Q4 2020 FreightCar America Inc Earnings Call
Ross dead
Greenberg welcome to the freightcar America fourth-quarter and full-year earnings conference call at this time. All participants are in a listen-only mode a question and answer session will follow the phone presentation. If anyone should require operators to age during the conference, please press star zero on your telephone keypad, please note. This conference is being recorded. Now turn the conference over to your host. Please sit for it to load of the rest of relations. You may be good.
Thank you and welcome joining me today or Jim Meyer president and Chief Executive Officer. Terry Rodgers Chief Financial Officer and Matt Pond Chief commercial officer. I remind everyone that statements made during this conference call relating to the company's expected future performance future business prospects of future events or plans may include forward-looking statements as defined by the private Securities litigation Reform Act of 1995 participants are directed to freightcar America is twenty-twenty form 10-K for a description of certain business risk, some of which may be outside birth 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 during today's call there will also be a discussion of some items that do not conform to us generally accepted accounting principles or gaap.
reconciliations of these non-gaap measures
To the most directly comparable gaap measures are included in the press release issued this morning our 2020 form 10-K and earnings release for the fourth quarter of 2020 are posted on the company's website at ww.w. Freightcar America with that. Let me now turn the call over to Jim for his opening remarks Thank you Lisa. Good morning. And thank you all for joining us today. 2020 was a truly unique year. It was highly challenging on so many different levels, but it was also a great year in terms of what was accomplished wage 2020 set the table for a future in the midst of both the Deep industry downturn and the once-in-a-century pandemic the freightcar America team finished the most challenging aspects of the business transformation and essentially finished remaking the company.
We are excited to share our progress today and to share some of the reasons why we believe in the potential of the new company.
I will also introduce you to our new Chief Financial Officer Terry Rodgers. So let's get started.
I am happy to report that we successfully completed our exit from Shoals everything went according to plan and given the operational challenges associated with closing down a two-plus million square foot facility as it continued to produce that is saying quite a lot. We had no appreciable cost overrun that we completed our last car build with quality and we return the facility back over to the Retirement Systems of Alabama the facility owner on the last day of February as originally planned.
One final time. I want to thank our shows employee for their dedication to the last day and we wish all of them the very best for the future.
Our new team at castanos started building cars in July and started shipping to customers in November today because castanos produced three different car types on time all while meeting or exceeding customer expectations for quality.
If we take a step back and consider where we were just three and a half years ago. We were a company with to Legacy costs disadvantaged facilities plus the extremely large facility in Muscle Shoals.
Our fixed costs and our variable costs were on competitive and we needed to produce 6000 to 7,000 units per year to be profitable.
We were not in a position to survive much less when in fact, we could only win under the condition of a Resurgence in the need for coal cars off fast forward to today and we are now a streamlined manufacturing organization that controls the newest purpose-built facility in North America off.
Saturday is appropriately sized for the moment and has the flexibility to scale when we need it to.
We have removed in excess of $25 billion dollars per year and fixed cost as compared to 2019 and we have improved our variable cost and we both believe we are ready to leave the industry in terms of quality.
In fact, we will have reduced our break-even production Levels by two-thirds compared to the old freightcar America. And that is after we finish scaling the castanos plant. It is fair to say that the heaviest of the heavy lifting of our transformation is now complete and we are ready to fulfill our vision to become the most cost-effective highest quality producer in the industry and that we can now start to shift some of our Focus towards growth.
At this very moment. We are a to production line company with capacity to produce approximately 2,000 rail cars per year dead on the mix and number of changeovers. We will scale this new business with the Up Cycle that we believe is going to come.
As a reminder the castanos footprint currently consists of two assembly lines a much larger paint shop one designed to accommodate future expansion pack wheel and axle shop.
We currently receive the majority of our Fabrications from Fosamax, which was our JV partner prior to acquiring their stake.
We have hired a very experienced team at the facility that is more than qualified to run a future larger operation.
The performance of this Workforce is in our opinion amongst the best in the industry and the results already attest to that fact.
