Greetings, and welcome to FreightCar America's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the conference over to your host, Joseph Caminiti, Investor Relations. Thank you. You may begin.

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 its third 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 third 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. While it has only been three weeks since our special call to provide you with an update on our business repositioning process, we have continued to make progress and we're excited to provide some additional updates for you today. Let me take a few minutes to recap some of the critical steps we have taken and that we are still in the process of completing to finalize the restructuring. First, we successfully completed the acquisition of the remaining 50% of our joint venture in Castaños, Mexico in mid-October. Production at the new Castaños factory started in July with the first car completed in August, and I'm happy to announce that the manufacturing facility is now fully certified by the Association of American Railroads, or AAR. To the best of our knowledge, this was completed at record time, which was due entirely to the strong team we have at Castaños. As a result, we will be shipping our first railcars from the facility this week. So in short, Castaños is manned with a highly experienced workforce, is AAR-certified, is producing and is now generating revenue. During the third quarter, we also successfully negotiated the early termination of our lease at the Cherokee, Alabama or Shoals facility. As of October, we have no additional ramp due at Shoals and we have agreed to sell and transfer certain basic infrastructure at the facility to the landlord in exchange for early termination. Again, there is no additional capital required as part of the lease at this stage. By early 2021, our entire FreightCar portfolio will be produced in Castaños. We will continue to produce aftermarket parts for our parts business in Richland, Pennsylvania and this is not expected to change. And…

Thanks, Jim. Turning to financial results. Consolidated revenues for the third quarter totaled $25.2 million, compared to $17.5 million in the second quarter of 2020 and $40.7 million in the third quarter of 2019. We delivered 163 railcars in the quarter, compared to 100 in the second quarter of 2020 and 467 in the third quarter of 2019. As previously noted, our current backlog of 2020 orders scheduled to ship in the year, is heavily weighted to the second half of the year. That said, we shipped fewer cars in the quarter than we expected as we made the strategic decision to shift some of our orders from Shoals to Castaños in order to take advantage of the certification timing and the improved economics of the new facility. This resulted in a push-out of deliveries from Q3 into Q4 and beyond. Thus, we still expect to come within the bottom end of our guidance range we provided for you last quarter, but have narrowed it to 750 to 850 railcars in the second half of 2020. Our gross profit improved to a negative $4.1 million compared to a negative $6.1 million in the second quarter of this year and a negative $5.4 million in the third quarter of 2019. Gross profit performance reflects the previous cost reductions and a mix of higher-margin railcars, which offsets the impact of negative efficiencies due to lower production volumes. SG&A for the quarter totaled $7.2 million, up from the $6.5 million in the second quarter of 2020, but down from the $7.8 million in Q3 of 2019. Sequential increase included several onetime costs related to the deal activity and certain commercial reserves for approximately $1 million. The company expects to have additional SG&A costs related to the new financing in both Q4 of this…

Thanks Chris. Our industry continues to navigate the challenges of this cyclical downturn. Key market indicators including rail traffic and railcar storage levels are trending in the right direction, although the economy in general remains uncertain due to the pandemic. Our view is that customer sentiment remained very cautious in the third quarter and thus we don't expect meaningful demand improvement in the near term. Although down from the second quarter, third quarter inquiries represented a greater mix of car types that FreightCar America is well suited to deliver. Our third quarter orders reflect the continued weakness and caution in the industry. We are extremely confident that the move to Castanos will strengthen our competitive position and allow us to earn our share of orders once the market begins to return to some level of normalcy. Despite the pandemic and the associated travel restrictions, we remain focused on staying engaged with our customers. Through the use of video, we have started hosting live and virtual customer meetings from Castanos and have received great feedback on the facility and experienced leadership there. I'll end with a review of our backlog. Our order backlog as of September 30th, 2020 consisted of 1,776 railcars compared to 1,839 railcars at the end of the second quarter. Our backlog has an estimated value of approximately $195 million. We've had no order cancellations as a result of our manufacturing shift and again continue to receive positive feedback from customers about both Castanos and our new business repositioning plan. With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?

