Q4 2023 FreightCar America Inc Earnings Call

Participants

Chris O'Day; Investor Relations; Riverton

James Meyer; President, Chief Executive Officer, Director; FreightCar America Inc

W. Matthew Tonn; Chief Commercial Officer; FreightCar America Inc

Mike Riordan; Chief Financial Officer; FreightCar America Inc

Nicholas Randall; Chief Operating Officer; FreightCar America Inc

Justin Long; Analyst; Stephens Inc.

Presentation

Operator

Welcome to FreightCar America's Fourth Quarter 2023 earnings conference call. At this time, all participants 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 that this conference is being recorded and an audio replay of the conference call will be available on the company's website within a few hours after this call.
I would now like to turn the call over to Chris our day with rich Investor Relations.

Chris O'Day

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 of the control of the Company and 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 result of new information, future events or otherwise.
During today's call, there 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 fourth quarter 2020 three's posted on the Company's website at freightcaramerica.com, along with our 10-K, which was filed yesterday after market.
With that, let me now turn the call over to Jim for opening remarks.

James Meyer

Thank you, Chris. Good morning, everyone, and thank you all for joining us today. FreightCar America achieved many significant milestones last year as part of our multiyear transformation, and I believe that we are now positioned to scale the business and generate compelling results. To support this belief, I will lead off with one very important metric for 2023. Freightcar America earned $6,658 of adjusted EBITDA per railcar. This compares to a loss of $18,020 of adjusted EBITDA per railcar in 2019, which was our last full year of operation prior to beginning the transformation.
During this timeframe, the Company eliminated very important levels of both fixed and variable cost. In addition, our prior manufacturing footprint Limited, the types of cars we were able to produce as well as access to skilled labor. We needed for expansion Fast Forward impact to 2023.
We achieved the just-mentioned adjusted EBITDA per railcar on just over 3,000 deliveries and a footprint now capable of producing 5,000 or more railcars per year as we ramp up production we expect to gain new operating efficiencies, driving more adjusted EBITDA per railcar on more railcars in total. In my view, this is the most important message today.
Now to touch on a few key highlights. For the full year, we delivered revenues of $358.1 million, a decrease of 2% year over year on deliveries of 3,022 railcars, a decrease of 5% year over year. The modest decline in top line numbers can be attributed to disruption and a move in our rail traffic at the U.S. Mexico border at the end of the year. Following the border issues we experienced during the third quarter, the government closed the border at Eagle Pass, Texas from December 18th to the 27th, which created a multi-week impact on our ability to both ship and produce railcars.
Furthermore, recall that our fourth production line started just prior to year end, which prevented significant additional scaling in 2023 with the resumption of rail service at the border, combined with our manufacturing facility now fully online, our teams are well prepared to meet demand. In addition to these headwinds, foreign exchange also impacted our results.
But despite these which combined were approximately $5 million in headwinds for the full year, we delivered full year adjusted EBITDA of $20.1 million versus $8.4 million in 2022, an improvement of $11.7 million or approximately 139% on slightly less revenue as we expanded our gross margin profile by 460 basis points from the prior year, achieving an industry-leading level of 11.7% for the full year.
In terms of our operations, we achieved several key milestones in 2023. Notably, we completed the build-out of Arcos Dorados Mexico manufacturing facility. We now have the capacity to seamlessly manufacture annual volume of 5,000 plus railcars our time that 15% are the annual demand for North America. Moreover, I am extremely pleased with the high level of operational excellence.
Our team has already been able to demonstrate, coupled with the ongoing execution of our commercial strategy. I am confident in our ability to further enhance the quality of our earnings as we flex the full potential of our capacity and operational and commercial strategies, some of which will be evident when Nick speaks to our outlook for 2024 in a few minutes.
Turning to the fourth quarter, revenue decreased 2% year over year to $126.6 million on deliveries of 1,021 railcars, both lower than expected, purely due to challenges around the already mentioned border closure and rail service disruption. Despite these headwinds, our gross margin increased 600 basis points to 9.6% compared to the fourth quarter of 2022.
And adjusted EBITDA increased $5.3 million versus the same quarter of the prior year to $6.5 million, which equates to $6,357 per railcar. And this is on the face of an approximately $2.7 million impact in the quarter on adjusted EBITDA from the last end of your shipments and FX. As you are most likely aware from other industry participants, order activity took a pause in the fourth quarter with FreightCar America securing 135 orders. I will say that activity has picked up significantly since the start of the new year but is still facing inertia from the high levels of caution being exercised by customers.
We believe us and our shows do caution with CapEx spending in view of mix, confidence and the economic outlook, elevated interest rates, which directly impact leasing cost and improvement in railroad performance metrics, which has led some buyers to reevaluate new quantities needed. Despite the softness we have line of sight to production of 4,000 to 4,400 railcars in 2024, which will allow us to achieve some of the scaling and levering we are so eager to demonstrate.
With that, I will next turn the call over to Matt to discuss the market, then Mike, for a more detailed view of 2023. And finally, to enact a preview 2024. Matt?

