FreightCar America, Inc. (RAIL) CEO James Meyer on Q1 2019 Results - Earnings Call Transcript

May 05, 2019 7:58 AM ETFreightCar America, Inc. (RAIL)1 Comment1 Like
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FreightCar America, Inc. (NASDAQ:RAIL) Q1 2019 Earnings Conference Call May 2, 2019 11:00 AM ET

Company Participants

Michael Cieslak - Head of FP&A and IR

James Meyer - President and CEO

Ted Baun - CCO

Chris Eppel - CFO

Conference Call Participants

Matthew Elkott - Cowen and Company

Justin Long - Stephens Inc.

Operator

Welcome to FreightCar America's First Quarter 2019 Earnings Conference Call and Webcast. At this time all participant lines are in a listen-only mode. For those of you 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 of the conference call will be available from roughly 1:00 p.m. Eastern time today until 11:59 p.m. Eastern time on June 2, 2019. To access the replay, please dial 800-475-6701. The replay passcode is 466777. An audio replay of the call will be available on the company's website within two days following this earnings call.

I'd now like to turn the call over to Mike Cieslak, Head of FP&A and Investor Relations at FreightCar America.

Michael Cieslak

Thank you, Amy, and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Chris Eppel, our new Chief Financial Officer; and Ted Baun, Chief Commercial Officer.

I'd like to remind everyone that statements made during this conference call relating to the company's expected future performance, future business prospects or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995.

Participants are directed to FreightCar America's 2018 Form 10-K for a description of certain business risks, some of which may be outside the control of the company that may cause actual results to materially differ from those expressed in the forward-looking statements. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise.

Our 2018 Form 10-K and earnings release for the first quarter of 2019 are posted on the company's website at www.freightcaramerica.com. With that, let me now turn the call over to Jim for a few opening remarks. Jim?

James Meyer

Thank you, Mike. I'm going to speak briefly on our results and restructuring progress and then ask Ted to speak on the market and Chris to present our financials.

First though, let me introduce Chris to you and share the reasons why we are so pleased to have him on board as our new CFO. I want to start by thanking Matt Kohnke for his hard work and the role over the last three years. We appreciate everything he did for us and look forward to his help during the transition.

Given the nature of our ongoing business transformation, however, we decided to look for a CFO with deep manufacturing and operational experience, someone that has led business turnarounds, is a skilled and proven cost cutter and is someone that will be a force multiplier to the team. And as luck would have it, the search not only brought us someone with these very credentials, but also someone that I know well and have worked very successfully within the past. So Chris, welcome to the team.

Turning to the quarter, our results were in line with expectations with deliveries lower on a year-over-year basis. While we understand that our results aren't anywhere near where we want them to be at the P&L level, our balance sheet remained strong with cash essentially unchanged from the prior quarter. Most importantly, we remain fully on track with our transformation and are confident that of our hard work will have us meaningfully reposition for the 2020 fiscal year.

Back to basics, which, as you know, is about running our plans well and lowering our COGS is in full implementation and allowing us now to also place heavy focus on product development in order to drive the top line. We continue to make improvements in the safety of our facilities and I'm pleased to report we had no recordable incidents in the first quarter.

We strongly believe that safety, quality and productivity are highly linked and that safety metrics, which are defined for us by the government are the easiest to appreciate. We are now operating at or near world-class levels for safety. The quality of the work at our facilities also continues to make tremendous strides.

Our products are meeting or exceeding industry quality standards with by far the lowest levels of rework since the Shoals factory was started. This is supported by internal KPIs, on-site independent audit results and other tracking data. And though our culture that's being remade around our continuous improvement mindset, we now aspire the quality levels that will stand us apart from the rest of the industry.

Our productivity, our worker hours consumed for - to produce a car also referred to as hours per unit is now much closer to where it needs to be and we are squarely in range on models that we have produced during the past 12 months. This is the result of fixing issues, realizing opportunities that we didn't previously see and improving our end-system quality, which reduces rework.

Our investment in bringing in the right leadership is paying off. And to build on this idea, we are now investing in our entire team of people through training. As introduced in the last call, we have shifted much of our plant operations focus from finding and fixing to training, training and more training. Our entire Shoals operation salaried workforce will complete a six day intensive remanufacturing program, during which time our Shoals' hourly workforce will complete additional welding training in our brand-new in-house weld school.

