Q2 2020 FreightCar America Inc Earnings Call

Come to bear Freightcar Americas second quarter, 2020, <unk> earnings conference call and webcast.

This time all participant lines are in listen only mode. Because those you participating on the conference call Dolby opportunity for your questions at the end of today's prepared comments.

Please note. This conference call is being recorded an audio replay of the conference call will be available on the company's website within a few hours. After this call.

I would like now, let's turn the call over to Joe Kennedy with Investor Relations.

Thank you and welcome joining me today.

President and Chief Executive Officer, Chris <unk>, Chief Financial Officer.

Chief commercial officer.

I'd like to remind everyone.

During this conference call relating to the company's expected future.

Future business prospects future plans may include forward looking statements.

Under the private Securities Litigation Reform Act like you guys.

Participants are directed at your Freightcar Americas 2019 form 10-K.

Second quarter 2020 form 10-Q, four description of certain business risks somewhat which maybe outside of the control the company that may cause actual results to materially differ.

Suppressed in the forward looking statements.

We expressly disclaims any duty.

Forward looking statements, whether as a result, new information future events or otherwise.

2019 form 10-K and earnings release for the second quarter 2020, <unk> on the company's website at Freightcar America Dotcom.

With that let me now turn the call over to Jim you opening remarks.

Thank you Joe Good morning, and thank you all for joining us today.

As they did last quarter I think it's important to start by recognizing and thinking all of our team members across the company.

For their continued dedication to health safety and serving our customer needs. During these unprecedented times.

We entered the year in a cyclical downturn in our industry.

And I Cobot 19 situation has further intensifies the severity of those market conditions.

But as always our people have risen until the challenge and continue to prioritize health and safety, while also working to fulfill the needs of our customers.

So a big thank you to all our employees.

When we last spoke I shared some of the many new protocols, we put in place our souls complex that are designed to help protect our employees from cobot 19.

Since then we have continuously reviewed and enhance these protocols and believe that we're doing everything possible to keep everyone healthy.

As part of this we shut down for two weeks due to the virus.

The last week or the first quarter and the first week of the second quarter.

We did this out of an abundance of caution and desire to prevent spread as soon as the first cases became known to us.

Since then and thanks to the protocols that our employees strict adherence to them.

We have not had additional lost days.

We did however, like so many other companies experience a much higher than normal level of absenteeism due to call that and that's how to drag on our production ramp up in the second quarter.

As a result.

Our delivery of 100 cars in the second quarter was below our expectations.

However, even at Smith, and the second quarter will be delivered in Q3.

And our July production was consistent with our outlook.

Well the pandemic on resulting staying in place orders across the country unpack the commercial activity across the industry.

And near term uncertainty remains a key question.

We have seen more encouraging signs that our commercial inquiry since early buy.

Well talk in more depth about that in a few minutes.

And although offering specific guidance starting the pandemic has obvious challenges our current production levels and clearer view of our commercial position I provided us with enough visibility.

<unk> second half deliveries and the range between 750000 railcars.

We also have 1839 railcars in our backlog as of June Thirtyth.

And I've not lost an order through the pandemic.

We've been on a two year plus.

Mission to improve our cost structure.

Productivity had a little more recently our footprint.

Our back to basics principles had been very important and allowing us to navigate.

Hey, cyclical downturn in our industry, what are absolutely critical and providing us the cushion we need to navigate this pandemic.

We've made significant strides I'm, making our business more competitive.

At our financial results are nowhere near where they need to be pandemic or no pandemic.

We know we need to do more.

Cost and productivity, our cornerstones of our culture now.

But we need to keep making progress across the board.

As part of this I'm excited to share with you today that Weve officially started production at our joint venture facility interest styles Mexico.

This is an important step forward as we are now producing and the newest purpose built railcar facility in Mexico.

Alongside the newest and purpose built facility in the U.S., our muscle Shoals plant.

As I've talked about in the past Wow, the build out of and other new facility in Mexico is being done at a challenging time in our industry.

We have to take this stuff if we are going to compete grow and make money during all future business conditions.

But Mexico labor rate is approximately 20% of that in the U.S. and.

And the new plan provides other sources those savings beyond just labor.

Now we can't compete more effectively across all car types and generate inherently higher margins and those produced and 'cause styles.

Our competitors I've been in the region for a long time now we must do the same.