W. Matthew Tonn

Thank you, Jim, and good morning, everyone. Throughout the majority of 2023, we experienced healthy inquiry activity with an increase in total orders book versus the prior year. For the full year 2023, we won orders totaling 3,491 railcars valued at approximately $397 million. This represents the largest annual order total since 2019 and a 5% increase in order intake compared to 3,306 orders booked during the prior year orders in 2023 by the customer segment, including Class one railroads, lessors and shippers. It remained consistent as has the continued addition of new customers.
We ended the year with a backlog of 2,914 railcars valued at approximately $348 million, representing increases of approximately 19.2% and 20.9% year over year, respectively. For the fourth quarter, we booked orders of 135 cars, which highlights the lumpiness we sometimes see from quarter to quarter for many Freight segments. As Jim alluded to earlier, customers are simply taking longer to fully analyze the timing of their new railcar purchases. From a market perspective, rail service, including rail velocity and dwell times are trending above their 5-year averages. Overall, we view these metrics as positive for a healthy rail environment that will drive more freight to rail and ultimately increased new railcar demand. C
ustomer feedback indicates that the balancing of improved rail service and its impact on fleet utilization, higher commodity and raw material prices and the commensurate increases in lease rates for new equipment, along with general uncertainties of the economy, all factor into their decision and timing of new railcar acquisitions.
It isn't a matter of when or if but when customers will make buy decisions as an industry. We expect to remain in the cycle of new railcar demand tied closely to replacement levels, and we are aligned with most other forecasts for total railcar deliveries falling in the range of 35,000 to 40,000 plus railcars for the full year 2024.
As Jim mentioned, the Cassano plant is hitting its stride now with four lines of production fully operational. The complete interest on Neo's campus is truly a differentiator for our brand and position FreightCar America for growth with the ability to deliver both more volume and a broader range of car types to our customers.
Back to the commercial front, we are seeing solid momentum again in bid activity in Q1. However, as I referenced earlier, the environment may remain somewhat lumpy quarter to quarter as customers manage through the aforementioned factors in filing the timing of when new railcars are needed as a company.
We will continue to maintain the disciplined commercial process, a collaborative approach to developing solutions for our customer specific railcar needs and secure business that aligns with our financial goals.
I'll now turn the call call over to Mike for comments related to our financial performance. Mike?

