FreightCar America, Inc. (NASDAQ:RAIL) Q3 2023 Earnings Call Transcript

FreightCar America, Inc. (NASDAQ:RAIL) Q3 2023 Earnings Call Transcript November 7, 2023

Operator: Greetings, and welcome to FreightCar America Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Victoria Roseman, Investor Relations. Thank you, Ms. Roseman. You may begin.

Victoria Roseman: Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Mike Riordan, Chief Financial Officer, Matt Tonn, Chief Commercial Officer; and Nick Randall, Chief Operating 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 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.

A high angle shot of a railway construction site, with workers in the frame.

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 U.S. Generally Accepted Accounting Principles or GAAP. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the earnings release issued yesterday afternoon. Our earnings release for the third quarter of 2023 is posted on the company's website at freightcaramerica.com along with our 8-K, which was filed yesterday after market. With that, let me now turn the call over to Jim for a few opening remarks.

Jim Meyer: Good morning, everyone, and thank you all for joining us today. FreightCar America delivered another quarter that highlighted our team's operational and commercial discipline, contributing favorably towards our continued focus on enhancing our quality of earnings. This comes despite headwinds in the quarter related to the halt of railroad services in Mexico due to migrant issues that limited shipments, as well as three large line changeovers, which together muted our top line. Revenue generated during the quarter decreased 28% year-over-year to $61.9 million on deliveries of 503 railcars, both lower than expected and both simply timing related. At the same time, we expanded our gross margin profile by an additional 30 basis points from last quarter, achieving an industry-leading 14.9% during the third quarter.

Adjusted EBITDA increased versus the same quarter of the prior year to $3.5 million, or approximately $7,000 per railcar. I am extremely pleased to see the fruits of our labor from the last several years begin to materialize, particularly in the face of a more muted top line driven by the aforementioned headwinds. The operational groundwork we laid and the commercial groundwork we continue to lay is we believe spot on for this company. Most importantly, while we do not expect progress to be achieved in a perfectly straight line, we do believe there is ample room to continue to improve the quality of our business vis-à-vis gross margin and profitability per railcar. This belief, along with us now being in a position to scale the business, creates the potential we have been working towards.

The completion of the fourth production line at our Castaños manufacturing campus during the third quarter signifies the long-anticipated completion of the facility, and all of us are beyond pleased and beyond proud. FreightCar America now has the capacity to seamlessly manufacture annual volume ranging from 4,000 to 6,000 railcars across four production lines. We are now starting up this fourth line and in yet another milestone moment for the company, we will see the first deliveries produced from this line in the fourth quarter. When we speak about operational excellence, for us, it is invariably measured in gross margin and profitability per railcar. To put a finer point on operational excellence and what it means to us, we are talking about railcar design and the ease in which our railcars can be manufactured, supply chain management and achieving the right levels of vertical integration, the quality and flexibility of our tooling, jigs, and fixtures, and of course, how we train, empower, and mobilize our nearly 2,000 production team members.

This is the bedrock of our company and represents continued and, we believe, significant opportunity in an industry with deep traditions. Complementing the company's growing and successfully differentiated position in operational excellence is our concurrent work to establish a unique commercial position. It is important that we begin to share another and equally important undertaking in the remaking of FreightCar America, and that is where and how we fit in an industry dominated by a very small number of much larger competitors. It is true that we now have a diverse portfolio of products, some of which have achieved market-leading positions. Our goal with respect to our product offering is simple, and that is to offer the products that customers want most and not simply as an alternative consideration or as part of a larger bidding process.

Like our operations, our products are under constant review and are constantly being improved. Continuous improvement is not simply a factory concept. It applies equally to engineering and product development. It is also true, we believe, that as a smaller company, we are better equipped to invest all the time required between our commercial and technical teams and current and prospective customers in order to deliver product solutions that best match each customer's specific needs. We are not a one-size-fits-all manufacturer. Our customers make substantial and long-term investments when buying railcars, and our goal every time is to give them the exact car they want, rarely is this an off-the-shelf design. This level of customization is supported by the gains generated from our operational excellence, and we believe contributes favorably to our margins.

