A sputtering industrial economy along with precision scheduled railroading (PSR) initiatives, which are designed to improve asset utilization and drive other efficiencies, have significantly impaired demand for railcars, sending a significant number of railcars into storage.
These fundamentals played out once again in railcar manufacturer and lessor FreightCar America’s (NASDAQ: RAIL) fourth-quarter 2019 financial results. In the period, the company reported a loss of $0.75 per share, worse than analysts’ expectations for a $0.59 per share loss.
In the quarter, FreightCar America delivered only 439 railcars compared to 1,047 deliveries during the fourth quarter of 2018. The company’s revenue was cut nearly in half at $44.9 million.
The company ended 2019 with a railcar order backlog of 1,650 railcars, compared to 1,704 at the end of third quarter 2019, valued at $206 million. Since year-end, FreightCar America has received orders for an additional 300 railcars. The company expects to deliver between 2,000 and 2,500 railcars in 2020.
Earlier this month, the Association of American Railroads (AAR) reported that 400,215 freight cars were now in storage, or 23.9% of the 1.67 million railcars in North America. Total railcars in storage are up more than 50,000 units from August 2019 and significantly higher than the sub-300,000-unit level seen throughout the second half of 2018.
Currently, the total North American railcar manufacturing backlog stands at 51,000 units, the lowest level since 2011.
For all of 2019, FreightCar America delivered 2,276 railcars compared to 4,214 deliveries in 2018.
FreightCar America has been restructuring its business to combat the precipitous erosion in demand. Last year, the company announced that it was downsizing its manufacturing capabilities, forming a lower production cost joint venture in Mexico and closing its Roanoke, Virginia manufacturing facility. The company also reduced the square footage under lease at its “Shoals” facility in Cherokee, Alabama. All in, the facility cuts are expected to produce $12 million in annual cash savings by January 2022.
“While industry conditions remained challenged, we focused on maintaining our internal momentum by executing against the last few steps of our ‘Back to Basics’ strategy. This included strong performance against our goals to remove over $5,000 per car in material costs over the last two years. It also included significant work to revamp our product portfolio to better align with customer needs,” said FreightCar America President and CEO Jim Meyer in the company’s fourth-quarter press release.
On the company’s earnings conference call, management said that they expect a “challenging 2020,” but believe that the internal cost initiatives undertaken will allow FreightCar America to see “bottom-line profitability” in all parts of the demand cycle.
When pressed on the current demand environment, management said that inquiries for railcars are down and that they expect new orders to be lower year-over-year in 2020. Management said that they don’t expect an upturn in demand until mid-2021 with conditions not returning to normal until 2022 or 2023.
Last week, rival railcar manufacturer Trinity Industries (NYSE: TRN) announced it was “right-sizing” manufacturing capacity and reducing headcount by 20% to meet lower railcar demand in 2020. The company’s guidance calls for the delivery of 16,000 new railcars in 2020 to its customers and into its lease fleet compared to the nearly 22,000 railcar deliveries it reported in 2019. The company’s reduction in production capacity will result in first-quarter deliveries of roughly half of the almost 7,000 cars the company delivered in the fourth quarter of 2019.
Further, Trinity’s management team said that current market lease rates are running 9% lower than the rates the company is currently receiving for railcars that have leases expiring in 2020. Trinity will see 17% of its railcar leasing portfolio up for renewal in 2020.
FreightCar America reported a $75.2 million net loss for full-year 2019, nearly double the $40.6 million loss it reported in 2018.
The company ended the year with $70 million in cash and restricted equivalents and $10.2 million in debt.
Shares of RAIL are up more than 10% on the day. The shares are approximately 80% lower than year-ago levels.
