This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Greetings. Welcome to the Freight Car America fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Lisa Fortuna of Investor Relations. You may begin.
spk03: Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, and Matt Pahn, 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 Great Power Americas Form 10-K 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 statement. 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 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 the most directly comparable GAAP measures are included in the press release issued this morning. Our earnings release for the fourth quarter 2021 is posted on the company's website at freightcaramerica.com and our 10-K, which was filed before the market opened earlier today. With that, let me now turn the call over to Jim for opening remarks.
spk04: Thank you, Lisa. Good morning, and thank you all for joining us today. I'm very pleased to start today's call with the introduction of Mike Reardon, who has been promoted to serve as our new chief financial officer. This changing of the guard became effective yesterday, which allows us to introduce him to you this morning. Mike previously served as the company's controller and chief accounting officer. and has been a member of the senior team since 2020. He has been instrumental in everything that we have accomplished over the past couple of years, and it was our hope when we recruited him that we would get to this day. I also want to extend a sincere thank you to Terry Rogers, who joined us on very short notice last year and guided our finance functions in what was still very much a transition year for the company. Terry will remain part of the team until May. With that, let's get started. I am extremely proud of what we have accomplished this quarter and in the full year 2021. Because we had a strategic update call with you just last month, I will be briefer with my comments. This past year was truly a remarkable one. The move of our manufacturing operations to Kistanos is now complete. and we have transformed Freight Car America into a much healthier growing company with a significant opportunity to drive shareholder value. Our revenue was up 87% year over year, and our order book at year end was up 67% versus the prior year end. Even so, we believe that we are just getting started. We continue to have high-quality discussions with customers, and we continue to expand our manufacturing footprint with added wheel and axle capability, a large fabrication shop, and additional production lines. What this says about Freight Car America is that we are competing and winning in the marketplace, and that we are confident about the future and our ability to make money going forward. As you saw in our press release today, we reported results that were in line with the expectations we communicated on the February call. This included a fifth consecutive quarter of positive gross margin, as well as positive manufacturing operating income for the third quarter in a row. During the fourth quarter, our revenue was up 23.8% year over year, and we delivered 604 rail cars versus 477 in the same period of 2020. The full year-over-year improvement was a direct result of our improved car structure, operating capabilities at the Castanos factory, our facility, and overall ability to compete. The transition of our manufacturing footprint to Castanos translated to approximately $20 million in annual fixed cost savings in 2021 versus the prior US-based footprint. And we expect annual fixed cost savings versus the prior US-based footprint to remain above $17 million going forward. Additionally, we lowered our labor cost per unit by 60% on average in 2021. compared to the previous US-based footprint. The Castano's factory is running well, and our team is performing at a high level. As stated on our third quarter earnings call, the Castano's team of nearly 1,000 individuals is essentially 100% vaccinated against COVID-19, and the personal and workplace disruptions from COVID have been largely avoided to date. Our workforce is one of the main reasons we believe that we stand out from our competitors. Additionally, our collective team has been superb in helping us navigate persistent supply chain constraints and raw material cost inflation, particularly as it relates to steel. Still, the demand environment across all our end markets continues to strengthen, and is in line with the return to growth strategy we laid out in 2021. We are continuing to see increasingly positive trends across the industry. Specifically, with rail cars and storage declining and traffic increasing, we are expecting an ongoing recovery of the cycle, which will allow Freight Car America to capitalize on heightened demand with additional capacity coming later this year and in 2023. I will let Matt dig more into the details of the demand environment in a few minutes. Turning to our capital structure and future cash needs, we are focused on improving our cash cushion, improving on our various loan terms and conditions, ensuring there is ample funding to complete the expansion of our Castanos facility, and eventually funding an entrance into the tank car market. We appreciate the confidence our current financial partners have in providing the funding and liquidity we need to complete our business transformation, but as our results improve, we expect to look for ways to lower our long-term cost of capital. In summary, the entire team is performing well, and we are pleased by the progress we have made and the results we produced in the fourth quarter and full year, despite the inflationary challenges. We are confident in our future growth and believe 2022 is shaping up to be the year where we start to deliver the strong performance that everyone expects and we believe that we're capable of. With that said, I would now like to turn the call over to Mike for a review of our financials. Mike?
