FreightCar America, Inc. (RAIL) Q4 2017 Earnings Report, Transcript and Summary

Welcome to FreightCar America's Fourth Quarter 2017 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this conference is being recorded. An audio replay of the conference call will be available from 1 p.m. Eastern time today until 11:59 p.m. Eastern time on March 27, 2018. To access the replay, please dial 800-475-6701. And the replay passcode is 444979. 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 Matt Kohnke, Chief Financial Officer of FreightCar America.

Thank you, and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; and Ted Baun, 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 2016 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. We will also make references to adjusted operating income and adjusted operating loss, which are net -- not measures in accordance with GAAP. For a reconciliation of adjusted operating income and loss to operating income and loss, the most directly comparable GAAP measures, please see the supplemental disclosure attached to the earnings release. Our 2016 Form 10-K and earnings release for the fourth quarter of 2017 are posted on the company's website at www.freightcaramerica.com. Please note that we also put out a separate press release last night outlining the acquisition of Navistar's interest at the Shoals manufacturing facility, which we will be discussing today as well. With that, let me now turn the call over to Jim for a few opening remarks. Jim?

Good morning, everyone, and thank you for joining us today. While the topic of today's call is obviously the fourth quarter, I'd like to spend a meaningful portion of our time on the operational improvement work that we are formally announcing today. Much of this work is already in motion, but I want to make sure that we provide some depth and metrics for you to evaluate our progress as the year continues. I spent my first half year as CEO of FreightCar learning the inner workings of the company, with the majority of my time spent at our Shoals manufacturing facility. My team and I have studied every level of our organization, with a particular emphasis analyzing the manufacturing and operational challenges that I've outlined for you in the last two earnings calls. Some of these issues have affected this company for some time, so today we are going to walk you through our plan to transform this business, position the company for future success and ultimately, deliver strong value to our shareholders. Let's first close out 2017 officially by having Matt and Ted walk you through our fourth quarter and 2017 results. I'll then come back and outline our Back to Basics operational excellence program in more detail. Ted, can you please lead us off?

Thank you, Jim. The challenges of the last several quarters unfortunately carried forward as our end markets remain in a cyclical downturn, and we continued to experience labor inefficiencies and production inconsistencies that caused a delivery shortfall against our full year 2017 expectations. Deliveries for the fourth quarter of 2017 totaled 977 railcars, which included 855 new, 47 rebuilt and 75 leased railcars. This compares to 1,364 railcars delivered in the same quarter of 2016, which included 1,137 new and 227 rebuilt railcars. Sequentially, railcar deliveries were up compared to the 829 railcars delivered in the third quarter of 2017, all of which were new. We received new orders of 552 railcars in the fourth quarter of 2017, however, we also had a 500 railcar order cancellation out of our backlog. Please note that this cancellation related to a certain specific and unique car type that was ordered 3 years ago for which our customer has neither seen nor will see near-term demand in the marketplace. None of the current backlog contains any of these car types moving forward. Fourth quarter 2017 net orders of 52 railcars compared to net orders received of 10 railcars in the fourth quarter of 2016 and orders of 920 railcars in the third quarter of 2017. Our order backlog at December 31, 2017 was 2,392 railcars, with an estimated total sales value of approximately $181 million compared to 3,317 railcars at the end of the third quarter. Our year-end 2017 backlog consist of 1,087 new railcars and 605 rebuilt railcars to be manufactured for direct sale and 700 railcars to be leased. As we move forward into 2018, our outlook for railcar deliveries is forecasted to range between 3,500 and 4,300 railcars. We expect to deliver all of our year-end backlog and obviously have a gap to fill from where we sit today. But we have several commercial opportunities that should provide a path to fill that gap as the year progresses. Industry-wide non-tank car orders totaled 7,343 railcars for the fourth quarter of 2017, which is roughly in line with industry non-tank car orders received in the prior 2 quarters. These consistent order patterns also closely aligned to the inquiries our sales team is receiving, which again provides some level of optimism as we enter 2018 that we may be near or have reached the trough of the cycle. Other railcar demand indicators remain constructive. Notably, in regards to U.S. rail traffic, which exhibited year-over-year growth in 2017 for both car loads and intermodal. On the supply side, while the number of railcars in storage is slowly coming down, the industry is still seeing an excess supply of railcars in storage for a number of car types, which may continue to dampen orders placed within the industry. While it is hard to gauge when order levels will improve, our sales team remains highly focused on working with our customers to find solutions to fit their railcar needs. Now I would like to turn the call over to Matt to go over our fourth quarter 2017 financial results.

