Freightcar America, Inc.

Greetings and welcome to the Pride Car America first quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief 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 Paul, 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 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, they 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 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 first quarter of 2023 is posted on the company's website at greatcaramerica.com, along with our AK, which was filed yesterday after market. With that, let me now turn the call over to Jim for a few opening remarks.

Thank you, Stephen. Good morning, everyone, and thank you all for joining us today. Freight Car America delivered Q1 results in line with our expectations for the quarter. This included revenues of $81 million on deliveries of 738 rail cars and adjusted EBITDA of $2.1 million. We experienced significant sequential improvement in our gross margin, driven by the continued ramp up of our Castanos Mexico factory. and actions taken to mitigate supply chain challenges, which began to flow through during the quarter. Also within these results, we completed three line changeovers, or one per line, more than we would typically expect in a quarter. At this point, we remain quite confident in the guidance provided for the full year. Matt will cover our sales highlights in more detail, although I would like to point out that our inquiry levels and order intake continue to be very strong with a book to bill ratio of 2.6 this quarter. Our production schedule is essentially full for the remainder of this year, and we are now very much focused on building our order book and setting business goals for 2024. The multi-year restructuring we undertook, starting with the closure of the Danville, then Roanoke, and finally Shoals factories to remove fixed cost and unneeded capacity, and to simultaneously create the campus we now have in Mexico, is directly resulting in Freight Car America being able to win the business best suited for the company. To a much greater degree than at any time in our recent history, We are making better commercial decisions and no longer living in the days when excessive capacity clouded our decision making. When we last spoke, I shared our strategic priorities for 2023 and the Freight Car America team remains laser focused on executing these initiatives. I would like to update you on just a few of these priorities. First, We have continued to expand our manufacturing campus, both in terms of overall capacity and equally importantly, capability. To be clear on the capacity, our goal has always been to run four production lines and build 4,000 to 5,000 cars per year. This is expected to be 4,000 to 5,000 units of profitable business and represents a reduction of approximately half of the capacity available on the prior US footprint. The capability just mentioned refers directly to efficiency and vertical integration. Our goal is to be the best manufacturer in the industry, and even more than that, to be a world-class manufacturer irrespective of industry. Making everything we can in-house is part of this. It gives us more direct control over our supply chain, quality, and cost. We are on pace to complete the Castanos campus as currently envisioned by the end of summer, at which point we will have the fourth production line available, our fabrication shop fully outfitted, and additional infrastructure and material delivery and handling in the exterior areas of the campus. We have put as much thought into how material is received, unloaded, processed, and then taken to the lines as we have to the actual construction of the rail cars themselves. Our focus, starting about the end of summer, will be simply on building rail cars and not the combined activities of building both rail cars and the approximately million square foot facility. We're getting very close to this day. As to our balance sheet and as we highlighted during our last call, we executed a term sheet for a very important refinancing during the quarter with our current financing partner, an affiliate of Pacific Investment Management Company. This transaction is expected to close on May 22nd. In brief and as a reminder on what this transaction will do for the company, One, it will provide the company with approximately $15 million in additional cash to invest in new initiatives to accelerate the next phase of our growth. Two, it will provide the option for the company to pay the dividend on the preferred stock on a payment in kind or pick basis, which equates to approximately $10 million per year improvement in operating cash flows. Three, We will also move from a variable rate loan structure on the existing term loan to a fixed dividend on the preferred. And finally, by eliminating most of the debt from our balance sheet, this final transaction will place us in a better position for further and lower cost financings in the future. I'll now turn the call over to Matt for a few commercial comments. Matt.

Thank you, Jim. And good morning, everyone. We started off the year on a strong note and continue to be encouraged by the strength of order activity and demand for our products by both long-term and new customers. For the quarter, we booked orders for 1,960 rail cars valued at $201 million, and this represents a book-to-bill ratio of 2.6 and nearly 130% increase in order bookings versus Q1 of 2022. We ended the quarter with a backlog of 3,667 rail cars, valued at approximately $413 million. We are now very much focused on booking orders for 2024. We are encouraged by the continued strength in order inquiries and the quality of the pipeline overall, which includes a broad range of car types. Turning to overall market conditions, our railcar lessor customers report improvement in lease renewals and increased lease rates along with near full utilization of their fleets. Rail cars stored have leveled off at their five-year average with over 80% of the fleet in active use. Shippers and railroads alike continue to evaluate their fleet needs due to near-term rail car retirements. All of this has led to a tighter car supply in many segments in an environment favorable to securing higher quality business. Rail car loadings have yet to return to their 2019 levels, but recent reporting by the Association of American Railroads for the first quarter of 2023 indicate key service metrics, including train speed, dwell, and cars online, trended favorably for the first quarter. Further advances are needed. However, continued service improvement will drive more freight to rail and ultimately support more demand for new rail cars. For now, and as we stated during the last earnings calls, we remain in a business cycle that is largely tied to replacement demand and aligned with 2023 forecast deliveries of between 42,000 and 45,000 rail cars. While there continues to be some economic uncertainties, our sales pipeline remains robust with customer inquiries and conversations signaling healthy rail car demand across a broad range of car types. We remain focused on discipline and on deals that deliver both value to the customer and margins that are aligned with our financial goals. With that, I'll turn the call over to Mike for a review of our financials. Mike?