Thirdly, our team has worked incredibly hard to align our business with customer groups that value the aforementioned, along with the fact that we do not compete on leases. Our approach is to partner with, instead of compete with, this very important group of customers. Fourthly and finally, we will continue to focus on providing what we believe to be the optimal balance between backlog and readiness to respond to customer needs. Backlog is critical to planning, but we are mindful of the drawbacks when acquiring backlog in quantities so large that it takes years to fulfill or backlog acquired as a result of large discounting practices. This is not our business model. A perfect order book for us is one that is long enough to allow for well-managed material planning and production scheduling, and short enough to allow us to be responsive to our customers' needs.

in summary, our commercial excellence is focused on having the best value proposition for individual customer needs, attention and service, and maintaining the right balance of backlog quality and quantity. At this point, I would like to address our guidance for the year. Due to our continued concerns over rail service disruption, we are lowering our fiscal 2023 guidance for revenue to be in the range of $365 million to $380 million, which is based on a forecasted production of 3,150 to 3,300 railcars. This is a shift in timing with some of our planned third quarter revenue now shifting into the fourth quarter and some of our fourth quarter revenue shifting into the first quarter of 2024. Importantly, our full year adjusted EBITDA guidance range remains unchanged.

We are reaffirming our expectation for full year adjusted EBITDA to be between $18 million and $22 million. I will now turn the call over to Matt for a few commercial comments.

Matt Tonn: Thank you, Jim, and good morning, everyone. During the quarter, our level of inquiries, order activity, and demand for our products remained healthy. For the third quarter, 2023, we closed orders for 1,015 railcars valued at approximately $122 million, with year-to-date orders totaling 3,356 railcars valued at approximately $379 million. This represents an order increase of approximately 200% versus the first three quarters of fiscal 2022. We ended the quarter with a backlog of 3,800 railcars valued at approximately $452 million, representing increases of approximately 50% and 64% year-over-year respectively. As Jim mentioned, our fourth production line at Castaños is now complete, with the first shipments from that new line scheduled to be delivered in the fourth quarter.

The sales team continues to build our pipeline for fiscal 2024, and having the fourth line available will increase our ability to better meet customers' needs for new railcars. Although weakness in freight loadings, the migrant issue at the border, and the overall macro environment continue to pose market uncertainties, we agree with industry forecasts of railcar deliveries of approximately 45,000 railcars in 2023. Our sales pipeline remains strong, with customer inquiries indicating that demand is still largely tied to railcar replacements across a diversified range of car types. Order activity by customer segment, including lessors, shippers, and Class 1 railroads, has remained consistent and includes the development of new customers who value our commercial proposition as outlined by Jim.

Our sales team continues to operate with discipline. Our overarching strategy is to prioritize business that delivers substantial value to customers and aligns with the core of our business, furthering our strategic objectives, which includes a healthy, well-managed backlog. This disciplined approach ensures that each decision aligns with both the needs of our customers and our long-term goals, reinforcing our commitment to growing, providing value, while maintaining a strategic direction that fortifies our business. And I'll turn the call over to Mike for comments related to our financial performance. Mike?

Mike Riordan: Thanks, Matt, and good morning, everyone. As Jim discussed in his opening remarks, for the third quarter we delivered significant year-over-year adjusted EBITDA growth and gross margin expansion. These were achieved despite a decrease in deliveries year-over-year, proving the success of our cost structure transformation. Our highly variable cost base provides us with the agility to scale our business to industry demand while maintaining profitability at lower delivery levels. Consolidated revenues for the third quarter of 2023 totaled $61.9 million with deliveries of 503 railcars compared to $85.7 million on deliveries of 783 railcars in the third quarter of 2022. Gross profit in the third quarter of 2023 was $9.2 million with a gross margin of 14.9% compared to gross profit of $4.6 million and gross margin of 5.3% in the third quarter of last year.

