Q3 2019 Earnings Call
Welcome to the Freightcar Americas third quarter 2019 earnings conference call Im webcast.
At this time all participant lines are in listen only mode.
For those of you press 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 with conference call will be available from roughly one PM Eastern time today until 159 PM Eastern time on December 1st 2019 <unk>.
To access the replay please dial one 804 756 701, the replay passcode 4733 to five [laughter], 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 call over to Mike seems like a head of the F. DNA and Investor Relations at Freightcar America. Please go ahead.
Thank you and walk joining me today are just by our President and Chief Executive Officer, Chris Apple Chief Financial Officer.
I'd like to remind everyone that.
During this conference call relating to the company's expected future performance future business prospects for future events or plans include forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
Participants are directed Freightcar Americas 2008 gene Form 10-K .
For a description of certain business risks, which maybe outside of the control. The company that may cause actual results may materially differ from those expressed in the forward looking statements.
We expressly disclaim any duty to provide updates to our forward looking statements.
Well, there as result of new information future events or otherwise.
Our 2008 gene Form 10-K and earnings release, <unk> third quarter 2019, our core southern company's website at Www Dot Freightcar America stopped.
With that let me now turn the call over to Jim for a few opening remarks John .
Thank you Mike Good morning, Thank you for joining us today.
Well, we honor 29 chain, we discussed with you our goal.
Substantial amount of our back to basics work needed by the end of this year.
We have largely achieved that goal and this is where I will start our discussion today.
Shoals is running well and we are finally able to claim our ability to realize the potential of this world class facility.
Now in addition to the great physical facility, we have the talent that's processes and they experience a building money thousands of cars under our belt.
With respect to the three key operational drivers that distinguishes plant safety quality and productivity.
Our safety is world class with only a single Osha recordable incident here today.
Our quality is meeting or exceeding industry standards, and we continue to invest in our people processes and plant facilities, such as additional welding a painting robotics.
What the goal of becoming a highest quality producer in the industry.
Productivity also continues to improve and as a direct result of those same investments well I'm, sorry, no and redesigning products and tooling.
We are not all more than halfway through our first order other important and newly Reengineered and retooled car type.
And our productivity or hours of direct labor to produce a unit.
Now on our run rate target approximately 30% lower than we were building this product and 27 chain of 20 aging.
But more important than a numbers as what our customers are saying about the consistency and overall quality workmanship coming off the lines and Shoals and I just spoke very positive at an affirmation of where we stand on the industry as a manufacturer.
Moving to our cost reduction progress.
The Roanoke wind up is on track I'm going very well.
As a reminder, closing Roanoke is expected to say $5 million per year in fixed cost starting as soon as we exit the facility in the first quarter of next year.
This is in addition to the $7 million per year, we will save our no Shoals lease agreement, which begins on January 2022.
Our shoals facility as more than ready to absorb the Roanoke operations and I would like to once again to acknowledge that commitment on work ethic of our Roanoke employees to do what they have always done which is to produce top quality cars, even as they build out the final order.
So to state the economics once more we expect our fixed manufacturing cost will improve by $5 million per year, starting at the end of the first quarter of 2020.
And then we realize another $7 million of cash savings per year, starting with the first quarter of 2020 true.
With respect to material cost reduction.
I have previously stated and updated you on our 29 chain goal to realize 2000 to $3000 those savings per railcar on a run rate basis.
We remain on track to achieve these new savings by year.
Cost reduction and lean manufacturing are becoming a key part of who we now are as a company.
And we will continue to take out significant cost over the foreseeable future.
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Our product portfolio work continues to progress and a line up so with where we know the market will be.
Without going into specific car types and our recent calls we have discussed for product categories skewed our future.
One is now in production the long with the productivity gains mentioned.
That's not that which also has an.
An important first order and we'll enter production at the end of Q1 2020.
And then two more products, which will be ready for mid 2020 production.
When I joined Freightcar America on August 27 chain, we weren't competitive and roughly a third of the North America.
Car market.
And another few quarters, we won't be competitive at approximately two thirds of them on tank car market.
And then what their recently announced JV, Mexico, we will have the ability to fill the remainder of the Scott.
One structural issue, we have not yet addressed is labor cost.