As a reminder of the nature of the JV and particulars of the new plant.

It is a 50 50, JV and Whats Freightcar America has management control.

With a great partner SASSA, Max which has deep operating room send railcar production and new plant startups.

The plant is scalable in a sense, we that we have built to production lines with capacity of approximately 1000 cars per annum each.

And the ability to add additional lines in the future if so desired.

The paint shop was sized to accommodate substantially more volume than currently contemplated.

In terms of the start up we are just beginning to Ron components through the beginning of the process and looked to have a first car complete by early September.

The order as far as strategically important customer that was already in our backlog and we're working hard to ensure a wall executed ramp up.

The team is simultaneously preparing for the certification process in the fall.

And given the fact that the new plant. This in the heart of Mexico's rail Mexico's railcar manufacturing industry.

Combined with the current softness in the market.

We've been able to hire extremely experienced workers to date.

In terms of capital considerations, what the Mexico JV.

We had about $7 million and Capex should our financials during the first six months of a year.

And I anticipate the remaining capital expenditures during 2020 to be in the range of $2 million to $4 million.

This is a very prudent spend as we continue to invest in our future.

So more to calm, but we're extremely excited about the transfer might transformational work, we've done to improve our footprint and reposition the business.

And I'll close my opening comments I got on what like knowledge about to our team at the Shoals factory, who continue to do great work out a difficult time.

With that I'll pass the call them out to talk about the market and our commercial activity.

Thanks, Jim.

Our industry remains in a cyclical downturn and we don't expect demands to snap back quickly as railcars and storage remain near record levels. However, as we monitor key demand indicators. The last several weeks have seen a flattening in the decline of North American rail volumes overall.

We do believe we are at an inflection point and near the bottom of the trough.

For example, recent railcar traffic numbers over the last few weeks saw improvement in grain loadings and intermodal traffic approaching pre cobot levels versus Q2.

Well I saw a reduction of over 22000 cars stored and we expect fleet store totals to trend lower sequentially as parts of the economy reopens in rail volumes improved.

From a commercial perspective, we have experienced very positive inquiry activity over the last 30 days, which has outpaced the entirety of Q2.

Active discussions on car conversions are ongoing with multiple customers seeking freightcar Americas engineering expertise to provide an economic advantage to re purpose railcar assets as importantly, the quality of the calls we are feeling and facilitating is much higher includes car types that are core to Freightcar Americas X.

For cheese and those in which we are well suited to build in a position to win.

Without getting into details we took our first order since the onset endemic just this past week.

Looking forward to the next few quarters, we will maintain production line flexibility to quickly answer customers needs and an ever changing environment, where car types are expected to fluctuate.

We will also continue to take a problem solving customer engagement approach, which includes accepting multiple small lot orders with our strategic shipper customers.

Being closer to our customers is more important than ever and we believe we bring a level of attentiveness to our customers that large competitors cannot match.

Moving to the numbers deliveries for the quarter second quarter or 2020 totaled 100, new railcars. This compares to 11 in the first quarter of 2020 and 759 in the second quarter of 2019.

Our order backlog as of June Thirtyth 2020 consisted of 1839 railcars compared to 1939 rail cars at the end of the first quarter.

Backlog has an estimated sales value of approximately 207 million.

With that said, Chris can you please walk us through the financial results for the first quarter.

Thanks, Matt turning to our financial results consolidated revenues, the second quarter totaled 17.5 million compared to 73.7 million the second quarter of last year.

As a result at a lower deliveries in the quarter.

As we noted in Q1, our backlog of 2020 orders scheduled to ship is heavily weighted to the second half for the year.

Back to 752000 units to ship.

Third and fourth quarters.

July's production and shipments are in line with these assumptions.

Our gross margin was down to a negative 6.1 million compared to 6 million in the second quarter of last year. Our gross margin was impact did by three specific items first and foremost was a loss of operating leverage.

Associated with the lower deliveries plus inefficiencies related to production ramp up costs. In addition, the quarter over quarter comparison was negatively impacted by the Q2 2019 positive impact of a resolution or previous years product claim these negative impacts.

Were partially offset by the company's structural fixed cost reductions mentioned on our previous calls.

Yes, you named for the quarter totaled 6.5 million.

Down 15.4 million in 2019.