Related to all of this our board just approved the construction of our own fabrication shop. This will allow us to make the large majority of our Fabrications in-house starting within 12 months, which will bring additional capability and efficiencies.
We will gauge the market and sales inquiry levels two times the construction of additional assembly lines and capacity.
No more onerous topic. We must find ways to mitigate the very substantial cost pressure associated with steel prices, which have doubled over the past twelve months and are currently at near all-time highs between these increases and continued pressure on pricing driven by the industry downturn and over-capacity. That's time remains margins will be under pressure for the short-term. The improving news as Matt will discuss is that order activity is starting to increase wage now that we Are Holy in Mexico with a smaller size. We have the ability to be modestly selective on the business we pursue
As we continue to build the company around the new footprint and castanos and start to focus on growth. We are highly encouraged by the feedback. We have received from customers who have toured the new facade are they they are impressed with the efficient and scalable size of the facility the highly-trained and experienced Workforce. We have assembled and the absolutely positive morale and culture other people.
We are increasingly encouraged by the number of new sales increases since the start of the year as well.
Our delivery guidance for the year is the range of 1400 to 1600 rail cars, which is approximately 2 times our deliveries for 2020.
Wow, this delivery guidance is below the roughly 2000 rail cars. We have noted as our new break-even level. It is aligned with where the industry is right now.
To conclude we close the door on Shoals and completed the physical part of the transformation of freightcar America 20-21 is about building momentum and support of expansion and profitable growth as we move forward. We believe the new flexibility of our business will allow us to write out the last stage of our Industries down and significantly capitalized on its next phase of expansion.
With that brief overview. It is my pleasure to introduce you to Terry Rodgers. Our new CFO. Terry is a true Finance professional with me on a 40 years of experience that includes having held the CFO positions at Roadrunner Transportation Systems, Hico and Ryerson. We are very fortunate to have them on the team Terry Jim. I'm excited to be here and enjoyed my first few months as the leader of our financial organization. We built a deep team in the financial group, and we're exposed to support three cars and pending return to growth and profitability.
Turning to our financial results Consolidated revenues for the fourth quarter 2020 included 60.6 million total 6.6, Excuse me, compared to twenty five point two million of the third quarter of 2012 or fourth quarter 2020 revenues were up 35% compared to fourth quarter 2019 revenues of 44.9 million. We delivered 477 real cars in the fourth quarter of 2028 compared to 163 rail cars in the third quarter of 2020 and 439 rail cars in the fourth quarter of 2019 is you recall that are third quarter 2020 itself off updated our delivery guidance for twenty twenty and are pleased to report that we achieved our Target of 751 deliveries despite the operational challenges created by both the pandemic in the manufacturing transition Charles to dismantle
a gross profit improved meaningfully
Fourth quarter to five point five million compared to a -8.1 million in the fourth quarter of 2019. This is the first quarter we had achieved positive gross profit performance since June of 2019 and it's only our second quarter of positive gross margin in the last 3 and 1/2 years sg&a for the fourth quarter totaled eight point seven million up from seven point five million in the fourth quarter of 2015. The increase in SGA sg&a was attributed to retention payments related to the shoals shut down and bonuses paid related to the successful finances. We expect sg&a expenses, excluding restructuring costs in the first quarter the approximately seven million per quarter in 2021.
Dominated operating loss for the fourth quarter of 2020 with 9.2 million compared to a loss of nine million in the fourth quarter of 2019 the operating loss in the fourth quarter in class nineteen million of impairment charges related to lease rail cars partially offset by 12.9 million of non-cash restructuring games largely related to the termination of the lease at the shoals manufacturing facility in the fourth quarter of 2020 operating loss for the fourth quarter of 2019 was 9 million and included a $2 charge from the loss on a sale of a hundred years previously held in the lease Fleet a six point six million non-cash game related to the termination of a post-retirement benefit plan. And in that two million dollar restructuring gain largely attributed wage, 2.4 million non-cash gain on a Roanoke Virginia facility related to the turf determination of that lease.