Again, we have made tremendous strides and lowering our material and fixed cost and we've also made tremendous strides that improving our labor productivity.
Managing labor rates. However, it is also imperative to compete in this industry and certain car types are simply infeasible to produce profitably from the U.S.
This is the motivation behind our recently announced joint venture.
As most of you May know, we announced the formation of a joint venture with Fosamax on September 10 manufacturer railcars and Costano Mexico.
Over the course of more than a year, we were able to find the right partner and that work together to create the write business structure.
This partnership gives us access to extremely skilled railcar workers in a variety of car types starving on day one.
It also gives us onyx and existing fabrication source fosamax approve them supplier to the industry [noise].
And finally, the partnership provides us with the right person to set up this new operation the same person a healthy industries two largest competitors established.
Establish and then lead their operations on the region.
Having a footprint in Mexico has always been I planned and critical component of our back to basic strategy.
We.
We knew it would be very difficult to compete and certain car types without a footprint in Mexico.
Our biggest competitors are already there.
For the same reasons that it's critical that we also bring some of our future operations to Mexico.
The manufacturing facility is under construction and we expect to start a slow ramp up both production and mid 20 Twond.
One complete the JV will consist of two production lines with about 2000 units per year of total capacity.
This is the final stuff for us to become profitable and car types that we otherwise wouldn't be if these were produced in the U.S.
In terms of the basic structure and capital outlay for the partnership.
Current fasten Maxwell share profits and losses of the JV 50 50.
We are committing $25 million to the JV through a combination of assets and a cash loan.
We anticipate providing between five and $7 million in the fourth quarter, which will be used to fund the initial working capital and asset needs.
As a manufacturer we are thrilled by the prospects of having the newest purpose built railcar factories and both the U.S. and Mexico.
The culmination of this work covers almost everything we have been targeting them back to basics.
28 chain, we put the plan at motion by taking full control of our Shoals facility investing in our workforce.
Moving more than $3000 of cost per railcar.
In 29 chain, we laid out the final phase, which will soon come to completion.
So the next logical question becomes where are the results.
It is well known by those who follow our industry that we are currently at our business downturn.
So much of the past year, most car types, except for tanks and plastic pallets had been down and many car types down significantly.
Asked is specifics the decline in loadings for U.S. railroads, why them to 5.6% year over year under third quarter and continues to widen this quarter.
Total rail cars in storage has increased and I love them over the last 12 months and railcar lease rates continue to trend downwards.
As of quarter and over 350000 cars or approximately 22% of the total fleet aren't storage.
Part of the rail supply Institute versus Q3 last year.
Q3, 2019 industry orders are down 71%.
Q3, 20 night chain industry backlog is down 21%.
On a year to date basis orders are down 54%.
The reason the reasons talked about for the slow down include the impact of spring and fall weather on the grain market.
Tariffs on intermodal traffic.
General concerns regarding the future strength of the economy.
And precision unscheduled railroading.
Regardless of the reasons, we all know this there'll be a cyclical and an essential needs business. Therefore, it will come back.
At Freightcar America over the last 24 months, our backlog has been heavily impacted by a combination of our incomplete product offering.
Our cost structure, which led us to not pursue certain business, which is especially true this year.
And that's off market just described.
Oh order backlog as of September Thirtyth 20 night chain consisted of 1700 on for railcars with an estimated total sales value of approximately $188 million.
While our backlog is up compared to the 11 other than 21 railcars at the end of the second quarter. It has significantly fall out over the last few cares.
Our back to basics work, including the Mexico flood product that will come on line next year addresses all but three weakness.
Must finish the job and be fully ready to take advantage of the next upcycle.
And please know that we will take the steps necessary to ensure sufficient liquidity as we wait out this difficult market and that we have a number of options to consider should this downturn persist as Chris will speak to shortly.
Looking ahead to the remainder of 29 Jane.
Our full year delivery guidance remains at 2200, 2500 railcars and consists entirely of salt production slots.
On one final note. We are pleased to formally welcome Matt talked to our chain as Chief commercial officer, Matt as an extremely accomplish sales on business development executive with more than 25 years of experience and the railcar industry.
He spent the last 11 years and senior sales marketing and business development roles at <unk> at Web Chuck.
