Q3 2020 FreightCar America Inc Earnings Call
Greetings and welcome to Freightcar Americas third quarter 2020, <unk> earnings Conference call. At this time all participants are in a listen only mode. A question. That's your central follow formal presentation. If anyone's require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I would now let's turn the conference over to your host.
Just a 10 minute investor relations. Thank you may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, <unk>, Chief Financial Officer, Matt <unk>, Chief Commercial officer.
I'd like to remind everyone that the 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 you mentioned 95.
Participants are directed to Freightcar Americas, 2019 form 10-K, and its third quarter 2020 form 10-Q, four description of certain business risks some of which may be outside the control of the company that may cause actual results to materially differ from those expressed in the forward looking statements weeks.
We express we disclaim any duty to provide updates to our forward looking statements, whether as a result, new information future events or otherwise.
Our 2019 form 10-K and earnings release for the third quarter of 2020 are posted on the company's website at Freightcar America Dotcom.
With that let me now turn the call over to Jim for a few opening remarks.
Thank you Joe Good morning, and thank you all for joining us today.
Well it is only about three weeks since our special call to provide you with an update on our business repositioning process. We have continued to make progress and were excited to provide some additional updates for you today.
Let me take a few minutes to recap some other critical steps we have taken and.
And that we are still in the process of completing to finalize the restructuring.
First we successfully completed the acquisition of the remaining 50% of our joint venture and Konstantinos, Mexico and mid October.
Production at the New Kid styles factory started in July.
The first car completed in August.
I'm happy to announce that the manufacturing facility is now fully certified by the association of American railroads for A.R.
The best of our knowledge. This was completed in record time, which was due entirely to the strong chain we have left the styles.
As a result, we will be shipping our first rail cars from the facility. This week.
So in short just stop house is man with a highly experienced workforce and they are certified is producing and is now generating revenue.
During the third quarter. We also successfully negotiated the early termination of our lease at the Cherokee, Alabama or Shoals facility.
As of October we have no additional wrap do at Shoals, and we have agreed to sell and transfer certain basic infrastructure at the facility to the landlord and exchanged for early termination.
Again, there is no additional capital required as part of the lease at this stage.
Hi early 2021.
Our entire freight car portfolio will be producing Costar house.
We will continue to produce aftermarket parts for our parts business and Richland, Pennsylvania, and this is not expected to change.
As I always do I want to thank our employees that Charles for their dedication and commitment to completing our remaining orders at that facility.
They continue to work with both professionalism and pride.
This is what we have accomplished in recent months, but what exactly are we trying to create.
First and foremost let us remember what we are we do not have a big lease fleet to fall back on and that is what our customers want from us anyway.
What we are and what our customers want us to be as a pure play manufacturer.
And given that we better be the best in the business at it for cost for quality and for on time delivery performance.
We have been working for almost three years now to create the best cost structure in the business and with the recent announcement, describing our final transforming transformative steps. We believe we are there.
No one else in our industry is producing from a single site.
Right and on the cost structure that we have in Mexico.
Nobody else can start turning a manufacturing.
Profit on the volume levels that we will soon be able to do.
And in addition, we have almost three years, a product reengineering and strategic sourcing initiatives from our back to basics work.
Lets transfer with us to the new footprint.
Starting now we can compete and every product category in which we have an offering.
Let us next talk about quality.
We have said for some time that our goal is to be the industry leader in quality.
Our move to Costar House is fully aligned with this objective.
Beyond the careful attention that went into the design of our new factory, we are assembling the very fast workforce in the business.
Now for the first time, we are located in the heart of railcar manufacturing for North America.
With access to a large pool of highly trained railcar manufacturing personnel.
We are hiring the best area.
The facts that Hey, we delivered the first deal to the plant in July and completed our first car in August.
And B, we had our onsite inspection audits from D.A.R.
In September and were formally certified just one month later, our testimony to the us.
And again, we will start shipping cars the customers this week.
Hi, moving all production ticket style by early 2021, we will have reset our cost base and our multiple steps closer to reaching our goal to become the highest quality and lowest cost producer in the industry.
Lastly, our industry remains in a cyclical downturn.
What has been greatly intensify by a once in a century pandemic.
