 million, up sequentially from $188 million. Deliveries for the fourth quarter of 2019 totaled 439 railcars, which includes 354 new cars and 85 rebuilds. This compares to 1,047 deliveries in the same quarter of 2018, which included 827 new cars and 220 rebuilds.

In the third quarter of 2019, we delivered 467 railcars, which included 255 new cars and 212 rebuilds. We received 385 orders in the fourth quarter of 2019. This is down year-over-year compared to 835 orders in the fourth quarter of 2018 and down sequentially compared to 1,050 orders in the previous quarter. While we do not typically speak of postquarter activity, given our reported backlog figure, we felt it was important to tell you that we received orders for 300 additional railcars in February.

With all that said, Chris, can you please walk us through the financial results for the fourth quarter?

Thanks, Matt. As a reminder, the company will file its annual Form 10-K with the Securities and Exchange Commission next week on March 4.

Turning to our financial results. Consolidated revenues for the fourth quarter 2019 totaled $44.9 million compared to $87.8 million in the fourth quarter last year. This is due to our lower deliveries in the quarter that Matt alluded to. Our gross margin fell to a negative $8.1 million compared to a negative $4 million in the fourth quarter of last year. Our current quarter's gross margin does include material cost savings of approximately $2,000 per car. However, this quarter's results were largely influenced by our operating -- our loss of operating leverage associated with the lower deliveries and costs associated with winding down our Roanoke facility. As a reminder, all carrying costs associated with Roanoke will be out of our run rate by the end of the first quarter of 2020.

SG&A for the quarter totaled $7.5 million, up from $7.2 million in the fourth quarter of 2018. The year-over-year increase was driven by incentive compensation expenses, which were partially offset by certain cost reductions that were enacted. Over the past year, the company has undergone a precise effort to review its ongoing needs and corresponding investments in SG&A. FreightCar is a different company going forward versus where it was several years ago.

As such, we reviewed every aspect of our cost base and how it fits into our go-forward strategies. This list includes, but is not limited to, our org structure, our benefits, professional services, compensation programs and corporate and staffing levels. We've made adjustments to each and all of these areas moving forward and into 2020. And as such, we'll have a lower SG&A run rate going forward.

While we do not give specific guidance on line item details in the P&L, it is safe to assume the company is now comfortably below the $7 million in quarterly SG&A run rate, excluding any special projects that could occur in the future.

Consolidated operating loss for the fourth quarter of 2019 was $9 million compared to operating loss of $11.3 million in the fourth quarter of 2018. Reflected in our operating loss is a $2 million charge from the loss of sale on approximately 100 railcars previously held in the leasing fleet. We currently have 545 cars remaining in our lease fleet, all of which have leases beyond 2020.

As we mentioned last quarter, we terminated our postretirement medical benefit plan, which generated a noncash gain of $6.6 million in the quarter. We expect ongoing cash savings associated with these actions of approximately $400,000 per year going forward. We also recorded a restructuring gain of $2 million in the quarter, which included $2.5 million noncash gain for our Roanoke, Virginia facility related to the termination of the lease.

Moving to the balance sheet. We finished the quarter with cash and cash equivalents, marketable securities and restricted certificates of deposit of $70 million. This was up $2 million compared to our 2018 year-end position and up $10 million from September 30, 2019. We continue to make cash-based decisions that are consistent with our long-term strategy. We have shown the ability to maintain ample cash position despite the industry headwinds. Our revolver position remains unchanged from the previous quarter, where we had 0 drawn against our asset-backed lending facility and $10 million drawn against our lease fleet loan. Jim mentioned, we will continue to prioritize maintaining liquidity while delivering shareholder returns.

Capital expenditures for 2019 totaled $5.6 million, which includes some initial capital spend associated with the Mexico JV in the fourth quarter. We're still finalizing our 2020 production schedule in Mexico. And as such, our cash contribution will vary based on that scenario. It is important to note that our spending will be timed to align with the launch schedule, which implies there is some variability to our cash spend in 2020. We will continue to update everyone on that progress throughout the year on our earnings calls.

Now I'd like to spend a minute discussing 2020. For the full year, we expect deliveries to range between 2,000 and 2,500 units. We do expect deliveries to ramp up as we move throughout the year. We are in the process of launching 3 major production builds, and the delivery process will not begin until the second quarter. Thus, we expect deliveries to start out small and then gradually increase as we move throughout the year.

For the year, we expect expenditures -- capital expenditures to range between $10 million and $12 million, inclusive of the build-out of the Mexico facility.

Now I'd like to turn the call back to Jim for a few remarks as well as the operator for questions.