spk06: Thanks, Jim, and good morning, everyone. First and foremost, I'm very excited to be in my new role as Chief Financial Officer. The past two years of working as the company's controller has prepared me well for this position because our entire team has worked hard in helping to transform the company. I also want to thank Terry for his support and mentorship in helping to prepare me for this role. We are excited about the future growth ahead, and our fourth quarter and full year 2021 financial results highlight the significant progress we have already made with the manufacturing transition. Consolidated revenues for the fourth quarter 2021 totaled $75 million compared to $58.3 million in the third quarter of 2021 and $60.6 million in the fourth quarter of 2020. The company delivered 604 rail cars in the fourth quarter of 2021, compared to 505 rail cars in the third quarter of 2021 and 477 rail cars in the fourth quarter of 2020. Our gross margin in the fourth quarter was 6.6 million, the fifth consecutive quarter of positive gross margin for the business. Gross margin was significantly higher compared to 1.5 million in the third quarter of 2021 and 5.5 million in the same period the prior year. SG&A for the fourth quarter totaled $6.4 million, up from $5.7 million in the third quarter of 2021 and down from $8.7 million in the fourth quarter of 2020. The sequential increase in consolidated selling general and administrative expenses during the quarter was primarily due to an increase in the reserve accrual for bonuses. Consolidated operating income for the fourth quarter of 2021 was $63,000 compared to an operating loss of 4.2 million in the third quarter of 2021, and an operating loss of 9.2 million in the fourth quarter of 2020. Operating income in the fourth quarter was driven by stronger manufacturing operating income, partially offset by corporate and other operating loss. Manufacturing operating income for the fourth quarter was 4.9 million, positive for the third consecutive quarter, and significantly higher than manufacturing operating income of 0.2 million in the third quarter of 2021, and a loss of 2.1 million in the fourth quarter of 2020. We now manufacture all rail cars in Castaños, and higher rail car volumes allowed us to leverage the operations of the business, directly impacting our manufacturing operating income. Now I'd like to remind investors again of the implication to the warrants issued with our November 2020 financing, the December 2020 delayed draw loan, and the contingent warrant associated with our May 2021 financing and how these impact our financial statements. The warrant liability is marked to fair market value each quarter with the change in value impact in our net income and earnings per share calculations. the fourth quarter of 2021 the non-cash gain on change in fair market value the warrant liability was 4.1 million compared to a non-cash charge of 0.3 million in the third quarter of 2021 and a non-cash charge of 3.7 million in the fourth quarter of 2020. again this is a non-cash item primarily reflecting the change in our stock price during the quarter Interest expense in the fourth quarter was $4 million compared to $3.6 million in the third quarter of 2021 and $1.6 million in the fourth quarter of 2020. Further, just over half of our interest expense in the fourth quarter of 2021 is non-cash and includes amortization of financing fees, discount on debt, and PIC interest. This is detailed on the statement of cash flows. As forecast in our call a few weeks ago, we achieved positive adjusted EBITDA in the quarter of 1.2 million. Now, moving to the balance sheet. We finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of 26.2 million compared to 27.5 million at the end of the third quarter of 2021. In addition, we have 15 million available under the delayed draw loan, which can be drawn at any time through January 31st, 2023. Also, we have made significant progress in managing our VAT receivables subsequent to the end of the fourth quarter. Through today, we have received refunds of approximately $10.3 million in the first quarter of 2022 related to VAT payments made in the first half of 2021. Additionally, we received our VAT certification earlier this month. This will effectively eliminate our requirement to pay VAT up front on goods imported into Mexico that we subsequently apply to be refunded. As a result of both certification and refund process, we now anticipate our VAT receivable to be in the seven to $10 million range by the end of 2022, down from approximately 31 million at year end 2021, generating a significant improvement in working capital. In summary, the certification will both reduce our administrative requirements related to monthly VAT filings and generate working capital improvement throughout the balance of fiscal 2022. Capital expenditures for the fourth quarter of 2021 were $0.3 million compared to $1.6 million for the fourth quarter of 2020. In 2022, CapEx levels will increase to complete the previously announced expansion of our internal fabrication capabilities by mid-year and production lines 3 and 4 by year end 2022 and 2023, respectively. We expect it will range between $7 and $8 million for the year. With that financial review, I'd like to now turn the call over to Matt for a few commercial comments related to the fourth quarter and moving forward. Matt?
