Earnings Labs

FreightCar America, Inc. (RAIL)

Q4 2019 Earnings Call· Thu, Feb 27, 2020

$8.13

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Transcript

Operator

Operator

Welcome to the FreightCar America's Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. An audio replay of the conference will be available from roughly 2:00 p.m. Eastern today until 11:59 Eastern Time on February 27, 2020. To access the replay, please dial (866) 207-1041. The replay access code is 8502743. 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 Josh Littman, Investor Relations.

Josh Littman

Analyst

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 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 fourth quarter of 2019 are posted on the company's website at www.freightcaramerica.com. And with that, let me now turn the call over to Jim for a few opening remarks.

James Meyer

Analyst · Cowen and Company

Thank you, Josh. Good morning and thank you for joining us today. I'm going to speak on our recent performance, where we are headed in general and our approach towards navigating our way through what will undoubtedly be a challenging 2020. We will then hear from our new Chief Commercial Officer, Matt Tonn; and finally, from Chris, who will provide detail on the fourth quarter numbers and delivery outlook for 2020. We've spent the last 2 years executing our Back to Basics strategy, our plan to transform FreightCar America into a world-class manufacturer that offers all the right car types and on a fully competitive cost structure. Back to Basics has been all about getting our business fundamentals where they need to be in order to allow ourselves to start to grow again and to be profitable even in a future downturn. We made more progress in 2019. And over the last 2 years, we have completed the majority of the work needed to realize these goals. Before we can declare Back to Basics complete, however, we need to finalize a few outstanding product development efforts and complete the build-out of our new operations in Mexico. We expect these remaining steps to be completed within the next few quarters. As a reminder of our Back to Basics efforts and progression, we first started by setting a manufacturing foundation for how our Shoals facility operates on a daily basis, derived from leading practices inside and outside the rail industry. The first phase of this work has been done for some time now, and Shoals is delivering substantially improved performance in safety, quality, productivity and cost. As we have reported for a number of quarters now, we are operating at world-class levels for safety, a critical leading indicator for any manufacturing site.…

Matthew Tonn

Analyst · Justin Long with Stephens Associates

Thanks, Jim. I'm really excited to be part of this team and at such a pivotal point. I thought I would take a moment and share why I thought now was the right time to choose FreightCar. I have over 30 years of experience, most of that in rail, and most of that involved working in challenged markets and as part of turnarounds. I understand how to navigate difficult markets from a commercial perspective and produce real results. As a former supplier, I held a multi-decade working relationship with FreightCar and many of its employees. Obviously, FreightCar has a long-term historical reputation as a premier railcar builder. Looking back 3 to 4 years ago, it would have been a tough decision for me to join this organization as the company's competitive position was growing weaker. Given my position in the supply chain, I've been able to keep a keen eye on what Jim and his team have been doing. I saw firsthand the tough decisions that were being made, the reset in the culture and the way things were changing down to the smallest task. It is important to me that FreightCar focuses on being the highest quality producer, and that helped me make my decision a lot easier. I'm also truly excited about what this organization can do with what will be the 2 newest state-of-the-art manufacturing facilities in the U.S. and in Mexico. It is clear to me that this is not the old FreightCar, and the changes Jim and his team have made are why I want to be part of the future. I have been through market cycles before, and I am completely optimistic in the rail market recovery and FreightCar's value proposition as a pure-play manufacturer. Since the start of my role, I've had the…