thanks matt and good morning everyone we are pleased with our first quarter financial performance as our team delivered strong operational execution successful building and delivering rail cars in line with our anticipated production schedule consolidated revenues for the first quarter of 2023 totaled 81 million with rail car deliveries of 738 compared to 129 million dollars on deliveries of 1 150 rail cars in the prior quarter and $93.2 million in the first quarter of 2022 on rail car deliveries of 783. And as Jim already mentioned, we also undertook multiple line changeovers in the quarter. Gross profit in the first quarter of 2023 was $7.5 million with a gross margin of 9.2% compared to gross profit of $4.6 million and gross margin of 3.6% in the prior quarter, and gross profit of $10.1 million and gross margin of 10.8% in the first quarter last year. We experienced significant improvement in our profitability sequentially, largely due to actions taken to mitigate supply chain challenges. We expect to see continued improvement in our margin profile during the remainder of 2023 from these efforts, as well as manufacturing efficiencies that we will realize as we complete the expansion of our facility over the course of the summer. SG&A for the first quarter of 2023 totaled $6.4 million, down from $10.7 million in the first quarter of 2022. In the first quarter of 2022, we recorded a large non-cash fair value adjustment for stock-based compensation. Sequentially, SG&A in the first quarter of 2023 was consistent with the fourth quarter of 2022. Consolidated operating income for the first quarter of 2023 was $1.1 million compared to an operating loss of $655,000 in the first quarter of 2022. The increase in consolidated operating income in the first quarter of 2023 was primarily driven by reduction in SG&A between the comparable periods as previously discussed. In the first quarter of 2023, we achieved adjusted EBITDA of 2.1 million compared to 1.2 million in the prior quarter and 3.3 million in the first quarter of 2022. Again, the sequential improvement in adjusted EBITDA was driven by the actions taken in the back half of 2022 to address supply chain challenges that we are now realizing. Compared to the prior year, Reduced volume was the primary driver as we had three changeovers in the first quarter of 2023 compared to one in the first quarter of 2022. For the first quarter of 2023, our adjusted net loss was 5.7 million or 21 cents per share compared to an adjusted net loss of 3.7 million or 15 cents per share in the first quarter last year. Adjusted net loss excludes the impact of non-recurring income of 613,000 due to the change in fair market value of the warrant liability that is directly affected by movement in our share price during the quarter. Capital expenditures for the first quarter of 2023 were approximately 2 million as we continued expanding our manufacturing footprint. As previously communicated, we will have a step up in capital spend for the remainder of this year and expect it to be approximately $11 million for the full fiscal 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. With that financial overview, I would now turn the call back over to Jim for a few closing remarks.

Thanks, Mike. I will now provide a brief overview of our outlook for the remainder of this year. We remain very positive on the position we are creating for ourselves within the market and also demand for our rail cars. Our production schedule for 2023 is essentially full and now growing into 2024, and the number of sales inquiries we continue to receive is very encouraging. The clarity we have on our anticipated results for the remainder of 2023 gives us confidence in reaffirming our previously stated guidance ranges. As a reminder, for the full year 2023, we are forecasting revenue of between $400 million and $430 million, up approximately 14% year over year at the midpoint of that range. This projection is based on expected deliveries of between 3,400 and 3,700 rail cars, an increase of approximately 11.5% at the midpoint of that range. We are also forecasting adjusted EBITDA guidance of between $15 million and $20 million for the full year. This represents a year-over-year increase of 108% at the midpoint. Finally, we expect positive operating cash flow for the second consecutive year. For the balance of this year, our team is focused on executing our production schedule improving on an already impressive manufacturing footprint in Castanos, building our backlog even further into next year, and driving profitable growth. And all of this will open opportunities for us to continue to improve our capital structure. That concludes our prepared remarks, and I'll turn the call over to the operator so that we can address questions.

