Freightcar America, Inc.

Greetings and welcome to Freight Car America's fourth quarter and full year 2022 earnings conference call. At this time, all participants are in 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen Poe with Alpha IR. Thank you. You may begin.

Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, and Matt Ton, 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 America's 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 earnings release issued yesterday afternoon. Our earnings release for the fourth quarter 2022 is posted on the company's website at greatcaramerica.com, along with our 10-K, which was filed yesterday aftermarket. With that, let me now turn the call over to Jim for a few opening remarks.

Thank you, Stephen. Good morning, and thank you all for joining us today. Freycar America finished another very important year in its transformation and transition from a turnaround story to a growth story. Here are some of our most important accomplishments for the full year. We delivered revenues of $364.8 million, an increase of 80% year over year, and above our previously provided outlook. on deliveries of 3,184 rail cars, an increase of 84% year-over-year. We delivered full-year adjusted EBITDA of $8.4 million versus a loss of $7.2 million in 2021, an improvement of $15.7 million. We delivered our first positive full year of operating cash flow since 2017, generating $11.5 million versus a use of $55.4 million in 2021, an improvement of $66.9 million. Including orders received shortly after the end of the year, our current production schedule for 2023 is essentially full. and we are now focused on our 2024 order book. While we continue to watch the rail industry with cautious optimism, the fact is that demand for rail cars built by Freight Car America is strong. We continue to invest in and build a world-class manufacturing campus located less than three hours by car from Texas. We now have three production lines, a paint shop, and fully capable fabrication and wheel and axle shops. By late summer this year, we expect to have four production lines and to double our paint shop capacity. In total, we will then have a facility fully able to produce 5,000 plus units per year without undue stress. Also, as announced yesterday, we entered into a very important refinancing which, when closed in May, will extinguish all of our term debt and replace it with a non-convertible preferred stock with our current financing partner, an affiliate of Pacific Investment Management Company. Here are several of the more important aspects of this financial transaction. First and foremost, this transaction demonstrates the confidence of our financial partner, PIMCO, which has continued to support the growth and future potential of the business. This confidence is especially true given the state of the capital markets, uncertain economy, and current volatility in banking. Next, This transaction provides us with additional capital to invest in new initiatives to accelerate the next phase of growth. The additional capital is provided by excess cash at the closing of the deal, a significant reduction in fees tied to our ABL facility, and we will have the option to pay the dividend on the preferred stock on a payment in kind or pick basis. This equates to approximately $15 million in additional cash at closing, plus an additional approximately $10 million per year in expected improvement in operating cash flows. We will also move from a variable rate loan structure on the extinguishing term loan to a fixed dividend on the preferred, which is obviously expected to be helpful in the current market environment. Finally, by eliminating most of the debt from our balance sheet, this financial transaction places us in a better position for further and lower cost refinancings in the future. While we are happy with this important first step to reshape our capital structure, we are still intently focused on achieving more conventional and lower cost financing in the future. I will talk about our views on 2023 in a few minutes. But first, I'll turn the call over to Matt and Mike, starting with Matt, for a few commercial comments. Matt?

Thank you, Jim, and good morning, everyone. We had a well-coordinated year in 2022, matching sales with the available capacity from two production lines for the full year, and then a third production line starting in the fourth quarter. We have since done the same for 2023. With that in mind, for the full year 2022, we took orders for 3,208 rail cars, of which 1,066 were booked in the fourth quarter. Very importantly, and an important internal metric for our company, we also increased the number of new customers by 36% in 2022, which is a true testament to the strength of our product offering, sales and technical talent, and after-sales service. We ended the year with a backlog of 2,445 rail cars valued at $288 million. And although we typically do not talk in advance of the next quarter close, we booked significant orders in the first quarter of 2023. Hence, even with the additional capacity we brought online at the end of this year, last year, our current production schedule for 2023 is essentially full, with booked orders now extending into 2024. Our focus as a company has been on orders for customers with unique product requirements and who place a premium on quality and service. This is our lane, and as a result of our efforts, we believe that Freight Car America is cementing itself as the preferred manufacturer in the industry. While some economic uncertainty and headwinds remain, overall, the railcar industry continues to demonstrate generally healthy fundamentals. Railcar storage numbers remain below the five-year average, and rail car retirements have outpaced new car deliveries for the past three years. With that said, we continue to closely monitor key economic indicators and the potential impact on our business and sector. So in short, we are cautiously optimistic about the industry, but much more optimistic about our own prospects within it. With that, I'll turn the call over to Mike for a few review of our financials.

