Welcome to FreightCar America's Second Quarter 2019 Earnings Conference Call and webcast. At this time all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note this conference is being recorded. An audio replay of the conference call will be available from roughly 1:00 P.M. Eastern today until midnight Eastern on September 1st, 2019. To access the replay, please dial 800-475-6701. The replay passcode is 470143. An audio replay of the call will be available on the company's website within two days following this earnings call. I would now like to turn the conference over to Mike Cieslak, Head of FP&A and Investor Relations at FreightCar America. Please go ahead.

Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; and Chris Eppel, Chief Financial 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 2018 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 2018 Form 10-K and earnings release for the second quarter of 2019 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. Jim?

Thank you, Mike. Good morning, everyone, and thank you for joining us today. I am going to spend some time discussing our progress on accomplishments in the quarter and then turn the call over to Chris to speak about our financial performance. This week marks my second year with the company and approximately 18 months since we announced Back to Basics, our turnaround strategy. Back to Basics was designed to give us the right products, produced on the right footprint, and for the right cost. Three areas in which our company was not well positioned two years ago. I will use some of this call to discuss how we are doing in each of these areas and then speak to our backlog in the market. Starting with product, we have previously discussed the need to design or redesign portions of the portfolio and then properly set up the factory for a number of different car types. These car types were either missing from our portfolio or insufficiently tooled and processed for efficient production. The enhancement of our product portfolio is crucial to our ability to compete in this industry and especially important given where our backlog stands today. Our most recent redesigned product is the 3/53 intermodal railcar. We are now in production with this updated car type, which was redesigned, retooled and completely reprocessed. We can confirm material cost savings of more than 10% and when fully ramped, we expect to realize labor savings of more than 20%. This redesign is transformational and we believe it makes us fully competitive in this car type. Another new and particularly important product in the pipeline is the large cube plastic pellet car, and we expect both the car and lining facilities to be ready in early 2020. And again, with every…

Thanks Jim. Turning to our financial results. Consolidated revenue for the second quarter 2019 totaled $73.7 million, a 10.4% increase compared to the $66.7 million for the second quarter last year and sequentially $70.7 million for the first quarter 2019. While unit deliveries were lower year-over-year, revenues were higher in the second quarter of 2019 due to business mix as there were more new car deliveries in this quarter. Our gross margin in the second quarter was a positive $6 million compared sequentially to the first quarter 2019 with negative gross margins of $6.9 million. As Jim mentioned, we are pleased with the direction of our margin performance in the quarter. The gross margin did include a positive onetime impact of $3.5 million as a result of settling a historical customer dispute. Remainder of the positive margin was driven by healthier production mix and the results of our Back to Basics initiatives. In terms of targeted cost savings recognized in the quarter, approximately $1,400 of cost savings per railcar went through the P&L. While our second quarter improved, as Jim alluded to, our margins will be influenced in the back half of the year by lower deliveries. SG&A for the quarter totaled $15.4 million, up $7.7 million from the first quarter of 2019 and $8.4 million in the second quarter of 2018. The current year's SG&A figure of $15.4 million included a $7.5 million settlement charge as the company resolved a customer dispute related to cars produced several years ago. As a result, a cash outflow related to the settlement accrual will be paid over the course of the next couple of years. Consolidated operating loss in the second quarter totaled $15.8 million. This compares to a consolidated operating loss of $3.5 million a year ago and $14.5 million operating…

Thank you. [Operator Instructions] And our first question is from Matt Elkott from Cowen. Please go ahead.

Good morning. Thank you for taking my question. Can you guys talk about the types of cars in the order you received after the second quarter?

Hi Matt, this is Jim. We do not call out car types on future orders. So--

Can you tell us if it's -- thanks Jim, can you tell us if it's -- how many different types of cars there were in the--

I'd say, it's a couple of different car types.

Okay. Got it. And then -- types of cars that are your kind of traditional, historically -- your core types or is it new designs?

Again, Matt, we don't comment on the mix or the specific car types on these future orders.

Got it. And did you guys -- sorry, if I missed it. Did you say, what the value of the order was?

Not at this time. We are not, again, giving that forward number. But we will obviously update the value of the backlog at the end of Q3.

Okay. Fair enough. And then on the $4 million net settlement charge that you guys reported. Can you tell us what types of cars that related to?

Matt, what I would tell you is, it relates to a -- an order and a build of cars that goes back sometime in history. I'll leave it at that.

