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Edited Transcript of RAIL earnings conference call or presentation 11-May-20 3:00pm GMT

·24 min read

Q1 2020 FreightCar America Inc Earnings Call CHICAGO Jun 16, 2020 (Thomson StreetEvents) -- Edited Transcript of FreightCar America Inc earnings conference call or presentation Monday, May 11, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Christopher J. Eppel FreightCar America, Inc. - VP of Finance, CFO & Treasurer * James R. Meyer FreightCar America, Inc. - President, CEO & Director * W. Matthew Tonn FreightCar America, Inc. - Chief Commercial Officer ================================================================================ Conference Call Participants ================================================================================ * Justin Trennon Long Stephens Inc., Research Division - MD * Matthew Youssef Elkott Cowen and Company, LLC, Research Division - Director * Josh Littman Alpha IR Group LLC - Senior Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Welcome to FreightCar America's First Quarter 2020 Earnings Conference Call and Webcast. (Operator Instructions) Please note, this conference is being recorded. An audio replay of the conference call will be available roughly 2:00 p.m. Eastern Time today until 12:00 a.m. Eastern Time on June 12, 2020. To access the replay, please dial (866) 207-1041. The replay passcode is 8676330. An audio replay of the call will be available on the company's website within 2 days following this earnings call. Now I'd like to turn the call over to Josh Littman, Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Josh Littman, Alpha IR Group LLC - Senior Analyst [2] -------------------------------------------------------------------------------- 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 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 first quarter of 2020 are posted on the company's website at www.freightcaramerica.com. With that, let me now turn the call over to Jim for a few opening remarks. -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Josh. Good morning, and thank you for joining us today. I would like to start this meeting by extending a sincere thank you to all of our employees for their commitment and dedication to health and safety in these unprecedented times. As we have said to this audience for more than 2 years now, our #1 priority is and will continue to be the safety of our employees. It's a very easy statement to make, especially in more normal times, but it can also challenge a company's true mettle when things get difficult. Not so for our team. We have substantial new protocols in place to protect the health of our workers, including the reprocessing of work on the assembly lines to ensure 6 feet of separation, assigning employees to small zones within the massive Shoals complex, daily defogging as part of the new cleaning regimen, requiring all employees to wear protective masks with new ones provided on an every-other-day basis, and the list goes on. Our employees are united in adhering to these new disciplines. To date, we've had 2 cases of COVID-19, each at Shoals, and I'm happy to report both employees are recovered and back with us. Our commitment to safety was tested with these 2 cases as they occurred before all of our protocol was in effect, and we immediately shut down the facility to quarantine those that we considered at risk for exposure, disinfected the entire facility and finished putting in place the remainder of our protocol. In total, we lost 8 production days as a result of this shutdown, which started at the end of the first quarter. The easy way to handle these situations would have been to send the symptomatic employees home and continue working without them. But we are doing everything we can to protect our people. I am very, very proud of the way in which our employees handled these cases and the decisions being made every day. This is real safety first. One final note on safety before we move on. Company-wide, we are now at 1.5 years since we had our last OSHA lost time accident. For a company that performs the type of work we perform and operate at a half dozen facilities during this period, this is the real evidence of the commitment, training and values of our team. Our customers and -- for our customers and shareholders, this translates to reduced downtime, reduced cost and better quality. I recognize all the unknowns and uncertainties as we move forward and assume the current environment, which has become significantly more challenging in recent months due to the pandemic, will stay this way for the indefinite future. We are now planning for a prolonged, deep down cycle and one that requires us to make adjustments, both -- to both the direction and speed of what we have focused on for the past couple of years. In response to the uncertainties brought forth by the COVID economy, our focus must be on liquidity in order to ensure we are in position to reap the benefits of our transformational work when the economy and industry do return. I cannot be more thankful for the Back to Basics principles we developed and have adhered to over the last 2-plus years. This strategy was designed to significantly improve our cost structure, productivity and footprint. The successful efforts we made to address all 3 of these legacy issues have put us in a much stronger position from which to navigate today's challenges. In fact, this work is more important to us now than ever before. Over the last 2 years, we reduced material cost by an average of more than $5,000 per railcar. In that same time frame, we exited 2 legacy coal manufacturing facilities and shrunk both our square footage and future rent payment at our leased Shoals facility by roughly 40%. Through the recent closure of the