Like to spend a few minutes discussing the implications of the warrant we issued last year as part of our recent financing is it will have an impact on our financial statements as we move forward this warrant liability will be marked down here market value each quarter and must the change in the value impact our net income and earnings per share calculations this past quarter the loss on change in fair market value of Warrant liability was 3.6 million, which is obviously a non-cash item and reflects the appreciation of our stock price since the warranty issue is in November 2020.
As a result of the warrant liability changes and other non-operating non-cash or non-recurring impacts. We have provided investors that calculation of our adjusted ebitda results. We believed additional information provides another meaningful metric in addition to gaap financial measures to evaluate our operational and financial performance.
Lost in the fourth quarter was 11.6 million compared to an ebitda a 5.9 million in the fourth quarter of 2019 interest expense in the fourth quarter of 2012 with 1.5 million vs. 0.2 million in the fourth quarter of 2019 reflecting the close to the new data agreements in the fourth quarter of 2020 going forward interesting facts remain above recent historical levels because of these new debt agreements.
You would.
Generally impacted by the same large non-operating just I just mentioned that impacted Arkansas. Offering loss in addition to the non-cash wash loss on change in fair market value of the warranty liability law. That was also previously noted.
Fourth quarter 2020 adjusted ebitda was a positive one point seven million when adjusting for the items previously discussed and other non-cash or non-recurring items.
Moving to the balance sheet finish the quarter in the year with cash and cash equivalents including restricted cash and certificates of deposit of fifty four point two million compared to seventy million of 2019 total cash included forty million in proceeds from the new secured Term Loan that was completed in November 2020 and provides the capital to execute on our strategy the strategy and largely complete transition to the Styles inventories, as of December Thirty $120 increase of 38.8 million from 25.1 million, as of December Thirty One hundred twenty nineteen month due to higher inventory levels.
Level 2 support the transition from the show facility cuz new manufacturing operation. You can stand up from Mexico cash balances will decline in the first quarter as we complete the transition to castanos off the February closure of Shoals and build working capital to meet the second quarter production targets Capital expenditures for the full year of 2020 of 9.8 million were notably higher than the 5.5 million and 2019 primarily related to the transition to our Mexico facility and production ramp-up during the fourth quarter given are smaller footprint. We expect our capex to drop in 2001 and currently forecast it'll range between two to three million. Once again, I'm thrilled to be leaving the fix our finance function gym. The team did an incredible job transition to style and I inherited a great staff. I believe we have a tremendous opportunity to drive long-term value and we're at a truly exciting inflection point in our history. I am looking forward to helping the company achieve its Vision to return to growth Em Dead.
I'd like to turn the call over to Matt for a few commercial comments relate to the fourth quarter and moving forward Matt. Thanks. Sherry is Jim mentioned the rail car industry continues to navigate the challenges of the lowest freightcar demand cycle seen since 2009 and the fourth quarter of 2020. We booked for orders for 90 rail cars and four hundred ninety cars for the year compared 585 and 2227 for the fourth quarter in full gear 2019 respectively, although order activity was relatively quiet. We were encouraged by the number in substance bought a new car inquiries throughout the fourth quarter of 2020 as well as continued improvements in key market indicators that ultimately Drive demand for new rail cars.
You're over year rail traffic growth seen in the second half of 2024 positive signs of the beginnings of an economic recovery. Although bringing in Intermodal car loadings outpaced all other commodity groups. We expect to see Improvement in the industrial economy and Associated car loadings reductions in rail car Fleet storage numbers down five consecutive months in the second half of 2020 having continued this trend off early part of 21. We do expect the increase scrap steel prices to support sequential reductions in stored cars throughout 21. We are encouraged by the strong level of new car order inquiries in the lifetime days along with improved customer sentiment as well as a reduction in recorded COVID-19 cases and increased vaccinations.
We like other.
Car builders or anxious to our factories. However, we are also careful that we close orders that are acceptable to us in satisfy our financial targets. We do anticipate an aggressive market pricing environment and twenty one month and the two times increase in steel cost in the last year have created additional headwinds thankfully are smaller footprint as it currently says positions us to be more selective orders are 21 delivery guidance of between $1,400 and $16 rail cars while double what we achieve in 2020 is still well below our historic average wage mentioned industry inquiry levels do support expected increases in order activity, which we anticipate being heavily weighted in the second half of 21.
