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In connection with the
Special Meeting of Stockholders (the “Special Meeting”) of
FreightCar America, Inc. (the “Company”), the Company filed a
definitive proxy statement and accompanying proxy card with the
U.S. Securities and Exchange Commission on November 2, 2020. On
November 10, 2020, the Company held an investors’ call to discuss
the Company’s earnings for the third quarter (the “Q3 Earnings
Call”). Below is the script for the Company’s Q3 Earnings
Third Quarter 2020 Earnings Call
Version 5 as of 11.9.20
Jim Meyer – President and Chief Executive Officer, FreightCar
Chris Eppel – Chief Financial Officer, FreightCar America
Matt Tonn – Chief Commercial Officer, FreightCar America
Joe Caminiti – Investor Relations
Welcome to FreightCar America’s Third Quarter 2020 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 on the Company’s website within a few hours after this
I would now like to turn the call over to Joe Caminiti, Investor
Thank you and welcome. Joining me today are Jim Meyer, President
and Chief Executive Officer, Chris Eppel, Chief Financial Officer,
and Matt Tonn, 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 2019 Form 10-K and its third quarter 2020
form 10-Q for a description of certain business risks, some of
which may be outside of 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 2019 Form 10-K and earnings release for the third quarter of
2020 are posted on the Company’s Web site at
With that, let me now turn the call over to Jim for a few opening
Thank you, Joe. Good morning and thank you all for joining us
today. While it has only been three weeks since our special call to
provide you with an update on our business repositioning process,
we have continued to make progress and we’re excited to provide
some additional updates for you today.
Let me take a few minutes to recap some of the critical steps we
have taken, 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 in Castaños, Mexico in mid-October.
Production at the new Castaños factory started in July, with the
first car completed in August, and I am happy to announce that the
manufacturing facility is now fully certified by Association of
American Railroads, or AAR. To the best of our knowledge, this was
completed in record time, which was due entirely to the strong team
we have at Castaños. As a result, we will be shipping our first
railcars from the facility this week. So, in short, Castaños is
manned with a highly experienced workforce, is AAR 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, AL or Shoals facility. As
of October, we have no additional rent due at Shoals and we have
agreed to sell and transfer certain basic infrastructure at the
facility to the landlord in exchange for the early termination.
Again, there is no additional capital required as part of the lease
at this stage.
By early 2021, our entire freight car portfolio will be produced in
Castaños. We will continue to produce aftermarket parts for our
parts business in Richland, PA and this is not expected to change.
And as I always do, I want to thank our employees at Shoals for
their dedication and commitment to completing our remaining orders
at that facility. They continue to work with both professionalism
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 isn’t what our customers want from us anyway. What we
are and what our customers want us to be, is a ‘pure play’
manufacturer. And given this, we better be the best in the business
at it – for cost, for quality, and for on-time delivery
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 transformative steps, we believe we are there.
No one else in our industry is producing from a single efficient
site 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 of product re-engineering and strategic sourcing initiatives
from our ‘Back to Basics’ work, which transfer with us to the new
footprint. Starting now, we can compete in 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 Castaños
is fully aligned with this objective. Beyond the careful attention
that went into the design of our new factory, we are assembling the
very best 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. Period. The facts
that (a), we delivered the first steel to the plant in July and
completed our first car in August, and (b) we had our onsite
inspection audits from the AAR in September and were formally
certified just one month later, are testimony to this. And again,
we will start shipping cars to customers this week.
By moving all production to Castaños by early 2021, we will have
reset our cost-base and are multiple steps closer to reaching our
goal to become the highest quality and lowest cost producer in the
Lastly, our industry remains in a cyclical downturn, which has been
greatly intensified by a ‘once in a century’ pandemic. While there
are some initial signs of market stabilization and small wins,
which Matt will talk about 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 full shift of
production to Castaños provides significant financial and
operational flexibility to ride out these headwinds. We have
lowered our breakeven economics to less than 2,000 cars per year.
And the Castaños 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 in one of the best positions in our
industry to navigate this pandemic with this new lean and 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 term loan. I will talk more
about the latter 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. Chris?
Thanks Jim. Turning to our financial results, consolidated revenues
for the third quarter totaled $25.2 million, compared to $17.5
million in the second quarter of 2020 and $40.7 million in the
third quarter of 2019. We delivered 163 railcars in the quarter,
compared to 100 in the second quarter of 2020 and 467 in the third
quarter of 2019.
As previously noted, our current backlog of 2020 orders, scheduled
to ship this year, is heavily weighted to the second half of the
year. That said, we shipped fewer cars in the third quarter than we
expected as we made the strategic decision to shift some of our
orders from Shoals to Castaños to take advantage of the
certification timing and improved economics of the new facility.
This resulted in a pushout of deliveries from Q3 into Q4 and
beyond. Thus, we still expect to come within the bottom end of the
guidance range we provided for you 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
negative $6.1 million in the second quarter of this year, and
negative $5.4 million in Q3 of 2019. Gross profit performance
reflects previous cost reductions and a mix of higher margin
railcars, which offsets the impact of negative efficiencies due to
lower production volumes.