Thank you, Ted. Consolidated revenues were $79.2 million in the fourth quarter of 2017 compared to $135.5 million in the fourth quarter of 2016 and $72 million in the third quarter of 2017. Consolidated operating loss for the fourth quarter of 2017 was $13.3 million, which included a $1.5 million contingency charge related to our patent litigation that was settled in the fourth quarter of 2017. Consolidated operating loss for the fourth quarter of 2016 was $3.1 million, which included restructuring and impairment charges of approximately $700,000. While consolidated operating loss for the third quarter of 2017 was $18.6 million, which included a $2.9 million contingency charge related to the aforementioned patent litigation, and $1.2 million in severance and other expenses related to the change in our Chief Executive Officer position. Excluding these costs, adjusted operating loss for the fourth quarter of 2017 was $11.9 million compared to an adjusted operating loss for the third quarter of 2017 of $14.5 million. The slight improvement quarter-over-quarter reflects higher deliveries, with improved, but still below average labor efficiencies at our Shoals facility. Selling, general and administrative expenses for the fourth quarter of 2017 were $9.3 million compared to $9.1 million in the fourth quarter of 2016 and $10.7 million in the third quarter of 2017. Fourth quarter 2017 expenses included an additional $1.5 million contingent liability provision related to patent litigation, which has since been settled and will require no additional reserves or legal fees. Turning to our balance sheet. Our financial position remains strong with no outstanding debt and $136.4 million in cash, cash equivalents, marketable securities, restricted cash and restricted certificates of deposit at December 31, 2017. For the full year of 2017, we generated positive operating cash flow of approximately $40 million, largely a result of a reduction in working capital levels. We remain highly focused on maintaining strong cash generation through disciplined cost and working capital management, which will allow us to better ride out the remainder of the cyclical downturn, support our operational excellence program and continue to allow the flexibility to invest as we deem appropriate. Capital spending for the fourth quarter of 2017 was approximately $350,000, while our full year 2017 total capital expenditures were approximately $1 million. For the full year of 2018 and excluding the Navistar purchase agreement, which Jim will speak to shortly, we expect capital expenditures to range between $3 million and $4 million. Before I hand the call back to Jim, I do want to note that January was impacted by the loss of approximately 1-week of production in Alabama due to weather-related issues. We also have 3 significant changeovers occurring at the Shoals during the quarter. Although our teams are working to make up the difference at this time, there is some potential for our first quarter deliveries to shift to the second quarter. I will now turn the call back over to Jim. Jim?