This makes sense given that we are at a low point and anticipating to recover it. The bigger unknown is not whether there will be a recovery of substance. But instead when it will start in Earnest and whether it would be gradual or steeper an agent.
The gym already noted. We are already seeing an early benefits of the transition to the new castanos facility and believe our competitive Position will improve along with market dynamics. The efficient footprint across not only leads itself to deliver our broad product portfolio. What is designed with the flexibility to change car types more quickly and run efficiently at lower volumes than what is generally supported by the other manufacturers further as the industry leader of Railcar conversions. We will continue targeted investments in this space including infrastructure capabilities of castanos and not answering of our offerings leveraging both our engineering and Manufacturing expertise.
For our customers. We have Surplus fleets our cars that no longer provide solid lease or Revenue returns freightcar America provides the solutions to upgrade underutilized real assets into the latest car designs that new Revenue opportunities for them.
In closing I wanted to share with me some of the customer reactions. We have received since production commenced at the sinus but COVID-19 travel restrictions lingering we have taken the opportunity to hold the number of virtual events long as your customers how they're great cars are manufactured from Fabrications and subassemblies to painting and lining and final Quality Inspection using the latest virtual meeting technology and video These virtual face plant tours and Sample car events provide an as if you were there first you have to look at the entire build process feedback on the in person and virtual visits have been overwhelmingly positive with a customer sitting are simple car reviews was one of the most professional and thorough ever within any golden.
This is just one anecdote of the type of responses. We're getting into San Jose and supports our purpose-built approach to customers with that. I'll turn the call back over to Jim for a few closing remarks. Jim is Matt. Our manufacturing transformation is now largely complete and we have taken control of our own destiny leave dramatically repositioned are competitive profile and in so doing created a new company one that is able to win. We certainly have work left to do with Building Sales momentum now at the top of the list.
if 20/20
He was about getting all the right pieces in the right places 20-21 is about building momentum. So that 2022 and Beyond will be about leveraging this new company to drive significantly enhance profitability Ki KI free cash flow and long-term shareholder value. We are looking forward to sharing that Jeff with all of you and thank you for your continued support.
That concludes our prepared remarks and I'll now turn the call over to the operator for Q&A.
And I just I'm will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation tone will indicate your line as in the question queue. You may press Start If you would like to remove your question from the cube, but participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key. One moment, please while you pull for questions about. Our first question is from Justin long with Stevens. Please proceed with your question. Thanks. Good morning, and Terry congrats on the new role. Look forward to working with you going off. Thank you.
So maybe that start with gross margins just because there was such a a notable Improvement both sequentially and and year-over-year when I looked back to the second half of 2019, you know a similar level of deliveries, but gross margins were negative 16% this quarter in 4q. We were a positive 9% Can you just help us Bridge the difference there? I know there have been a lot of cost improvements and and operating improvements and the business but I think it would be helpful to break down the the major buckets that we should be thinking about. This is primarily that we had a a very attractive and well priced order that we were processing through most of the fourth quarter off.
and improved fixed cost structure and and it just
more efficient management of of that order of going through which I think we will be able to see as we go forward in a more efficient cost structure in castanos in the future.
Okay, and in terms of gross margins going forward, I know you mentioned the run-up and and steel prices may be causing some near-term pressure. Is there anything else you can share to help us from a modeling standpoint? I'm guessing sequentially gross margins will be down. But do you still expect gross margins to be positive throughout twenty Twenty-One or or could we slip back into negative territory?
We want to avoid providing any sort of guidance going forward on the financial in terms of a financial forecasts. But certainly we feel we have a more attractive cost structure as Matt mentioned. We are facing the headwinds of higher steel prices, but you know, we do feel we positioned ourselves to operate at a much more profitable level going forward, but we don't really want to get into providing specific guidance for 21.