Mike Riordan

Thanks, Matt, and good morning, everyone. I'll begin with an overview of the fourth quarter financials and then touch on the full year 2023 highlights, some of which Jim already mentioned in his opening remarks. First, let's turn to the fourth quarter results.
Consolidated revenues for the fourth quarter of 2023 totaled $126.6 million with deliveries of 1,021 railcars compared to $129 million on deliveries of 1,150 railcars in the fourth quarter of 2022. Gross profit in the fourth quarter of 2023 was $12.1 million with a gross margin of 9.6% compared to gross profit of $4.6 million and gross margin of 3.6% in the fourth quarter of last year, despite relatively flat deliveries due to the adverse impact of the border closure in the quarter, we significantly expanded gross margin supported by an even more efficient production process and robust commercial strategy with our facility entering a new phase with all production lines operating beginning December 2023, we anticipate further gross margin improvement throughout 2024.
SG&A for the fourth quarter of 2023 totaled $7.7 million, up from $6.3 million in the fourth quarter of 2022, primarily due to a year-over-year increase in stock-based compensation as the fourth quarter of 2022 had a favorable fair market value adjustment for certain cash settled awards. Consolidated operating income for the fourth quarter of 2023 was $268,000 compared to an operating loss of $6.2 million in the fourth quarter of 2022.
The increase in consolidated operating income in the fourth quarter of 2023 was primarily driven by increased gross profit, offset by a $4.1 million impairment charge related to our last tranche of railcars in our lease fleet. In the fourth quarter of 2023, we achieved adjusted EBITDA of $6.5 million compared to $1.2 million in the fourth quarter of 2022, primarily driven by increased operational efficiencies.
Again, as Jim highlighted earlier, our fourth quarter adjusted EBITDA was muted due to the US-Mexico border closure in December that prevented shipments of finished goods as well as the continued strengthening of the Mexican peso. In total, these were a headwind of approximately $2.7 million in the quarter. While the effect of core foreign currency will always exist, we implemented a foreign currency risk management program in the third quarter of 2023 that will reduce the impact on our earnings in future periods.
For the fourth quarter of 2023, our adjusted net income was $2.4 million or a loss of $0.07 per share compared to an adjusted net loss of $8.1 million or $0.31 per share in the fourth quarter of last year. Adjusted net loss accounts for the impact of certain noncash items and nonrecurring items, such as the $4.1 million impairment on leased railcars as well as the change in fair market value of our warrant liability, which fluctuates each quarter in line with the change in our share price during the period.
Capital expenditures for the fourth quarter of 2023 were approximately $3.8 million related to the timing of payments for work that was finished at the end of the third quarter to complete the fourth production line at our Keystone news facility. For the full year, it was $12.7 million. With the completion of our fourth production line, we expect future capital spend to decrease considerably and to primarily be in a maintenance cycle.
We estimate our maintenance cycle to be approximately half to three-quarters of a percent of revenue. For the full year 2023, we completed our expansion work, which included increasing the capacity of our vertically integrated fabrication shop as well as production lines three and four. Adjusted EBITDA for the full year was $20.1 million, an $11.7 million increase or 139% improvement from 2022.
As Jim mentioned earlier, while we are very pleased with our 2023 results. Foreign currency in the December border closure were headwinds to our earnings of approximately $5 million due to the favorable cost structure focused on U.S. footprint and the operational leverage we designed into our transformed business group reported our second consecutive year of positive operating cash flow. Cash generated from operating activities was $4.8 million in 2023 compared to cash flows from operating activities of $11.5 million in 2022, a $6.7 million decrease because of the border closure in the final weeks of December that led to a large buildup of inventory as we were unable to ship finished railcars.
With that financial overview, I'd like to now turn the call over to Nick for a few remarks on our outlook.