Thanks Matt. We've spent the last few weeks talking about the critical business repositioning process and we have had a few consistent questions, so I thought the best thing we could do today is to address these questions on this call. The first question is why now? Why does FreightCar America need to execute such an aggressive repositioning plan in the middle of a pandemic when the market is in the middle of a down cycle? To start, our Back to Basics strategy made significant progress in lowering our cost per car, but it hasn't been enough not in this pandemic and the resulting prolonged industry downturn. We entered 2020 with cautious optimism, but the impact of the down cycle and pandemic forced us to accelerate our plans. We must change our cost structure and we must do so quickly. We cannot afford to sustain the current level of losses and we must put quarters like this one behind us once and for all. This move gets us to where we need to be. And the good news is that through the Back to Basics work and then the JV formation and the Castanos plant start-up, we can do it now as in right now and we can do it without disruption and without giving up future scale and upside. We will just no longer be paying for that scale until we actually need it. The next question involves the structure of our purchase of the remaining interest in our joint venture in Mexico. Specifically, why did we choose to purchase the Gil family's 50% interest in the JV in exchange for approximately 14.5% of our common stock? The simple answer is that Castanos is our future. And with the decision to move all of our production to Mexico, we…

Thank you. At this time, we will now conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Justin Long with Stephens.

Thanks and good morning. So maybe to start, I wanted to go back to the breakeven commentary you've provided. I know you're lowering the number of shipments that you need to break even. I just wanted to clarify that, as you think about breakeven, is that from an operating income perspective or a net income perspective?

Yes. So that's an operating income perspective Justin. But again the additional net depositary interest you know approximately what that's going to be based on the term scenario. So we're not going to give a specific additional but we do feel that there's not a giant material difference between those numbers up in that net based on the economics of the new facility.

Okay. That's helpful. And as you think about adding capacity at that facility in Mexico over time, what are the signs that you need to see in order to make that investment? And just kind of thinking bigger picture, if we transition to more of a replacement market, let's just say 35,000, 40,000 builds, somewhere in that neighborhood, is that an environment where you would expand capacity? Or do we need to see above replacement demand and production in order for you to make that investment?

Matt, why don't you go first? Justin we're in different locations now but Matt you go first.

Justin, I think you touched on a couple of those factors. Our decision to expand this plant capacity is going to be really supported by a composite of market factors including our customer engagement and the intelligence we learned from them on strategic long-term needs. All of these will be taken into consideration as we put ourselves in a position for the next demand upside.

Okay.

So I think to add to that, there's no one single piece of information that's likely to indicate to us now is the time. We're going to be looking at lots of things as anybody would. What you need – what we need to keep in mind is the way the Castaños plant was manufactured, we can add lines three and four relatively quickly. We're talking months not years. The paint shop is there. The workforce is readily available. And the benefit, as I've already said of what we have right now is during the down cycle we're not paying for what we're not using. But at the same token, we need to make sure we're there when the market does come back because we don't obviously want to miss out on that. And so in summary, we're going to be looking at a whole array of indicators. But keep in mind when we do pull a trigger to add production lines, it's multiple months but it's not a year-plus type undertaking.

Got it. That's helpful. And maybe just lastly from a modeling perspective, I think you mentioned in the prepared remarks that SG&A would be going up a little bit sequentially in the fourth quarter and next year. Any order of magnitude you can share on what that step-up could look like?

Right. Well our view is that it's going to be below where it was this quarter but it was – the guidance that I've given previously was under $7 million. We're not going to give specific timing guidance on some of these one-time charges and when they'll hit, but as we look over going forward, it will – the guidance for this year was under $7 million and we expect it to come down, as we clear out some of these one-time charges. So again, expect it to be under what we thought it would be this year, once the one-time charges have cleared. And we'll give you some more exact guidance on that at year-end, okay?

Got it. Okay. So those were all one-time items. That's good to clarify. Well I'll leave it at that. I appreciate the time.