Thanks, Ted, and thanks, Matt. Let's move on to the more interesting news today and talk about how we are transforming this company. I spent the last several months observing the way in which we do business each and every day, getting to know our people and processes. And as someone who's led the operations and manufacturing functions of several other capital-intensive companies, I can safely say we have a significant opportunity to not only improve but to become very, very good. I've also spent a great deal of time talking with and getting to know many of our customers and actively listening to what they want from us to be successful in their own businesses. The good news is that a few common themes permeated all of those conversations. The most critical of which are their desires to see real diversity in their supply chain and to see FreightCar succeed in building out a larger role in that chain. Their belief in us stems from our long history within the railcar manufacturing industry, which has always been based on superior car designs and on superior customer focus. Our product teams are talented and experienced, have engineered the most durable and lightweight coal cars in the history of the industry, and they have spent the better part of the decade transferring that knowledge across all of the other railcar types that we offer today, and less weight with more payload means better economics for our customers. Our products are complemented by a strong reputation as a company that puts customers first, and is willing to work with our customers to give them exactly what they need. These 2 cornerstones of our company will not change. To round out this discussion of our strengths, I want to call attention to, in the most positive manner, that we have one of the newest manufacturing platforms in our industry at the state-of-the-art Shoals facility. This is a truly unique asset that we are going to leverage much, much better, with this manufacturing platform as a U.S.-based workforce that we are investing more deeply in and better developing. Lastly, we have a very strong balance sheet and financial position that will enable us to achieve everything we set our minds on. As Matt said, this financial strength is one of our strongest and most critical assets during this turnaround period, and we will continue to both make all of the progress necessary and prudently manage cash flows. Let's now turn our attention to where we need to improve. In order to turn great facilities into great manufacturing operations, you must have the right and simplified structure, strong processes, led with a lean culture and a deepened strength. Unfortunately, FreightCar's operations in Shoals have not been fully reflective of this. In fact, we've had a high-cost structure, complex organization and a lack of basic manufacturing fundamentals. More specifically, our challenges include cohabitation on our Shoals facility. As many of you know, we have been a subtenant to Navistar international at the Shoals facility and we have not handled the complete railcar build as they have historically executed the initial fabrication, truck assembly and then paint and blast. Secondly, our manufacturing processes remain underdeveloped and inefficient and our lean learning culture hasn't been developed correctly. Thirdly, we haven't hired enough of the right people in the right positions and our training investment in our workforce hasn't been enough of a priority. And lastly, our sourcing and procurement functions need more attention. The bottom line is we have to transform the foundation of this company in order for us to win. We are sharing with you a program already commenced, that we are calling Back to Basics. There are 3 main components of this strategy, which include: one, simplifying our structure; two, developing, training and retaining the right talent across our organization; and three, implementing disciplined manufacturing processes and lean thinking. Our plan is dynamic, measured and is being executed with a sense of urgency. I'll start with the simplification of our structure, where we have new developments to discuss today. First, to help streamline our operations, we announced yesterday that we have taken control of the Shoals facility, and we'll acquire all of the operating assets of Navistar International there. This transaction will give us 100% control of railcar operations, and we will move from being a subtenant of Navistar at Shoals to the primary tenant. We will assume the balance of the lease and in return, Navistar will pay us a make whole provision of $24.1 million. Additionally, we will pay them $17.3 million for fabrication and paint and blast equipment as well as approximately $4 million for select inventory, for a total consideration of approximately $21 million. And lastly, we will retain nearly 200 of Navistar's former employees at the plant, who will now be compensated and incentivized under our umbrella. This transaction is expected to close tomorrow, subject to the conditions set forth in the asset purchase agreement. Optimizing our supply chain has been one of my primary objectives since joining the company. And with this transaction, we will be in greater control of our destiny as we can now focus on consistent and efficient production from start to finish. This is an extremely important start but it is only a start as we look to continue to streamline. Additionally, as we have previously communicated, we idled the Danville, Illinois facility in 2017 and this is now permanent. We have reallocated some of the talent from that location to other parts of the organization including Shoals. The next part of our Back to Basics strategy is focused on developing and training our people and attracting the right talent to our organization. Over the last several months, we have augmented our leadership talent through the addition of several new leaders all located in Shoals. These include a new Vice President of Operations, a new Vice President of Supply Chain, a Director of Lean Manufacturing, a Vice President of Human Resources, a Director of Plant Environmental Health and Safety. Two of these 5 recruits bring historical operational experience from Danaher, a few more that I've had the pleasure to work with in past roles, and I'm thrilled to have all of them on our team. We have a very promising workforce at our Shoals facility and by giving them the proper leadership and proper tools, we will turn a capable workforce into a high-quality and high-performing workforce. Additionally, we need to invest in stronger training for our teams and we have a number of new initiatives designed around continual learning and more advanced training. And let's not forget a more rigorous commitment to safety, as it is vital that we protect our associates and properly train all of our people to remain committed to running a safe and reliable shop. Safety, quality and productivity go hand in hand. And safely -- safety is likely the best single measurement of a plant's discipline and its potential to perform. We are now performing very well in this category. In summary, we must have the right talent and we must have everyone trained to the right levels, and we will continue to recruit and invest in our team. The third component of our Back to Basics strategy focuses on the creation of tools and processes that can help us lay the groundwork to create repeatable and consistent workflows. Without these, we will continue to have productivity performance issues and missed opportunities. I'll highlight just a few of these at a high level. Visual management. We have implemented visual management for the first time to our senior production leadership is now using it to run the day-to-day operations within the plant. We are using it to track every piece of whip in the factory and every current and potential issue with the progression of the whip through the manufacturing process. New model launch process. We lose too much time and have too much expense associated with model changeovers. Frequent model changeovers are the nature of the business, and we have an opportunity to get just as good at this through rigorous and well-defined methods as other industries such as automotive. We are working on this now. Materials management. Every aspect of our materials management will benefit from process improvement and we are in the midst of implementing major process changes right now in Shoals. In the far flung, I will touch on quality systems. Just like on the new model launch process, we have much to borrow with pride from automotive and to build on to our existing systems. To conclude, these processes and many more are designed to effect significant cultural and organizational change. And while these types of processes take time to root, we will begin to see and feel the progress this year, including taking out meaningful cost. We expect to enter 2019 with direct cost of goods sold savings of at least $3,000 to $4,000 per railcar on a run-rate basis, excluding the impact of commodity movements. I want to emphasize, this does not require reinventing the wheel, rather these are some of the more basic foundational elements of a highly productive and commercially successful manufacturing entity. A lot of companies have great assets and many others have a great workforce. One starting point in our favor is that we have great assets, we have capable employees and a business legacy that enables us to recruit the additional talent we need. And this is just the start. As our company adopts these disciplines, puts production issues behind us and develops great operational excellence, we will evolve further and take more cost out of the business in 2019 and beyond. This ends our prepared comments, and we are now ready to address your questions.