Well there are some initial signs of market stabilization and small wins, which Matt will talk to in a few minutes, we cannot be certain how long the downturn will last.
As a result.
We have done several things to mitigate the risks associated with these external conditions.
First we have accelerated our business repositioning plan as the whole shift production to start house provides significant financial and operational flexibility to ride out these headwinds.
We have lowered our breakeven economics to less than 2000 cars per year.
And I guess I must facility will be scaled quickly.
Once we see signs that the pandemic and its economic effects are leaving us for good.
I would argue we will be back.
S. positions in our industry to navigate this pandemic.
With this new leaner scalable business profile and that it will allow us to emerge quickly and from a position of strength when conditions allow.
We have also obtained a new asset backed credit facility and we are in the final steps of completing a 40 million dollar term loan I will talk more about the ladder late.
Later in the call.
With that brief overview I'll pass the call to Chris to talk more specifically about our financial results and performance in the third quarter press.
Thanks, Jim turning to the financial results consolidated revenues for the third quarter totaled 25.2 million compared to 17.5 million in the second quarter of 2020.
$40.7 million in the third quarter of 2019.
We delivered a 163 railcars in the quarter compared to 100, and the second quarter of 2020 and.
467 in the third quarter of 2018.
As previously noted our current backlog of 2020 orders scheduled to ship in the air is heavily weighted to the second half of the year.
That said, we shipped fewer cars and the quarter than we expected as we made the strategic decision to shift some of our orders for Shoals to consign, yes in order to take advantage of the certification timing and the improved economics of the new facility.
This resulted in a pushout of deliveries from Q3 into Q4 and beyond.
The us we still expect to come within the bottom end of our guidance range we provided.
The last quarter, but have narrowed it to 750 to 850 railcars for the second half of 2020.
Our gross profit improved to a negative 4.1 million compared to a negative $6.1 million in the second quarter.
This year at a negative 5.4 million in the third quarter of 2019.
Gross profit performance.
Reflects the previous cost reductions and a mix of higher margin railcars, which offsets the impact of negative efficiencies due to lower production volumes.
That's your name for the quarter totaled 7.2 million up from the $6.5 million in the second quarter of 2020, but down from the 7.8 billion in Q3 of 2096.
The sequential increase included several one time costs related to the deal activity and certain commercial reserves for approximately $1 million. The company expects to have additional assets unit costs related to the new financing in both Q4 of this year in Q1 of 2021 exclude.
These costs the companies as you know they will remain under $7 million going forward.
Consolidated operating loss for the third quarter 2020.
Was 41.3 million compared to an operating loss of 12.9 million in the second quarter 2020, and a loss of 36.3 million.
In the quarter a year ago.
The sequential increase in the loss was primarily attributable to the $30.1 million of restructuring impairment charges incurred during the quarter. As a reminder, the majority of these charges specifically related to the exit from our Shoals facility.
The charge included 17.5 million non cash impairment charge to reduce the shoals facility lease asset to its fair value a noncash impairment charge for property plant and equipment of 9 million.
And employee severance and retention charges, a 3.4 million.
Furthermore, the final agreement with the landlord was reached in the beginning of the fourth quarter, which required us to write down the lease liability associated with the facility and that quarter in line with generally accepted accounting principles as such we will record a non cash gain.
Related to the lease in the fourth quarter results.
Moving to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposits up 32.9 million down from 52.4 million at the end of Q2 and down.
30, and down 37.1 million from the year end 2019 part of the decline in our cash result is a distributed to the build in our working capital inventories increased to 60.2 million from $47.1 million last quarter and from 25 point.
1 million as of December 30, Onest 2019. This increase is related to the delivery guidance, we are providing cap.
Capital expenditures for the third quarter 2020 totaled $1.3 million, the majority of which was related to the needs of our Mexican facilities to support our production ramp up.
The company anticipates between one and $2 million of additional capital investments in 2020. This will allow us to complete the first phase of our Mexican production capacity.
I'd like to turn the call over to Matt for a few commercial comments related to the third quarter and moving forward Matt.
Thanks, Chris our industry continues to navigate the challenges of the cyclical downturn.
Market indicators, including rail traffic and railcar storage levels are trending in the right direction, although the economy in general General remains uncertain due to the pandemic.