When each of these are done, our entire Shoals' hourly workforce will then also complete a remanufacturing program. All of this is leading to an extremely important cultural transformation and delivering additional improvement on the factory floor.

Our first two floorlet Kaizen [ph] projects are complete and delivering productivity gains of five to seven hours per unit each and we will be doing many dozens more of these as we continue to deploy this training to the factory floor throughout the rest of the year.

As to our material cost-reduction plan for the year, we feel good about the $2,000 to $3,000 per car savings target that we communicated in the last call. With the momentum that is building within our operations, we feel confident in our ability to increase our focus on product development. In the quarter, we completed first time car builds for four additional car types under our formalized new model launch process.

If you remember from the last quarter, we entered 2018 believing that we are commercially competitive in 12 car types with the expectation of being competitive in 24 car types by the end of 2019. This is still the expectation.

In addition to the operational transformation taking shape, let us not forget the balance sheet. Our cash and cash equivalents position of $68 million was relatively unchanged versus year-end. It is also worth noting that in April, we announced two new credit facilities, the first is a $50 million asset-based corporate revolver, which will replace our current earnings-based revolver. The second is a $40 million dedicated facility to support our newly incorporated leasing entity and will be backed by future delivery of those leased units.

Along with the two new credits facilities and the additional flexibility they will provide, we will ensure that we continue to maintain a quality balance sheet. To conclude, we are making strong progress against our strategic transformation and remain confident in our ability to finish the job.

Ted, can you please take us through the commercial results for the first quarter?

Ted Baun

Thanks, Jim. Moving to our commercial figures for the first quarter, deliveries totaled 641 railcars, all of which were new railcars. This compares to 1,094 railcar deliveries in the same quarter last year, which included 891 new cars, 81 rebuilds and 122 leased cars.

Sequentially, railcar deliveries were down compared to the 1,047 railcars delivered in the previous quarter comprised of 827 new cars and 220 rebuilds. We received orders for 694 railcars during the first quarter of which 194 were new railcars and 500 were rebuilds. This is down compared to orders of 756 railcars we received during the same quarter in 2018 and orders of 835 railcars received in the fourth quarter of 2018.

Our order backlog, as of March 31, 2019, consisted of 1,752 railcars with an estimated total sales value of approximately $152 million compared sequentially to our backlog at the end of the fourth quarter, which consisted of 1,699 railcars with an estimated total sales value of approximately $160 million.

Our quarter end backlog figure consists of 1,252 new railcars and 500 rebuilds. Similar to the first quarter of 2018, we saw a high level of rebuild orders. Industry-wide non-tank car orders comprised 4,816 railcars for the first quarter of 2019, down from 13,492 non-tank railcars for the fourth quarter of 2018. Box cars, large cube covered hoppers, gondolas and flat cars comprise the bulk of the non-tank industry orders.

Similar to last quarter, we, again, received a reasonable share of the orders within the product segments where we consider ourselves to be strong, but these segments represent a smaller portion of these overall industry activity. Our current product development initiatives will give us the ability to better compete in the markets with inherently higher volumes and we remain on track to get ourselves well positioned in these categories.

Our railcar inquiry levels in the first quarter were slightly below Q4 2018 levels, which we attribute to customers dealing with the effects of the Midwest U.S. flooding and continuing to assess the ongoing implementation of precision scheduled railroading practices. Rail traffic softened as Q1 progressed and in the month of March, only 4 of 20 rail traffic categories showed year-over-year gains, the fewest since July 2016.

Railcars in storage also increased within the quarter by roughly 16,000 cars. With respect to the near term industry outlook going forward, we believe rail traffic will recover from the issues within the quarter and will grow at modest levels. We anticipate railcar inquiry levels to remain at an average pace in the future and expect to see continued demand for certain covered hopper cars, flat cars and gondolas.

With that, I would like to turn the call over to Chris as he will detail our first quarter financial results.

