FreightCar America Inc (RAIL) 2020 Q4 法說會逐字稿

Greetings. Welcome to the FreightCar America Fourth Quarter and Full Year Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to your host, Lisa Fortuna of Investor Relations. You may begin.

Thank you, and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Terry Rogers, 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 2020 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.

During today's call, there will also be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning. Our 2020 Form 10-K and earnings release for the fourth quarter of 2020 are posted on the company's website at www.freightcaramerica.com.

With that, let me now turn the call over to Jim for his opening remarks.

Thank you, Lisa. Good morning, and thank you all for joining us today. 2020 was a truly unique year. It was highly challenging on so many different levels, but it was also a great year in terms of what was accomplished. 2020 set the table for our future. In the midst of both the deep industry downturn and the once-in-a-century pandemic, the FreightCar America team finished the most challenging aspects of the business transformation and essentially finished remaking the company.

We are excited to share our progress today and to share some of the reasons why we believe in the potential of the new company. I will also introduce you to our new Chief Financial Officer, Terry Rogers. So let's get started.

I am happy to report that we successfully completed our exit from Shoals. Everything went according to plan. And given the operational challenges associated with closing down a 2-plus million square foot facility as it continued to produce, that is saying quite a lot. We had no appreciable cost overruns.

We completed our last car build with quality, and we returned the facility back over to the Retirement Systems of Alabama, the facility owner, on the last day of February as originally planned. One final time, I want to thank our Shoals' employees for their dedication to the last day, and we wish all of them the very best for the future.

Our new team at Castaños started building cars in July and started shipping to customers in November. To date, Castaños has produced 3 different car types on time, all while meeting or exceeding customer expectations for quality.

If we take a step back and consider where we were just 3.5 years ago, we were a company with 2 legacy cost-disadvantaged facilities, plus the extremely large facility in Muscle Shoals. Our fixed costs and our variable costs were uncompetitive, and we needed to produce 6,000 to 7,000 units per year to be profitable. We were not in a position to survive, much less win. In fact, we could only win under the condition of a resurgence and the need for coal cars.

Fast forward to today, and we are now a streamline manufacturing organization that controls the newest purpose-built facility in North America. That facility is appropriately sized for the moment and has the flexibility to scale when we need it to. We have removed in excess of $25 million per year in fixed cost as compared to 2019, and we have improved our variable cost, and we believe we are ready to lead the industry in terms of quality.

In fact, we will have reduced our breakeven production levels by 2/3 compared to the old FreightCar America, and that is after we finished scaling the Castaños plant. It is fair to say that the heaviest of the heavy lifting of our transformation is now complete. And we are ready to fulfill our vision to become the most cost effective, highest quality producer in the industry and that we can now start to shift some of our focus towards growth.

At this very moment, we are a 2 production line company with capacity to produce approximately 2,000 railcars per year, depending on the mix and number of changeovers. We will scale this new business with the upcycle that we believe is going to come.

As a reminder, the Castaños footprint currently consists of 2 assembly lines, a much larger paint shop, 1 designed to accommodate future expansion and a wheel and axle shop. We currently receive the majority of our fabrications from Fasemex, which was our JV partner prior to acquiring their stake.

We have hired a very experienced team at the facility that is more than qualified to run a future larger operation. The performance of this workforce is, in our opinion, amongst the best in the industry and the results already attest to that fact.

Related to all of this, our Board just approved the construction of our own fabrication shop. This will allow us to make the large majority of our fabrications in-house starting within 12 months, which will bring additional capability and efficiencies. We will gauge the market and sales inquiry levels to time the construction of additional assembly lines and capacity.

On a more onerous topic, we must find ways to mitigate the very substantial cost pressure associated with steel prices, which have doubled over the past 12 months and are currently at near all-time highs. Between these increases and continued pressure on pricing, driven by the industry downturn and overcapacity that still remains, margins will be under pressure for the short term. The improving news, as Matt will discuss, is that order activity is starting to increase. And now that we are wholly in Mexico with a smaller size, we have the ability to be modestly selective on the business we pursue.

