FreightCar America Inc (RAIL) 2020 Q2 法說會逐字稿

Welcome to FreightCar America's Second Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions)

Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would like now to turn the call over to Joe Caminiti with 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 the 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 2019 Form 10-K and second quarter 2020 Form 10-Q 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 2019 Form 10-K and earnings release for the second quarter of 2020 are posted on the company's website at freightcaramerica.com.

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

Thank you, Joe. Good morning. And thank you all for joining us today. As I did last quarter, I think it's important to start by recognizing and thanking all of our team members across the company for their continued dedication to health, safety and serving our customer needs during these unprecedented times. We entered the year in a cyclical downturn in our industry, and the COVID-19 situation has further intensified the severity of those market conditions.

But as always, our people have risen to the challenge and continue to prioritize health and safety, while also working to fulfill the needs of our customers. So a big thank you to all our employees.

When we last spoke, I shared some of the many new protocols we put in place at our Shoals complex that are designed to help protect our employees from COVID-19. Since then, we have continuously reviewed and enhanced these protocols and believe that we are doing everything possible to keep everyone healthy.

As part of this, we shut down for 2 weeks due to the virus, the last week of the first quarter and the first week of the second quarter. We did this out of an abundance of caution and desire to prevent spread as soon as the first cases became known to us. Since then, and thanks to the protocols and our employees' strict adherence to them, we have not had additional lost days.

We did, however, like so many other companies, experienced a much higher than normal level of absenteeism due to COVID and this had a drag on our production ramp-up in the second quarter.

As a result, our delivery of 100 cars in the second quarter was below our expectations. However, units missed in the second quarter will be delivered in Q3, and our July production was consistent with our outlook.

While the pandemic and resulting stay-in-place orders across the country impacted commercial activity across the industry and near-term uncertainty remains a key question, we have seen more encouraging signs in our commercial inquiries since early May. Matt will talk in more depth about that in a few minutes.

And although offering specific guidance during the pandemic has obvious challenges, our current production levels and clearer view of our commercial position have provided us with enough visibility to forecast second half deliveries in the range between 750 and 1,000 railcars. We also have 1,839 railcars in our backlog as of June 30 and have not lost an order through the pandemic.

We've been on a 2-year plus mission to improve our cost structure, productivity and a little more recently, our footprint. Our Back to Basics principles have been very important in allowing us to navigate a cyclical downturn in our industry, but are absolutely critical in providing us the cushion we need to navigate this pandemic. We've made significant strides in making our business more competitive, but our financial results are nowhere near where they need to be, pandemic or no pandemic. We know we need to do more. Cost and productivity are cornerstones of our culture now, but we need to keep making progress across the board.

As part of this, I'm excited to share with you today that we've officially started production at our joint venture facility in Castaños, Mexico. This is an important step forward as we are now producing in the newest purpose-built railcar facility in Mexico, alongside the newest and purpose-built facility in the U.S., our Muscle Shoals plant.

As I've talked about in the past, while the build-out of a new facility in Mexico is being done at a challenging time in our industry, we have to take the steps if we are going to compete, grow and make money during all future business conditions.

The Mexico labor rate is approximately 20% of that in the U.S., and the new plant provides other sources of savings beyond just labor. Now we can compete more effectively across all car types and generate inherently higher margins in those produced in Castaños.

Our competitors have been in the region for a long time now, we must do the same. As a reminder of the nature of the JV and particulars of the new plant, it is a 50-50 JV in which FreightCar America has management control but with a great partner, Fasemex, which has deep operating routes in railcar production and new plant startups. The plant is scalable in the sense that we have built 2 production lines with capacity of approximately 1,000 cars per annum each and the ability to add additional lines in the future, if so desired.

The paint shop was sized to accommodate substantially more volume than currently contemplated. In terms of the startup, we are just beginning to run components through the beginning of the process and look to have a first car complete by early September. The order is for a strategically important customer that was already in our backlog, and we are working hard to ensure a well-executed ramp-up. The team is simultaneously preparing for the certification process in the fall.

And given the fact that the new plant is in the heart of Mexico's railcar manufacturing industry. Combined with the current softness in the market, we've been able to hire extremely experienced workers to date.

In terms of capital considerations with the Mexico JV, we had about $7 million in CapEx at our financials during the first 6 months of the year, and I anticipate the remaining capital expenditures during 2020 to be in the range of $2 million to $4 million. This is a very prudent spend as we continue to invest in our future.

So more to come, but we're extremely excited about the transformational work we've done to improve our footprint and reposition the business. And I'll close my opening comments again with an acknowledgment to our team at the Shoals factory, who continue to do great work at a difficult time. With that, I'll pass the call to Matt to talk about the market and our commercial activity. Matt?

Thanks, Jim. Our industry remains in a cyclical downturn, and we don't expect demand to snap back quickly as railcars and storage remain near record levels. However, as we monitor key demand indicators, the last several weeks have seen a flattening in the decline of North American rail volumes overall. We do believe we are at an inflection point and near the bottom of the trough. For example, recent railcar traffic numbers over the last few weeks saw improvement in grain loadings and intermodal traffic approaching pre COVID levels versus Q2. So I saw a reduction of over 22,000 cars stored, and we expect fleet store totals to trend lower sequentially as parts of the economy reopens and rail volumes improve.

