Freightcar America, Inc.

Greetings and welcome to FATCA America's first quarter fiscal 2022 conference call. At this time, all participants are in a lesson-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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Lisa Fortuna, Investor Relations. Please go ahead.

Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, and Matt Hahn, 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 Freight Car 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 statements. 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 press release issued this morning. Our earnings release for the first quarter 2022 is posted on the company's website at freightcaramerica.com and our 10-Q, which will be filed after the market today. With that, let me now turn the call over to Jim for a few opening remarks.

Thank you, Lisa. Good morning, and thank you all for joining today. As you saw in today's press release, Freight Car America continues to build on the momentum started in 2021. We delivered our strongest quarterly revenue result in nearly five years and first double-digit gross margin since the first quarter of 2016. As I've said on nearly every call over the last several years, our goals are to be the best manufacturer in the business and to keep getting better from there. To us, to be the best manufacturer means to be the best in safety, quality, and efficiency. Our safety performance in Q1 was flawless, quality good, And if manufacturing operating income is a proxy for efficiency, then we outperformed our much larger competitors by more than 20 to 1 on a percentage basis. In short, our efforts to position the company for long-term growth by becoming the best manufacturer in the business are paying off. And we look forward to the challenge of further differentiating our performance as we progress through 2022 and beyond. Matt will provide more detailed industry comments, but at a very high level, we continue to see more positive trends in the industry than we do warning signs, and order and queries remain relatively strong. We are, however, watching this space carefully, as well as trends in the overall economy. As a reminder, and as we said on the last call, however, All of our decisions related to production planning are based on firm orders. Our new manufacturing footprint in Costanos continues to run very well, as evidenced by our financial performance in the first quarter of 2022. Furthermore, we continue to prepare to scale the operation, and we will be ready to capitalize on improving demand. Our revenues for the first quarter were up 188% year over year. Along with strong top line growth, we achieved double digit gross margin of 10.8%, which was $10.1 million of gross profit on just 783 rail cars. We feel that this is a good barometer reading of a business currently running with just two production lines. but with two more lines and an in-house fabrication shop in the works. I specifically mentioned the latter because our fabrication shop will bring further improvement benefits to our operational efficiency. Despite our improving financial results, supply chain and inflationary headwinds remain very real challenges and continue to put pressure on the company. But with that said, I could not be more proud of our team's ability to continue to navigate through these challenges and mitigate the effects. While we are pleased with the progress and results achieved during the quarter, we are also still building out the facility, hiring, training, and implementing better processes. In many respects, we are still ramping up and learning on where and how we can improve. As you know, in the past we have been reluctant to provide much in the way of forward-looking targets as we were focused on ensuring the successful transition to Kastanos. We are pleased for the first time in at least a long time to introduce revenue guidance. For the full year of 2022, we are forecasting revenue to be between $320 million and $340 million up approximately 63% year-over-year at the midpoint of the range. This projection is based on expected deliveries of between 2,800 to 3,000 rail cars, an increase of approximately 68% from the midpoint of the range, and up from our previously stated delivery guidance of between 2,600 to 2,900 rail cars. And as we proceed through the year, we will continue to have a very strong focus on gross margin percentages and gross profit dollars. In summary, our team is performing well, and we expect our performance to only get better as industry conditions improve and we continue to scale our operations with the same levels of focus on cost discipline and manufacturing excellence. With that, I would now like to turn the call over to Mike for a review of our financials. Mike?