Roanoke facility, we are saving roughly $5 million per year in fixed cost which began in the first quarter of this year. Our new agreement at the Shoals facility will generate cash savings of $7 million per year, which takes effect starting January of 2022. Our first quarter was obviously very weak with minimal delivery numbers. This was the result of a combination of the timing and weakness in the backlog, line changeovers and some lost production days at the end of the quarter due to the coronavirus. However, as we complete 2 launches, our factory is now entering back into light yet more meaningful production. Two lines are running, and a third is in the early stages of startup. As a reminder, we have 4 available production lines at Shoals. We have not received any order cancellations and are not building any railcars that do not have a firm order behind them. The build-out of our manufacturing plant in Mexico is still on track. As we said last quarter, we are in the equipment installation phase inside the factory, which will take us through June. We are working on securing our first order for the facility, and our goal is to start production some time during the third quarter. However, we will not enter production there without a firm customer order. With our industry in a downturn and available capacity at near-historic highs, we will be entering an extremely competitive marketplace potentially for the next several years. Because of this, we need to be in Mexico more than ever. And finally, we ended the first quarter with $60 million of cash. This included $45 million of unrestricted cash and cash equivalents and $15 million of restricted cash and restricted certificates of deposit. We will continue to protect our balance sheet, and we'll do so in consideration of all levers at our disposal. In April, we applied for and received a CARES Act PPP loan, for which we are both grateful and confident in having met all eligibility criteria. Chris will discuss our current liquidity position in greater detail in his remarks. Before I turn the call over to Matt, I want to be clear that our first quarter numbers are not reflective of our near-term opportunities. Our Shoals facility is building cars again. We are continuing to adhere to our strict safety protocols to keep our employees safe and our product quality and production efficiency efforts remain on track. And based on what we know today, we expect deliveries to ramp up throughout the year. With that, I'll turn the call over to Matt to walk through our commercial results for the first quarter. -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [4] -------------------------------------------------------------------------------- Thanks, Jim. Before discussing our commercial results, I would like to give an update on what we are seeing in the market. As an industry, we are no stranger to cyclical demand patterns, but this downturn does look different from what we have encountered during past challenging market environments. Whether global recession or COVID-19, one constant remains, the importance of the rail network and demand for rail assets are an economic certainty. We cannot control the market nor predict the timing of the turnaround, and therefore, we remain focused on what we can control, strengthening customer relationships, offering value solutions and closely monitoring market trends so we are well positioned to respond to customer needs. From a current -- commercial perspective, the current environment remains fluid, as customers are obviously taking a conservative view of the future. Year-over-year carload traffic through the first quarter 2020 was off by over 5%, with some market segments experiencing double-digit declines. Further, cars in storage continue to be at near-historic levels. Many customers are putting inquiries and orders on a temporary hold. We remain in daily contact with our customers as we help them navigate these uncertain times, and we are preparing for a variety of return-to-work scenarios, and we'll be ready to meet their needs when the time is right. Turning to the backlog. Our order backlog as of March 31, 2020, consisted of 1,939 railcars compared to 1,650 railcars at the end of the fourth quarter. Our backlog has an estimated sales value of approximately $221 million, up sequentially from $206 million. As Jim mentioned, we are not building anything that does not have a firm order behind it. Deliveries for the first quarter of 2020 totaled 11 new railcars. This compares to 641 deliveries in the same quarter of 2019, all of which were new railcars. In the fourth quarter of 2019, we delivered 439 railcars, which included 354 new cars and 85 rebuilds. We received 300 orders in the first quarter of 2020, and this was down year-over-year compared to 694 orders in the first quarter of 2019 and down sequentially compared to 385 orders in the previous quarter. With that said, Chris, can you please walk us through the financial results for the first quarter? -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [5] -------------------------------------------------------------------------------- Thanks, Matt. Turning to our financial results. Consolidated revenues for the first quarter totaled $5.2 million compared to $70.7 million in the first quarter of last year, the result of the lower deliveries in the quarter that Matt just discussed. Our gross margins fell to a negative $8.8 million compared to a negative $6.8 million in the first quarter of last year. Moving forward, our gross margin will not carry any carrying costs associated with the wind-down of our Roanoke facility. Similar to the fourth quarter of 2019, this quarter's results were largely influenced by a loss of operating leverage associated with lower deliveries, partially offset by the ongoing reductions