Thank you. We will now 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 lines 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 keys. One moment, please, while we pull for questions. Our first question comes from Dustin Long with Steven Zink. Please go ahead.

Thanks, and good morning. Morning, Dustin. Morning. I wanted to start with a question on the production outlook. You alluded to the line changeovers you had in the first quarter, so I was just wondering if you could give a little bit more color in terms of the guidance and how you're expecting production to ramp over the course of the next several quarters, or maybe it's a situation where the implied production for the remainder of the year should be pretty consistent 2Q to 4Q, but I'd love to get your thoughts around that.

Yeah, Justin, so going forward, we would expect the next couple quarters to look pretty consistent to Q1. with a further ramp up in Q4 on deliveries.

Okay, got it. That's clear.

Sorry, Justin. It's Jim. Hi. So, yeah, so kind of a smooth next, you know, consistent next couple of quarters on unit deliveries and, you know, as Mike just said, then a ramp in the fourth quarter. That's on the unit count. And then on the margin piece of it, we expect to continue to see improving margins for the next couple of quarters as well.

Well, that kind of dives into my next question about the cadence of gross margin. So is it reasonable to expect sequential improvement? each quarter over the remainder of the year, or is there anything in terms of mix or other line changeovers the rest of the year that we should be aware of?

Yeah, see, we've been doing this so long, I anticipated your question. We'll see improvement over the next couple of quarters. You know, we'll go out that far. And, you know, so, yes.

Okay, great. And then in terms of the inquiry levels and pipeline, it was encouraging to hear that you're still seeing a good amount of activity on that front. But given the fact that 2023 production is essentially full and you do have some macro uncertainties out there, any thoughts around just order flow and some of those inquiries converting to orders the next couple of quarters? Do you think it's reasonable to expect a little bit of a slowdown versus what we've seen the last quarter or two? Or do you think this order flow can be sustained given the replacement needs that are out there?

Yeah, I think your comment on the replacement needs, it hits the nail on the head, right? So I think what we expect based on inquiry levels in our conversations with customers to have relatively consistent activity from quarter to quarter. There will be some fluctuation based on timing of needs, customers' own approval, internal approval processes, but we're not expecting significant changes from quarter to quarter. We think, based on the discussions we're having, the customer base we've coveted, that we'll have consistent order activity and interest in the product offering.

Okay. Great to hear. And last one for me is on the balance sheet. Jim, I think you mentioned an expectation for operating cash flow to be positive this year. Do you think free cash flow will be positive as well?

Hey, Justin, this is Mike. You know, we do expect operating cash flow to be positive. You know, I think free cash flow will be a little tougher given we're still expanding the facility. As we mentioned, there's still 11 million of CapEx. This is the last year of, you know, major capital expenditures to build out that facility down there. So I think that one's a little harder for us to look at as we complete the year. Okay.

Understood. I'll leave it there.

I appreciate the time. Thanks, Justin.

Next question comes from Matt Elkhart with TD Cohen.

Please go ahead.

Good morning. Thank you. Just want to understand the dynamic of the backlog and orders. Going forward, are all the orders you're going to be taking going to be for 2024 or beyond because you're booked for 2023?

That's accurate, Matt.

Okay. So I guess if that's the case, you only need about 2,900 cars from your current backlog to to cover this year's delivery, even if we take the high end. So you're left with about 700 cars. Are those mostly for 2024 deliveries?

Yeah, we've got orders that go into 2024 and beyond, so your math is factual.

But the great preponderance is 2024 of what's left from that. Correct.

Okay, got it. And then your orders, you know, it's a good order number, which is somewhat inconsistent with what we've seen with the other builders. Your orders look more solid. Are there cold car orders in the number?

No. That I can tell you. You know we don't comment on car type, but as we just did, there's no cold cars in that. Yeah. I have to say, you know, just to build on some comments that Matt made, our Matt, you know, the industry seems to be pretty steady around replacement demand levels, as everybody out there is articulating. The demand for our rail cars has been, you know, a real positive, certainly for us, and You know, so, you know, not every quarter is going to be like Q1 with a 2.6 book-to-bill ratio, obviously, but we feel, you know, very good about not just the number or total size of the inquiries, but also the quality of the discussions and you know, the quality of the details, you know, behind these discussions. So we feel pretty good.

Okay. That's good to know. Jim, I know that, you know, coal cars have seen somewhat of a recovery. I mean, if you judge by lease rates and demand, there's a bit of tightness. Do you think that we will actually see coal cars getting built in the next couple of years or no?

so matt i'll just share that there have been inquiries out there it's been quite some time since coal cars have been built the fleet is pretty well utilized you've seen some fluctuation and loadings uh it seems given the current environment both politically uh you know just i guess mostly politically it seems unlikely that we would see a significant increase in demand i think eventually there will have to be some level of replacement i don't think coal goes away completely but We don't view that car type as something that's a primary focus long term and where you'll see significant demand.