Okay.
And then lastly you mentioned from an inquiry standpoint that things have have picked up year-to-date. Have you received any orders so far down in in twenty Twenty-One and and maybe just from an inquiry perspective, you could provide a little bit more color to help us understand that the magnitude of the pickup you've seen. So I'm just that I can't I won't talk specifically about orders received at this point, but there will be a more substantive update on our on our next call. I will tell you that what we are seeing in the marketplace is a broader public worry levels are much broader from a car type perspective than what we've seen in the last year which I think is indicative of the overall industry starting to make a Time.
Okay. Thanks. I'll leave it at that. I appreciate the time. Yeah Justin, this is Jim just to put a little more color maybe on the first of your questions around the gross improvement from 2019 to 2020. You know, we we benefited from several things including the fact that part of our production was on the new footprint and obviously the new footprint is more cost competitive than the one that we recently closed and Schultz, but also we were benefiting from you know, several years of material cost reductions and also the fact that both fronts for the quarter the the old shows and the new castanos ran reasonably well, and I'd have to say the birth
The thrill for us is how quickly the new footprint in castanos has ramped up towards efficiency. It's it's better off surpassed our own internal expectations. So in that sense, I'm looking forward. We feel very confident in the future delivery capability of the new footprint.
Great. Thanks can appreciate those thoughts?
And our next question is from Matt with Colin. Please proceed with your question.
Good morning. Thank you Jim and maybe Matt also just follow up on the order on Justin's order question about you know, we've had several months of improvements in the utilization number I think cars and stores are down hundred thirty thousand units in the summers in Chicago by rail. Traffic has been selected positive. We were you know, we had multiple weather events that uh created disruptions in a network that could be a driver for for rail equipment. Are you guys surprised that you know, the order activity has not picked up more than that it has already and do you think that will walk, you know, is it possible that will have a quarter or two or we see kind of abrupt rise in in orders because of where the utilisation number has has
Gone, too. Yeah.
I think I think you're probably on to something, um without getting into specifics the level of inquiries that we're seeing as I mentioned previously did include a broader phone number or car size based on the the timing we're hearing from customers. I think we're going to see some of that it takes it takes a while for order processes to go through all of their ships, uh, and to go from the inquiry stage to the order stage, but I think the other piece of it as you mentioned is with increase in traffic some of the some of the the storage numbers which are often very positively all lead to increased activity. Um, not just an inquiry levels but in order activity, and again, we see a a large portion of the order a cake falling into the second half of the year. So I think your points are valid.
Okay, so I think I mean maybe we started to see the manifestation in the metrics more on the leasing side because it seems like major unless there is something you know 5% or so sequential improvements and rates for the last couple of quarters, but the manufacturer order activity has definitely lacked. I mean the fourth quarter was you know, if I'm if I'm looking at this correctly. I think it might have been the worst quarter of the Year from a order perspective. Do you think that the you know political and uncertainty off of late last year had anything to do with people, you know wanting to wait before pulling the trigger on manufacturing orders and instead maybe just going to Leasing and I'm trying to get short-term leases for for the time being. Well, I think it's safe to say that there were some pretty aggressive lease rates available out there on Broad across a broad number of cards sites dead.
And sleeps available. So those typically are going to get consumed first to your point on customer sentiment. No doubt that that COVID-19 the overall economy in a certainty associated with the election and and corporate vaccinations and the overall health of the of the economy consumer spending etcetera had an impact on some of that decision-making and we're seeing that is beginning to ease and that customer sentiment is definitely improved. So when we if we compare a few chords and now and we'll talk more about it in the in our in our first quarter earnings call, but definitely send him in his Improvement. We've seen a significant change over the course of the last 90 days Matt, this is Jim I would just add to this month because you know, at least internally at freightcar America, we've been so focused on, you know, reconstructing the business. It's almost dead.