Our view is that customer sentiment remained very cautious in the third quarter and us we don't expect meaningful demand improvement in the near term.
Although down from the second quarter third quarter inquiries represented a greater mix of car types that Freightcar America is well suited to deliver our third quarter orders reflect the continued weakness and caution in the industry.
We are extremely confident that the move to consign, yes will strengthen our competitive position and allow us to earn our share of orders once the market begins to return to some level of normalcy. Despite the pandemic and the associated travel restrictions, we remain focused on staying engaged with our customers.
Through the use of video we have started homes do you live in virtual customer meetings Frankenstein iOS and have received great feedback on the facility and experienced leadership there.
I'll end with a review of our backlog.
Our order backlog as of September Thirtyth 2020 consisted of 1776 railcars compared to 1839 railcars at the end of the second quarter. Our backlog has an estimated value of approximately 195 million.
We've had no order cancellations as a result of our manufacturing shift and again continue to receive positive feedback from customers about focused on iOS and our new business repositioning plan.
With that I'll now turn the call back over to Jim for a few closing remarks Jim.
Thanks, Matt.
We have spent the last few weeks talking about the critical business repositioning process and we have had a few consistent questions. So I thought the best thing we could do today. It's a drug is to address these questions on this call.
The first question is why now why does Freightcar America need to execute such an aggressive repositioning plan in the middle of a pandemic when the markets in the middle of a down cycle.
Let's start our back to basics strategy made significant progress and lowering our cost per car.
But it hasn't been enough not enough pandemic and the resulting prolonged industry downturn.
We enter 2020 with cautious optimism, but the impact of the down cycle and pandemic forced us to accelerate our plans.
We must change our cost structure and we must do so quickly.
We cannot afford to sustain the current level of losses, and we must put quarters like this one behind us once and for all.
This move gets us to where we need to be.
And the good news is that through the back to basics work.
And then a JV formation Annika styles plant start up we can do it now as then right now and we can do it without disruption and without giving up future scale an upside.
Well just no longer be paying for that scale until we actually need it.
The next question involves the structure of our purchase of the remaining interest in our joint venture in Mexico, specifically.
Why did we choose to purchase the guilt families 50% interest in the JV in exchange for approximately 14.5% of our common stock.
The simple answer is that someone else is our future.
And what's the decision to move all of our production to Mexico, we needed to ensure more complete management control of our soon to be only manufacturing facility.
We also needed to have complete ownership of the profit stream coming out of that.
We did the deal that stock versus cash for two reasons, one cash must be managed carefully and this time of economic uncertainty.
And two we did the deal stock because we believed it was absolutely critical to directly align our interest with those of our partners.
As to the amount approximately 14.5%.
Consider that the JV is where the majority the large majority of our future profits are expected to be earned.
So we believe strongly that purchasing 50% of the future profits coming out of Mexico for approximately 14.5% of the company equity represents very good value for our stockholders.
The third question involves our new term loan and investors, obviously want to better understand why we need this capital today.
There are really two answers to this question as well one involves risk management and the second is focused on the need for growth capital.
In terms of risk management, our cash position is down nearly $40 million since the end up 2019.
And the pandemic has clearly elongated the current downturn in our industry cycle.
Not only do our investors see that but our customers do too.
In a capital intensive business like ours, we need strong liquidity and customers need to know we have a balance sheet that will allow us to fulfill our commitments to that.
Without the proper balance sheet, winning business becomes that much harder.
But equally important is one this industry downturn finally reverses and it always does.
We need to be enough position to leverage the opportunity.
Well require additional capital to ramp up production build.
Well, the third and fourth production line like a star House and support working capital needs to build inventory.
We must leverage the next up cycle to win share and become a larger company again, and that's going to need capital to support it.
This incremental funding is vital to our plans and vital to our future.
Lastly, we've had a common question around our capital raise process.
Some investors view the term.
The term loan structure as expensive.
Since it includes a warrant that provides our new lending partner with the ability to purchase up to 23% of the company's outstanding common stock for a penny a share.
So the question is that what was the process and why that steel.
Well, let me start by saying this solution was not entered into lightly.
This team ran a process for nearly a year.
