FreightCar America (NASDAQ: RAIL) announced a joint venture with a metal fabricator in Mexico for the purposes of manufacturing railcars.
FreightCar America inked a deal with Fabricaciones y Servicios de México, S.A. de C.V. (Fasemex) to build railcars in Castaños, Mexico. Construction on the new facility has begun with the expectation that railcar production will commence in the middle of 2020. FreightCar America is funding the joint venture over several years with $25 million in assets and cash. The two companies will split the profits or losses in the 50-50 deal.
The announcement is part of the company’s efforts to improve operating efficiency by lowering production costs and consolidating its manufacturing footprint.
“Getting ourselves repositioned and on the right cost structure are core to our ‘Back to Basics’ strategy. We are making great progress in our material and fixed cost reduction efforts, and now, with the addition of this partnership in Castaños, we will become even more competitive in certain railcar types that weren’t economically feasible previously,” said FreightCar America’s President and Chief Executive Officer Jim Meyer.
FreightCar America is tightening the belt on the downside of the railcar cycle as lower rail volumes and precision scheduled railroading (PSR) initiatives continue to weigh on new car demand.
The company implemented the “Back to Basics” strategy in 2018, which is designed to reduce material and labor costs, improve the product portfolio to more profitable car types, and optimize its manufacturing capabilities. By the end of 2018, the company had reduced cost of goods sold by $3,000 per railcar manufactured, which management contends was negatively impacted by a higher number of production changeovers and shorter than normal production runs. The company wants to achieve $5,000 in savings per car in 2019.
Prior to the company’s second quarter 2019 earnings report, it announced that it would shutter its Roanoke, Virginia production facility, which is expected to save the company approximately $5 million annually. In early 2019, the company announced that it had struck an agreement to reduce the square footage and lease payment, both by 40%, at its “Shoals” facility in Cherokee, Alabama. The new lease doesn’t take effect until January 2022.
“While we complete construction of this new facility, we remain deeply committed to Shoals as our primary manufacturing platform and will continue with our plans to make incremental investments and consolidate our Roanoke operation into Shoals,” said Meyer.
The Chicago, Illinois-based company manufactures and leases railcars and supplies railcar parts. The company designs and builds hopper, gondola, intermodal and flat railcars. FreightCar America’s production backlog was 1,121 railcars with a value of $96 million at the end of the 2019 second quarter. However, the company received new orders totaling 1,050 railcars after the financial period ended.
Shares of RAIL are off more than 3% on the day.