A little bit easy to forget about the fact that we're still in the midst of a once-in-a-century pandemic with his wreaked Chaos on the entire world. So, you know, if you layer that on top of what was already a deep rail car industry recession, you know, all's you can do at this point is look at the key indicators like real cars in storage as we all know is getting better every month. The general economic macro indicators are improving, you know, it's we like I'm sure everyone else this will turn and as I think said correctly in his comments, it's not about if it's about kind of the nature of the recovery phone number.
going to be
Southern and strong and more jolting like or is it going to be a bit more gradual? That's what we all wish we knew we don't know off but if it if it's quick and sudden that's fantastic if it's a bit more gradual given where we are as a business owner our new footprint our new cost structure we can hang in there with it. So, you know for us the you know, we're watching very carefully internally is when do we begin to pull the trigger on additional assembly lines? It's very good to be small right now while the industry is still small and figuring itself out. But obviously we want to be there when it does come back and so more of our attention at the birth.
My son is engaging want to break ground on additional capacity of the new footprint.
All that makes friends gym. I mean you guys are kind of a different company on many levels right now. Did you talk about your you know sales efforts? And you know, is there is there a I mean has the sales Outreach effort been tweaked. Are you guys focusing on you know a different type of customer are you you know, focusing on a different type of Railcar. Just wondering if with all the changes that you've done so far. There's a change to your you know, kind of Target customer profile. I'm going to I'll start out with a couple of ideas, but Matt add more maybe to it if you think about the two biggest competitors and then yep.
Think about the really small guys. There's a lot of room in the marketplace in between and you know, so from a big picture conceptual standpoint. We see a very nice spot for us in between as we said before we're not going to be a significant player in the back end of the business. We consider ourselves a pure-play manufacturer that lends us to partner very well with the leasing companies month. And uh, so we see sort of a a natural fit there from a a partnership perspective or a customer relationship perspective in terms of order sizes and things like that. You know, we're a small company. We've been a small company birth
We need to be.
Be good at model changes changeovers. We need to be efficient at engineering which we've always been known for and so it's very important for us to maintain our strength and they are absolute strikes and our ability to work with customers modify em to meet the requirements, you know, you hear us now talk about purpose-built and and to be able to then effect and run a smaller Club days on our new footprint and you know, if you just look at what we've done we literally just started receiving material and castanos month in July four months before we were a our certified we started building in August. We were certified in October we started birth
Delivering in November and we deliver positive gross profit for the quarter, um to this point we've done three model changeovers. So we're very focused on uh, the engineering side of it meeting customer requirements, whether they're dead, you know, whatever they might be and we're going to continue to focus on how we do model changes changeovers very efficiently we've found in the past. We've invested a lot of engineering and money on flexible tooling. So when we do change we're getting some leverage and we shorten the time because they're partial physical change overs and instead of more complete ones. And now that we have the team that we have in castanos which are all it's a very highly experienced Workforce dead.
We can conduct those changeovers even faster and obviously more economically because of the cost structure.
So hopefully that's gives some texture to your question. But do you want to add to that I would say Jim I think you covered all the key items here. I'll just walk out to you know, the the pure-play position that we hold in the marketplace. We believe in customer feedback confirms a better value proposition versus some of our competitors. We're not going to compete with our leasing Partners on lease opportunities but partner with them and as it relates to the you know, the the purpose-built facility we have at this time Jim's point of manufacturing and volume flexibility that I think positions us very well with a number of customers at leasing companies shippers, like where we have the ability to do smaller run a relatively inefficiently and make those changes with minimal interruptions to our production capacity. So I think I think you know, we're we we play and dead.
You know the market would would most.
Will customers but I think Jim's point we have uh, the capability to the serve customers from a from a moral purpose perspective than I thought some of our competitors do.
Got it. Thanks so much for the inside guys. Appreciate it and tell you congratulations on the new role. Thank you. Look forward to meeting you. Thanks, man.
And it looks like we have reached the end of the questionnaire at the session and I'll now turn the call over to get my referral code remarks. Thank you again for your time today. We're truly excited about the future of the business or transformation is now largely complete and we are beginning the process to Pivot to growth as we continue to build Upon a Time in twenty Twenty-One. Have a great day and thank you very much.
This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.
Joseph