Chris Eppel

Thanks, Ted. And before I begin, I want to express my excitement to join FreightCar America and have an opportunity to work with Jim again. FreightCar America has tremendous potential and I'm energized to join at such a pivotal point in company's turnaround. I look forward to working with the team as we create value for FreightCar shareholders, customers and employees going forward.

Moving to the financials. Consolidated revenues for the first quarter 2019 totaled $70.7 million compared to $83 million for the first quarter of last year and $87.8 million in the fourth quarter of 2018. The sequential decline in revenue is driven by lower deliveries in the quarter. Our negative gross margin of $6.8 million compared sequentially to the fourth quarter 2018 negative gross margin of $4 million. The decrease in margin was primarily due to lower volumes and a onetime product warranty reserve recorded in the quarter related to cars produced several years ago.

The consolidated operating loss for the first quarter was $14.5 million. This compares to a consolidated operating loss of $8.9 million in Q1 of 2018 and $11.3 million operating loss in the fourth quarter of 2018.

SG&A for the quarter totaled $7.7 million, up from $7.2 million in the fourth quarter 2018, but down from the $8 million in the first quarter of 2018. This increase on a sequential basis was driven by our 2019 incentive compensation accrual as well as R&D expenses associated with our new product development efforts. As a reminder, our team had no incentive compensation paid in 2018.

Capital expenditures for the first quarter totaled $760,000. We continue to anticipate our CapEx figures for the year to be between $4 million and $5 million. These expenditures will go towards advancing our design of our new products, bringing those products online and enhancing our Shoals facility with a number of modifications that will be made throughout the year.

Finally, the company adopted the new lease accounting standard in the quarter. The change both created a net lease assets and a lease liability on our balance sheet that do not materially impact our income statement. Please refer to footnote 4 in our 10-Q for additional information on this change.

With that, I would like to conclude my prepared remarks and turn the call over to the operator for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from Matt Elkott with Cowen. Please go ahead.

Matthew Elkott

Good morning. Thank you for taking my question. Ted, you mentioned average base for increase going forward, can you elaborate a bit on what you mean by that?

Ted Baun

Yes, hey Matt, what we're seeing is typical to what we've reported in the last several quarters. So increase are not lighting the world on fire comparatively and they're sort of at the pace that we've seen here recently and it's the same car types that I've reported in the past. For us, it's certain covered hopper cars, flat cars and gondolas, obviously, not pertinent to us are tank cars, which are doing very well right now.

Matthew Elkott

Okay. So the reason I ask is, you did note the down tick in inquiries and orders in the first quarter, which we already know, but I wanted to make sure that average base means the continuation of more moderate trends of the first quarter going forward.

Ted Baun

Yes, it's really just - it was a comment on the gross inquiries that we receive from quarter-to-quarter. The challenge obviously is turning those inquiries into orders.

Matthew Elkott

Okay. And the industry saw cancellations of 3,000 covered frac sand hoppers in the quarter. Can you tell us what percentage of your current backlog is frac sand cars?

Ted Baun

We don't typically get into the specifics relating to our backlog, but we can tell you that with respect to the energy markets, we do not have any exposure at the current time.

Matthew Elkott

That's good to know. And the decline in the ASP from last quarter, can you tell us how much of that was attributable to the new orders you've taken or the deliveries you made in the quarter?

Ted Baun

Yes. It's a function of mix and obviously, the rebuilds that we had in Q1 were not present in Q4 '18.

Matthew Elkott

Got it. And just one final question for Chris. And Chris, congratulation on the new role. The accounts receivable and inventory declined meaningfully in the quarter. What are the drivers behind that? Anything noteworthy?

Chris Eppel

Really nothing noteworthy. It's just the function of the shipments in the quarter at end of last quarter going into this quarter.

Matthew Elkott

Thank you very much.

Operator

And our next question is from Justin Long with Stephens. Please go ahead.

Justin Long

Thanks and good morning. So maybe to start, I wanted to ask if you had any updated thoughts around the cadence of deliveries over the remainder of the year. Just curious, what's getting baked into the guidance? And also if there is any color you can provide on the mix of new versus rebuilt cars in the quarters ahead, that would be helpful.