As we continue to build the company around the new footprint in Castaños and start to focus on growth, we are highly encouraged by the feedback we have received from customers who have toured the new facility. They are impressed with the efficient and scalable size of the facility, the highly trained and experienced workforce we have assembled and the absolutely positive morale and culture of the people.

We are increasingly encouraged by the number of new sales increases since the start of the year as well. Our delivery guidance for the year is a range of 1,400 to 1,600 railcars, which is approximately 2x our deliveries for 2020. While this delivery guidance is below the roughly 2,000 railcars we have noted as our new breakeven level, it is aligned with where the industry is right now.

To conclude, we closed the door on Shoals and completed the physical part of the transformation of FreightCar America. 2021 is about building momentum in support of expansion and profitable growth as we move forward. We believe the new flexibility of our business will allow us to ride out the last stage of our industry's downturn and significantly capitalize on its next phase of expansion.

With that brief overview, it is my pleasure to introduce you to Terry Rogers, our new CFO. Terry is a true finance professional with nearly 40 years of experience that includes having held the CFO positions at Roadrunner Transportation Systems, Heico and Ryerson. We are very fortunate to have him on the team. Terry?

Thanks, Jim. I'm excited to be here and I've enjoyed my first few months as the leader of our financial organization. We've built a deep team in the financial group, and we're excited to support FreightCar's impending return to growth and profitability.

Turning to our financial results. Consolidated revenues for the fourth quarter 2020 included $60.6 million -- totaled $60.6 million, excuse me, compared to $25.2 million in the third quarter of 2020. Fourth quarter 2020 revenues were up 35% compared to fourth quarter 2019 revenues of $44.9 million. We delivered 477 railcars in the fourth quarter of 2020 compared to 163 railcars in the third quarter of 2020 and 439 railcars in the fourth quarter of 2019.

As you recall, at our third quarter 2020 results, we had updated our delivery guidance for 2020 and are pleased to report that we achieved our target of 751 deliveries despite the operational challenges created by both the pandemic and the manufacturing transition from Shoals to Castaños.

Our gross profit improved meaningfully in the fourth quarter to $5.5 million compared to a negative $8.1 million in the fourth quarter of 2019. This is the first quarter we had achieved positive gross profit performance since June of 2019, and it's only our second quarter of positive gross margin in the last 3.5 years.

SG&A for the fourth quarter totaled $8.7 million, up from $7.5 million in the fourth quarter of 2019. The increase in SG&A was attributable to retention payments related to the Shoals shutdown and bonuses paid related to the successful financings. We expect SG&A expenses, excluding restructuring costs in the first quarter, to be approximately $7 million per quarter in 2021.

Consolidated operating loss for the fourth quarter of 2020 was $9.2 million, compared to a loss of $9 million in the fourth quarter of 2019. The operating loss in the fourth quarter included $19 million of impairment charges related to leased railcars, partially offset by $12.9 million of noncash restructuring gains, largely related to the termination of the lease at the Shoals manufacturing facility in the fourth quarter of 2020.

Operating loss for the fourth quarter of 2019 was $9 million and included a $2 million charge from the loss on a sale of 100 railcars previously held in the leased fleet, a $6.6 million noncash gain related to the termination of a post-retirement benefit plan and a net $2 million restructuring gain, largely attributed to a $2.4 million noncash gain on our Roanoke, Virginia, facility related to the termination of that lease.

I'd like to spend a few minutes discussing the implications of the warrant we issued last year as part of our recent financing, as it will have an impact on our financial statements as we move forward. This warrant liability will be marked to fair market value each quarter, and thus, the change in the value will impact our net income and earnings per share calculations. This past quarter, the loss on change in fair market value of warrant liability was $3.7 million, which is obviously a noncash item and reflects the appreciation of our stock price since the warrant issuance in November 2020.