Thanks, Jim. Good morning, everyone. We delivered stronger financial results in the first quarter as evidenced by our significant improvements in year-over-year top line and gross margin. Consolidated revenues for the first quarter 2022 totaled $93.2 million compared to $32.4 million in the first quarter of 2021, an increase of 188% year-over-year. The company's deliveries increased 153% from 309 rail cars in the first quarter of 2021 to 783 rail cars in the first quarter of 2022. Further, our product mix shifted between the comparable periods and, coupled with an increase in steel price year-over-year, generated a 14% increase in the average selling price of delivered cars. Our gross profit in the first quarter of 2022 was $10.1 million, a significant increase compared to 1.3 million in the same period the prior year. Growth margin increased 670 basis points from 4.1% in the first quarter of 2021 to 10.8% in the first quarter of 2022, and was the sixth consecutive quarter of gross profit for the business. SG&A for the first quarter of 2022 totaled 10.7 million, up from 9.2 million in the first quarter of 2021. The increase in SG&A during the first quarter of 2022 was primarily due to an increase in stock-based compensation that is largely tied to movement in the company's stock price. Manufacturing operating income for the first quarter of 2022 was $8.5 million compared to manufacturing operating loss of $6 million in the first quarter of 2021 and was positive for the fourth consecutive quarter. Consolidated operating loss for the first quarter of 2022 was 0.7 million, compared to an operating loss of 14.5 million in the first quarter of 2021. Consolidated operating loss in the first quarter of 2022 was primarily driven by the strong manufacturing operating income offset by stock-based compensation that, as previously discussed, is largely tied to movement in the company's stock price. Interest expense in the first quarter of 2022 was 5.7 million, compared to $2.5 million in the first quarter of 2021. This increase was driven by non-cash amortization of deferred financing costs associated with refinancing activities that took place in the prior year after the first quarter of 2021. As a reminder, the warrants issued with our financing transactions directly impact our financial statements. The warrant liability is marked as fair market value each quarter with the change in value impacting our net income and earnings per share calculations. For the first quarter of 2022, the non-cash charge due to the change in fair market value of the warrant liability was $20.7 million. Again, this is a non-cash item primarily reflecting the change in our stock price during the quarter. In the first quarter of 2022, we achieved positive adjusted EBITDA of $3.3 million compared to an adjusted EBITDA loss of $1.8 million in the same period last year. Now, moving to the balance sheet, we finished the quarter with cash and cash and restricted cash equivalents, including availability under the delayed draw loan of $56 million. Capital expenditures for the first quarter of 2022 were approximately $1 million compared to $0.5 million for the first quarter of 2021. As stated on our last earnings call, we expect CapEx to increase in 2022 as we complete our investments in our previously announced expansion of our internal fabrication and wheel and axle capabilities by mid-year, and complete production lines three and four by year end 2022 and early 2023, respectively. Due to the timing of these projects, we expect the bulk of capital spending to be in the second half of the year. For the full year 2022, we still believe CapEx will range between seven and eight million. We look forward to more than doubling our capacity to between 4,000 and 6,000 rail cars as we bring on the two additional production lines. And we now believe that each additional line will bring on approximately 1,500 rail cars of capacity per year, up from our original projection of approximately 1,000 rail cars. Importantly, we are committed to keeping our manufacturing operating structure aligned with our sales, as well as maintaining our current SG&A structure. Therefore, we expect our adjusted EBITDA profile to directly benefit from the operational leverage of the expanded footprint. As noted in Jim's opening comments, we are excited to provide a revenue outlook and reiterate our expectation of positive adjusted EBITDA for the full year 2022. Looking into the second quarter, we will have multiple changeovers on both production lines, which will lower the pace of deliveries in the short term. However, this is our only period of dual changeovers for the remainder of the year, and we will see a significant pickup in production and deliveries during the second half of 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 first quarter and moving forward. Matt?

Thank you, Mike, and good morning, everyone. As Jim alluded to in his comments, the railcar industry continues to see positive activity. Our inquiries during the quarter remain healthy and on par with the activity we witnessed beginning early in the fourth quarter last year. Additionally, the types of inquiries we are receiving are diverse in nature and a broad range of railcar types. another positive industry indicator. Order activity was also strong and comprised a good mix of business for us during the quarter. The actual number of booked orders was 855 rail cars. These orders were largely a reflection of the customers' need to upgrade older fleets and to expand their business in select markets. By the end of this year, we expect that we will have produced 10 different car types and more than 4,500 total rail cars in Casanos since commencing operation there about 20 months ago. While we continue to face persistent inflationary headwinds, which directly impact raw material pricing, replacement demand for new rail cars remains relatively strong in large part due to a continued scrapping activity of aging rail assets. With that said, our conversion business provides us with optionality in this environment and reduces our customers' exposure to high raw material and specialty component pricing. With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?

Thanks, Matt. Now, let me briefly remind you of our expectations and strategic priorities for 2022 that we laid out at the beginning of this year. First, we remain on track and expect to be profitable on an adjusted EBITDA basis for the full fiscal year 2022. Second, we remain on track with and are making good progress on the expansion of our Castanos facility. By mid-2022, we expect to have completed the expansion of our wheel and axle shop and our 162,000 square foot fabrication shop. These operational additions bring significant efficiencies that will directly impact our bottom line results. We are also on pace to start a third production line during the fourth quarter and expect to have a fourth line ready in 2023. As Mike alluded to in his remarks, we expect these lines to double our capacity to approximately 4000 to 6000 units per year. In closing, and as was announced in today's press release, I plan to step down from my position as CEO in 2023. We fundamentally restructured the business during the last several years and are now positioning Freight Car America for profitable and significant growth. This will be our singular focus. I'm working closely with the rest of the board on the search for a successor, and we expect to have a comprehensive and smooth transition in due course. Additionally, I intend to remain heavily involved with the business as an active member of the board of directors once the transition does occur. Growth, scale, and improved profitability are the future for our business. We will continue to focus on differentiating Freight Car America as a best-in-class manufacturer with the ability to flex product specifications and order sizes to meet customer demand. We remain determined to be the leader in the industry for quality and customer satisfaction. That concludes our prepared remarks, and I'll now turn the call over to the operator so that we can address your questions.

Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your answers before pressing the star keys. One moment please while we poll for questions. Our first question is from George Sellers with Stephens. Please go ahead.

Thanks and good morning. Morning. Good morning. So I guess to start, the updated delivery guidance is the high end of your annual total capacity. So can you just discuss your confidence in reaching that and then the visibility maybe that your backlog gives you to the remainder of the year? And I guess said a little differently, are you entirely sold out for the year or do you need to get more orders in 2022 to reach that target?

Matt, why don't you address that first? Yeah, morning, George. I think what it says is we've got a very strong backlog for 22. There remain some pockets of opportunity on our line space, but a big part of our focus right now is really on addressing inquiries and booking orders for 23 and beyond.

Yeah, George, this is Jim. As it relates to the rest of your question, we've said pretty consistently that a good rule of thumb is 1,000 units of volume per year per line. Our real experience to date has been somewhat better than that as the factory continues to run better and better. Combined with, of course, the orders, the mix, and the number of changeovers executed. So that's part of the reason we said today that we're now sort of describing our future capacity as a range of 4,000 to 6,000 units per year once we get the other two lines on board. Starting about the fourth quarter, we'll have the third line running, and so we're quite confident in our volume forecast for the year, and we feel good about the corresponding revenue.

Okay, that's helpful. And then I guess on the comments that you made, Matt, It sounds like you're getting orders that are related to sort of replacement demand, but then also some areas of growth. Could you talk about the different industries that you're seeing more replacement demand and some areas where there's more growth demand?

Yeah, I think the majority of what we are seeing is on the replacement demand, given the number of cars scrapped over the course of the next couple of years. But in And without getting into specific markets, I think you can say that we're seeing demand increase in some select covered hopper markets. Fertilizer is obviously an area of strength right now. Steel continues to be an area of strength given demands, replacement of specialty gondolas as well as mill gondolas are both areas of strength in the market.

Got it. Okay. And then in terms of pricing, Have you been able to push a little bit more on price as the backlog has filled up a little bit, or how has pricing trended recently?

I think, without getting into specifics, George, what we're seeing is we remain in a relatively competitive marketplace. We're starting to see some improvement in talking to our customers on the lease front, which is positive signs that they're starting to be able to capture some improved lease rates as new cars enter in the market. We anticipate that a slight improvement in pricing over time. We're all still working through some of the challenges on the supply chain and increases in raw materials and specialties. So specifics to price increases are really hard to elaborate on at this point.

George, this is Jim. I would just add that You know, obviously, it's still an extremely competitive environment on the one end, and on the other end, we're all dealing with high inflationary pressures and have been with steel for quite some time now. As we've said any number of times, part of our strategy as we executed the move to Mexico is was to keep ourselves right-sized with the market. We've been right-sized up to this point. We're forecasting to stay that way as we bring on the other lines a little bit later on in time. But by keeping ourselves right-sized from a capacity standpoint, it also gives us the important opportunity to be a bit more careful, a bit more selective, and pick the business that's out there that best suits our company. And I think you see that in part in our gross margin performance versus maybe what you've seen in some of the others.

Okay. That's really helpful. I'll leave it there. Thank you all for the time. Thanks, George.

Thank you. Our next question is from Matt Alcott with Corwin. Please go ahead.

Good morning, and Jim, congratulations on the planned retirement. And staying on this topic, can you maybe talk about the timing? Is there something strategic about this, or is this just purely personal? And if there is something strategic, do you feel like you've gotten the company to a point where You can pass the baton now to someone else. And also maybe talk about the succession process and if you guys have started looking internally and externally for the future CEO.

Yeah. Good morning, Matt. So I don't quite know what you mean by strategic or not strategic. You know, my goal has been, is, and always will be to support this company. You know, this has been a very interesting past period of time. The amount of work that's been accomplished and where we sit today, quite frankly, I find thrilling. And for that reason, I don't plan to be too far away from the action. I will continue to stay on the Board of Directors. I will be an active member of the Board of Directors, and I will be helping the company every way I can, hopefully without getting in the way, to really push it for growth. We've been through this phase of restructuring the company, fixing what wasn't good about it or what wasn't working correctly. That's behind us. And now we've just got this terrific business platform. And so I'm going to step out of the, I'll call it the 24-7 swivel chair position for personal reasons. And I'll leave that to somebody younger, but very much plan to stay involved with the company. I always have, and frankly, more than ever at this point, personally have just very high expectations for this company.

