Freightcar America, Inc.

Welcome to Freight Car America's second quarter 2023 earnings conference call. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference today, there will be an opportunity for your questions at the end of today's prepared comments. Please note that this conference is being recorded. An audio replay of the conference will be available on the company's website within a few hours after this call. I would now like to turn the call over to Chris O'Day with Riverton Invest Relations. Please go ahead.

Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, Matt Ton, Chief Commercial Officer, and Nick Randall, Chief Operating Officer. I'd like to remind everyone that statements made during this conference call relating to the company's expected future performance, future business prospects, or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to FreightCar America's Form 10-K for description of certain business risks, some of which may be outside of 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 it is 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 earnings release issued yesterday afternoon. Earnings release for the second quarter of 2023 is posted on the company's website at freightcaramerica.com, along with our 8K, which was filed yesterday after market. With that, let me now turn the call over to Jim for a few opening remarks.

Good morning, everyone, and thank you all for joining us today. Freight Car America delivered impressive second quarter results as we continue to pursue and realize our efforts to become world class at what we do. Revenues for the quarter increased 56% year over year to $88.6 million on deliveries of 760 rail cars. During the quarter, We continued to work to finish the construction and the dialing in of our still new manufacturing operations and thereby improve performance, which during the second quarter produced a very respectable gross margin of 14.6%. I will add that the impact of foreign currency headwinds absorbed during the quarter make our results all the more commendable. And best of all, we still have much, much more that we plan to do to further leverage our operations and further improve efficiencies. As we have stated before, our goal is to be the best manufacturer in the industry, setting new standards for our peers in quality, efficiency, and overall performance. This quarter characterized these efforts well, allowing us to achieve strong results while delivering even stronger value to our customers. As part of our commitment to operational excellence, we announced during the quarter the appointment of our first Chief Operating Officer, Nick Randall. Nick brings extensive manufacturing experience and a track record for delivering superior customer satisfaction at premier companies. He is a great addition to our leadership team and will guide us to even higher levels of performance. Nick is with us on the call today and will be available as part of the Q&A. After approximately four years of construction, three of those years in which we were simultaneously producing rail cars, we are finally nearing completion of the vertically integrated manufacturing campus in Kastanos. And just think about this for a minute. While in the midst of extremely challenging business conditions and a three years long global pandemic, the Freight Car America team envisioned and undertook to complete a state-of-the-art manufacturing campus in Mexico, brought it online on time, transferred all US rail car manufacturing operations to Mexico, and is now generating the best manufacturing margins in the business, and I might add by a substantial amount. With the completion of our world-class, fully functional facility, we can readily produce 4,000 to 5,000 cars per year without strain and expect to maintain industry-leading manufacturing margins. As we defined in prior calls, to us, world-class means achieving the best quality, best efficiency, best on-time delivery, while preserving the flexibility to produce different types of products. During the quarter, we reached another key milestone by delivering on our planned exit from the leasing part of the business and successfully selling off the majority of our remaining lease fleet which included just over 400 cars. Furthermore, as we have discussed during the last couple of calls, in the quarter we completed the transaction with Pacific Investment Management Company that converted our term loans into preferred shares. These two steps, the exit from leasing and the financing transaction, marked significant progress as we worked to further strengthen our financial position. The debt on our balance sheet has been reduced to that of just the ABL, which gives us much greater financing flexibility for the future and allows the team to remain focused on core growth initiatives. So in total, the second quarter represented important progress in driving revenue growth, margin expansion, and strengthening our balance sheet. At this point, I'll address our guidance for the year. We are raising our previously stated full year adjusted EBITDA guidance range from between $15 million and $20 million to a range of between $18 million and $22 million. In addition, we are reaffirming our fiscal 2023 guidance for revenue to be in the range of between $400 million and $430 million, which is based on forecasted production of between 3,400 and 3,700 rail cars. I'll now turn the call over to Matt for a few commercial comments.