in operating fixed cost and variable costs. SG&A for the quarter totaled $7.4 million, down from the $7.7 million in the quarter of 2019. The year-over-year decrease was driven by lower employment-related costs. However, the decrease was partially offset by the noncash amortization of the management retention program announced in the Q4, and to a lesser degree, several project-specific costs. I mentioned on our last call that our SG&A would be under the $7 million on a quarterly run rate for the year. That was excluding special projects and unusual noncash items. Excluding those amounts in the quarter, we did achieve that goal, and our go-forward SG&A will continue to move downward throughout the year as we continue to cut SG&A costs. Consolidated operating loss for the first quarter 2020 was $17.1 million compared to an operating loss of $14.5 million in the first quarter of 2019. Reflected in our operating loss is a $900,000 restructuring charge associated with the final wind-down of our Roanoke facility. Moving to the balance sheet. We finished the quarter with cash, cash equivalents and restricted cash of $60.5 million, down roughly $10 million as compared to the 2019 year-end position and roughly $8 million as compared to March 31, 2019. The decline in our cash position was driven by the low deliveries during the quarter, investments in inventory for Q2 production ramp-up and our upfront investments in the Mexican JV, partially offset by a customer deposits. Given the economic uncertainty that has resulted from the pandemic, our priority will be to manage liquidity in line with the industry conditions. Our revolver position remains unchanged from the previous quarter as we had 0 drawn against our asset-backed lending facility and $10 million drawn against our lease fleet facility. As Jim mentioned, we're also one of the many industrial companies that applied for and received funds under the government's Paycheck Protection Program. The funds were received after quarter's end. As intended, the entirety of these funds will be used to support hundreds of factory jobs in addition to funding our basic rent and utilities. Capital expenditures for the quarter, first quarter 2020, totaled $3.7 million, the majority of which was related to the build-out of our Mexican facility. As we mentioned on our last call, our capital spending in Mexico will be timed to align with launch schedules, which implies there is a variability and an optionality to our cash spend if those plans change. We will continue to update everyone on our progress throughout the year on our earnings calls. I'll end with an update on our outlook for 2020. Given the current uncertainties associated with COVID-19 and the lack of visibility into what the recovery looks like across our markets, we are withdrawing our previously announced 2020 guidance for deliveries and capital expenditures. As visibility returns to the economy and our markets, we'll reassess our provision of guidance as appropriate. Now I'd like to turn the call back over to Jim for a few closing remarks. -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- Thanks, Chris. Before I turn the call over for questions, I would like to summarize the actions we are taking in light of COVID-19 and the items that give us some comfort in this evolving environment. Our team continues to adhere to health and safety protocols, and we will continue to move swiftly to make any adjustments to align with emerging best practices. Our Back to Basics efforts are providing some of the cushion and toolkit needed to survive this pandemic. The strategic decisions and cost savings initiatives put forth over the last 2.5 years have put our business in a much better position to emerge from this crisis. Our Shoals factory is in production, and based on what we know today, we expect deliveries to ramp up through the year. The product quality and production efficiency initiatives we have in place are progressing well and continue to bolster our position as a pure-play railcar manufacturer. The build-out of our Mexico facility remains on track, and the ability to produce cars in Mexico will be more important than ever as we need to assume the industry remains highly competitive for the next several years. And finally, we will continue to control cost and preserve capital and will consider all options to protect our franchise. Until we are out of the woods, we consider it both wise and prudent to view nothing is off the table. I would again like to thank our employees for their commitment to health and safety and their ability to react quickly to these ever-changing circumstances. With that, I will like to conclude our prepared remarks and turn the call over to the operator for Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question will come from the line of Justin Long from Stephens. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [2] -------------------------------------------------------------------------------- Just wanted to start with a question on the backlog, a little over 1,900 units. Is there any color you can provide on how much of that backlog is allocated for delivery in 2020? And you talked about a sequential ramp in production, but I was wondering if you could give a little bit more color on how you expect that ramp to progress the rest of the year based on what you already have locked in. -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [3] -------------------------------------------------------------------------------- Justin, this is Matt Tonn. As Chris had mentioned, I think Jim has mentioned as well, we're not going to provide specific guidance for 2020 on our current backlog. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [4] -------------------------------------------------------------------------------- Okay. But maybe help us think through how much of the backlog is for this year versus next year? -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [5] -------------------------------------------------------------------------------- As we mentioned before, we're not going to kind of dissect the backlog on the call per se, but it's safe to say that we do have slightly more -- the majority of the backlog is related to this year. And but we're not going to get into specifically how much. And as that gets into specifically giving unit guidance for the year. But again, we are planning around part of that backlog moving this year. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [6] -------------------------------------------------------------------------------- Okay. Understood. And then just thinking about the market, obviously, things have hit a big pause button here recently. But I was wondering if there was any color you could provide on new railcar pricing just for the industry as a whole. And I know it varies by car type. So it's very mix dependent. But if you were to just kind of look at the blended average, how would you say the new railcar pricing environment has trended pre-COVID to where we are today? -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [7] -------------------------------------------------------------------------------- So Justin, this is Matt. Maybe a little bit of color to add. I think it's safe to say that given the current economic conditions we face and the demand for railcars, you're starting to see some downward pressure on new car pricing. I think it's following what we're seeing on the lease side of the market, where you're seeing significant pressure on lease rates. And we anticipate that we will see that type of pressure on new car prices for the next -- for the foreseeable future. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [8] -------------------------------------------------------------------------------- Makes sense. Is there a way to just kind of ballpark what that pullback has been? I mean is that 10%, 20%? What's kind of the rough magnitude? -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [9] -------------------------------------------------------------------------------- I would say that it's very car type specific. But you're looking at, without giving the specifics on percentages, you're probably in the... -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- We're not -- we don't need to be giving guidance on that. Justin, this is Jim. Obviously, the marketplace has been highly disrupted. It's happened relatively quickly. And to speculate how this will translate into pricing is, frankly, difficult at best. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [11] -------------------------------------------------------------------------------- Okay. Maybe transitioning to G&A and some of the comments there. It sounds like sequentially, things are going to move lower. But is there a way to think about how much from a cost perspective you can take out of the business in a downturn like this? And then on the $5 million of savings from Roanoke, you mentioned that started to hit in the first quarter. How much of that was realized in the first quarter versus being incremental in 2Q and beyond? -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [12] -------------------------------------------------------------------------------- Sure thing Justin, this is Chris. Just a couple of things on your questions. First, as it relates to Roanoke, the majority of the savings were actually in the quarter, but not all of them. So I'm not going to give the specific dissection of that. But if you think about it, we closed up operations towards the end of the quarter, but costs have been -- were winding down before then. So you've got from a pure cost perspective, but again, the rent itself which was probably the biggest piece, went through the majority of the quarter. So as you think about it, there's still more meat on that bone to come through the P&L in the next quarter. As far as the SG&A number goes, we're still comfortable with the guidance we gave at year-end around being under a $7 million run rate. As always, as the situation requires, the company is going to go back and take additional actions on SG&A. I'm not going to give you a specific. But as always, we do have more ability to address that part of the P&L., and we'll go back there as required and as the situation demands. -------------------------------------------------------------------------------- Justin Trennon Long, Stephens Inc., Research Division - MD [13] -------------------------------------------------------------------------------- Okay. That's helpful. And then lastly, going back to the commentary around this being a multiyear downturn and kind of managing the business for that, kind of 2 questions on that. One, when you look at the balance sheet, how do you feel about the liquidity position in the case that we kind of bump along the bottom here for another 2 to 3 years? And secondly, strategically, is there anything that you're considering right now that would be different versus what you've discussed historically in the context of a prolonged downturn? -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [14] -------------------------------------------------------------------------------- Right. Thanks for the question. I mean, obviously, as we mentioned, we're not going to give cash guidance kind of out throughout this year and next year, but we'll make a couple of comments when you think about additional things for us to do, as I mentioned, the opportunity to get additional savings through taking down other investments in some of the infrastructure is definitely there. All the items we had talked about on previous calls still