This is not only a testament to our ability to attract tier one talent, but also how proven industry leaders see the potential of freight car and want to be part of our future success.
But that said Chris can you please walk us through the financial results for the third quarter.
Thanks, Jim before we discuss the financial performance wanted to review and accounting related matter in the quarter.
In line with normal gap practices. The company completed its annual goodwill impairment testing during the quarter.
Due to our most recent financial results and the current condition of the new freight car market. The company recorded a non cash goodwill impairment charge of 21.5 million in the quarter.
This represents the entire amount of goodwill on the company's balance sheet.
Sure I had this charge has no impact on liquidity or our cash position.
Furthermore, the charge will not impact our ability to generate cash flow or influence ongoing operations.
Turning to the financial results consolidated revenues for the third quarter 2019 totaled 40.7 million compared to 79 million in the third quarter of last year did the factors already discussed by chance.
Based on the 47% decline it'll libraries from the third quarter of last year, our gross margin fell through and I get a 5.4 million compared to a negative 3.8 million in the third quarter of last year.
Despite our volume decline and the corresponding loss and the corresponding lots of operating leverage the company benefited for their progress if it's material cost reduction efforts.
As a reminder, Renault facility will and production in the fourth quarter and we expect all costs associated with this facility to cease during Q1 of 2020 in terms of 2019 targeted cost savings.
Approximately 1200 of new cost reduction for railcar achieved during this year was recognized in the piano for the quarter.
That's your name for the quarter totaled 7.8 million.
Up from the for the 5.4 million in the third quarter of 2018, the increase in has today as compared to the prior was primarily related to the timing in certain a compensation expenses year over year and project based legal expense as compared to the prior year.
This increase is not a trend and we expect SGN, a cost to be down sequentially and year or year over year in coming quarters.
Also note the company will terminate the post retirement medical benefit it provided for certain employees effective January one 2020. This policy change will generate approximately a 6.3 million dollar gain that in the fourth quarter. In addition to ongoing cash savings of approximately 400000.
Per year going forward.
Consolidated operating loss for the third quarter of 2019 was 36 point threemillion largely attributed to the or the aforementioned goodwill impairment.
Excluding that impairment and the 1.5 knowing of restructuring charges related to round out our operating loss was 13.2 million as compared to a loss of 8.7 million in the third quarter of 2018.
Moving to the balance sheet.
Finished the quarter with cash cash equivalents of approximately 60 million a decline from the 71 million of the prior quarter.
As we go forward, we have multiple liquidity options available to us and feel confident about our current position.
As such Freightcar had no additional borrowings or asset sales of any type during the quarter.
The company made maintains an asset backed lending facility. In addition to a separate facility secured by its police car portfolio as I mentioned not I put our prior call. We continue to focus on identifying less productive assets of the balance sheet that we can turn into productive flexible assets in the future.
While we did not take any action in this regard within the quarter. The company has the ability to reallocate its balance sheet towards additional liquidity in the coming quarters. If necessary. Examples include but are not limited to the utilization of current borrowing facilities additional monetization of our lease fleet.
And all other assets the dish and additional debt funding opportunities.
Furthermore.
Outside of our expected the initial cash loan of between five and 7 million to the JV, we will make that we'll make it a fourth quarter. The company's previously announced JV investments are not dates specific it can be managed in line with building on the order book for the products produced at that location.
The company's only debt remains a $10 million at lease fleet laws.
Sure directly by a portion of our lease portfolio.
As a reminder, this facility is secured directly against lease assets and no other part of our balance sheet.
As such it separate from our ABL facility.
The company also maintains additional liquidity and this lease fleet on top of alone.
Finally capital expenditures for the third quarter totaled $1.2 million.
For 2019, we continue to anticipate Capex figure for the year, excluding the JV to be roughly $5 million.
These expenditures will go towards advancing the design of our new products, bringing those products online.
And enhancing our shoals facility with a number of improvements to support those efforts.
In summary, the company remains in a stable cash position with multiple opportunities for additional balance sheet liquidity.
This positions us to effectively manage the so called reduction we're currently experiencing an industry demand.
The work that has been clay completed on both the fixed cost base.