Thank you, Jim, and good morning, everyone. During the quarter, our level of inquiries, order activity, and demand for our products remain solid, with industry demand largely tied to the replacement of aging railcar fleets. For the second quarter 2023, we closed orders for 381 railcars valued at $51 million, with first half orders totaling 2,341 railcars valued at $256 million. This represents an order increase of 23% versus the first half of fiscal 2022. We ended the quarter with a backlog of 3,288 rail cars valued at approximately 382 million. We had a strong quarter with our three current production lines yielding 8 million in adjusted EBITDA. As Jim mentioned, completing our fourth production line at Castaños is in sight. The team continues to build our pipeline for fiscal 2024, and having the fourth line available should increase our commercial flexibility. Although weakness in freight car loadings and the overall macroeconomic environment conditions pose market uncertainties, we affirm industry forecasts of rail car deliveries of 45,000 rail cars in 2023. Our sales pipeline remains strong with customer inquiries indicating rail car demand across a diversified range of car types. We continue to see tight car supply in some segments due in part to high utilization of our lesser customers fleet combined with rail car retirements. Our continued exit from leasing supports our unique position as a pure play manufacturer with all of our focus on achieving manufacturing excellence and deepening our customer relationships. With a high percentage of our customers being direct lessors of rail cars, our position as a fully committed supplier and non-competitor, Freight Car America continues to prove an increasing attractive partner for these customers. On the commercial front, we are maintaining a steadfast focus on operating with discipline, prioritizing deals that bring substantial value to our customers, suit our business, and align with our strategic goals. I'll now turn the call over to Mike for comments related to our financial performance. Mike?

Thanks, Matt, and good morning, everyone. As Jim discussed in his opening remarks, for the second quarter, we delivered significant top-line growth and gross margin expansion year over year. Consolidated revenues for the second quarter of 2023 totaled $88.6 million with rail car deliveries of $760 compared to $56.8 million on deliveries of 468 rail cars in the second quarter of 2022. Gross profit in the second quarter of 2023 was $13 million with a gross margin of 14.6% compared to gross profit of $6.6 million and gross margin of 11.6% in the second quarter of last year. While partially offset by the negative impact of foreign currency fluctuations, we continue to see improvement in our margin profile from the realization of our planned manufacturing efficiencies at our Castaños facility. SG&A for the second quarter of 2023 totaled $5.9 million, up from $4.1 million in the second quarter of 2022, driven by stock-based compensation that increased due to a larger movement in the share price during the second quarter of 2022, versus the change in share price during the second quarter of 2023. Moving forward, SG&A should be more consistent as we converted certain stock-based compensation awards during the quarter from cash to stock-settled instruments. This move will eliminate an additional $3.2 million of liabilities that existed at the beginning of the year that had been subject to mark-to-market accounting each period. Consolidated operating income for the second quarter of 2023 was $7.7 million compared to operating income of $2.5 million in the second quarter of 2022. The increase in consolidated operating income in the second quarter of 2023 was primarily driven by increased gross profit. During the quarter, we sold a large portion of our legacy lease fleet, which resulted in a $622,000 gain on sale and proceeds of approximately $8.5 million. The proceeds were used to both fund the continued build out of our Castaños campus, as well as to settle a revolving credit facility that was tied to a portion of our lease fleet. Additionally, we refinanced our term loan through a preferred share issuance during the second quarter of 2023 that resulted in a $17.8 million loss on debt extinguishment, partially offset by a $2.9 million gain on extinguishing our lease fleet credit facility for a net $14.9 million loss on debt extinguishment. The actions taken this quarter to monetize our legacy lease fleet, refinance our term loan, and convert certain stock-based compensation awards are consistent with our ongoing commitment to strengthen our balance sheet. When combined with our strong gross profit driven by our focus on operational excellence, this should enable us to take advantage of a lower cost of capital in the future and growth-focused opportunities. In the second quarter of 2023, we achieved adjusted EBITDA of $8 million compared to $2.3 million in the second quarter of 2022. primarily driven by increased volume and continued supply chain and manufacturing efficiencies realized by our operating teams. For the second quarter of 2023, our adjusted net income was $2.7 million, or 2 cents per share, compared to an adjusted net loss of $6.2 million, or 33 cents per share, in the second quarter of last year. Capital expenditures for the second quarter of 2023 were approximately $3 million as we continued expanding our manufacturing footprint. Once the Mexico build out is completed, capital expenditures should decrease considerably. We expect recurring capital expenditures to be approximately half to three quarters of a percent of revenue going forward. With that financial overview, I'd like to now turn the call back over to Jim for a few closing remarks.