do remain. But obviously, the company will continue to expand its liquidity strategies over time as -- depending on what happens in this environment. So I think it's safe to say there are other things that we'll always continue to evaluate. But at this point in time, I'm going to kind of stay away from kind of some -- any specifics around liquidity plans and anything else. -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- I would just add -- this is Jim. We're considering all options in order to preserve our liquidity. As I said earlier, we're very thankful for the Back to Basics work that we started sometime in the past. And we're going to continue to match costs to the production schedule. -------------------------------------------------------------------------------- Operator [16] -------------------------------------------------------------------------------- (Operator Instructions) We have a question from the line of Matt Elkott from Cowen. -------------------------------------------------------------------------------- Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [17] -------------------------------------------------------------------------------- Can you guys help me understand the manufacturing revenue per unit of delivery? I think it's way higher than it's been in the past, plus $267,000, I think, versus in the last several quarters, it's been in the 80s and 90s. So I'm just trying to understand why that is. -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [18] -------------------------------------------------------------------------------- Yes. Obviously, we had a very low delivery number. And as such, the parts number is influencing that a little bit. So when you get down to such a low actual unit number, there's a couple other things that go in there that are not specific car -- usually, that kind of -- that noise washes out. But again, it's more of an issue around that. But going forward, you'll see a more traditional number. -------------------------------------------------------------------------------- Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [19] -------------------------------------------------------------------------------- Okay. That makes sense. And then my next question is in a downturn, some larger builders may not be active in manufacturing lines for some small, sporadic orders. Are you guys positioned in any way to potentially take advantage of that? Do you have more flexibility to take on small, sporadic orders in a downturn where someone may be hesitant to order 500 cars and instead they want 50? And that's -- is that something that you can take advantage of in absence of the larger builders participating in that market? -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Matt, this is Jim. Thanks for the question. I guess the short answer to your question is, yes, we certainly believe that. As we've talked about in a couple of calls, part of where we've been placing process focus and making investments is both in the manner in which we manage and execute our line changeovers with the goal to be the best in the business at conducting a quick changeover. We feel we've made substantial progress towards achieving that objective. In part and parcel with that is in the manner and design at which we do our new tooling and whether it is flexible to cover a variety of car configurations or is specific to 1 product. And so we've been investing very heavily in process and flexible tooling, and we very much see part of where we will excel going forward is in the ability to do these somewhat smaller orders. -------------------------------------------------------------------------------- Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [21] -------------------------------------------------------------------------------- Okay. Great. That does make sense. And you guys said that you had no cancellations, which is encouraging. But what percent of your backlog had to be adjusted to ladder your deliveries? -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [22] -------------------------------------------------------------------------------- Yes, Matt, this is Matt Tonn. We haven't had any adjustments on deliveries at this point in time due to cancellations or requests from customers. -------------------------------------------------------------------------------- Matthew Youssef Elkott, Cowen and Company, LLC, Research Division - Director [23] -------------------------------------------------------------------------------- So none of the backlog has been deferred to a year out or 2 years out? -------------------------------------------------------------------------------- W. Matthew Tonn, FreightCar America, Inc. - Chief Commercial Officer [24] -------------------------------------------------------------------------------- No. No. -------------------------------------------------------------------------------- Christopher J. Eppel, FreightCar America, Inc. - VP of Finance, CFO & Treasurer [25] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- At this time, there are no further questions in queue. I'd like to turn it back over to Jim Meyer. Please go ahead. -------------------------------------------------------------------------------- James R. Meyer, FreightCar America, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Thank you again for your time today and your continued support. We all, as always, look forward to continuing to update you on our progress. Have a great day, and please stay safe. Thank you. -------------------------------------------------------------------------------- Operator [28] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, that will conclude our conference for today. Thank for your participation and for using AT&T Executive Teleconference. You may now disconnect.