As a result of the warrant liability changes and other nonoperating, noncash or nonrecurring impacts, we have provided investors a calculation of our adjusted EBITDA results. We believe this additional information provides another meaningful metric in addition to GAAP financial measures to evaluate our operational and financial performance.

EBITDA loss for the fourth quarter was $11.6 million compared to an EBITDA loss of $5.9 million in the fourth quarter of 2019. Interest expense in the fourth quarter of 2020 was $1.5 million versus $0.2 million in the fourth quarter of 2019, reflecting the close of the new debt agreements in the fourth quarter of 2020. Going forward, interest expense will remain above recent historical levels because of these new debt agreements.

EBITDA was generally impacted by the same large nonoperating adjustments that I just mentioned that impacted our consolidated operating loss, in addition to the noncash loss on change in fair market value of the warrant liability that was also previously noted. Fourth quarter 2020 adjusted EBITDA was a positive $1.7 million when adjusting for the items previously discussed and other noncash or nonrecurring items.

Moving to the balance sheet. We finished the quarter and the year with cash and cash equivalents, including restricted cash and certificates of deposit, of $54.2 million, compared to $70 million at the end of 2019. Total cash included $40 million of proceeds from the new secured term loan that was completed in November 2020 and provides the capital to execute on our strategy and largely completed transition to Castaños.

Inventory as of December 31, 2020, increased to $38.8 million from $25.1 million as of December 31, 2019, due to higher inventory levels to support the transition from the Shoals facility to the new manufacturing operation in Castaños, Mexico. Cash balances will decline in the first quarter as we complete the transition to Castaños and the February closure of Shoals and build working capital to meet the second quarter production targets.

Capital expenditures for the full year of 2020 of $9.8 million were notably higher than the $5.6 million in 2019, primarily related to the transition to our Mexico facility and production ramp-up during the fourth quarter. Given our smaller footprint, we expect our CapEx to drop in 2021 and currently forecast that it will range between $2 million to $3 million.

Once again, I'm thrilled to be leading the FreightCar finance function. Jim and the team did an incredible job transitioning Castaños and I inherited a great staff. I believe we have a tremendous opportunity to drive long-term value, and we're at a truly exciting inflection point in our history. I'm looking forward to helping the company achieve its vision to return to growth and profitability.

And I'd like to turn the call over to Matt for a few commercial comments related to the fourth quarter and moving forward. Matt?

Thanks, Terry. As Jim mentioned, the railcar industry continues to navigate the challenges of the lowest FreightCar demand cycle seen since 2009.

In the fourth quarter of 2020, we booked orders for 90 railcars and 490 railcars for the year, compared to 385 and 2,227 for the fourth quarter and full year 2019, respectively. Although order activity was relatively quiet, we were encouraged by the number of new substance of new car inquiries throughout the fourth quarter of 2020 as well as continued improvements in key market indicators that ultimately drive demand for new railcars.

Year-over-year rail traffic growth seen in the second half of 2020 are positive signs of the beginnings of an economic recovery. Although grain and intermodal car loadings outpaced all other commodity groups, we expect to see improvement in the industrial economy and associated car loadings. Reductions in railcar fleet storage numbers down 5 consecutive months in the second half of 2020 and continued this trend in the early part of '21. We do expect the increased scrap steel pricing to support sequential reductions in stored cars throughout '21.

We are encouraged by the strong level of new car order inquiries in the last 90 days, along with improved customer sentiment as well as a reduction in reported COVID cases and increased vaccinations. We, like other railcar builders, are anxious to fill our factories. However, we are also careful that we close orders that are acceptable to us and satisfy our financial targets. We do anticipate an aggressive market pricing environment in '21 and the 2x increase in steel costs in the last year have created additional headwinds. Thankfully, our smaller footprint, as it currently exists, positions us to be more selective on orders.