[Operator Instructions]. Our first question will come from Matt Elkott with Cowen.

I wanted to ask, even if I do just some quick math here on the cost savings on the cost of goods sold from the acquisition of the assets that gets you pretty close to breakeven on the gross profit front. Can you provide us some color on where you see yourself becoming profitable, both from a gross profit perspective and also what the acquisition does to your operating cost and when you envision profitability on the operating line going forward?

Matt. It's Matt Kohnke. As we've talked about before, we're not going to provide guidance going forward, but let's just talk through a couple of things. If you look at the fourth quarter, at the gross margin level on units delivered, it was about $4,000 loss. And yes, if we hit the high-end of the range that we just talked about, in the direct cost areas like material cost and labor cost reductions, certainly, there -- that gives us closer to breakeven. Obviously, there's a lot of dynamics happening in the marketplace in terms of pricing. And as we get additional volume through, we absorb more and more of those fixed cost. So that helps to also move us in a positive direction. In terms of the economics of the deal, we structured it in such a way that the additional costs that we'll incur is basically being covered by make whole upfront payment that we'll receive at closing. So the economics on a cash basis certainly should be neutral.

Got it. That's helpful color, Matt. I also noticed that the -- on a different subject, the backlog ASP, declined from, I think, $86,000 or something to $75,000 per railcar. Was that a function of and a change in the mix of orders coming in or deliveries that you guys delivered in the fourth quarter? Or is it more of a -- more a function of aggressive pricing in the industry?

Hey, Matt. It's Ted Baun. The function of the low ASP of orders taken in Q4.

Got it. Okay. All right. And on my final question, on the intermodal front, looks like the intermodal for utilization has been picking up slightly over the past few months. This may be, I guess, tied to the extreme tightness in the truckload market and conversion to rail. And then in April, we have the -- they're going to start issuing citations for noncompliant trucks. Are you guys starting to see an uptick in inquiries at least for intermodal equipment?