And the portfolio expansion position us to be any caught the cash positive position when industry volumes improved and we launched our enhanced product offerings at a competitive cost base.
With that I'd like to conclude our prepared remarks, and turn the call over to the operator for Q1 day.
Ladies and gentlemen, if he would like to ask a question press star one at this time.
Once again for any questions Press star one.
Well wait just a moment for questions the key lab.
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Right and we will begin with Atlanta, Matt Brooklier with Buckingham Research. Please go ahead.
We talk about you know.
The you know the cost savings the cadence that you talked a little bit about it early in the call, but that's kind of.
Fair amount of moving parts at this point in time, maybe talk about the cadence of cost savings moving forward into fourth quarter and then you know maybe if you could just kind of summarize the you know the total potential cost savings in 2020, where do you think that potentially you know shakes out.
Sure I'm I'm, a I've talked to a couple of things specifically that Jim mentioned in his section this is Chris.
First the Roanoke cost savings that we've talked about of approximately 5 million.
That's a fully embedded into the piano Oh within the first quarter of 2020. So if you look out next generation start seeing parts of that in Q1, and then going forward.
The lease cash the cash impact of at least reduction is Ah starts at the end of 21 effectively the beginning of 2022.
The 7 million, we discussed the ongoing a material cost reductions obviously get done sequentially over time in line with how we've announced so again part of that was in the number you saw that despite the significant client sales you saw a small.
Our decline in gross margin. So you are seeing some of that now you'll see more in the future and then addition, you'll start seeing sequential SGN a improvement.
Effectively in the next quarter, becoming greater as we go off into next year.
Jim It's like add anything no I think that covers.
What the total potential annual SGN, a savings of those could be what and wanting.
Oh, we're not giving guidance on that right now but.
We will a little bit I'll talk more about our guidance and our next call.
And then when we look at the backlog you know where it stands now we take into consideration you know.
Back to deliveries in fourth quarter.
I think something like 1200, roughly 1200 units I'm, assuming there's kind of minimal order activity, because obviously, what's happening in the industry, but could you just talk to the backlog and you know how much of what you have in the backlog right now is anticipated to deliver and into.
Thousand 20.
It.
Right now were again, we're not giving 2020 guidance about how much of the backlog specifically for that amount obviously based on our guidance that we haven't given for the rest of the year. You can anticipate Q4 to be re unit perspective to be roughly in line with Q3 and again, we'll continue it will give additional guidance.
On that and our next call as we give guidance on 2020.
Yeah, and this is Jim I think well just also and as we've I think we doesn't the last call. The majority of the backlog is scheduled for 2020, but we'll leave it at that.
Fair enough and then what you know as you look at your backlog maybe talk about card types. No. We recently saw there was.
Pretty sizeable cancellation for small cube covered hoppers down for the Frac sand market you Havent seen those cars in your backlog as of today and then maybe just talk to the the types of cars other types of cars.
And then backlog currently Matt This is Jim I'll answer or Ah both ways, we don't have any sand cars in our backlog, but other than that we don't give specific guidance or on the nature of the mix or car types.
All Oh pass along thank you for the time thanks, Matt.
Our next we will go the line I'm just been long with Stephens. Please go ahead.
Thanks, and good morning.
So I wanted to circle back to the JV in Mexico, I think you mentioned they'll be capacity for about 2000 units, but is there any color you can provide on the car type the you'll be able to build in Mexico and at what point will you start to be able to take order.
Others for that Mexican facility, if not already.
Oh, Hi, Justin this is Jim well, let me.
Let's give a little clarification on the joint venture.
We will bring online one production line next year.
With a plan to settle allowed it to production lines total.
So that sort of the gives you a visual on the if you will automate the size of it.
As the sort of fits with the overall business.
Our primary manufacturing platform is and remains Shoals, Alabama, we've invested a lot and that we're going to continue to invest on that.
Our Roanoke facility as you know, which isn't winding down now all of that product in fact transfers so [noise].
What we will be doing specific with the footprint and Mexico, why that's ready and 2020.
Is Ah open up the ability for us to compete in car types or currently not active than today.
Just because of the nature of the economics of those particular car types, but I'd, rather not get into the specifics of what we will build where and when although them to perhaps reiterate what was stated on a prior call, which is intermodal well cars, which are.