spk05: Thanks, Mike. As I highlighted in our February update call, the rail industry continues to show improving fundamentals despite supply chain headwinds and higher steel costs, both of which still exist today. Cars in storage have fallen by over 200,000 units since the peak of 520,000 cars in July of 2020, with a consistent reduction month over month over the last 21 months. Today, there are just over 300,000 cars in storage. Railcar scrapping rates are also pointing in the right direction for a strengthening railcar demand cycle. Since 2020, railcar annual scrapping figures have outpaced deliveries and historical replacement demand as customers retire older and less efficient railcar assets. With scrap rates that remain historically high, we expect this trend to continue into 2022. Lease rates are also improving across multiple car categories. We are seeing utilization of the North American fleet improving, with some customers reporting near 100% of fleets in use or under lease. We see these key indicators, coupled with opportunities for improved rail efficiencies and traffic growth, as very positive signs for a sustainable rail car demand cycle. all of this supported by inquiry and order activity. Railcar orders booked in the fourth quarter were 1,032 versus 90 in the fourth quarter of 2020. Order inquiries are up year over year, and demand in Q1 continues to be solid across our diverse railcar portfolio. Further interest in our designs that offer reduced weight and increased capacity are gaining momentum. Keep in mind that nearly two decades ago, Freight Car America led the industry in lightweight coal car designs and prioritized these design attributes on other car types, including mill gondolas, coil cars, and grain cars. While there remain some economic uncertainties in our global economy, particularly around the supply chain disruptions and raw material inflation, demand for our rail cars continues to improve, and we fully expect to capitalize on this demand with our improved Castaños manufacturing footprint, which will bring on additional production capabilities starting this year. With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?
spk04: Thanks, Matt. Now, let me briefly remind everyone of our expectations and strategic priorities for 2022 that we laid out during our February update call. First, we expect to be profitable on an adjusted EBITDA basis for the full fiscal year 2022. Second, we will continue to expand the new Castanos facility. By mid-2022, we expect that we will have completed the expansion of our wheel and axle shop and our 162,000 square foot fabrication shop and have both online. We are also on pace to have production line number three operating by the end of the year and expect the fourth line to be ready in 2023. Also, as we have previously mentioned, we plan to have a fifth production line at the ready also sometime in 2023. In 2023, we expect that we will have doubled our capacity to approximately 4,000 to 5,000 units per year and be making most of our fabrications in-house. With these operational enhancements, we expect the benefit from the scaling effects of more units produced and substantial additional cost savings from producing our fabrications in-house. In closing, profitability and scale are the future of Freight Car America, and it truly comes down to the hard work of our entire team. I can't thank the team enough for their efforts to date, the benefits of which are just beginning to bear fruit. We're looking forward to seeing continued acceleration of the business, sharing this with all of you and thank you for your continued support. That concludes our prepared remarks and I'll turn the call over to the operator for Q&A.
spk02: Thank you, and at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Justin Long with Stevens. Please proceed with your question.
spk01: Thanks and good morning.
spk04: Good morning, Justin.
spk01: I wanted to follow up on the comment about inquiry levels improving year over year. Could you provide some more color on how inquiries have progressed on a sequential basis, 4Q to 1Q, and given where we are in the quarter, any commentary you can provide on year-to-date or quarter-to-date order activity?
spk05: Yeah, Justin, good morning. I guess what I can share is that we continue to see levels of inquiries improve from quarter to quarter. I won't get into the specifics, but just to characterize that they're up. And we're obviously starting to see as a result of the inquiry levels an improvement in order activity as well. Looking at what we saw from Q3 to Q4, obviously a lot of additional order activity occurred. And we're seeing similar activity in Q1. We're a couple of months away from reporting on that. We'll have some more clarity to provide then.
spk01: Okay, that's helpful. And just to clarify, it sounds like just directionally orders in the first quarter are likely to be up. Maybe you could just say if that's correct. And if so, is that the reason why we saw the delivery guidance raise? I just wanted to get more color around that increase to the guide.