Thanks, Chris. As we look ahead to 2020, our goals will be familiar themes to you. In Mexico, we are now in the equipment installation phase inside the factory, and this will take us through June. Our goal is to produce our first car there in the third quarter time frame and be in production by year-end, are on track.

In Shoals, we will complete the installation of a new car aligning facility, continue to invest in automation as part of our quality and efficiency initiatives, and implement what we believe will be a best-in-industry quality system inside the factory.

Third, we will finish all our planned product development work. And fourth, we will take all actions necessary to ensure that we maintain a strong balance sheet and, more specifically, a strong cash position such that under even a prolonged industry downturn, we can finish the work set forth and give Matt and his team the time needed to rebuild our backlog to healthy levels.

With that, I would like to conclude our prepared remarks and turn the call over to the operator for Q&A.

(Operator Instructions) We have a question coming from Matt Elkott from Cowen and Company.

Congratulations on the progress you guys made in the quarter. Jim, when you talk about profitability in the next upturn or upcycle, is there a specific production number that you guys have that would get you to profitability? And by profitability, did you mean -- I mean does it mean net profitability? Or does it mean EBITDA profitability? Any more color on that would be helpful.

Yes, Matt, our goal as a company and where our Back to Basics work was designed to take us is to be bottom line profitable even in industry downturn condition. As we've seen for a number of years, to be profitable in the good times and then essentially give it back in the bad times isn't the right place to be. And that's certainly not -- our goal is, again, to be bottom line profitable all the time.

With what -- in terms of a number, I'm not going to give you a breakeven volume or something like that. But I think what's important to keep in mind is we have fundamentally improved our cost structure on every single front, be it product cost, be it fixed cost, be it SG&A cost. And these aren't small improvements, they're significant. They're very large improvements. And I'll stop it there. And -- but again, thanks for the question. And we see ourselves getting to a position again where we're profitable under all likely anticipated business conditions.

And our next question comes from the line of Justin Long with Stephens Associates.

So I know in the fourth quarter, there were some management incentives that looked like they were updated, as it pertains to raising capital and potentially selling an ownership stake in the business. So I was wondering if you could talk about the catalyst for some of those changes. And how you're thinking about addressing those items this year and just kind of the bigger picture strategy on that front?

Justin, this is Jim again. First of all, our Board of Directors, more specifically our Compensation Committee, undertook the exercise and recommended that certain retention mechanisms be put in place for key management. It's pretty normal course for a business going through a turnaround situation, and our Board agreed with that and took the actions that it did.

I will tell you, secondly, the senior management team, all of us, are absolutely committed and excited to see this through. We've worked too hard to get to this point, and we want to be here now to enjoy the fruits of the work. Having said that, the rest of your question around raising capital and so forth, again, I think I would leave it that. We, like all businesses going through a turnaround, and not just a turnaround, but a turnaround in a very challenging market condition, it's important that we plan, strategize, war-game, whatever you want to call it, for all types of business scenarios, including a prolonged industry downturn. And we just want to know that whatever we do, we're in -- we're well positioned to see it through and realize the fruits of all the work that's been accomplished today.

Okay. That's helpful. And then circling back on some of the cost items. I just wanted to get your thoughts around kind of expectations for costs in 2020. You mentioned that the fixed costs associated with Roanoke, coming down $5 million after the first quarter. Anything else on the operating side or the cost side with additional material savings that you would call out that we should be contemplating in our models?

Yes, Justin. Let me put it this way for right now. We were -- 2 years ago when we started our focused work on material cost reduction, we put a target out there. I think it was originally about $2,500. We beat that. We did something similar again in 2019. We have internal targets again this year, which the team is working for. We haven't put those out just yet because there's enough softness in the market. There's enough uncertainty in the backlog that we will build that we just didn't think it was appropriate to do it just yet. But rest assure that, as we said on prior calls, our focus on material cost reduction, it's now part of our DNA, if you will. There's more to get. There's -- and also, our focus on productivity improvements, there's plenty more to get. So it's going to continue to be significant. And then we've already spoken, as you mentioned, on fixed cost reduction, we've made a few highlighting comments on SG&A reductions. So we're going to continue to get tighter and tighter and run the tightest ship we can here.

Okay. And just in terms of the demand environment right now, based on the inquiries that you're seeing in the market, what's your assumption for industry railcar orders in 2020 relative to what we've seen in the past couple of quarters? I'm just curious if you're expecting kind of more of the same or any change.

I'll let Matt address that.

Yes. We see order volume being down year-over-year, and I think that's going to continue based on the level of inquiries and just the general atmosphere of the market right now. Looking long-term and getting back to a more normalized orders and deliveries, we see an upturn starting mid-'21, with things getting back to a normal level in the '22, early '23 time frame.