Which included 7.5 million up a one time cost to settle customer dispute for several years prior year over year decrease was driven by lower employment related cost and continued efforts to manage the company's expenses in line with business conditions.

The company also had point threemillion of restructuring costs and the quarter related to they kitting, there right up Virginia facility.

This compares favorable to impairment and restructuring charges of 6.5 million in Q2 of 2019.

The company does not anticipate any material cost associated with the right not at Roanoke exit in the future.

Mr. With my comments on our last earnings call. Our go forward SJ, we'll continue to be under 7 million a quarter, excluding any one time charges that may occur.

They will also moved downwards as we continued to rightsize our as today in line with business conditions.

Consolidated operating loss for the second quarter, 2020 was 12.9 million compared to operating loss of 15.8 million in the second quarter of 2019.

The reduction in the loss was related to the Q2 2019 charges I referenced in my previous comments.

Moving to the balance sheet, we finished the quarter with cash cash equivalents included restricted cash and certificates of deposit a 52.4 million.

Down roughly 18 million compared to our 2019, Europe position and down roughly 8 million from March 30, Onest 2020.

As noted in our second quarter 10-Q on August seven what other companies leasing entities Freightcar America leasing LLC received notice from 11 to bank that based on a recent appraisal the 10.2 million.

Principal balance under the M.T. credit agreement exceeded availability under that agreement.

As of today, they appraisal by 5.1 million.

The company and its leasing entity, it's contesting 17 banks assertion.

Moving back to the results for the quarter the decline in our position was driven by operating losses during the quarter investments and our inventories for production and upfront investments to build out the Mexican JV.

Which were partially offset by the proceeds from the payroll production program loan.

Given the economic uncertainty this resulted from the pandemic.

We maintained our priority is to manage our liquidity along with achieving our transformational objectives. As we are confident in our ability to do both.

Our revolver position remains unchanged from the previous quarter as we had zero drawn against our asset backed facility and 10 million drawn against our and then key lease facility, which is secured by certain cars and our least slate.

Capital expenditures for the second quarter, a 2020 totaled 2.5 million.

The majority of which was related to build out of our Mexican facility in anticipation of our production go lives.

The company anticipates between two and 4 million of additional capital investment and 2020, which will allow us to complete the first phase of the JV production production capacity investments.

Now I'd like to turn the call back to Jim for a few closing remarks.

Thanks, Chris before I turn the call over for questions I would like to close with a few big picture comments.

Again, thank you to our employees across our organization for your commitment during these difficult times.

We've navigated numerous cycles at our history, but we've never done so in the middle of a pandemic and plus I'm very proud of how our team has stayed together and worked hard to safely complete our work.

As we discussed today, we have taken the next step at our footprint realignment and have started to produce cars on Mexico.

These efforts are not without risk, but we are being prudent and thoughtful as we execute against our strategies.

Well continue to monitor every opportunity we have to better position the business for a long term success and drive value for our stakeholders.

And most importantly, the steps were taking in Mexico and across our platform are truly transformational.

We will emerge from this cyclical downturn and pandemic, a much stronger position to grow and be in extremely formidable and profitable competitor.

That concludes our prepared remarks, and I'll now turn the call over to the operator for Q and <unk>.

Thank you.

At this time will be conducting a question and answer session. If you want to ask the question. Please press star one on your telephone keypad and a confirmation tone indicate your line is in the question Q.

You mean press star to view would like to remove your question from the Q.

A petition to say using speaker equipment.

Please impacted your handset before pressing the star Keith.

One moment, please probably poll for questions.

Thank you and our first question is from the line of net <unk> with Cowen. Please proceed with your question.

Good morning. Thank you all my first question I think it's for my God that you mentioned been version can you elaborate on what.

Type of commodities are these conversions are for.

And our they.

Primarily shippers that are calling about conversions or are there are less stores the railroads.

Good morning, Matt and thanks to the question as you probably know typically we don't get into specifics on car types. What I can share with you that we've seen quite a bit of activity on conversions from both shipper communities as well as less stores given the number of cars in storage and some other car types that are.

Likely to enter back into the marketplace given overbuilt situation. We think we're in really good position to participate in that market as it develops.

Okay, and then on the err on the backlog I think Oh the roughly.

1000 cars that the balance at the backlog. After this year how much of that balance is for next year and how much of it as for later years.