Okay, got it. And just maybe one last kind of bigger picture question, Jim. Obviously, you've made some progress and it's good to see the positive gross margin in the quarter. If we take a longer term view, three to five years from now, how do you see -- how do you envision the company from a competitive standpoint? Just trying to look beyond this transitory phase with all the efforts that you guys are implementing to regain profitability and look past that and see what the company would look like in three to five years.

Yes, so -- I mean it's important to kind of take stock on where we've been. We've been a company with a variety of railcars and trying to diversify ourselves in any number of directions. And doing so, against the backdrop of a very large operating footprint. And as we go forward, we're sort of flipping that around. We're going to a smaller, tighter, much more efficient footprint. And we're going to a more focused set of product categories that we plan to focus on. And -- so where we see ourselves several years down the road is clearly a much stronger, healthy full competitor in the marketplace and a very good number three out there. The industry deserves and our customers, as we said before, continue to a lot more choice, and we intend to be that alternative choice.

That's helpful, Jim. And then I think we've talked about this on previous calls, maybe a couple of quarters ago. But on the lease fleet, is there any possibility that we can move to a more traditional or conventional lease fleet further down the line? Or you are happy with the current approach?

This is Chris, that's a great question. As you know, the purpose of the revolver that we've put in place was to allow us to position ourselves in a more traditional way in terms of building specifically to lease and holding to a certain extent of time. So, we've expanded that flexibility. That's not -- I think it's safe to say, that's kind of going to be the majority of how we are looking, but we did take our first step towards that. And as time goes on and the balance sheet supports it, we'll probably be more aggressive in that area.

Got it. And just one last quick one, if I may. Back in 2015, I think you guys produced close to 9,000 cars. So, that probably was flirting with your maximum capacity. With how the company is now and all the capacity rationalization that you've done so far, what is your maximum production capacity?

Well, that's a question, Matt, seems like it should have a singular answer, but of course, it doesn't, because it depends on the type of car you are building and the number of changeovers, and so forth. But we've said before when we are done consolidating Shoals and realizing the operational improvement work that is very well underway, of course. We talked in terms of roughly an 8,000 unit a year capacity type of number. We think that's still a funny good number. And as it relates a little more clarity on the significant reduction that we'll be putting in place on the Shoals footprint. The number of lines currently is for production lines, after the consolidation it will stay for production lines. Where we're shrinking the footprint is in an area of the building that is heavily underutilized. And essentially, we're -- as we renegotiated our future rental agreements, we basically consolidate ourselves out of being responsible for what will, what are, and would remain underutilized or fully unutilized pieces of the building.

Great. Thank you very much.

[Operator Instructions] And our next question is from Justin Long. Please go ahead.

Thanks and good morning. So, I wanted to start with the question on SG&A. I know there were a few one-time items in the quarter. So, could you just clarify what you view as kind of the adjusted SG&A number in the second quarter? And then any thoughts about the progression of SG&A going forward?

As I mentioned in my remarks, we had $7.5 million related to the customer settlement that ran through the SG&A line. If you make that adjustment out, that gets you just under $8 million in the SG&A, and that's somewhat in line with what you saw in 2019. So, I think that if you're modeling or you're looking for that $7 million, $8 million as a normalized SG&A at this point in time, it's probably the right way to think about it.

Okay. So, that should be pretty flat sequentially. And then, just to make sure I heard correctly, you said $3.5 million was the impact to gross margin in the quarter?

Yes. I wanted to do -- yes, that's correct. There was a positive $3.5 million and, again, the negative $7.5 million, so you net to $4 million. I do want to also mention, I made a comment that adjusted for all these items, the operating loss, I should have said $5.3 million, I might have transposed the numbers. I just wanted to clarify that as well. But the $3.5 million is the positive impact. So, to adjust the gross margin, you take out $3.5 million.

Got you, okay, that helps to clarify. I think I was -- just wanted to make sure my $5.3 million adjusted number was right. And then on the delivery guidance, so second half of the year, should we be thinking about the kind of quarterly cadence of deliveries being pretty consistent, 3Q and 4Q? Or how should we be thinking about that cadence?

I gave you a lot of guidance on this. But in general, I think it's safe to say that this will be a little bit more weighted to the third quarter at this point than the fourth quarter.

Okay. And then there was another large manufacturer that kind of hinted at the fact that there's been a bit more price competition when it comes to the new railcar market here recently. So, could you just comment kind of more broadly on the pricing trends that you are seeing out there? And where are you seeing pressure of it, more of kind of broad-based pricing pressure? Or if you are seeing certain car types where things are more competitive?