Got it. That's very helpful insight, Jim. And then maybe switching back to the market demand and market conditions, you know, barring unexpected turns in the freight environment and the rail car supply-demand dynamics, which have been pretty favorable for the last 18 months, you know, I would say, does it look like you guys should this, you know, projectory of increased deliveries on a quarterly basis, Does it look like it will continue into 2023, barring anything, you know, a market downturn?

Yeah, man, I think inquiry levels support that. You know, none of us have the crystal ball, but when I look at inquiry levels, order activity, and some of the key indicators on demand and replacement levels, I think, you know, the dynamics in the marketplace still change. remain very positive as we go into next year.

And then we should expect gross margins to continue to improve as well with the improvement, the rise in deliveries.

Well, Matt, we're not going to give sort of further guidance than we've already given. I think for this year now We've now given volume guidance, revenue guidance, and we've certainly laid out a baseline expectation for our adjusted EBITDA. And you obviously have first quarter gross margin from which you can work with. But as you know, every piece of business we take, every order we deliver has its own particular economics. I will tell you, we remain very heavily focused on gross margin and the gross profit dollars that come out of it. It is a very key part of the day-to-day running of the business. We are no longer in that position that We found ourselves in several years ago where our capacity was such that every piece of business felt like a must-win piece of business. That's just not the world we're working in today with our new company. So I think I'll kind of leave it at that.

Okay. And Jim and Matt, you know, the cycle, the rail car cycle for the industry historically has been driven by one or two, you know, rail car types. This one, as you guys mentioned earlier, is much more broad based. So, you know, just theoretically, as it relates to margins, does this limit, you know, the margin upside relative to previous cycles when you have to do, lot of line changeovers or as or is the case that you know as you mentioned Jim you're being selective in what types of rail cars you what types of orders you go after because of that reason partly because you don't want to do a lot of line line changeovers well it all factors in and you know as we said in our comments earlier we've got both our lines

going through changeovers and the quarter we're in now, Q2. And, you know, once we're through those, you know, we're going to be running pretty hot for the, you know, at least the remainder of the year. And that's partly, again, attributed to a factory that's running very well. The orders and backlog, which, in part, You know, on the orders we go after harder or less hard depends on what we're currently building. All this stuff plays into it. We're managing the business for gross margin, for growth and profitability.

Makes sense. And then just one last question for you, Jim, or for Matt. I think you guys mentioned the, you know, covered hoppers and a couple of other types of rail cars. Historically, you guys are the go-to for open hoppers, and demand for aggregate, sand, stone, shipments on rail are probably the highest traffic group right now. Is that a market you guys are participating in, or are there not cars being built because we have enough already?

Yeah, so that's a market we do participate in and have been known for. With infrastructure spending, that obviously bodes well for those companies that require cars carrying various types of aggregate and stone. So we see some positive signs in that area that would certainly be a benefit to Freycar's entire portfolio.

But it's not currently reflected in the backlog necessarily?

Yeah, without getting into specifics, I'll just say that that's a market we do participate in. We have delivered some of those cars that serve those markets.

Okay. And, Matt, you did talk about scrapping. It continues to be at elevated levels despite, you know, a year and a half of scrapping. We're still scrapping more cars. You know, industry utilization for the whole fleet is over 80%. and we're still, you know, builds are still below replacement levels after two years of being below replacement levels. You know, Matt, would you say that we're at full utilization for the industry fleet right now?

I don't know that I would say that, but I would say maybe anecdotally the responses we get back from customers we talk to is that they are experiencing high rates of utilization. So I think I think the fact that you mentioned it, the scrap rates outpacing replacement rates, two solid years in a row, probably almost three if you factor in last year, I think 2019 was near 50,000 cars scrapped. 2020 and 2021 were both in excess of that, outpacing what our deliveries were. I think you're looking at at least for a period of time, continued demand, a positive demand cycle, given that fact.

Got it. Thanks very much, Alan. Appreciate it.

Thanks, Matt.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to Jim Mayo for closing remarks.

Thank you all for joining today's call. We're excited about the future of Freight Car America as we enter our next stage of growth, and we look forward to sharing our successes with you all in the future. Have a good day.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.