So Matt, I would just summarize the whole coal car discussion as, you know, we're still presumably the first phone call that someone would make when in the market for new coal cars. You know, we're never going to forget the past or forget you know, that piece of our business. But I think more importantly, what the last several quarters of order intakes have quite clearly demonstrate, you know, the company has successfully transitioned from the days of coal car centric to the broad portfolio we now have. You know, I think that's a job well done at this point.

Yeah. No, that makes sense. I mean, but as Matt said, I mean, you would imagine that at some point there would be a modest replacement need if coal is not going to zero, which it's not. Definitely metallurgical coal is not going anywhere. Thermal coal will have a secular decline story continuing, but we'll need coal. One other question is, You know, many in the industry are expecting deliveries to be 40 to 45,000 cars this year, with next year being in a similar range, but maybe towards the lower end of that range. Matt and Jim, I'd love to hear your thoughts on where you think industry deliveries will be this year and next year.

Well, I think, as I stated in my comments, I think, you know, probably a little bit closer to the high point of that range, 40 to 45, 42 to 45. I think As we look out in following years and the cycle we're in of replacement demand, I think we'll stay relatively consistent in that 40 to 45 range. There could be some up years and some years maybe not quite hitting it, but I don't see anything in the marketplace currently that indicates a strain from those numbers as we look out on the horizon.

Okay. And then one question on the labor side. Sorry if I missed it in your prepared comments, but a lot of the builders have had issues with access to labor. What's the labor picture from your perspective?

Yeah, Jim, again, we feel good about our labor. As we've commented any number of times, our workforce is a key strength of the company. As we've ramped up our footprint from essentially nothing three years ago to today, we've brought on a rounded 1,500 employees in Mexico and skilled employees. And we feel good about the labor market as it relates to our demand and the ability to continue to support you know, at least reasonable growth expectations.

Jim, if we take labor and the rest of the supply chain disruptions and access to components and all that stuff together, do you feel like it's largely behind you or do you feel like more efficiencies can be achieved in the coming quarters? And, you know, yeah, go ahead.

I love that question. Look, you know I were very serious and they're not just words when we say our goal is to be the best manufacturer in the industry and to be world class by any industry standards. We are always going to be improving in every aspect, including efficiencies. You know, keep in mind. We are still constructing essentially 100-acre, million-square-foot campus around us as we build rail cars. And that piece of it will, as I said earlier, the dust, if you will, will settle about sometime this summer. And then we can focus just on running, improving, and continuing to dial in the operations. We're just still bringing on our large fabrication shop. In fact, we're already working to double the capacity we get out of the fab shop. We're doing the same in our paint shop. All these things make us more efficient. We're also now very focused on how we receive and process incoming materials. So, no, continuous improvement is going to be always a part of us, and I think it should be especially meaningful, you know, over the next 12 to 24 months as we really dial in this new campus.

Okay, that's helpful. And just one last question, Jim. I know you guys have largely maintained your guidance, basically. But it sounds like your tone has gotten more positive, which is kind of surprising given all the macro stuff and interest rates and rail traffic being down and rail service improving a bit. Is the source of this apparent improvement in tone your high inquiry level and your solid order number? Any more color on this would be helpful.

Yeah, it's a great question. I'm glad you noticed the tone because we are positive. Look, what we've done over the last three years now is completely re-engineer and retool the company. You know, we were carrying three factories not that long ago with capacity for 10,000, 11,000 rail cars. And not only was that very fixed cost burdensome, as we've talked about any number of times, but it also put us, you know, in a position where every order was kind of a must win important piece of business to try to get just to keep something running through, you know, all the available capacity. we're done with those days. And what we have now is a very cost efficient business with a very efficient factory. And it's right sized for what we view as the lane we're going to play in in the industry. And so between adjusting our size, right sizing our capacity, And now being able to focus on smart and best business to fill the new capacity level, it's all just working. And that's where the confidence, especially as we look out, because we are still finishing construction on the new campus. And that's soon to be behind us. And so we think it's just going to keep getting better.

Got it. Thank you very much, Mike. Thanks, Matt. Thanks, Mike. Thank you, Matt.

There are no further questions at this time.

I would like to turn the floor back over to Jim Meyer for closing comments.

Thank you all for joining our call today. Have a great day, and we'll look forward to talking to you on the Q2 call. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.