This is Jim, Justin. We'll subscribe to the competitor starts that you alluded to as a very competitive market for pricing. It's a tough pricing environment.

And would you say, it's gotten materially worse over the last quarter or it stayed kind of about the same and it remain competitive?

Yes, I would say, it feels about the same as it has felt. I'm not going to suggest it's gotten worse. But I'm not going to suggest it's improved any either.

Okay. And then last question kind of following up on the order that you received subsequent to quarter end. Can you give some color on the customer and whether or not this is a customer that you've worked with previously that maybe took delivery of some cars from Shoals and was happy with those cars and is ordering more now or this just a new customer to FreightCar for the first time?

Justin, we don't elaborate on that type of thing. And we'll speak consistently about it as part of our third quarter earnings call.

Okay, great. I'll leave it that. I appreciate the time.

Okay. Thank you, Justin.

Our next question is from Matt Brooklier from Buckingham Research. Please go ahead.

Yes, thanks. Good morning. Jim, you talked about software environment being part of another revision down in terms of your expected deliveries for this year. But just curious, if you could just provide maybe a little bit more color in terms of how that transpired those conversations with customers -- transpired during 2Q? And kind of your thoughts on -- initial thoughts on 2020? But just trying to get maybe a little bit of more -- better sense of some of the drivers aside from just the broader weakness in the market that drove delivery guidance down for the year?

Well, Matt, we're -- let me answer another couple of thoughts here. We remain very, very confident that -- as part of our Back to Basics work that we have portfolio work to do, and which parts of the portfolio to address, and how to address it. That portfolio work is, to a very great degree influenced by discussions we have all the time with customers, current, past and future hopefully customers. And so -- and we're very confident in what we're working on and where we're headed. And we now see light at the end of the tunnel in terms of being ready and moving into the launch phases, which is where we all want to get to with new products or redesign products on a better cost structure. And what I'm going to simply say is until we get to the point where we're actually in launch mode with these new products, it's pretty tough to participate in the marketplace, of course. But the customers that are out there that buy certain car types do know what we are working on and many of them know the timing in which we'll be ready. So, that's a positive. And many of the car types that we have and have been in production with that have been important to us, the work that we've done around product development and reprocessing there purely makes us much more competitive in margin standpoint. So, we need all the pieces to come together ultimately. We need good cost structure on the current portfolio. We need the additions to the new portfolio. And then there isn't a builder out there that would invite a little bit of pressure at least in the marketplace.

And then could you talk to -- you did give some color earlier in the call. But -- what's left in the lease fleet from a car composition perspective, I can't remember if you gave that detail? Trying to get a sense of what types of cars are in the lease really currently?

Right. We don't give the details of lease fleet. But as we mentioned in the remarks that the fleet, the 645 cars in the fleet are 100% on lease at this point in time. So, I'll just kind of reiterate that information for you as you're looking out.

Trying to get a sense if utilization did potentially slip, if there is a potential for the need to sell additional cars and therefore maybe take additional losses on those sales?

In general, I mean not specific to lease fleet, but I think it's safe to say we're going to continue to look at underutilized assets. And if it makes sense to be able to take those underutilized assets and turn them into more flexible assets, that's worth a strategy, we would consider doing that. But -- and again, as of right now, we are focused on maintaining our lease fleet until we see a better use for the assets.

Okay. And then just to clarify one thing, that the debt that you took on in the quarter, that debt is backstopped by lease assets?

That's correct. It's actually on the lease facility, the M&T lease facility, which the details will be released today with the earnings on that facility. And it is 100% backed by the lease portfolio and not anything else on the balance sheet.

Okay. And then just my last question. Do you have a targeted leverage ratio for the lease fleet? How should we think about balance sheet leverage into the end of this year?

Well, the lease fleet itself has about 40 -- it's a $40 million revolver as we've disclosed previously. So, when you think about how that gets utilized, there is an evaluation that gets done by the facility in terms of the car and based on their value, you get a percentage of that. But again, that will be disclosed when we release the details. So, that particularly -- there is really no other debt in the company at this point in time.

All right. I guess my question is, is there a possibility that your balance sheet leverage [technical difficulty]

We have the flexibility right now and the availability to do that. That's not part of our plans as of right now.

And at this time, there are no further questions in queue. Please continue.

Thank you, again, for your time today and your continued support. Look forward to continuing to update all of you on our progress. Have a great day. Thank you.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.