Hey, Matt, it's Ted again. Intermodal has been one of those bright spots, probably for about the last 8 years, ever since coming out of the recession. So we expect that to continue. You pointed out the tightening of the truck capacity, that's something we keep an eye on. Consumer spending has been up. All of that bodes well for intermodal. So we expect to see continued strength in that market.

And next we will go to Brian Colley of Stephens.

So Jim, just wanted to ask, now that you've had more time to evaluate the operations and the cost structure, is your opinion about the cost savings opportunity or the timeline for improvement changed at all?

Well, no. And I mean the opportunity that we have by getting our business fundamentals dialed in as we overview just how is tremendous. We feel good about our ability to take out the product costs. We've already outlined a $3,000 to $4,000 per car by the end of this year. We consider this to be a step forward. Step one for us was the transaction that we worked through and announced last night with Navistar. Which essentially was, in some respects, a very big and complex make-buy decision. And so now we will gain efficiencies and savings through that transaction. We have many other projects already identified in the pipeline. And so cost reduction is going to become a way of life for us. Operational excellence and greater efficiencies are going to become a way of life for us. So we're excited about what we announced yesterday. We're excited to have full control of the build of our units in Shoals. And we're very excited about what we see as opportunity as we get going here.

I appreciate the color there. And then just thinking about those unit cost reductions that you're targeting this year, I'm just curious, what that looks like compared to the total opportunity that you seek. Just curious what it represents of the total cost savings opportunity? And also, curious if there's still a meaningful amount of room for SG&A cost reductions, or if it's mostly just on the costs of goods sold side?

We, undoubtedly, have opportunity in cost across our entire company, be it COGS, be it overhead cost, be SG&A cost. The focus and the biggest lever for us right now is our COGS. It's the biggest cost line item for sure on the P&L, it's where we have the most opportunity. The costs we're targeting are all direct cost for the moment. And the $3,000 to $4,000 that we've announced is predominantly material with some labor. That mix will shift as we get going and as we continue to identify more and more opportunities. But where this ultimately goes, we're going to take this one step at a time. And again, we achieved a significant first step last night in the announcement around the Shoals and Navistar. And step 2 for us is let's go get this first $3,000 to $4,000 out.

All right. I appreciate the color there. I also wanted to ask about just how we should be thinking about the cadence of deliveries this year? And if possible, the cadence of margin improvement. And then just lastly, quick modeling one, what you guys are expecting for the tax rate?

So it's Matt. So on the tax rate, we expect our effective tax rate to be about 23% for 2018. In terms of delivery cadence, somewhat smooth throughout the course of the year. And your second part of the question again was...

Just on the cadence of margin improvement.

Yes. We're not going to comment on gross margin expectations going forward at this time.

And our next question will come from Matt Brooklier at Buckingham Research.

I think I may have missed, my phone cut out a little bit, but did you indicate you're permanently closing Danville.

Yes. We did.

But you're keeping Roanoke open?

Yes, Roanoke has a good amount of work, they're building cars for us now and the team is doing an absolutely wonderful job at it. I had the pleasure to spend a day with them last week. And all things are well and performing to expectation at Roanoke. To what I think is your more underlying question around total capacity, again, we're going to take our Back to Basics one step at a time. We gained control just now of Shoals. We're going to go make Shoals a dialed in and very, very good manufacturing platform for us. And as part of what all businesses do all the time is, we continue to evaluate capacity and we continuously will be evaluating our cost structure. But for now, our focus is on getting the Shoals up and running and rigging the $3,000 to $4,000 on rail cars out that we talked about.

Okay. Is there the potential, as you go through this process, to look at, I guess, look at the facility, look at Shoals? And I know it's non-coal cars right now but at some point in the future, could you also be building coal cars at that facility?