Our 2021 delivery guidance of between 1,400 and 1,600 railcars, while double what we've achieved in 2020, is still well below our historic average. As I mentioned, industry inquiry levels do support expected increases in order activity, which we anticipate being heavily weighted in the second half of '21. This makes sense given that we are at a low point and anticipating the recovery. The bigger unknown is not whether there will be a recovery of substance, but instead, when it will start in earnest and whether it will become gradual or steeper in nature.

As Jim already noted, we are already seeing early benefits of the transition to the new Castaños facility and believe our competitive position will improve along with market dynamics. The efficient footprint of Castaños not only leads itself to deliver our broad product portfolio, but is designed with the flexibility to change car types more quickly and run efficiently at lower volumes than what is generally supported by the other manufacturers.

Further, as the industry leader of railcar conversions, we will continue targeted investments in this space, including infrastructure capabilities to Castaños and expansion of our offerings, leveraging both our engineering and manufacturing expertise. For our customers who have surplus fleets or cars that no longer provide solid lease or revenue returns, FreightCar America provides the solutions to upgrade underutilized rail assets into the latest car designs that generate new revenue opportunities for them.

In closing, I wanted to share with you some of the customer reactions we have received since production commenced at Castaños. With COVID travel restrictions lingering, we have taken the opportunity to hold a number of virtual events that show customers how their freight cars are manufactured from fabrications and subassemblies to painting and lining and final quality inspection.

Using the latest virtual meeting technology in video, these virtual face-to-face plant tours and sample car events provide a, as if you were there, firsthand look at the entire build process. Feedback on the in-person and virtual visits have been overwhelmingly positive, with a top customer saying our sample car reviews was one of the most professional and thorough ever within any builder. This is just one anecdote of the type of responses we are getting on Castaños and supports our purpose-built approach to customers.

With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?

Thanks, Matt. Our manufacturing transformation is now largely complete, and we have taken control of our own destiny. We have dramatically repositioned our competitive profile. And in so doing, created a new company, one that is able to win. We certainly have work left to do with building sales momentum now at the top of the list.

If 2020 was about getting all the right pieces in the right places, 2021 is about building momentum so that 2022 and beyond will be about leveraging this new company to drive significantly enhanced profitability, key -- free cash flow and long-term shareholder value. We are looking forward to sharing that journey with all of you, and thank you for your continued support.

That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.

(Operator Instructions) Our first question is from Justin Long with Stephens.

Terry, congrats on the new role. I look forward to working with you going forward.

Thank you.

So maybe to start with gross margins just because there was such a notable improvement, both sequentially and year-over-year, when I look back to the second half of 2019, a similar level of deliveries, but gross margins were negative 16% this quarter. In 4Q, we were positive 9%.

Can you just help us bridge the difference there? I know there have been a lot of cost improvements and operating improvements in the business. But I think it would be helpful to break down the major buckets that we should be thinking about.

I think it's primarily that we had a very attractive and well-priced order that we were processing through most of the fourth quarter and improved fixed cost structure and just more efficient management of that order going through, which I think we'll be able to see as we go forward in a more efficient cost structure in Castaños in the future.

Okay. And in terms of gross margins going forward, I know you mentioned the run-up in steel prices maybe causing some near-term pressure. Is there anything else you can share to help us from a modeling standpoint? I'm guessing sequentially, gross margins will be down, but do you still expect gross margins to be positive throughout 2021 or could we slip back into negative territory?

We want to avoid providing any sort of guidance going forward on the financial -- in terms of the financial forecast. But certainly, we feel we have a more attractive cost structure. As Matt mentioned, we are facing the headwinds of higher steel prices. But we do feel we've positioned ourselves to operate at a much more profitable level going forward. But we don't really want to get into providing specific guidance for 2021.