spk04: Justin, this is Jim. Good morning. You know, again, as Matt said, I think we're less than two months, probably more like seven weeks at this point away from having our Q1 call already. So we're going to save some of this for that. What I will say about our delivery guidance and raising it, it's a direct reflection of booked orders. It's, you know, less to do with kind of forecasting and where we see things going as opposed to where things happen to be right now.
spk01: Understood. Second question, I wanted to ask about revenue per rail car. It jumped up a decent amount sequentially, higher than what you currently have in the backlog as well. So was there anything unique in the fourth quarter related to mix that drove that and Maybe you could just comment on the general pricing environment as well.
spk04: Let me start, and then maybe Mike can add something to that or Matt. I mean, you know, quarter-to-quarter, obviously, mixed moves, and, you know, it – We also have, as you know, in our build schedule from time to time, rebuilds. And obviously that affects revenue or the top line revenue. So it's got more to do with mix and quality in the backlog and less to do with you know, a sudden change in kind of the pricing dynamics in the marketplace, for sure. And I think we're probably even a bit more sort of, you see that more on our business right now, given just the two production lines. You know, it just all depends on what we're running through that quarter. Mike or Matt, do you want to add anything to that?
spk05: I think you touched on the key items. You had a couple of things that occurred. You referenced product mix. I think efficiencies and the plant being more productive and efficient had a lot to do with it as well.
spk04: But to the revenue, it's really a mixed question.
spk01: Okay. Okay. Got it. I guess the last one for me is you look out on the horizon and think about the capacity additions that are coming later this year and into 2023. Is there anything you can share on kind of the margin targets you anticipate once we're at a more normalized rate of production, you know, after these capacity ads? And, you know, I don't know if it's easier to talk to a kind of a gross margin percentage or an EBITDA margin percentage, but just Curious how you're thinking about the profitability objectives as production rates.
spk04: Well, obviously, we have gross margin targets in mind in our planning. And we have an advantage now that we didn't have under the prior U.S. footprint in that it's smaller and more tailored to the size company that we are, and all that translates to we can be more selective on the business that we accept. I don't want to get into forecasting specific targets. What I'll say, though, I think when we get to our Q1 call again, which is probably only about seven weeks away, I think you'll have you know, what'll probably be the best indication yet of the capability of the new business. It'll be, you know, this is really the first year we're running out from under the turbulence of transitioning from the U.S. to Mexico. So I guess I would ask for your patience and let's wait for the Q1 call. And, you know, I think we can, you know, put more in the context then, and you'll have a better understanding.
spk01: Sounds good. I appreciate the time. And Mike, congrats on the new role.
spk07: Thank you, Justin. Thanks, Justin. Thanks, Justin.
spk02: Our next question comes from the line of Matt Ellicott with Cowan. Please proceed with your question.
spk08: Good morning. Thank you. And Mike, congratulations on the new role. You guys delivered 604 cars in the fourth quarter. Can you talk a bit more about the cadence of deliveries? Should we expect that number to progressively go up starting with the first quarter of 2022? Or is there going to be a kind of a lighter first half as you adjust your manufacturing footprint for the higher deliveries for the year?
spk07: Any color on the cadence of deliveries would be appreciated. Morning, Matt. This is Jim.
spk04: You know, it's a bit hard for me to comment in a meaningful way on the quarter by quarter. Obviously, the trend over multiple quarters and over the year is we're on an increase. We were on a substantial increase last year. We're on a substantial increase this year. we'll have the capacity to continue on a substantial increase next year. But as it relates to quarter by quarter this year, again, I think without drilling down too far, and maybe we can talk more about this on the next call, we're still in a period where we're operating two production lines. We're obviously influenced by mix, which determines ultimately how many units per day are coming off of each of those two lines. And then we're also affected by a changeover, you know, one changeover in the middle of a quarter when you have two production line as a unit count impact. Let us see if we can, you know, articulate on that a little more in the first quarter call. But, you know, I think we're, you know, you know what the full year delivery guidance is and, you know, it's not horribly out of balance, if you will, quarter to quarter.
spk08: Got it. Thanks, Jim. And then I would imagine, I know you're expecting EBITDA to be positive for the full year, but I would imagine it's a similar answer to the quarterly EBITDA cadence.