Christopher Eppel

Analyst · Justin Long with Stephens Associates

Thanks, Matt. As a reminder, the company will file its annual Form 10-K with the Securities and Exchange Commission next week on March 4. Turning to our financial results. Consolidated revenues for the fourth quarter 2019 totaled $44.9 million compared to $87.8 million in the fourth quarter last year. This is due to our lower deliveries in the quarter that Matt alluded to. Our gross margin fell to a negative $8.1 million compared to a negative $4 million in the fourth quarter of last year. Our current quarter's gross margin does include material cost savings of approximately $2,000 per car. However, this quarter's results were largely influenced by our operating -- our loss of operating leverage associated with the lower deliveries and costs associated with winding down our Roanoke facility. As a reminder, all carrying costs associated with Roanoke will be out of our run rate by the end of the first quarter of 2020. SG&A for the quarter totaled $7.5 million, up from $7.2 million in the fourth quarter of 2018. The year-over-year increase was driven by incentive compensation expenses, which were partially offset by certain cost reductions that were enacted. Over the past year, the company has undergone a precise effort to review its ongoing needs and corresponding investments in SG&A. FreightCar is a different company going forward versus where it was several years ago. As such, we reviewed every aspect of our cost base and how it fits into our go-forward strategies. This list includes, but is not limited to, our org structure, our benefits, professional services, compensation programs and corporate and staffing levels. We've made adjustments to each and all of these areas moving forward and into 2020. And as such, we'll have a lower SG&A run rate going forward. While we do not give specific…

James Meyer

Analyst · Cowen and Company

Thanks, Chris. As we look ahead to 2020, our goals will be familiar themes to you. In Mexico, we are now in the equipment installation phase inside the factory, and this will take us through June. Our goal is to produce our first car there in the third quarter time frame and be in production by year-end, are on track. In Shoals, we will complete the installation of a new car aligning facility, continue to invest in automation as part of our quality and efficiency initiatives, and implement what we believe will be a best-in-industry quality system inside the factory. Third, we will finish all our planned product development work. And fourth, we will take all actions necessary to ensure that we maintain a strong balance sheet and, more specifically, a strong cash position such that under even a prolonged industry downturn, we can finish the work set forth and give Matt and his team the time needed to rebuild our backlog to healthy levels. With that, I would like to conclude our prepared remarks and turn the call over to the operator for Q&A.

Operator

Operator

[Operator Instructions] We have a question coming from Matt Elkott from Cowen and Company.

Matthew Elkott

Analyst · Cowen and Company

Congratulations on the progress you guys made in the quarter. Jim, when you talk about profitability in the next upturn or upcycle, is there a specific production number that you guys have that would get you to profitability? And by profitability, did you mean -- I mean does it mean net profitability? Or does it mean EBITDA profitability? Any more color on that would be helpful.

James Meyer

Analyst · Cowen and Company

Yes, Matt, our goal as a company and where our Back to Basics work was designed to take us is to be bottom line profitable even in industry downturn condition. As we've seen for a number of years, to be profitable in the good times and then essentially give it back in the bad times isn't the right place to be. And that's certainly not -- our goal is, again, to be bottom line profitable all the time. With what -- in terms of a number, I'm not going to give you a breakeven volume or something like that. But I think what's important to keep in mind is we have fundamentally improved our cost structure on every single front, be it product cost, be it fixed cost, be it SG&A cost. And these aren't small improvements, they're significant. They're very large improvements. And I'll stop it there. And -- but again, thanks for the question. And we see ourselves getting to a position again where we're profitable under all likely anticipated business conditions.

Operator

Operator

And our next question comes from the line of Justin Long with Stephens Associates.

Justin Long

Analyst · Justin Long with Stephens Associates

So I know in the fourth quarter, there were some management incentives that looked like they were updated, as it pertains to raising capital and potentially selling an ownership stake in the business. So I was wondering if you could talk about the catalyst for some of those changes. And how you're thinking about addressing those items this year and just kind of the bigger picture strategy on that front?

James Meyer

Analyst · Justin Long with Stephens Associates

Justin, this is Jim again. First of all, our Board of Directors, more specifically our Compensation Committee, undertook the exercise and recommended that certain retention mechanisms be put in place for key management. It's pretty normal course for a business going through a turnaround situation, and our Board agreed with that and took the actions that it did. I will tell you, secondly, the senior management team, all of us, are absolutely committed and excited to see this through. We've worked too hard to get to this point, and we want to be here now to enjoy the fruits of the work. Having said that, the rest of your question around raising capital and so forth, again, I think I would leave it that. We, like all businesses going through a turnaround, and not just a turnaround, but a turnaround in a very challenging market condition, it's important that we plan, strategize, war-game, whatever you want to call it, for all types of business scenarios, including a prolonged industry downturn. And we just want to know that whatever we do, we're in -- we're well positioned to see it through and realize the fruits of all the work that's been accomplished today.