Okay. And then lastly, you mentioned from an inquiry standpoint that things have picked up year-to-date. Have you received any orders so far in 2021? And maybe just from an inquiry perspective, you could provide a little bit more color to help us understand the magnitude of the pickup you've seen?

So Justin, I can't -- I won't talk specifically about orders received at this point, but there will be a more substantive update on our next call. I will tell you that what we are seeing in the marketplace is a broader -- the inquiry levels are much broader from a car type perspective than we've seen in the last year, which I think is indicative of the overall industry starting to make a turn.

Okay. I'll leave it at that. I appreciate the time.

Yes, Justin, this is Jim. Just to put a little more color maybe on the first of your questions around the gross margin improvement from 2019 to 2020. We benefited from several things, including the fact that part of our production was on the new footprint. And obviously, the new footprint is more cost competitive than the one that we've recently closed in Shoals.

But also, we are benefiting from several years of material cost reductions and also the fact that both footprints for the quarter, the old Shoals and the new Castaños, ran reasonably well. And I'd have to say the thrill for us is how quickly the new footprint in Castaños has ramped up towards efficiency. It's met or surpassed our own internal expectations. So in that sense, and looking forward, we feel very confident in the future delivery capability of the new footprint.

And our next question is from Matt Elkott with Cowen.

Jim and maybe Matt, also, just a follow-up on the order on Justin's order question. We've had several months of improvement in the utilization number. I think cars and stores are down 130,000 units since the summer since July. Rail traffic has inflected positive. We had multiple weather events that created disruptions in a network that could be a driver for rail equipment. Are you guys surprised that the order activity has not picked up more than it has already? And do you think that will -- is it possible that we'll have a quarter or 2 where we see kind of an abrupt rise in orders because of where the utilization number has gone to?

Yes, Matt, I think you're probably on to something. Without getting into specifics, the level of inquiries that we're seeing, as I mentioned previously, that include a broader number of car types. Based on the timing we're hearing from customers, I think we're going to see some of that. It takes a while for order processes to go through all of their steps and to go from the inquiry stage to the order stage.

But I think the other piece of it, as you mentioned, is with increase in traffic, some of the storage numbers, which are trending very positively, all lead to increased activity, not at just in inquiry levels but in order activity. And again, we see a large portion of the order activity falling into the second half of the year. So I think your points are valid.

Okay. So we -- I think -- I mean maybe we started to see the manifestation in metrics, but more on the leasing side because it seems like major lessors saw 5% or so sequential improvements in rates for the last couple of quarters, but the manufacturing order activity has definitely lagged. I mean the fourth quarter was -- if I'm looking at this correctly, I think it might have been the worst quarter of the year from an order perspective.

Do you think that the political and COVID uncertainty of late last year had anything to do with people wanting to wait before pulling the trigger on manufacturing orders and instead maybe just going to leasing and trying to get short-term leases for the time being?

Well, I think it's safe to say that there were some pretty aggressive lease rates available out there across a broad number of car types and fleets available. So those typically are going to get consumed first.

To your point, on customer sentiment, no doubt that COVID, the overall economy and uncertainty associated with the election and COVID vaccinations and the overall health of the economy, consumer spending, et cetera, had an impact on some of that decision-making. And we're seeing where that is beginning to ease and that customer sentiment has definitely improved.

So when we -- if we compare Q4 to now, and we'll talk more about it in our first quarter earnings call, but definitely, sentiment has improved, and we've seen a significant change over the course of the last 90 days.

Matt, this is Jim. I would just add to this because at least internally at FreightCar America, we've been so focused on reconstructing the business, it's almost a little bit easy to forget about the fact that we're still in the midst of a once-in-a-century pandemic which has wreaked chaos on the entire world. So you layer that on top of what was already a deep railcar industry recession, all you can do at this point is look at the key indicators like railcars and storage as, we all know, is getting better every month. The general economic macro indicators are improving.