Yes. The footprint at the Shoals is large enough that we ought to be able to design in into the platform down there, flexibility to build essentially any car type that we want to build. We're certainly not there today. But having not only the optionality of the footprint that we have today between Shoals and Roanoke but having the flexibility to build any number of railcar types within each one is always an advantage. So as we proceed with Back to Basics and becoming efficient -- part of becoming efficient is becoming flexible.

That's very helpful. And then what's left in your backlog at this point, in terms of railcars from a type equipment perspective?

Matt, it's Ted. Our backlog consists of a number of different of car types across the spectrum. We're not going to get into the specifics, but suffice it to say, it's open-top hoppers, gondolas and some rebuilds.

And any commentary on quarter-to-date inquiries, orders. If you've heard from other -- some of your peers that maybe things have ticked up at the end of December into Jan and Feb. I'm just curious to hear if you guys have commentary for current inquiry and order activity here?

Yes, similar with us. We're seeing inquiry levels showing a slight improvement over prior quarters. I think the quality of those inquiries are also ticking up. As we progress into 2018, we feel encouraged about the business prospects.

And next we will go to Michael Gallo with CL King.

If I may, just a question on the -- two questions on the $3,000 or $4,000 per car reduction. Number one, does that include potential sourcing saving, which I think you've talked about as kind of the longer-term opportunity? And number two, should we think about this business kind of more structurally that historical margins that we saw perhaps at somewhat higher levels in the high single-digit to low double-digit gross margin range as more in the mid-teens range? Or how should we think about that?

Let me take the first piece of that and then Matt will take the second piece of it. And let's talk about the cost a little bit more, in particular, the COGS. The biggest piece of our COGS savings is very likely to come from material, followed by a close second in labor or productivity improvements over time. There are many, many ways, methods, standardized approaches to taking out both material and labor cost. And these are the things we're just getting started on. Some of it takes longer, some of it doesn't take nearly as long. Sitting down and having commercial negotiations around long-term supply agreement with existing suppliers for existing parts can be very productive and move relatively quickly. When you start changing parts or changing suppliers or both, it can take longer. If you're doing it from a domestic to another domestic, it doesn't take maybe as long as going from a domestic to a low-cost country region. So it all depends. Another piece of where we have opportunity, which is part of the work plans that are being rolled out is part consolidations. In the sense that, we've got 50 very similar parts that could be rationalized into 2, 3 or 4 and sourced for greater quantities. All these things, in terms of the timing, it's going to come down to the priorities. Obviously, we're going at the biggest first. We're going at the biggest and the easiest stuff first. And as you get further and further down the food chain and there's more engineering design and development at time, that's where it starts to stretch out a little bit. But we have plenty on the radar screen right now, between short-term productivity gains as well as some fairly straightforward sourcing activities that we ought to be able to get off to a pretty good start here.

And Michael, it's Matt. On the later question, obviously, there's a lot of variables that impact margin, some of which we control and some of which we don't control. So if you look back at some of the numbers that you referenced, more importantly, what we're doing today is new and should be additive to the numbers that you referenced, that 9% or high single digits, whatever you had mentioned. So this is where we have to source better, control our costs and do it in a different format. And again, should be additive to the past.

And our next question comes from Willard Milby at Seaport Global Securities.

Just wanted to ask a question on the Navistar facility. I think you all, I believe, spent 1/3 or maybe a little bit more of the square footage there now. With the additional square footage, what can you all do from a line point of view? I think you are running 3 or 4 lines right now. Kind of, where do you see that going and what kind of efficiency do you think you could get having maybe more lines opened down there?