No problem, Justin. As I mentioned in my remarks, we had about $1 million what we viewed as one-time items in the number this quarter for SG&A.

Okay. Thanks, again.

Our next question comes from the line of Matt Elkott with Cowen. Please proceed with your question.

Good morning. Thank you. Matt, I think you mentioned the backlog. My question is, if we subtract the expected deliveries in the fourth quarter, what percent of the remaining backlog is for 2021 deliveries?

Hi, Matt, it's Chris. I'm just going to say, we're not going to give specific 2021 guidance right now. So we'll give you some better views on that at year-end. But again a big chunk of it as you would guess would be 2021, but we'll give you more specifics at year-end. Matt, go ahead.

No, I just -- you took the words right out of my mouth.

No, that's helpful. But I guess more of it is for 2021 than later?

Correct.

Correct.

Okay. Got it. And Matt, you mentioned that there has been some pockets of improvement and inquiries in cars that you guys have an expertise in. Can you elaborate on that? Is it mainly intermodal? Is there grain cars? Just any more insight on that front would be helpful.

I think without getting into specifics, Matt, there's been pockets of really solid rail activity both in the two segments you referenced intermodal and grain. But I think what we're seeing is a little bit more diversification of car types in terms of inquiries that have been coming through which is some positive news as the industrial economy starts to strengthen somewhat.

Got it. And just maybe a bigger picture industry question. You guys noted, the rail traffic improvement. The cars and storage numbers are coming down which is good. What do you think needs to happen beyond this for a real uptick in demand to happen if you continue on this -- on this trajectory of improving rail industry metrics?

Yes. I think Matt, as talked through on this call storage numbers although they're down consecutively in the last three months roughly 75,000 cars trending in the right direction we still need to make a lot of headway here before that really impacts demand improvement. The same goes for rail traffic. Some sectors are seeing some really great growth. Intermodal is one of those. Grain traffic is pretty strong. But clearly we need to see more cars online. We need to see increased traffic numbers. We need to see really a significant reduction in storage before we start to see a demand curve.

Okay. And then maybe just one last one. I know you guys are going for the lowest-price highest-quality manufacturer approach. Can you give us any type of feedback on how much traction you're getting with customers? I mean is that sinking in with customers? Do you have to do more to get the message across? Or is it just a matter of time you just have to prove it over the course of the next few quarters?

This is Jim. Let me start by answering that one and then I'll perhaps turn it back to Matt. Where we want our business structure to be in support and how we are positioning ourselves in the marketplace are complementary, but it's not exactly the same thing. Our position in the marketplace is to be a pure-play manufacturer. As you know, many people know the majority of railcars purchased every year are purchased by leasing companies. Our built competitors of course compete in that space as well. We don't. And so the idea that a leasing company can come and work with us and know that there's not a competitive or conflicting discussion potentially it resonates very well with our customers. We didn't quite frankly set my conference room and come up with this idea. This was brought to us by the customer base. So our position is a pure-play manufacturer. But because that's our only business principally, we need to be frankly very, very good. We need to be the very best at it. And we think we can do that. And we think what we'll define best is a combination of cost and quality and on-time performance. So that's the position and the supporting, the ideas for the underlying structure behind it. Matt do you want to add to that?

Yes. I'll just add that over the course of the last several weeks, we've conducted multiple customer engagements virtually including plant tours and various customer-specific events and responses have been overwhelmingly positive. And as a result of much of that interaction we've picked up some new customers as well. So the impact of Castanos and the view from customers has been taken very positively.

Great. Thanks Matt. Thanks, Jim and thanks, Chris. Appreciate it.

You’re welcome, Matt.

Welcome, Matt.

And with that we have reached the end of our question-and-answer session. And I would now like to turn the call back over to Jim Meyer for any closing remarks.

Thank you again for your time today. We need your support to complete this business repositioning process and to ensure our future. I look forward to entering an exciting new phase for our company with all of you and strongly believe we have the right plan to deliver strong value. Thank you and have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.