From a commercial perspective, we have experienced very positive inquiry activity over the last 30 days, which has outpaced the entirety of Q2. Active discussions on car conversions are ongoing with multiple customers seeking FreightCar America's engineering expertise to provide an economic advantage to repurpose railcar assets.

As importantly, the quality of the calls we are fielding and facilitating is much higher and includes car types that are core to FreightCar America's expertise and those in which we are well suited to build and in a position to win.

Without getting into details, we took our first order since the onset of the pandemic just this past week.

Looking forward to the next few quarters, we will maintain production line flexibility to quickly answer customers' needs in an ever-changing environment where car types are expected to fluctuate. We will also continue to take a problem-solving customer engagement approach, which includes accepting multiple small lot orders with our strategic shipper customers. Being closer to our customers is more important than ever, and we believe we bring a level of attentiveness to our customers that large competitors cannot match.

Moving to the numbers. Deliveries for the quarter -- second quarter of 2020 totaled 100 new railcars, this compares to 11 in the first quarter of 2020 and 759 in the second quarter of 2019. Our order backlog as of June 30, 2020, consisted of 1,839 railcars compared to 1,939 railcars at the end of the first quarter. Our backlog has an estimated sales value of approximately $207 million.

With that said, Chris, can you please walk us through the financial results for the first quarter.

Thanks, Matt. Turning to our financial results. Consolidated revenues for the second quarter totaled $17.5 million compared to $73.7 million in the second quarter of last year as a result of lower deliveries in the quarter. As we noted in Q1, our backlog of 2020 orders scheduled to ship is heavily weighted to the second half of the year. We expect 750 to 1,000 units to ship in the third and fourth quarters. July's production and shipments are in line with these assumptions.

Our gross margin was down to a negative $6.1 million compared to $6 million in the second quarter of last year.

Our gross margin was impact by 3 specific items. First and foremost was the loss of operating leverage associated with the lower deliveries plus inefficiencies related to production ramp-up costs. In addition, the quarter-over-quarter comparison was negatively impacted by the Q2 2019 positive impact of a resolution for previous year's product claims. These negative impacts were partially offset by the company's structural fixed cost reductions mentioned on our previous calls. SG&A for the quarter totaled $6.5 million, down $15.4 million in 2019, which included $7.5 million of a onetime cost to settle a customer dispute from several years prior. The year-over-year decrease was driven by lower employment-related costs and continued efforts to manage the company's expenses in line with business conditions. The company also had $0.3 million of restructuring costs in the quarter related to vacating the Roanoke, Virginia facility. This compares favorable to impairment and restructuring charges of $6.5 million in Q2 of 2019. The company does not anticipate any material costs associated with Roanoke exit in the future.

Consistent with my comments, on our last earnings call, our go-forward SG&A will continue to be under $7 million a quarter, excluding any onetime charges that may occur, and we'll also move downwards as we continue to rightsize our SG&A in line with business conditions. Consolidated operating loss for the second quarter 2020 was $12.9 million compared to operating loss of $15.8 million in the second quarter of 2019. The reduction in the loss was related to the Q2 2019 charges I referenced in my previous comments.

Moving to the balance sheet. We finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposits, of $52.4 million, down roughly $18 million compared to our 2019 year-end position and down roughly $8 million from March 31, 2020.

As noted in our second quarter 10-Q, on August 7, one of the company's leasing entities, FreightCar America leasing LLC, received notice from M&T bank that based on a recent appraisal, the $10.2 million principal balance under the M&T credit agreement exceeded availability under that agreement as of the day of the appraisal by $5.1 million.

The company and its leasing entity is contesting M&T Bank's assertion.

Moving back to the results for the quarter. The decline in our position was driven by operating losses during the quarter, investments in our inventories for production and upfront investments to build out the Mexican JV, which were partially offset by the proceeds from the payroll production program loan.

Given the economic uncertainty that has resulted from the pandemic, we maintain our priority to manage our liquidity along with achieving our transformational objectives as we are confident in our ability to do both.

Our revolver position remains unchanged from the previous quarter as we had 0 drawn against our asset-backed facility and $10 million drawn against our M&T lease facility, which is secured by certain cars in our lease fleet. Capital expenditures for the second quarter of 2020 totaled $2.5 million, the majority of which was related to the build-out of our Mexican facility in anticipation of our production go live. The company anticipates between $2 million and $4 million of additional capital investment in 2020, which will allow us to complete the first phase of the JV production capacity investment.

Now I'd like to turn the call back to Jim for a few closing remarks.

Thanks, Chris. Before I turn the call over for questions, I would like to close with a few big picture comments. Again, thank you to our employees across our organization for your commitment during these difficult times. We've navigated numerous cycles in our history, but we've never done so in the middle of a pandemic. And thus, I'm very proud of how our team has stayed together and worked hard to safely complete our work. As we discussed today, we have taken the next step in our footprint realignment and have started to produce cars in Mexico. These efforts are not without risk, but we are being prudent and thoughtful as we execute against our strategies. We'll continue to monitor every opportunity we have to better position the business for long-term success and drive value for our stakeholders.