But just to be clear on the first part of that, have you seen a slowdown in activity from the fourth quarter to the first quarter?

In terms of inquiries?

Correct.

No, we have not.

Okay. So is it pretty similar?

Inquiries about -- inquiries have been relatively steady, but they're at a lower rate, historically.

Okay. And then last question for me was on the cash balance. You gave the guidance on CapEx. We have the delivery guidance and a few kind of cost items. When you put it all together, do you have an initial expectation on where we're going to end the year from a balance sheet perspective as it relates to cash?

Justin, this is Chris. Right now, we're not giving out an ending cash balance situation based on what we talked about with some timing issues and how the spend in Mexico may go. As we mentioned, we are going to be very precise in how we invest into Mexico in line with orders. So there's a couple of different scenarios we've modeled out. But in general, again, that cash number we talked about and the units are in the base. And then some of these other opportunities will either be triggered or not triggered based on other situations. So we're not, today, going to give you an exact cash number. But just as Jim mentioned, rest assured, we're going to be focused on maintaining ample liquidity to get us to the next few years.

Yes, Justin, this is Jim. I think part of the X factor here is, well, as we said, we have to do both. We have to finish Back to Basics, including the Mexico build-out, and we have to maintain a strong cash balance. That's -- those are givens.

As to how we will manage that as we go through the year, part of it, really the X factor is what we see happening in the marketplace. If we see the current industry funk continuing or if we do start to see a meaningful increase in activity out there, would probably have some influence on how we balance the completion and the cash balance. But -- so as Chris said, we're not going to give a number now. There's lots of variables that'll influence our thinking.

And our next question comes from the line of Matt Elkott with Cowen.

Sorry if I missed it, but did you guys say how many of your -- how much of your current backlog is for delivery this year?

No, we didn't.

No. We didn't give that specific number. We typically don't give that number out. But like I mentioned, our range for deliveries this year is 2,000 to 2,500.

Okay. So what's the manufacturing lead time now? Because even if you're -- all of your deliveries happen or all of your backlog is delivered this year, then you would still need, based on this range, I guess, 350 to 850 orders, which is not a huge number. But I guess a lot of it would have to come in the first half. Just trying to get a sense of what the lead -- manufacturing lead times are right now.

Yes, Matt, this is Jim. We've got plenty of time, at this point, to fill out the orders for the balance of the year, which is why we've given the range we've given. General lead times for the industry, not to speak specific to us but for the industry, from the time order received to when production can start typically is in a range of 10 to 15 weeks or so. And that's on average, and there's lots of caveats with that. For instance, if -- are we -- are these "tack-on orders," where you've got the line up and running and there's incremental orders placed against it, so there are lots of caveats. But as we -- we're pretty comfortable with the guidance at this point and have frankly a fair bit of time.

And then I think if I look back at the last several years at the height of the upcycle or the last upcycle we had in -- the last major upcycle we had in 2015, you guys delivered almost 9,000 cars. Now with the new manufacturing lines and the reinvented manufacturing infrastructure, is there like a maximum production output number that you can share with us, Jim?

I'll have to give you a kind of a broad brush here and not the precision you're probably looking for because keep in mind, again, car models differ pretty tremendously in terms of build hours and the rate at which they flow through factories. It depends on whether you're interrupting the lines to execute changeovers, et cetera, et cetera. But as I commented in the earlier part of my -- of our prepared comments, the Shoals factory is eminently capable of putting out 4,000 to 6,000 units per year, depending on what that mix and number of changeovers and so forth looks like. And I don't -- we've commented about it in prior calls, but not this one. When we get Mexico up and running, our goal is to have 1 production line up and running this year with the second one next year. And obviously, that's good for incremental volume on top of the 4,000 to 6,000. So whether we're going to be in a position to do 9,000 units, again, I'm not sure. I'm not sure I want to be. The best way to run our business is to be at full capacity most of the time, not just once every decade or 2.

Yes. That makes sense. And then just one final question. Your forecast for deliveries and your internal maybe forecast for orders, what kind of assumptions are you guys making for rail traffic and -- mainly rail traffic, I guess, or the -- and the macro, as a whole, for the year?

I think if you look at the trend, the rail traffic numbers have been flat to slightly down. I don't think that we think that the industry is going to see significant improvement in rail traffic over the course of this -- next year in any segment.

And there are no more questions in queue. So I would like to turn the call back over to Jim for a few closing remarks.

Thank you again for your time today and your continued support. I look forward to continuing to update you on our progress. So have a great day. Thank you.

And that does conclude our conference for today. You may now disconnect.