We went to the market with a plan and ask what it would cost to underwriter.
This plan wasnt backed by assets and it wasnt backed by a strong positive Eva to string.
Rather it was focused on value creation and the expectation that we can turn around past negative EBITDA results into real profitability in the future.
We reviewed countless proposals and it quickly became clear that every solution required some degree of equity of equity for what a whichever partner we selected.
The bottom line is this was the best solution available to US we will not find a better deal and remember that we are in the middle of a pandemic, causing greater certainty.
We need to reposition this business and we need to do it now.
We need us capital to complete the restructuring reassure our customers that we have the staying power.
Backstop the business through the pandemic and fund our future working capital and growth investment needs.
So while we understand that this business repositioning plan well require roughly 35% and total dilution for our stock holders through the JV purchase and the new term loan.
It's the right solution.
Owning a business that's struggling to compete and isn't growing with limited capital to fix it so.
First is a business that has a clear path for becoming the lowest cost highest quality producer in the industry well.
One that will grow and earn profit at a significantly higher rate.
As an easy decision.
Oh, I am asking all of U.S. stockholders to vote for our plan by submitting your proxy in support of this new term loan.
This is an extraordinarily important decision and we need your support.
That concludes our prepared remarks, and I'll now turn the call over to the operator for Q and a.
Thank you at this time, we will now be conducting a question answer session. If you would like that's a question. Please press star one on your telephone keypad a confirmation. So indicate your line is in the question queue.
For search if you would like to remove your question from acute for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning.
So maybe to start I wanted to go back to the breakeven commentary you provided I know you're lowering the number of shipments that you need to breakeven, but just wanted to clarify that.
Do you think about breakeven is that from an operating income perspective, or a net income perspective.
Yeah. So that's an operating income perspective, Justin but again the the additional that's obviously interest.
You know approximately what that's going to be based on the term scenario.
So you know, we're not going to give a specific additional but we do feel that there's not a giant material difference between those numbers option up in that.
Based on economics of the new facility.
Okay. That's helpful and as you think about adding capacity at that facility in Mexico over time, what are the signs that you need to see in order to make.
Make that investment and just kind of thinking bigger picture you know if we if we transition to more of a replacement market I should say 35000, 40000 build somewhere in that neighborhood.
Is that an environment, where you would expand capacity or do we need to see above replacement demand and production in order for you to make that investment.
Yeah. Good morning, just because.
Matt Why don't you go first just I was just going to say that right now, but I'm not going to go first [laughter] Justin I think you touched on a couple of those factors our decision to expand plant capacity is going to be really supported by.
A composite of market factors, including our customer engagement in the intelligence, we learn from them.
Strategic long term needs.
All of these will be taken into consideration as we put ourselves in a position for the next demand of cycle.
Okay I'm.
So I think to add to that.
There's no one single piece of information.
That's likely to.
Indicate to US now the time, we're going to be looking at lots of things as anybody would.
What do you need what we need to keep in mind is the way that constantinos plant was manufactured we can add lines three and four are relatively quickly we're talking months not years. The paint shop is there the workforce is.
Readily available.
And you know.
The benefit as I've already said or what we have right now is.
During the down cycle, we're not paying for what we're not using a.
But at the same token we need to make sure were there when the market does come back because we don't obviously want to miss out on that and.
So in summary, we're going to be looking a whole array of of indicators.
But keep in mind, when we do pull a trigger to add production lines. It's a it's it's multiple months, but it's not a year plus type undertaking.
Got it that's helpful and maybe just lastly from a modeling perspective, I think you mentioned in the prepared remarks today, that's DNA would be going up a little bit sequentially in the fourth quarter and next year.
Any order of magnitude you can share on what that could look like.
Right well I mean, our view is that it's going to be below where it was this quarter, but it was the guidance that given previously it was under seven.
We're not going to give specific timing guidance on some of these one time charges and one all head, but as we look over going forward. It will you know does the guidance for this year was under 70 that we expected to come down.
I'm actually clear out some of these one time charges. So again expected to be under what we thought it would be this year once the onetime charges and have cleared and we'll give you some more exact guidance on that at year end okay.
Got it okay. So those were all onetime items that that's good to clarify well I'll leave it at that I appreciate the time.