Despite the lower deliveries and adverse impact of foreign currency in the quarter, we continue to expand gross margins driven by our increased production efficiencies coupled with strong commercial performance. SG&A for the third quarter of 2023 totaled $7.5 million, up from $7.1 million in the third quarter of 2022 as we continue to recruit and invest in operational talent. Consolidated operating income for the third quarter of 2023 was $1.4 million, compared to an operating loss of $10.7 million in the third quarter of 2022. The increase in consolidated operating income in the third quarter of 2023 was primarily driven by increased gross profit, as well as the third quarter of 2022 having an $8.1 million non-cash charge related to settling historical pension liabilities.

In the third quarter of 2023, we achieved adjusted EBITDA of $3.5 million compared to $1.6 million in the third quarter of 2022, primarily driven by increased operational and commercial excellence initiatives that Jim discussed previously. For the third quarter of 2023, our adjusted net income was $0.2 million, or a loss of $0.14 per share, compared to an adjusted net loss of $5.4 million, or $0.21 per share, in the third quarter of last year. Under U.S. GAAP, accrued dividends related to our preferred shares are treated as a reduction to net income available to common shareholders are treated as a reduction to net income available to common shareholders when calculating our earnings per share, resulting in negative earnings per share for the quarter.

Capital expenditures for the third quarter of 2023, were approximately $4 million as we completed construction, of the fourth line at our Castaños facility. There will be further cash outflows during the fourth quarter related to the timing of payments for works that finish at the end of the third quarter. However, now that the Mexico buildout is complete, capital expenditure should decrease considerably in 2024. Now turning to guidance. As Jim previously mentioned, due to the impact of railroad disruptions from the migrant issue, we are adjusting our full year 2023 revenue guidance to be between $365 million and $380 million, which is based on a lower forecast delivery of 3,150 to 3,300 railcars. At the same time, we are reaffirming our previously stated full year adjusted EBITDA guidance of between $18 million and $22 million.

The inherent strength of our business foundation has enabled us to maintain a solid bottom line despite this external challenge. Reflecting on the journey we have been on the past several years, we are very proud of the achievements our business has made in such a short time. Our operational and commercial excellence initiatives have laid the foundation for us to achieve industry-leading margins. Looking ahead, the combination of our highly variable cost structure and carefully managed SG&A should create significant operational leverage as we scale our business to four lines of production. This, in turn, we believe should provide significant growth in our bottom line profitability. With that financial overview, I'd like to now turn the call back over to Jim for a few closing remarks.

Jim Meyer: Thank you, Mike. And let me wrap up our formal remarks with one other piece of work extremely important to our future, and that is our debt structure and relationship with PIMCO. As all of you know, our company was in a challenging position this time three years ago. After evaluating multiple options to ensure that FreightCar America would have the liquidity necessary for the creation of a new and much stronger future. We aligned with a partner we believed, would not only provide the necessary support, but also the reliability during the uncertainties prevailing at the time. PIMCO proved to be exactly that partner. Now, as we move forward and as our business continues to demonstrate strength, we will look to improve our capital structure, take out the preferred shares held by PIMCO, and effectively conclude this chapter of what has been a very beneficial relationship for FreightCar America.

This has always been our shared vision. Although I cannot provide you with additional details on when this might occur, I do want to state our intention to get this done just as soon as conditions permit. In closing, we continue to set goals quarter-by-quarter, and the team continues to deliver on these goals. I'm very pleased with how we sit as a company today, the prospect of transitioning out of the PIMCO financing, and what the next several years hold for us. With that, I will ask the operator to open the lines for some Q&A. Thank you.

Operator: Thank you. [Operator Instructions] The first question comes from the line of Justin Long with Stephens Inc. Please go ahead.

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