Yes. Thanks for the question. So I'm not exactly sure what percentage we were responsible for versus Navistar. But let's just say it was 40-60. The majority of the Navistar 60 is utilized by Navistar at the moment. And that's where the fabrication work takes place, that's where the truck assembly or the undercarriage work takes place. And that's also where the blast and paint facilities reside, which consumes a pretty big footprint all by itself. So the facility, the footprint or the square footage is fully accounted for today. As we become efficient and more lean and take control of the total facility, we will create open floor space, we will create additional capacity. It's easy to imagine what that might look like. We don't know for sure until we get through the work, and so we're certainly not going to comment on what might be possible. But we think a great deal is possible. But first and foremost, the importance of this deal that was announced last night is, it gives us full manufacturing control of a very large operation. The front-end of our manufacturing process was led by a supplier, Navistar, which is the fabrication department. The back-end of the factory was led by a supplier, Navistar, in the case of blast and paint. And we were running the assembly piece of it in the middle, if you will. So we will have -- now that we have or will have control over the entire process, the entire facility, we will be able to get that thing running much more efficiently. And we're very excited about what we'll get done over the next period of time here.

All right. And just, I guess, another question on the ASPs, of orders during the quarter. It sounds like inquiries are better from a volume and pricing point of view. Are you all thinking that you can return to levels of pricing in that, maybe, above $85,000 to $100,000 per unit range? Is the environment something that could help you achieve those levels or are we in this $75,000 to $80,000 per car pricing environment right now?

Hey, Willard. It's Ted. I think, as we look forward to the near future, I would expect the ASPs to remain where they are. We are going after several rebuild potentials that will have a tendency to bring that ASP value down as well as just the general mix that we see going forward. We think that it's probably a fairly stable ASP outlook.

And now we go to Brady Cox from Stifel.

I just want to ask again, on the Navistar facility, because maybe just that I wasn't clear when we were going through it earlier. I understand the cash impact is going to be relatively neutral upfront. But can you walk us through what the impact is going to be on operating expenses from that during the year, with changes in lease expense or maintenance or other facility costs, just any detail around that would be helpful.

Yes. So Brady, it's Matt. We're not getting into great level of detail on the economics of the transaction, just knowing that we've structured the deal to be not any worse off than we were. And think that over time it we will be a accretive and additive investment for the longer term. So we feel good with the structure of it as laid out in the transaction.

Okay. And outside of potential efficiency improvements, was any of the change in cost structures associated with that included in that $3,000 to $4,000 of savings per car or is that totally separate of any changes related to the facility? Outside of efficiency, of course?

As we look at the roadmap for the first $3,000 to $4,000, a very small portion of that in fact is assumed to come from the Navistar transaction. Again, now that we've got control or we'll have control of the entire operation and we go about our manufacturing excellence work, we're going to see efficiencies come from that. Significant efficiencies, we expect. But that's going to take more time to get under our belts and to demonstrate consistency. And so we're not assuming much at all in this initial $3,000 to $4,000 that we've outlined.

Okay. And then with a bunch of the cars in the backlog now slotted for the lease fleet, can you just talk about it, is that any change, an overarching strategy? Are you hoping to build out a bigger lease fleet or is just sort of this what happened to be there in the quarter?

Hey, Brady. It's Ted. We respond to our customers request with respect to leasing and there has been a great deal of interest in leasing. So as it relates to the near-term opportunities, our intent remains the same, which is we're going to look to sell those transactions to a third-party.

Okay. That's helpful. And maybe just one last question on the backlog right now, maybe I missed if you said it earlier, but how much of your current 2018 production outlook is filled with what's in the backlog right now? Just taking under consideration, anything that might be beyond 2018. And what you said you have a lot of commercial opportunities, what markets do you expect will make up for the difference or what's most likely to make up the difference between that and your production plan?

So we gave guidance of 3,500 to 4,300 cars for the full year 2018. Our backlog as of 12/31, was 2392 units. So therein lies the gap that we have to go fill. Your second question addresses how we're going to fill that gap and we are seeing active inquiries in the covered hopper car space, gondolas, some hoppers and some intermodal equipment.

Okay. And just one point of clarification though, on that 2,392 units of backlog, is any of that backlog for cars that will be built beyond 2018 or is all of that for 2018 production?

All of that is for 2018.

And at this time, there are no other questions in queue.