Mike? Thanks, Matt, and good morning, everyone. I'll begin with an overview of the fourth quarter financials, and then we'll touch on the full year 2022 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 2022 totaled $129 million compared to $75 million in the fourth quarter of 2021, an increase of 71.9% year-over-year with rail car deliveries of 1,150, an increase of 90.4% year-over-year. While we were pleased with the number of units and the quality of the cars we produced in the quarter, our gross margins and profitability were again impacted by deliveries of lower margin rail car orders as we discussed on our previous earnings calls and continued supply chain pressures. Gross profit in the fourth quarter of 2022 was $4.6 million compared to $6.6 million in the same period the prior year, and gross margin was 3.6% compared to 8.8% last year. Through actions taken by the company in the fourth quarter, we will see margin improvement beginning in the first quarter of 2023 with continued improvement across the balance of 2023. SG&A for the fourth quarter of 2022 totaled $6.3 million, in line with $6.4 million in the fourth quarter of 2021. As a reminder, we're committed to maintaining our current low-cost SG&A structure, even as we continue to scale our production and add manufacturing capacity. Consolidated operating loss for the fourth quarter of 2022 was 6.2 million compared to operating income of 63,000 in the fourth quarter of 2021. Consolidated operating loss in the fourth quarter of 2022 was primarily driven by lower gross profit and a $4.5 million impairment on leased rail cars. In the fourth quarter of 2022, we achieved a positive adjusted EBITDA of 1.2 million, which was equivalent to the same period last year. For the fourth quarter, our adjusted net loss was $8.1 million, or $0.31 per share, compared to an adjusted net loss of $3.1 million, or $0.14 per share, in the fourth quarter last year. Adjusted net loss excludes the impact of certain non-cash and non-recurring charges, such as the $4.5 million impairment on leased rail cars, the one-time Mexican VAT cost of $1.9 million, and non-cash income of $4.7 million due to the change in the fair market value of the warrant liability. As a reminder, the change in fair market value of the warrant liability fluctuates each quarter, primarily resulting from the change in our share price during the period. Interest expense in the fourth quarter of 2022 was $7.9 million compared to $4 million in the fourth quarter of 2021. This was primarily driven by an increase in non-cash deferred financing fee amortization between the comparable periods. Capital expenditures for the fourth quarter of 2022 were approximately $4.4 million as we continued expanding our manufacturing footprint. For the full year, it was $7.8 million. Looking ahead to 2023, we will have a step up in capital expenditures and expect it to be approximately $11 million for the year. This increase in CapEx will support additional investments, including increased blast and paint capacity, our fourth production line, and further expansion of our in-house fabrication capabilities. For the full year 2022, we are proud of our achievements, which included significant expansion projects, top-line growth, and improved profitability. Adjusted EBITDA for the full year was $8.4 million, a $15.7 million improvement from 2021. We did this in spite of producing a large number of orders taken during a particularly challenging period for pricing, coupled with inefficiencies generated by supply chain challenges. This, therefore, speaks directly to the positive operational leverage and favorable cost structure of our Castaños footprint. As I've highlighted the last two quarters, and Jim touched on early, our operating cash flow has significantly improved, with cash generated from operating activities of $11.5 million in 2022, positive for the first time since 2017, and compared to cash used in operating activities of $55.4 million in 2021, a $66.9 million improvement. With that financial overview, I'd like to now turn the call back over to Jim for a few closing remarks.

Thanks, Mike. Let me conclude by providing an overview of our outlook and priorities for 2023. Once again, we are cautiously optimistic on the market, and we are quite positive on our position within the market and demand as it relates to our rail cars. Our production schedule for 2023 is essentially full. and the number of inquiries we continue to receive is very encouraging. We will continue to expand in 2023, and we'll prepare for even more growth in 2024. For the full year 2023, we're forecasting revenue of between $400 million and $430 million, up approximately 14% year-over-year at the midpoint of the range. This projection is based on expected deliveries of between 3,400 to 3,700 rail cars, an increase of approximately 11.5% at the midpoint of the range. Additionally, we are introducing adjusted EBITDA guidance of between $15 million and $20 million for the full year. This represents a very significant year-over-year increase of 108% at the midpoint. and further demonstrates the fruits of our turnaround. Finally, we expect positive operating cash flow for the second consecutive year. We have better clarity on our anticipated results for this fiscal year than we have had in a very long time and are increasingly confident in the outlook. The key focus for our team this year will be to execute and deliver the business in hand, continue to build backlog for next year, and create opportunity for further improvement in our capital structure. Outside of these important priorities, we continue to have discussions around the future and how best to leverage the impressive manufacturing campus and dedicated workforce that we have put together in Mexico. 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. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may 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 handset before pressing the star key. Our first question comes from the line of Justin Long with Stevens. Please proceed with your question.