SG&A for the quarter totaled $7.2 million up from $6.5 million
in the second quarter of 2020, but down from $7.8 million in Q3 of
2019. The sequential increase included several onetime costs
related to the deal activity and certain commercial reserves for
approximately $1 million. The Company expects to have additional
SG&A costs related to the financing in both Q4 of this year and
Q1 of 2021. Excluding these costs, the Company’s SG&A will
remain under $7 million.
Consolidated operating loss for the third quarter of 2020 was $41.3
million, compared to an operating loss of $12.9 million in the
second quarter of 2020 and a loss of $36.3 million in the year ago
period. The sequential increase in the loss was primarily
attributable to $30.1 million of restructuring and impairment
charges incurred during the quarter. As a reminder, the majority of
these charges specifically related to the exit from the Shoals
facility. Specifically, the charge included a $17.5 million
non-cash impairment charge recorded to reduce the Shoals facility
lease asset to its fair value, non-cash impairment charges for
property, plant and equipment of $9.0 million, and employee
severance and retention charges of $3.4 million. Furthermore, the
final agreement with the landlord was reached in the beginning of
the fourth quarter, which requires us to write down the lease
liability associated with the facility in that quarter in line with
Generally Accepted Accounting Principles. As such, we will record a
non-cash gain related to the lease in our Q4 results.
Moving to the balance sheet, we finished the quarter with cash and
cash equivalents, including restricted cash and certificates of
deposit, of $32.9 million, down from $52.4 million at the end of Q2
and down $37.1 million from the year end 2019. Part of the decline
in our cash results is attributable to a build in our working
capital. Inventories increased to $60.2 million, from $47.1 million
last quarter and $25.1 million as of December 31, 2019. This
increase is related to the delivery guidance we are providing.
Capital expenditures for the third quarter of 2020 totaled $1.3
million dollars, the majority of which was related to the needs of
our Mexico facility to support our production ramp-up. The Company
anticipates between $1-to-2 million of additional capital
investments in 2020, which will allow us to complete the first
phase of our Mexican capacity production investments.
Now 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
this cyclical downturn. Key market indicators including rail
traffic and railcar storage levels are trending in the right
direction although the economy in general remains uncertain due to
the pandemic. Our view is that customer sentiment remained very
cautious in the third quarter, and thus, we don’t anticipate
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 Castaños 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 hosting live
and virtual customer meetings from Castaños, and have received
great feedback on the facility and experienced leadership
I’ll end with a review of our backlog. Our order backlog as of
September 30, 2020 consisted of 1,776 railcars, compared to 1,839
railcars at the end of the second quarter. Our backlog has an
estimated sale 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
both Castanos 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 this
critical business repositioning process and we have had a few
consistent questions. So, I thought the best thing we could do
today 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 market’s in the middle of a downcycle?
To start, our ‘Back to Basics’ strategy made significant progress
in lowing our cost per car, but it hasn’t been enough, not in this
pandemic and the resulting prolonged industry downturn.
We entered 2020 with cautious optimism, but the impact of the
downcycle 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 our 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 the JV formation and Castaños plant
start-up, we can do it now, as in right now, and we can do it
without disruption and without giving up future scale and upside.
We will just no longer be paying for that scale until we need
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 Gil Family’s 50% interest in the
JV, in exchange for approximately 14 and a half percent of our
The simple answer is that
is our future. And with the decision to move all 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
We did the deal in stock versus for two reasons. One, cash must be
managed carefully in this time of economic uncertainty, and two, we
did the deal in stock because we believed it was absolutely
critical to directly align our interests with those of our
partners. As to the amount, approximately 14 and a half percent,
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 and a half percent of 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
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 of 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 require strong liquidity
and customers need to know we have a balance sheet that will allow
us to fulfill our commitments to them. Without the proper balance
sheet, winning business becomes that much harder.
But equally important is when this industry downturn finally
reverses – and it always does – we need to be in a position to
leverage the opportunity. That will require additional capital to
ramp up production, build the 3rd and 4th
production lines at Castaños, and support working capital needs to
build inventory. We must leverage the next upcycle to win share and
become a larger company again, and that’s going to need capital to
This incremental funding is vital to our plans and vital to our
Lastly, we’ve had a common question around our capital raise
process. Some investors view 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 has been, what
was the process and why this deal?
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 asked what it would cost to underwrite it. This
plan wasn’t backed by assets and it wasn’t backed by a strong
positive EBITDA stream. 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 for whichever partner we
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 great uncertainty. We need to reposition this
business and we need to do it now. We need this 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 will
require roughly 35% in total dilution for our stockholders, 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 itself….versus a business that has a
clear path for becoming the lowest cost, highest quality producer
in its industry – one that will grow and earn profit at a
significantly higher rate – is an easy decision.
Thus, I am asking all of you as 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
That concludes our prepared remarks and I’ll now turn the call over
to the operator for Q&A.
At this time there are no other questions in queue.
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. Have a great day.