FreightCar America, Inc. (RAIL) Q2 2020 Earnings Report, Transcript and Summary

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'd now like to turn the call over to Joe Caminiti, 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 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 for joining us today. As we 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 that are 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 two 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 cases [ph]. 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, even it's 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 activities 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 rail cars. We also have 1,839 rail cars in our backlog as of June 30th. And have not lost an order through the pandemic. We've been on a two 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 and 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 Castanos, 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 US 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 condition. 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 margin in those produced and Castanos. 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 roots in railcar production and new plants start-up, the plant is scalable in the sense that we have built to production lines with capacity of approximately 1,000 cars per annum each. And the ability to add additional lines in the future is so desired. The paint shop was sized to accommodate substantially more volume than currently contemplated. In terms of the start-up, 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 rail - Mexico's rail car 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 six 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 acknowledgement 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 then we don't expect demand to snap back quickly as rail cars and storage remain near record levels. However, as we monitor key demand indicators, the last several weeks have seen a flattening and 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 a 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 cars 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 sites 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 second quarter of 2020 over 100 new rail cars, this compares to 11 in the first quarter of 2020 and 759 in the second quarter of 2019. Our order backlog as of June 30th, 2020, consisted of 1,839 rail cars, compared to 1,939 rail cars at the end of the first quarter. Our backlog has an estimated sale 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 for 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 impacted by three 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 claim, 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 costs to settle a customer dispute from several years prior. The year-over-year decrease was driven by a 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 at Roanoke exit in the future. Consistent with my comment 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 right size 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 of 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 deposit of $52.4 million, down roughly $18 million compared to our 2019 year end position and down roughly $8 million from March 31st, 2020. As noted in our second quarter, 10-Q, on August 7th, one of the companies 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 up the Mexican JV, which were partially offset by the proceeds from the payroll production program loan. Given the economic uncertainty that 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 zero drawn against our asset backed facility and $10 million drawn against our M&T lease facility which is secured by certain cars in our fleets. Capital expenditures for the second quarter of 2020 totaled $2.5 million, the majority of which was related to 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 investments 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 plus I'm very proud of 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 possible as we execute against our strategies. We'll continue to monitor every opportunity we have to better position the business for a 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'll 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.

Thank you. At this time, will be conducting a question and answer session. [Operator Instructions] Thank you. And our first question is from the line of Matt Elkott with Cowen. Please proceed with your question.

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

Good morning Matt, thanks for the question. As you probably know, typically we don't get into specifics on our tax but I can share with you that we're seeing quite a bit activity on conversions from both shipper communities as well as less source, given the number of cars in stores and some of the car types that are likely to enter back into the market place given the overbuilt situation. We think we're in a really good position to participate in that market that 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 take that, 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 imported to [Technical Difficulty]. So I would say it is more heavily weighted to next year but we're not [Technical Difficulty].

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

Yeah Matt. That is in 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 the timing on deliveries.

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

Yeah, I think without getting into specific car types or customers, we are seeing some specific pockets of opportunity. I think I mentioned in my comment 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's - 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 a larger picture question maybe for Jim or Chris. Basically what you guys know now and under maybe kind of a base case scenario for the pandemic in 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 it's a great question, but I will tell you that we've been working - our pivotal plans and our focus is to get obviously back to profitability sooner than later. We have a variety of different scenarios. Obviously, volume is an aspect to that but I don't see any reason to say we would not be planning for process [Technical Difficulty].

Great. Thank you very much, guys. Appreciate it.

Yeah, hi Matt, this is Jim. Just to close out on what Chris said. Keep in mind everything we've been doing for two and a half 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' answer just a little bit.

Got it. Jim, thank you very much. And Chris and Matt, thanks very much.

Welcome.

Our next question is from the line of Justin Long with Stephens. Please proceed with your question.

Good morning. This is George Sellers on for Justin. Thanks for taking my question. 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?

Good morning, 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 competent 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 on 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 you recently. What are maybe the more normalized levels or what should we be expecting going forward for some of those line items?

Hi George. This is Chris. So, obviously to the extent, when we work to negotiate a contract in the deal [Technical Difficulty] 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 are all specific deals. I think as you go forward, it would not expect to see the significant amount of customer deposits that we have as a percentage of sales right now. Also more a factor of [Technical Difficulty] upcoming orders. So as you would guess there's somewhat offsetting the inventory position. As the company's volumes increase in order to increase, you'll see more inventory in general. I would say the number that's a little more unusual the amount of deposit versus inventory relationship. But as you know [Technical Difficulty] inventory will be more normalized the demand [Technical Difficulty]. But again, getting into a specific number on either to note the guidance scenarios, sales volumes in order to [Technical Difficulty].

Okay, great. Thank you all. That's all I had.

Thank you. At this time, we've reached the end of our allotted time for question-and-answer session. I will 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. Thank you for your participation.