Thanks and good morning.

Good morning.

So maybe to start with the commentary around year-to-date orders, when I think about the guidance that you just laid out for deliveries in 2023 and the backlog that you ended the year with, it seems to imply that you've received somewhere around 1,000 orders so far this year. So I just wanted to double back and see if that math is correct.

Yeah, Justin, we won't get into the specifics, but it's significantly more than that.

Okay, got it. That's helpful. And I guess in terms of that delivery guidance, you know, you mentioned it's an increase from 2022, but it feels like your capacity to produce rail cars could be significantly increased. higher than than that guidance so maybe you could help us think through you know potential for upside to that delivery outlook or if there's a strategic reason why you're kind of limiting builds within that range yeah Justin this is Jim good morning we're the guidance were given we've given is what we see and expect to build at this time obviously

It's guidance and volume that's associated with three production lines running for the full year. Is there opportunity or upside beyond that? That is really going to come down to a question of when we decide to start ramping up production line number four and if we decide this year to start ramping up production line number four. Every time we bring on a new production line, we add and train one to two shifts worth of people, so it's a significant investment. And we'll make that decision at the right time, depending on not just near-term orders in hand, but what the longer-term outlook looks like. So the guidance we've given to summarize is for the three production lines that we have up and running. And whether we move off of that upwards really is going to depend on kind of a longer-term view on investing in and ramping up the fourth line.

Got it. That's helpful. I guess in terms of the adjusted EBITDA guidance that you provided for 2023, any way to help us think through the gross margin assumption that's baked into that outlook and the level of visibility you have in terms of some of these supply chain issues getting better?

Justin, let me start and then I'll pass it over to Mike. You know, where I'll start is, as a company, we are focused very much on two priorities. One is EBITDA generation, and the other is operating cash flow. And, you know, so as we think about plan and operate our business, that's where our two priorities are. I'll let Mike comment further as it relates to your question on gross margin.

Hi, Justin. So what I'd say is we've given revenue in adjusted EBITDA, and we've talked previously about our SG&A and how we keep that a low cost and relatively fixed amount. So I think from those, you could kind of back into gross margin for modeling purposes.

Got it. But any color you can provide on the cadence of those gross margins as we progress through the year? I know you alluded to the supply chain issues continuing in the first quarter and then getting better thereafter. Just wanted to make sure I kind of understood that progression.

Sure. Go ahead. Sure. So as I mentioned, we're going to see a relative to Q4 pretty significant increase in Q1 in our margin rate as we've taken several actions in the fourth quarter of 2022 to better ourselves for this and address those supply chain issues. And then the balance of the year will continue to see favorability to the margin we even see in Q1.

Got it. Thanks. I appreciate the time. Thanks.

Our next question comes from the line of Matt Elcott with TD Cowen. Please proceed with your question.

Good morning. Thanks, guys. Helpful commentary on the gross margin progression throughout the year. Is there any way you can give us maybe just like a ballpark of where you expect maybe to exit the year as far as the gross margin?

Matt, hi. Good morning. This is Jim. We've not given guidance on gross margin yet. You're supposed to congratulate us for giving guidance on EBIDA. Congratulations.

That's definitely narrated. I like seeing that. It's certainly helpful. Okay. So, yeah, I get to see that EBIDA guidance is, Is there any way you guys can give us maybe at least directionally where you think, because the capital structure side has been a bit complex, obviously, directionally what the interest expense line might look like in 2023?

Sure. So as you've seen in the release, we traded out our We issued the preferred stock and traded out for the term loan. Both of those are relatively close in the rates. As we mentioned, the dividend is 17.5%, which from the 10K filing you'll see is pretty close to the interest rate on our term loan now. But the key there is it's trading a variable structure for a fixed structure. And then in addition, we're going to see a lowering of our borrowing costs and interest expense related to the reduction in ABL fees which is approximately $3 million a year on an annual basis as part of this refinancing.

Okay. Got it. And I guess share count, any color on the share count? Is there any volatility there?

There shouldn't be any volatility on the share count.

Okay. Okay. And then, you know, switching back maybe to some operational stuff. I know you guys have a tank car authorization or application in progress here. Is there any update on that? And can you give us a bit more color as to what the end markets for that tank car might be when you eventually get it? I know this is not a near term thing. It's a long term thing. But any color on the end markets and update on where it stands?