Thanks, Mike. Overall, our second quarter performance and results were strong, attesting to the inherent qualities of our efforts over the past several years. As we look ahead to the second half of this year, the team remains dedicated to seamless execution and timely delivery of our current commitments and continuing to show an improved level of financial performance. We're excited by the prospects of our future, the team we have and continue to build, the manufacturing campus now nearly complete, and an array of growth topics that may come to fruition. While the industry and macro economy may generate questions and or concerns regarding the near term, what is certain is that the Freight Car America team will deliver on whatever it sets its collective mind on. Our team is determined and committed to setting the right goals for superior operating excellence, customer satisfaction and growth, and then realizing these goals. I want to thank our entire team for their hard work and you for your support and for joining us today as we look to deliver on our strategic objectives and continue to grow. That concludes our prepared remarks and I'll now turn the call over to the operator so we can address your questions.

Thank you. We will now 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'd 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. Our first question comes from the line of Justin Long with Stevens, Inc. Please proceed with your question.

Yeah, good morning, everyone. This is Brady on for Justin. I wanted to start with a question on your production outlook for the remainder of the year. You maintained your full-year delivery guidance, which implies just over 2,000 cars delivered in the second half of the year. Could you give us a little color on your expectations on the cadence of those deliveries as it pertains to the third quarter and fourth quarter?

Mike, do you want to address that?

Sure. We see the 2000 spread will not be even. Q4 is going to be a little heavier than Q3, but consistent with the past, we're not going to get very specific guidance on the number of deliveries, but we will see the ramp up as we complete the Castaños facility.

Okay, thanks. And maybe I could follow up with a question on gross margins. You know, on the first quarter call, you noted that you expected sequential margin improvement through the remainder of the year. Given the meaningful step up we saw here in the second quarter, could you give some color around your expectations for third quarter and fourth quarter as it stands today?

Brady, this is Jim. I'll try to address your question this way. Q2 obviously was a great quarter for the business. It really demonstrates what the capability of the business is at this time. And it was really driven by operational excellence at the factory. It was also, of course, as every quarter is, it was influenced by a particular mix as well. So this quarter was especially strong. And I think the adjusted EBITDA per vehicle produced was about $10,500 per car. So that's a very big number. And if you look at the guidance provided for the rest of the year, that steps down a little bit. And you can do the math on that. So I think in total, the takeaway on the gross margin story is the company expects to perform at a higher level of gross margin than it's been performing at. But this quarter was particularly nice for us.

Okay, great. That makes sense. Maybe I could just finish with a question on your order expectations over the second half of the year. You mentioned in the release that orders were weaker because of timing. Could you give a little color around that? Are you expecting orders to pick up in the second half relative to the first half? Thanks.

Let me start with that, and I'll turn it over to Matt. As a smaller company, obviously a couple of orders can make the quarter-to-quarter intake either look – bigger or smaller. And while, like you, we pay attention to our quarterly order intake, it's probably a little bit more helpful to look over slightly longer periods of time. If you look over the first half, our book to bill ratio was about 1.6. Mark Broughton, So I just preface before turning it over to Matt that timing is important and it it particularly influences you know this particular metric in a in any one quarter, but matt if you want to comment on the. the quality of the pipeline and your discussion?

Yeah, Brady, I think probably the best way to answer it is when we think about the current pipeline, the sales funnel we have that's established, the conversations we have with customers, we expect continued strength and order activity as we go out for the rest of the year. Okay. To Jim's point, it's really about timing and customers getting through all of their internal processes for work. approval sometimes just pushes things out. That's all.

Okay. Great. That makes sense. Thanks for the time, guys. I'll leave it there and pass it along. Thanks, Brady. Thanks, Brady.