And most importantly, the steps we're taking in Mexico and across our platform are truly transformational. We will emerge from this cyclical downturn and pandemic in a much stronger position to grow and be an extremely formidable and profitable competitor.

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

(Operator Instructions)

And our first question is from the line of Matt Elkott with Cowen.

My first question, I think, is for Matt. Matt, you mentioned conversion. Can you elaborate on what type of commodities are -- these conversions are for? And are they primarily shippers that are calling about conversions or are there lessors or railroads?

Matt, thanks for the question. As you probably know, typically, we don't get into specifics on car types, but I can share with you that we've seen quite a bit of activity on conversions from both shipper communities as well as lessors, given the number of cars in storage and some of the car types that are likely to enter back into the marketplace given an overbuilt situation. We think we're in a really good position to participate in that market as it develops.

Okay. And then on the backlog, I think of the roughly 1,000 cars, that's the balance of the backlog after this year, how much of that balance is for next year? And how much of it is for later years?

I don't have those -- Go ahead, Chris.

Matt, this is Chris. I'll just add to it. Obviously, we disclosed -- we kind of disclosed the backlog position for the rest of the year. And in our Q, we also disclosed how much is for the 12 months. So what we're -- I would say it's heavily -- it's more heavily weighted to next year, but we're not going to (inaudible) give guidance breaking down in Q3.

That's fair. And then the -- I think you mentioned you received an order after the close of a quarter. Is that -- can you give us any color on the timing of those deliveries?

Yes, Matt. That is an order that goes into next year on a car type that is very specific to -- it plays well to the FreightCar America's strength but that's just only 1 delivery.

Got it. And then just 1 last one on the order front. Besides conversions, are you seeing any type of positive sign of green shoots for newly built cars in any market?

Yes. I think without getting into specific car types or customers, we are seeing some specific pockets of opportunity. I think I mentioned in my comments that we see a number of shippers looking for some smaller quantity builds which suits us well given our ability to do quick change in our manufacturing processes. So yes, the answer is, there is -- there are quite a few -- I'll say there are a few solid pockets of opportunity as the market starts to improve in pockets.

Got it. And then just one last maybe larger-picture question, maybe for Jim or Chris. Based on what you guys know now and under maybe kind of a base case scenario for the pandemic and the market. Do you think you guys can achieve profitability sometime in 2022 or is that still a lofty goal?

Thanks for the question, Matt. Obviously, that's a [guidance-framed question, but I will tell you that we've been working -- our internal plans and our focus is to get back to profitability sooner than later. We have a variety of different scenarios. Obviously, volume is a significant aspect to that. But I don't see any reason to say we would not be planning for a profit (inaudible).

Yes. Just -- Matt, this is Jim. Just to close out on what Chris said. Keep in mind, everything we've been doing for 2.5 years now, this very significant business realignment and restructuring. It is intended to make us profitable in all future foreseeable business climates, and that's why we're so focused on finishing it and finishing it even under the current challenging conditions that we're all under at the moment. So just to build on Chris's answer just a little bit.

Our next question is from the line of Justin Long from Stephens.

This is George Sellers on for Justin. So it sounds like inquiry levels have improved here recently. What is your expectation for the progression of orders for maybe the industry as a whole in the next several quarters?

George, I think you're going to see an increase of some activity, I think, across the industry. We anticipate converting a number of these inquiries into orders. Without getting into specifics, we feel fairly confident about that. I think you're going to see the rest of the industry where order volume is going to remain somewhat lumpy, and a lot of it will be tied to the return of the economy from my earlier comments, the return of various components of the economy post COVID.

Okay. Great. That's helpful. And then maybe moving to the balance sheet. We've seen inventory and customer deposits kind of swing around here recently. What are maybe the more normalized levels? Or what should we be expecting going forward for some of those line items?

George, this is Chris. So obviously, to the extent when we work through and negotiated a contract and deal for a company, the time by which we have to hold inventory as part of the deal build and shipment cycle in addition to whether or not it makes sense to have deposits in the negotiation process or all-specific [type] deals. I think as you go forward, it would be -- you would not expect to see this significant amount of customer deposits that we have as a percent of sales right now. Those are more a factor of uniqueness from coming quarters. So as you would guess, those deposits are somewhat offsetting the inventory position. As the company's volumes increase and orders increase, you'll see more inventory in general. But I would say the number that's a little more unusual is the amount of deposit versus inventory relationship. And as you go forward, you will see the inventory would be more normalized and we expect to see a smaller percent of customer deposits. But again getting into a specific number on either is a guidance scenario and volumes and orders arising.

At this time, we've reached the end of our allotted time for question and answers today. I'll turn the call to Mr. Jim Meyer for his closing remarks.

Thank you again for your time today and your continued support in FreightCar America. We look forward to continuing to update you on our progress. Have a great day, and please stay healthy. Thank you.

Thank you to everyone who participated today. This concludes today's call. You may disconnect your lines at this time, and thank you for your participation.