I don't have those I, usually go ahead, Chris Hi, Matt Matt Matt This is Chris knowledge, but obviously, we did close.

We've got to disclose the backlog position for the the rough the error in our Q. We also disclose how much is.

So what were I would say it heavily it's more heavily weighted here, but we're not going again.

Oh.

Yeah.

Uh huh.

That's fair and then the I think you mentioned you received or an order after the close of a quarter is that can you give us any.

Color on the tightening up those deliveries.

Yeah, Matt that's a there is an order that goes into next year on on a car type that is very.

Very specific to the plays well to the Freightcar America strengths.

But that's just had one deliver.

Got it and then just one last one on the on the order upfront.

Besides getting versions are you seeing any type of positive sign on green shoots.

Oh for newly build cars in any market.

Yeah, I think without getting into specific car types are customers. We are seen some specific pockets of opportunity I think I mentioned in my comments that.

We see a number of Ah shippers looking for some small quantity builds which suits us well given our ability to do quick change in our manufacturing processes.

So yes. The answer is there's there are quite a few I'll say there are few a solid pockets of opportunity.

As a market starts to improve in pockets.

Got it and then just one last may be larger picture question they'd be heard Jan.

Chris.

You know based on what you guys know now and you know under or maybe kind of a base case scenario for the for the pen doesn't make enough market [noise].

Do you think you guys going achieves a profitability sometime and twentytwenty too.

Or is that still a lofty goal.

I'll take the question, Matt obviously again, that's a a guy spread a question, but I will tell you that we bid work. They are our internal plans in our and our focus is ticket active.

The profitability.

Sooner than later.

We have a variety of different scenarios.

They buy it was it.

Yeah I.

The any reason to say, we would not be planning for a problem.

Right.

Great. Thank you very much guys. Appreciate it yeah, yes, Matt. This is John just a I didn't close out what Chris a you now keep in mind everything we've been doing for two and a half years now.

Ah that's very significant business realignment and restructuring you know it is intended to make us profitable.

All future Forseeable ER business climates, and you know that's why we're so focused on finishing up a and finishing their you know even under the current challenging conditions that were all under at the moment.

So just to build [noise].

Yeah.

Presses answer just a little bit.

Got it okay, Jim Thank you very much more christen, Matt thanks very much.

Welcome.

Our next question is Fineline, if Justin long Stevens. Please proceed with your question.

Good morning. This is George sellers on for Justin Thanks for taking my question I'm. So it sounds like inquiry levels have improved he recently what is your expectation for the progression of of orders from maybe the industry as a hole in the next several quarters.

Good morning, George I think you're gonna see or an increase of some activity I think across the industry. We anticipate converting a number of these inquiries into orders without getting into specifics, we feel very confident about that.

Thank you know you're going to see the rest of the industry, where order volume is going to remain somewhat lumpy.

And a lot of it will be tied to the return of the economy for my earlier comments are the return of various components of the economy post cobot.

Okay, Great that's helpful.

And then maybe moving to the the balance sheet, we've seen inventory and and customer deposits kinda swing around here recently wondered maybe the more normalized levels or what should we be expecting I'm going forward.

For some of those line items.

Hi, George This is Chris. So obviously six then what we work through and negotiate or contracted yup.

At the time by which we have to hold inventory as part of the deal build and shipment cycle. In addition to.

Whether or not it makes sense to happen how's the deposit and a in the negotiation process are all specific.

Ill.

I think as you go forward it would be it would you would not expect to see the significant amount.

That.

We have the person that it just feels right now.

For more accurate.

Uh huh.

So you wouldn't gap.

No deposits are somewhat offsetting the inventory position.

The Companys I anything crazy in order to increase you'll see more.

I would say that number that's a little more towards the a lot of deposit.

For your relationship and as you go forward.

You would think inventory do more normalized.

See a offers.

[noise].

But again getting into a specific number on either the guy that scenarios.

<unk>.

Okay, great. Thank you all that's that's all I had.

Thank you at this time, if we see end of our allotted time for questions and answers sitting or turn the call to Mr., Jim I or for his closing remarks.

Thank you I guess for your time today, and your continued support and Freightcar America.

We look forward to continuing to update you on our progress have a great day and please stay healthy. Thank you.

Thank you everyone who participated today. This concludes today's call you may disconnect. Your lines at this time. Thank you for your participation.