An important part of the industry and an important part of our future that's product or that is and will be built in shoals ER and we've also talked about making significant investments additional investments in our painting facilities and so part of a plastic pellet production.
And that's also a dedicated product to our shoals facility, but I won't go any further than that at this time.
Okay. That's helpful and obviously there have been a lot of strategic improvements in announcement date you've made.
Here over the last couple of years or so, but do you have any thoughts around the timing of when the business can return to 10 breakeven and you know you mentioned a weaker railcar demand environment. It do we need to see an up cycle or a material improvement in the demand environment to get to break.
He then or do you think what some of that but print rationalization and cost improvements. We've seen that you can get to break even even in todays demand environment.
Oh this is Chris so its a good questions. If you would expect we continue to be focus on lowering effectively our breakeven point as a company and a lot of the the foot price reductions and cost reductions.
And efficiencies that we've been putting in place allows us a to get there now when you look at the portfolio expansion that effectively allows us to gets more cars and that down market. So it's hard to say if it's really the the way that's kinda highlights we think about it as we're producing or creating a cost.
Fluctuate infrastructure that will get us to profitable at a at a unit volume consistent to where are we seeing in the prior few years, obviously for US. It's a it's ahead of where we are today, but we do not view you know this this lowering the break even point is up.
Next time period thing, we'll continue to make adjustments to the company in line with what we see from an order basis, but the I mean long story short I think the idea is that the company's breakeven point is much lower than it had been several years ago, and we'll continue to lower it.
Makes sense and lastly, just thinking about the railcar demand environment today [laughter] do you have an expectation on how just industry railcar orders progress over the next several quarters is your assumption that we tend to stay around that the threeq you level.
All are we getting better or worse, how are you thinking about that.
Justin This is Jim Yeah, we.
We are students just like you have.
Rail industry data that's put out regularly.
That's what we read that's what we forecast and that's what we plan our business off Oh.
So.
I know you're familiar with all of that data and that's what we even saw so.
Okay got it thanks for the time.
Thank you Justin.
And my last question comes from Atlanta, Matt Alcott with Cowen. Please go ahead.
Good morning, Thank you to stay on the order front I think you got a 1050 not orders in the quarter.
Which is basically a number you had mentioned on July 31st that you've got in July So thought in the last three months you got you didn't get any orders or did you get some orders by had some cancellations.
Matt This is Jim I'm. Good morning, Yeah. The order intake for the quarter was ER was.
Taken at a across a couple of different orders and it was in the first part or the quarter and time that let us or make mention of it as you noted on the last call we've not taken additional orders since that call.
We remain do it active with our sales funnel and.
You know, it's a it's obviously not as healthy as anybody would like it to be in the industry right now.
But there is activity out there and.
We're doing what we always do which is.
I'll work the final at work deals.
Got it and I guess, they only the only other thing I'd add to that is as we have you know we've talked about what the retooling in bringing online. The additional car types. We have a lot more of this we have a lot more types of discussions that we can have today than we did pass.
Quarters.
Very helpful. Thanks, Jim and for Chris I want to make sure I heard this correctly the F G and H expense in the fourth quarter should be below three Q and below.
For Q last year's bus here.
Yeah. It should be allowed the below three three Q, obviously there are other.
Structural things that they could have done they could have an impact on that but as far as far as what I would call. The structural SGN a it should be a it should be again come definitely coming down over this quarter and then looking favorable as it is as compared to prior year.
Okay, and I missed the first time, Minnesota called <unk>, sorry, if I missed this but.
Did you say anything about when you would expect your gross margin to.
The positive again.
We've not given time guidance on that at this point.
Okay.
And then on the the backlog a b a went up significantly in the third quarter or is that more a function of the orders you received or more of the deliveries you made in the third quarter.
[noise] Laura.
Obviously mathematically this is John minutes, a combination of both but I'm going to say bias towards orders received.
Okay.
Aren't perfect. Thank you very much stolen.
Thank you Matt.
And there are no further questions.
Thank you again for your time today and your continued support I look forward to continuing to update you.
On our future calls have a good day.
Ladies and gentlemen that does conclude your call for today. Thank you for your participation you may now disconnect.
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