Nicholas Randall

Thanks, Mike. I want to start by highlighting some key strategic developments from the past quarter. Our team has continued to reach major achievements, successfully doubling our on-site paint capacity, building product across all four of our production lines in sourcing, the significant majority of our fabricated parts and growing our workforce in Mexico, all of this split achieved while making up plants amongst the safest manufacturing facilities in North America.
These achievements underscore our commitment to our customers, our employees and our shareholders in terms of operations despite the challenges we faced in 2023, including Balda disruptions, we made significant progress in increasing productivity as optimizing the supply chain and improving our assembly processes and capabilities these improvements are critical to our long-term success and reflect our dedication to operational excellence. Our priorities for the upcoming year remain unchanged.
The team will continue to focus on executing our operational and commercial strategies while working to build our backlog and deliver high-quality products on time to our customers. We also remain committed to creating opportunities for further improvements in our capital structure and driving continued improvements in our cash generation moving forward.
With the disruption associated with our 2023 plant expansion work behind us, I believe we can expect a progressively better year, especially when considering the combined benefits from more volume, more productivity and putting even more operational excellence initiatives to work for the full year 2024 we are forecasting revenues between $520 million $572 million, up approximately 52.5% year over year at the midpoint of the range.
This expectation is based on expected deliveries between 4,000 to 4,400 railcars, an increase of approximately 39% at the midpoint of the range. We expect adjusted EBITDA guidance between $32 million $38 million dollars for the full year, representing a year-over-year increase of 74.1% at the midpoint and further underscores underscoring the power of our transformation strategy.
Finally, we expect positive operating cash flow for the third consecutive year. I am truly excited about the opportunities that underpin our guidance for 2024 and also mindful of the potential challenges of UNI-P prepared to manage through.
I want to express my gratitude to our customers, our employees, partners and shareholders for your continued support.
I will now turn over to Jim for a few closing remarks.

James Meyer

Thanks, Matt. I will come back to the theme we started today's call with and that is today FreightCar America is a vastly better Company defined by a full array of railcar products with some of those products being the preferred car type in the industry. We are also a company defined by our people and their commitment to give our customers what they want. And 24 seven accessibility for the leadership team.
We're also defined by our manufacturing campus in Castaños the newest and most efficient factory in the industry. Our factory is our showroom and it is the place we want our customers to experience before they're making their purchase decisions.
And finally, we are defined by our Transform cost structure and competitiveness. As a result, our customer base is growing. Our repeat customer base is growing as shareholders and the industry will be better off for us. As Nick pointed out, our priorities for the upcoming year remain unchanged.
The team will continue to focus on executing our operational and commercial strategies and demonstrate the power of scale and leverage that we believe exists in the business. We also remain committed to improving our capital structure and driving incremental cash generation.
All of us have great expectations for FreightCar America. And given what has been achieved under the most difficult of circumstances, I am extremely confident in the team and direction of the Company.
In closing, as first mentioned, quite some time ago. Now we have been planning for the next generation of leadership and continuity. So let me also comment on the other press release issued last night. I will be stepping down as President and Chief Executive Officer effective May. Once Nick, our current Chief Operating Officer will assume the role of President and CEO. and join our Board of Directors at the same time, Nick has been second in command for nine months now, and I knew I do not believe it necessary to do a full reintroduction.
He's an operations, expert customer and product centric and came to us from a division of one of the most admired companies in the world, Berkshire Hathaway. Mike shares my values and my vision for the company, and I believe that he and Mike and Matt and the rest of the team will deliver for our shareholders. My role will continue with FreightCar America, where also starting on May 1, I will begin serving as the company's Executive Chairman, which will allow me in conjunction with Nick and the rest of the Board to focus on strategic and other topics are of the utmost importance to our future. With these changes, we are not stopping or changing our agenda. Instead, we are preparing to accelerate as a vastly healthier and more formidable company.
With that, I will ask the operator to open the lines for Q&A.

Question and Answer Session

Operator

Thank you. We'll now be conducting a question and answer session. (Operator Instructions)
Justin Long, Stephens.

Justin Long

Thanks, and good morning.

James Meyer

Morning.

Justin Long

First of all, let me say to both Jim and Nick, congrats on the transition, and I maybe wanted to start there with a question for you, Nick, as you step into this role, sounds like from the prepared remarks, the overall strategy isn't going to change.
But Jim, I think you mentioned there could be some opportunities to accelerate the trajectory of the business going forward. So Nick, as you make this transition, what are some of the priorities for you out of the gate? And do you have any thoughts on ways you can enhance or accelerate the current plan?