Yeah, Matt. This is Jim again. So I guess the first update is we now have AAR approval for three tank car designs, three car types that really are the core of the market, if you will, and cover a disproportionately favorable percentage of the tanker market. So we've got designs approval this year. As we've already noted, our factory is essentially full. And so we don't expect to be building tankers in the current calendar year. You know, when we do move into that direction, you know, we'll obviously talk about it at that time. We're not prepared today. In terms of how we enter it, which I, you know, in terms of the subsegments of the market, you know, obviously we would like to do so in the non-hazardous cargo space area. vegetable oils and other types of liquids that obviously present a significantly reduced risk profile. At this point, it's about timing and sequencing with our other priorities, including the continued building out of the campus. and how we choose best to use it near term, as well as partnering with the right customers. You know, when we enter it, we want to believe that we're entering and investing in it, you know, with a long-term relationship.

Okay, yeah, that's helpful. So no flammable liquid tank cars, I guess.

Our goal would be not to enter into the market in the flammability piece.

Initially, not in that market. Do you think the push to move up the date for the retrofitting or replacement of the non-DOT 117 cars, do you think that could create opportunities in non-flammable liquids? tank cars that you guys can take advantage of maybe next calendar year? If everybody else is busy making DOT 117J or DOT 117R, you might have an opportunity in the non-flammable liquid area.

Matt, good question. I'll just say that we believe that that regulation is likely to occur and that will probably create some opportunities for us. And to Jim's comments, we intend to be prepared for it. But I do believe that it's going to have an impact on the demand for cars that are in the non-Hazmat service, which would bode well for free car America.

Okay. And then just one follow-up. I know Justin asked about this, but the supply chain issues easing in beyond 1Q, Can you just give us an idea on what the supply chain issues are? Are they labor and components? Some of the other builders have had issues on those two fronts. And do you expect the easing to be sudden and dramatic, or is it going to be a gradual process, meaning even 2Q is not going to be optimal and then we'll head towards a more optimal space by the end of the year?

Matt, this is Jim. It's going to be a little faster than gradual. I'll start with that. Without getting too pinpointed here, a lot of our supply chain issues, not all of them, but a lot of them are with the tier ones in the United States. that have struggled with labor and hiring. They in turn have also struggled with their material suppliers who would be our tier twos and threes. So it's just, it's been the whole assortment of issues that everybody reads about in the papers every day. and it's affecting everybody's output and on-time delivery. And obviously, when parts don't come in on time, our cars don't get built the way they were intended to get built, and they don't ship when they're intended to be shipped. So it just adds all sorts of unwanted inefficiencies on our end. Some of the positives in it is Um, first of all, by having, um, you know, full visibility for all practical purposes and to what we're building this year. And frankly, at this point, even what we're going to be building, you know, as we look at Q1, 2024 gives us a much, much longer planning horizon, uh, with our suppliers. And that is tremendously helpful to both parties. Um, so that's an important improvement. A second piece is, you know, we've got our fabrication shop online. As Mike mentioned in his comments around where we'll be investing further monies this year, we're essentially planning to double the capacity or internal capability of our fab shop over the course of this calendar year. And the more that we can make, the more that we control, the better it is for our on-time performance. So that's a second big opportunity. And again, the first piece, which is now in effect, is the fact that we have our fab shop up and running and feeding our assembly lines. But coming as we proceed across the year will be additional capability to that. So those are two big factors. And then of course, through the history and what we went through all of last year, we have, you know, obviously very good understanding of where the chronic pain points are. And, you know, the supply chain team has worked around that to some extent. So it doesn't leave us completely but we expect it to be substantially better managed this calendar year.

Okay, got it. That's very helpful insight. And then maybe switching back to the balance sheet, sorry if I missed it, but you guys had a $20 million reduction in balance sheet inventory. Can you just walk us through what drove that?

Sure. This is Mike. So part of that inventory reduction is you're comparing year over year. Steel price inside inventory was at a very high rate in 2021. And as we moved our way through 2022, we saw a reduction in that cost of inventory flow itself out as it's replaced with lower cost steel as the crew moved down throughout the year.

Great. Thank you very much, gentlemen. Appreciate it. You're welcome. Thanks, Matt.

There are no further questions in the queue. I'd like to hand the call back over to Jim Meyer for closing remarks.

I'll keep it brief. Thank you all for joining today's call. Have a great day, and we'll talk to you next quarter.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.