Ted Baun

Sure, Justin, it's Ted. When we look at the rest of the delivery cadence throughout the balance of 2019, we would classify that as essentially flat. Q2, Q3 and Q4 equally spread out over the next 3 for all intents and purposes. With respect to the rebuilds, again, we're not going to get into to specific guidance, but those rebuilds will also follow a similar pattern.

Justin Long

Okay. That's really helpful. And then on the gross margin line, going back to some of your commentary, Jim, on the strategic initiatives and the repositioning of the business going into 2020, I know you don't give guidance on this, but do you have any high-level thoughts about when the business could return to being gross profit positive? Is that something that you think is achievable by the end of this year, into next year, would love to just get your high-level thoughts?

James Meyer

Hi, Justin. Let me start by reiterating, we are very pleased with where we're at in the transformation. And first phase of the transformation was around manufacturing operations and cost structure, where we actually couldn't be any more pleased with what our folks have done for us to-date. There's still a lot more to do. There's a lot more opportunity and will be for the foreseeable future and all of that will continue to build and accumulate for us.

The second piece of what we've got to get done, of course, is we got to have the right product portfolio and as I've said, many, many times, we need to have the right cost structure in the business and platform to build. And then we need to have the right products to sell it to the marketplace.

So right now, our gross margins are challenged by several things. They are challenged by the number of changeovers that we talked about for a couple of quarters and relatively high number of small production runs, which is both an impediment, but also an opportunity. It is the opportunity for us to reprocess and retool those products, but it hurts at the gross margin line.

What we need most of all to drive this business at this point because again, we're feeling increasingly good about where we're at, at the manufacturing plant from. We got to get the right products out there so we can start building the backlog in a meaningful way. And so that's what it's going to take to drive the gross margin line at this point more than anything. It's about right products on the right cost structure and building that backlog. And you're right, we don't get forward-looking guidance, but we're quite comfortable with how we see things right now.

Justin Long

Okay, great. That's helpful. And then maybe lastly, for Chris. Congrats on the new role. And I know you just came on board, but I would love to just get your initial thoughts around financial priorities out of the gate in the context of the strategic plan that's been laid out here.

Chris Eppel

Thanks, Justin. I want to say a couple of things about joining and why I'm excited about joining and the things that were very attractive to me about the company. And I think the first thing for me was the opportunity to work with Jim and his track record and operational turnarounds and product transformation efforts, and again, obviously, we're aligned in our support and resources going into those things.

To me, the second thing that really got me excited about coming on board was the value-creation path for FreightCar to me was very clear and achievable based on what I've seen in other companies and the timing and the details behind that and how were laid out was again very, very exciting and we'll be continually on that path as laid out previously.

And then finally, if you look at our balance sheet and the fact that the balance sheet provides us more flexibility to achieve our plan, but to also achieve them in kind of the orderly systemic fashion that the team has laid out previously. So no change in terms of the prior comments around cash and financial conservatism, but hopefully, that provides a little background.

Justin Long

It does. Thank you and appreciate the time as always.

Operator

And our next question is from the line of Matthew Brooklier with Buckingham Research. Please go ahead.

Unidentified Analyst

Hi, it's Kyle for Matt. I just have a couple of questions. I know you guys spoke to warranty expense a little bit but do you mind asking about how much the incremental warranty expense was during 1Q 2019? And if you have any color on what type of products are driving the cost and maybe what these expectations for the warranty expense might be moving forward?

Chris Eppel

To address your question, it's around $1.5 million and you can obviously see that by looking at the change in our warranty accruals so it's not anything overly surprising. Really, that was related to products produced several years ago and is not in any way indicative of any trend going forward. So our normalized warranty view exceed - without that $1.5 million is how you should look at as going forward.

Unidentified Analyst

Okay. And then also, would you mind just talking about what demand is looking like, I guess, since quarter closed? Have you seen a ramp up or down, increase or any change going on?

Ted Baun

Hey Kyle, it's Ted. We don't really comment on post quarter activities, but I would just say that April feels like much of how March and February looked.

Unidentified Analyst

Okay, great. Thank you, I appreciate the commentary.

Ted Baun

Sure.

Operator

And there are no further questions in the queue.

James Meyer

Thank you all for participating and joining us today and we look forward to keeping you apprised of our progress with the transformation of our company. See you next quarter.

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