Nicholas Randall

Thanks, Justin, and thank you for the congratulations, thank you very much. Yes, let me give a as Jim mentioned, I've been here for nine months now. So I've had a significant amount of time to spend on the ground in our casinos facility in Mexico to get very integrated and sort of very close to the processes we have the investments we've made the facility that exist down there. And I will tell you that my first nine months is truly impressive what a great facility has been placed in Pakistan, U.S. and expanded over the last two or three years.
I think the team has done an outstanding job on what they've accomplished in customers by also believe there is more to come from our continuous operations and our approach to operational excellence. So I think there's as we said, it's the same priority. Our priority is to drive that operational excellence, the benefit up priorities to drive and all of those cost takeout initiatives to remove non-value-added work in the US.
So we'll continue to do that. And the teams have been embarked on that, and we'll continue to push that through so that that reflects in our bottom line from a cost performance perspective in casinos, I think on improving operations is not just a one-shot deal. It's not something we do over a three-month period. And David, it is a process of the continuous process. It pursues excellence. So we'll continue to do that.
From an operational perspective, our priority is really to know now we've built this capacity is to be able to fill that capacity and expand our products to meet what our customers require or what the industry requires. And I think and externally have to spend more time with customers and key stakeholders that we can help our customers win so that we win their work when the when the entitlement to have their work.
I'll work with existing customers, new customers, Matt and the team to make sure that our products and services clearly meet what our industry needs or expects over the coming 12, 18, 36 months period. So that's what I've kind of learned just over the last nine months. I think that what was your question, but if not, let me know, that does and thank you for that.

Justin Long

And maybe the shift to the performance of the business. As you called out a few times, the $5 million impact that you saw from FX and the issues at the border. Could you specifically or could you break that out in terms of how much of that $5 million related to the border issues and maybe provide an update on how those issues at the border are playing out year to date?

Mike Riordan

Sure, Justin. I'll start with breaking out. So the border contributed about $1.3 million. And over the course of the year it was $3.7 million on FX for that breakout. In terms of the border closure, I'll turn that one over.

Nicholas Randall

Just so just so that I mean, it's a couple of things on the border closure. Just to note was at the end of Q4, the timing of the border closure was right at the end of sort of week three of December, which gives you a little time to sort of respond in time for the quarter.
So what we've done since then is we've got to we've got a much closer management with the railcar, the rail operators. So we have a better view of what to expect and we've also got a better closer management daily review of what's happening and where it's going to impact. So we can be better prepared and better mitigated for future or any extended or surprise border closures, I will say right now it's better than it was in Q4 from a border and delivery expectations.

Justin Long

Okay. That's helpful. And I guess the last one for me you gave the guidance for 2024 and it implies pretty significant growth across the board. But is there any additional color you can provide on the quarterly cadence of that guidance as we think about the timing of deliveries and margin performance of the business, things that may be fluctuating based on mix or other factors?

James Meyer

Mike, do you want to respond to that?

Mike Riordan

Sure. I'll start with you from a we're not going to give specific quarterly numbers, but I will say we'll see sequential improvement throughout the year. Q1 will be our lowest as I as I mentioned, we didn't start production on our fourth line until December. So you can understand there will be ramp up production costs, et cetera, going on in Q1 that will mute those results compared to the rest of the year when that fourth line is fully utilized and running at full capacity and the learning carries over from hiring the new crews. So you'll see that scale up throughout the year with Q1 being the low point from a gross margin perspective.

Justin Long

Okay. And from a delivery perspective, would you expect a similar cadence, 1Q being the lowest and then building through the year?

Mike Riordan

So on that one, as we talked about with the border closure, there's a hangover from Q4 so deliveries in Q1 will actually be a little higher given how much was kind of sitting on property. And as you look through our financials, you'll see there is still just over $23 million of finished goods or about 200 railcars finished on property that would have been Q4 that are going to fall into Q1. So Q1 deliveries will actually be a little high as a result of the border closure hangover falling into Q1.

Justin Long

Okay. Very helpful. Thank you for the time.

James Meyer

Thanks, Justin.

Mike Riordan

Just, thank you.

Operator

Thank you. At this time, we've reached the end of our question-and-answer session, and this will also conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation and have a great day.