No problem, Jeff and as I mentioned in my remarks, we had about a million dollars what we viewed as one time items in the number this quarter.
Yesterday.
Okay. Thanks again.
Our next question comes the line of Matt Elkott with Cowen. Please proceed with your question.
Yeah. Good morning. Thank you I'm not I think you mentioned the the backlog my question is.
If we subtract the <unk> or the expected deliveries in the fourth quarter.
What percent of the remaining backlog is for Twentytwenty one deliveries.
Hi, Matt its Korea.
Just going to say, we're not going to give specific.
2021 guidance right now so we'll give you some some better views on that at year end, but I again, a big chunk of it as you would guess would be 2021, but we'll give you more specifics at year end macro had.
No I I was just you put that goes up a lot of my mouth.
Got it that's helpful, but I guess more of it is poor Twentytwenty. One then later.
Correct.
All right Okay.
Got it.
And Oh, Matt you mentioned that there has been some you know pockets of improvement.
And inquiries in cars that you guys are.
Having expertise in can you elaborate on that is it mainly intermodal is their grain cars just any more insights on that front would be helpful.
I think without getting into specifics a matt.
There has been been pockets of really solid rail activity. Both in the two segments you referenced intermodal angering what I think what we're seeing is a little bit more diversification of car types in terms of inquiries.
That have been coming through which is a which has some positive news as the industrial economy starts to to strengthen somewhat.
Got it and just maybe a bigger picture industry question are you guys noted the rail traffic and improved meant the cars in storage. Our numbers are are coming down which is good.
You know what do you think needs to happen beyond that who are a real uptick in.
And then on to that to happen. If you continue on this on this trajectory of improving you know rail industry metrics.
Yeah, I think I think Matt as talk through on this call storage numbers, although they're down consecutively. The last three months roughly 75000 cars trending in the right direction, we still need to make a lot of headway here before that really impacts demand improvement the same guy.
Goes for rail traffic some sectors are seeing some really great growth.
Intermodal is one of those green traffic is pretty strong.
But clearly we need to see more cars online we need to see increased traffic numbers and we need to see really are a significant reduction in storage before we we start to see a demand curve.
Okay.
And then maybe just one last one I know you guys are you, though going for the you know a lowest price the highest highest quality manufacturer approach can you give us any type of feedback.
How much traction were getting with customers.
Got things going on with customized you have to do more to get the message across or is it just a matter of time you just have to prove its a you know over the course of the next few quarters.
This is Jim let me start.
By answering that one another or perhaps turn it back to Mike.
You know the.
Where we want our business structure to be in support.
And how we are positioning ourselves in the marketplace are complimentary, but it's not exactly the same thing.
Our position in the market place is to be a pure play manufacturer.
As a you know many people know the majority of rail cars purchased every year, our purchase by leasing companies.
The are built competitors of course compete in that space as well, we don't and so the idea that a leasing company can come and work with us and know that there is not a.
Got it.
The competitive are conflicting discussion potentially is it resonates very well with our customers.
We didn't quite frankly sitting in a conference room and come up with this idea that this was brought to us by.
By the customer base, so our position is a pure play manufacturer.
But because that's our only business principally.
We need to be frankly, very very good we need to be the very best started and we think we can do that and we think what will define best is a combination of cost and quality and on time performance.
So that that's the position and you know the supporting the ideas for the underlying structure behind it Matt.
Matt do you want to add to that I'll, just I'll just add that over the course of the last several weeks we've conducted.
Multiple customer engagements virtually.
Including plant tours in various customer specific events and responses have been overwhelmingly positive.
And as a result of much of that interaction, we picked up some new customers as well so.
The the impact of cost on Nielsen the and the view from customers has been has been taken very positively.
Great. Thanks, Mike Thanks, Jane Thanks, Chris appreciate it.
Matt Welcome Matt.
And with that we have reached the end of our question answer session and I would now let's turn the call back over to Jim Meyer for any closing remarks.
Thank you again for your time today.
We need your support to complete this business repositioning process and to ensure our future.
I look forward to entering an exciting new phase for our company with all of you and strongly believe we have the right plan to deliver strong value. Thank you and have a great day.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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