Justin Long

Analyst · Justin Long with Stephens Associates

Okay. That's helpful. And then circling back on some of the cost items. I just wanted to get your thoughts around kind of expectations for costs in 2020. You mentioned that the fixed costs associated with Roanoke, coming down $5 million after the first quarter. Anything else on the operating side or the cost side with additional material savings that you would call out that we should be contemplating in our models?

James Meyer

Analyst · Justin Long with Stephens Associates

Yes, Justin. Let me put it this way for right now. We were -- 2 years ago when we started our focused work on material cost reduction, we put a target out there. I think it was originally about $2,500. We beat that. We did something similar again in 2019. We have internal targets again this year, which the team is working for. We haven't put those out just yet because there's enough softness in the market. There's enough uncertainty in the backlog that we will build that we just didn't think it was appropriate to do it just yet. But rest assure that, as we said on prior calls, our focus on material cost reduction, it's now part of our DNA, if you will. There's more to get. There's -- and also, our focus on productivity improvements, there's plenty more to get. So it's going to continue to be significant. And then we've already spoken, as you mentioned, on fixed cost reduction, we've made a few highlighting comments on SG&A reductions. So we're going to continue to get tighter and tighter and run the tightest ship we can here.

Justin Long

Analyst · Justin Long with Stephens Associates

Okay. And just in terms of the demand environment right now, based on the inquiries that you're seeing in the market, what's your assumption for industry railcar orders in 2020 relative to what we've seen in the past couple of quarters? I'm just curious if you're expecting kind of more of the same or any change.

James Meyer

Analyst · Justin Long with Stephens Associates

I'll let Matt address that.

Matthew Tonn

Analyst · Justin Long with Stephens Associates

Yes. We see order volume being down year-over-year, and I think that's going to continue based on the level of inquiries and just the general atmosphere of the market right now. Looking long-term and getting back to a more normalized orders and deliveries, we see an upturn starting mid-'21, with things getting back to a normal level in the '22, early '23 time frame.

Justin Long

Analyst · Justin Long with Stephens Associates

But just to be clear on the first part of that, have you seen a slowdown in activity from the fourth quarter to the first quarter?

Matthew Tonn

Analyst · Justin Long with Stephens Associates

In terms of inquiries?

Justin Long

Analyst · Justin Long with Stephens Associates

Correct.

James Meyer

Analyst · Justin Long with Stephens Associates

No, we have not.

Justin Long

Analyst · Justin Long with Stephens Associates

Okay. So is it pretty similar?

James Meyer

Analyst · Justin Long with Stephens Associates

Inquiries about -- inquiries have been relatively steady, but they're at a lower rate, historically.

Justin Long

Analyst · Justin Long with Stephens Associates

Okay. And then last question for me was on the cash balance. You gave the guidance on CapEx. We have the delivery guidance and a few kind of cost items. When you put it all together, do you have an initial expectation on where we're going to end the year from a balance sheet perspective as it relates to cash?

Christopher Eppel

Analyst · Justin Long with Stephens Associates

Justin, this is Chris. Right now, we're not giving out an ending cash balance situation based on what we talked about with some timing issues and how the spend in Mexico may go. As we mentioned, we are going to be very precise in how we invest into Mexico in line with orders. So there's a couple of different scenarios we've modeled out. But in general, again, that cash number we talked about and the units are in the base. And then some of these other opportunities will either be triggered or not triggered based on other situations. So we're not, today, going to give you an exact cash number. But just as Jim mentioned, rest assured, we're going to be focused on maintaining ample liquidity to get us to the next few years.