spk04: Yeah, and Matt, I think my comment to that, and I say this a little bit tongue-in-cheek, is as you know, we're just kind of coming out from under our shells of talking about full year type guidance information and You know, there'll probably be a little more coming out of our shelves before we get into the quarter-by-quarter type discussions. We're not quite there yet.
spk08: Yeah, understood. And then maybe switching back to orders, you know, Matt, you gave some insight. Can you tell us where most of the orders are coming from? Is it lessors? Is it shippers? And... Are people calling in and saying, I want the cars delivered as soon as possible, or are there strategic buyers that are placing orders for deliveries beyond this year, for 2023 or even beyond?
spk05: Yeah, Matt, good morning. I would say all of the above. Order activity has been pretty well mixed between shippers, railroads, lessors. You know, you're close to the market and you see the You read the tea leaves of demand and what's driving it. We're seeing activity on all fronts, but we're also seeing demand that's spreading into the out years on a more longer-term basis. I can share with you that we are booking orders into next year, and we anticipate that to continue. There continues to be demand for orders placed this year and cars to be delivered this year, uh, which wherever we can, we can look at that. We do.
spk08: Got it. Okay. And what are some of the, I mean, you, you talked about some car types, but what are the cars that are maybe experiencing even shortages right now where people really need the cars, uh, you know, as soon as possible. And what are some of the other types that people are, you know, uh, calling in with strategic orders beyond this year?
spk05: Well, I'll share with you without maybe getting into real specifics, but certainly it's been widely publicized that demands for boxcars continue. That looks to be longer term when you look at the age of the fleet. The condition of milgons overall in the industry are aging, and there is a shortage of supply. And I think you could say the same for certain types of flat cars as well that are in demand. Okay. Those are three, I think, that are probably the ones that most would say, if you look at most industry reporting, are in demand. But the diversification of our portfolio, our ability to do conversions, also brings in additional opportunities for a broader product offering.
spk08: And taking a bit of a longer-term view, I know the automotive industry has been hampered by chip shortages, but eventually there will be a pent-up production cycle in that industry. Do you think that could, you know... Matt, you're breaking up. Can you repeat that question?
spk04: Matt, we cannot hear you due to the line quality.
spk08: Oh, sorry about that. Can you hear me now? Oh, just got...
spk04: It just got better. Thanks.
spk08: Okay, great. I was just saying a longer-term question. The automotive industry has been hampered by all these production issues because of the semiconductor shortage. When the industry starts to build to accommodate the pent-up demand eventually in the next few years, do you think that could lead to a... increase demand for automotive cars on the railcar side?
spk05: It seems logical. Matt, I will tell you that with that, we don't follow that particular car type very closely, but I do know that there's been some activity in that market as of late. It seems logical as given the fact that few auto racks and the flats have been provided over the course of at least the last two years, it seems logical that you'd start to see some demand improvement there.
spk08: Okay. And then just one last question about the industry, Matt. I think the utilization numbers in the low 80s now, which is a huge improvement from 68% back in July of 2020, Based on the scrappage rates and the improved recovering freight demand, do you think we could be flirting with high 80s by the end of this year, especially that a lot of the production by the larger builders is not going to happen until late this year?
spk05: Yeah, that's, Matt, I'd be speculating probably like yourself. Obviously, with the scrap rates of the last two years being at or above replacement rates and then deliveries being below that, you're going to continue to see solid demand, which I think will help a little bit on that utilization front, but the realities are There are some customers, as I mentioned in my comments, that are essentially their entire fleets are being utilized and or under lease. I think that bumping up a higher number and utilization is likely 90 seems like a long way away, but it seems like a potential. I'll leave it at that.
spk07: Okay, great. Thank you.
spk08: Very helpful. I appreciate it, guys.
spk07: Thanks, Matt. Thanks, Matt.
spk02: And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. And it looks like we have reached the end of the question and answer session, and I'll now turn the call back over to Jim Meyer for a closing remark.
spk04: Thank you all for joining today's call. We are excited about the future of late-care America and truly believe we are well on our way to sustaining long-term growth. Have a great day and we look forward to talking with you on the May call. Thank you.
spk02: And this concludes today's conference and you may disconnect your line at this time. Thank you for your participation.
Disclaimer