It's -- we like, I'm sure, everyone else, this will turn. And as Matt, I think, said correctly in his comments, it's not about if, it's about kind of the nature of the recovery. And is it going to be sudden and strong and more jolting like? Or is it going to be a bit more gradual? That's what we all wish we knew. We don't know. But if it's quick and sudden, that's fantastic. If it's a bit more gradual, given where we are as a business now, our new footprint, our new cost structure, we can hang in there with it.

So for us, the -- we're watching very carefully internally is when do we begin to pull the trigger on additional assembly lines. It's very good to be small right now, while the industry is still small and figuring itself out. But obviously, we want to be there when it does come back. And so more of our attention at the moment on is engaging when to break ground on additional capacity of the new footprint.

All that makes sense. Jim -- I mean you guys are kind of a different new company on many levels right now. Can you talk about your sales efforts? And is there a -- I mean has the sales outreach effort been tweaked? Are you guys focusing on different type of customer? Are you focusing on a different type of railcar? Just wondering if with all the changes that you've done so far, there's a change to your kind of target customer profile?

I'm going to -- I'll start out with a couple of ideas, but I'll let Matt add more maybe to it. If you think about the 2 biggest competitors and then you think about the really small guys, there's a lot of room in the marketplace in between. And -- so from a big picture conceptual standpoint, we see a very nice spot for us in between.

As we've said before, we're not going to be a significant player in the leasing end of the business. We consider ourselves a pure-play manufacturer that lends us to partner very well with the leasing companies. And so we see sort of a natural fit there from a partnership perspective or a customer relationship perspective. In terms of order sizes and things like that, look, we're a small company, we've been a small company. We need to be good at model changes -- changeovers. We need to be efficient at engineering, which we've always been known for.

And so it's very important for us to maintain our strength, and they are absolute strengths, and our ability to work with customers, modify to meet their requirements. You hear us now talk about purpose built. And to be able to then affect and run smaller quantities on our new footprint. And if you just look at what we've done, we literally just started receiving material in Castaños in July, 4 months before we were AAR certified. We started building in August, we were certified in October, we started delivering in November and we delivered positive gross profit for the quarter.

To this point, we've done 3 model changeovers. So we're very focused on the engineering side of it, meaning customer requirements, whether they're -- whatever they might be, and we're going to continue to focus on how we do model changes -- changeovers very efficiently. We've commented in the past, we've invested a lot of engineering and money on flexible tooling, so when we do change, we're getting some leverage, and we shorten the time because there are partial physical changeovers instead of more complete ones.

And now that we have the team that we have in Castaños, which are all -- it's a very highly experienced workforce, we can conduct those changeovers even faster and obviously, more economically because of the cost structure. So hopefully, that gives some texture to your question. But Matt, do you want to add to that?

Yes. I would say, Jim, I think you covered all the key items here. I'll just add to the pure-play position that we hold in the marketplace we believe, and customer feedback confirms a better value proposition versus some of our competitors. We're not going to compete with our leasing partners on lease opportunities but partner with them.

And as it relates to the purpose-built facility we have at Castaños, to Jim's point, we have manufacturing and volume flexibility that I think positions us very well with a number of customers, leasing companies, shippers, like where we have the ability to do smaller runs very competitively and efficiently and make those changes with minimal interruptions to our production capacity.

So I think we're -- we play in the market with multiple customers, but I think, to Jim's point, we have the capability to serve customers from a more purpose perspective than I think some of our competitors do.

Got it. I appreciate it. And Terry, congratulations on the new role.

Thank you. Look forward to meeting you.

Thanks, Matt.

And it looks like we have reached the end of the question-and-answer session. And I'll now turn the call over to Jim Meyer for closing remarks.

Thank you again for your time today. We're truly excited about the future of the business. Our transformation is now largely complete, and we are beginning the process to pivot to growth as we continue to build momentum in 2021. Have a great day, and thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.