James Meyer

Analyst · Justin Long with Stephens Associates

Yes, Justin, this is Jim. I think part of the X factor here is, well, as we said, we have to do both. We have to finish Back to Basics, including the Mexico build-out, and we have to maintain a strong cash balance. That's -- those are givens. As to how we will manage that as we go through the year, part of it, really the X factor is what we see happening in the marketplace. If we see the current industry funk continuing or if we do start to see a meaningful increase in activity out there, would probably have some influence on how we balance the completion and the cash balance. But -- so as Chris said, we're not going to give a number now. There's lots of variables that'll influence our thinking.

Operator

Operator

And our next question comes from the line of Matt Elkott with Cowen.

Matthew Elkott

Analyst · Matt Elkott with Cowen

Sorry if I missed it, but did you guys say how many of your -- how much of your current backlog is for delivery this year?

Matthew Tonn

Analyst · Matt Elkott with Cowen

No, we didn't.

Christopher Eppel

Analyst · Matt Elkott with Cowen

No. We didn't give that specific number. We typically don't give that number out. But like I mentioned, our range for deliveries this year is 2,000 to 2,500.

Matthew Elkott

Analyst · Matt Elkott with Cowen

Okay. So what's the manufacturing lead time now? Because even if you're -- all of your deliveries happen or all of your backlog is delivered this year, then you would still need, based on this range, I guess, 350 to 850 orders, which is not a huge number. But I guess a lot of it would have to come in the first half. Just trying to get a sense of what the lead -- manufacturing lead times are right now.

James Meyer

Analyst · Matt Elkott with Cowen

Yes, Matt, this is Jim. We've got plenty of time, at this point, to fill out the orders for the balance of the year, which is why we've given the range we've given. General lead times for the industry, not to speak specific to us but for the industry, from the time order received to when production can start typically is in a range of 10 to 15 weeks or so. And that's on average, and there's lots of caveats with that. For instance, if -- are we -- are these "tack-on orders," where you've got the line up and running and there's incremental orders placed against it, so there are lots of caveats. But as we -- we're pretty comfortable with the guidance at this point and have frankly a fair bit of time.

Matthew Elkott

Analyst · Matt Elkott with Cowen

And then I think if I look back at the last several years at the height of the upcycle or the last upcycle we had in -- the last major upcycle we had in 2015, you guys delivered almost 9,000 cars. Now with the new manufacturing lines and the reinvented manufacturing infrastructure, is there like a maximum production output number that you can share with us, Jim?

James Meyer

Analyst · Matt Elkott with Cowen

I'll have to give you a kind of a broad brush here and not the precision you're probably looking for because keep in mind, again, car models differ pretty tremendously in terms of build hours and the rate at which they flow through factories. It depends on whether you're interrupting the lines to execute changeovers, et cetera, et cetera. But as I commented in the earlier part of my -- of our prepared comments, the Shoals factory is eminently capable of putting out 4,000 to 6,000 units per year, depending on what that mix and number of changeovers and so forth looks like. And I don't -- we've commented about it in prior calls, but not this one. When we get Mexico up and running, our goal is to have 1 production line up and running this year with the second one next year. And obviously, that's good for incremental volume on top of the 4,000 to 6,000. So whether we're going to be in a position to do 9,000 units, again, I'm not sure. I'm not sure I want to be. The best way to run our business is to be at full capacity most of the time, not just once every decade or 2.

Matthew Elkott

Analyst · Matt Elkott with Cowen

Yes. That makes sense. And then just one final question. Your forecast for deliveries and your internal maybe forecast for orders, what kind of assumptions are you guys making for rail traffic and -- mainly rail traffic, I guess, or the -- and the macro, as a whole, for the year?

Matthew Tonn

Analyst · Matt Elkott with Cowen

I think if you look at the trend, the rail traffic numbers have been flat to slightly down. I don't think that we think that the industry is going to see significant improvement in rail traffic over the course of this -- next year in any segment.

Operator

Operator

And there are no more questions in queue. So I would like to turn the call back over to Jim for a few closing remarks.

James Meyer

Analyst · Cowen and Company

Thank you again for your time today and your continued support. I look forward to continuing to update you on our progress. So have a great day. Thank you.

Operator

Operator

And that does conclude our conference for today. You may now disconnect.