Thank you.

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

Good morning. Thank you. Jim, just I want to understand the capacity question a bit more. I think you mentioned once Castano's is up and running, your capacity goes up to 4,000 to 5,000 cars per year. When does that kick in, that incremental capacity, that total output capability? Does it kick in, like, in the second half of this year or next year?

Well, so... Hi, Matt. Think about it this way. Having the... the plant done, sort of think of it as putting shovels down, which we're very, very nearly at that point now in the campus. We'll have a fourth line available. We expect over the next really weeks or month. And then it's how we choose to use that line. And it's going to be whether that fourth line is actually producing rail cars or being used as a swing line, in which case we're ramping up on an empty line while we're ramping down on a producing line and move people. However we use it, and we'll ultimately use it in both of those ways, it's enormously beneficial to the business. So from a pure capacity standpoint, as you know, it very much depends on what you're building. But as we've said in the past and I said in the prepared remarks today, we feel very comfortable of being able to put out 4,000 to 5,000 cars per year if we're in fact utilizing all four lines. And if we're not utilizing all four lines and using that fourth line more as a swing line, as we call it, then it's additional efficiencies on, you know, the business coming off of the other three because you're shrinking the lost time in between changeovers.

Yeah, no, that makes sense.

So, can you also maybe talk about what percentage of your current backlog is for beyond 2023?

I don't think we have that in front of us at the moment. You know, I think you can kind of do the math with the ranges we've given you. You have the backlog and dollar value on the books as of June 30th, and you obviously have our – you can back into our second half delivery guidance from the full year number. Yeah.

I guess the only variable that's hard to gauge is the order activity in the second half and how much of it would be for – like how much are you assuming of the order activity in the second half would be for same-year delivery?

So at this point, our fiscal 23, that business for all practical purposes is locked and loaded and booked. especially when you factor in supply lead times. Yeah, go ahead.

Yeah, Jim, I mean, it's good to see that the order activity is still, the order and inquiry activity is still solid. You had obviously very strong orders in the first half. I guess it seems pretty feasible to grow deliveries next year pretty meaningfully, right?

Well, at this point, Matt, I think, you know, we're having a earnings call on the quarter ended June 30th, 2023. And I really don't want us to get ahead of ourselves and start talking about 2024 just yet. In terms of the available capacity, the available capacity is certainly there to do more cars. As well as the available capacity will be there on a similar order intake to do it with another degree of efficiency because of that swing line concept. But I'd rather, you know, we would really be speculative to start talking about 2024 at this point, so we're not ready to do that.

Okay, fair enough. Maybe just a couple more, you know, slightly more nitty-gritty questions. The ASP went up by 3%. Is there just normal, like, mixed stuff?

Yeah, that'd be normal. That's mixed-driven math.

Mm-hmm. Okay. And I know you said the order activity has remained pretty solid. Did you guys receive orders in July and the first week of August?

We'll report on that in the next quarter. Let us have something to talk about next quarter, Matt.

All right. Makes sense, Jim. Okay. I got it. I think that's it for me. Thanks so much, and great quarter. Appreciate it.

Thanks, Matt. Nice talking to you, Matt. Before we end the call, I would like to just take a minute and introduce Nick to everybody out there and give Nick just a couple of seconds here to say a few words.

Thanks, Jim, and good morning. First and foremost, I'm really excited and enthusiastic about joining the team. I recently joined Freight Car America because what I see is an incredibly potent mix for unbelievable success in value creation. We think about it, we're an organization with over 120 years of history, a foundational player in the industry in which we operate, but also an agile company that just in the last four years has gone from breaking ground in Mexico to the construction of a flagship campus and simultaneously installing a comprehensive operating system with industry-leading capabilities that delivers increasing levels of value from our operations in Kostanos. It's really important to me that we continue to build on what we have. That is to continually focus on delivering an increasing level of customer satisfaction. And for me, that comes down to the relentless pursuit of operational excellence across all of our operations and support processes. It really is a privilege for me to take on this role as Chief Operations Officer. My team has an incredible level of talent. fueled by decades of experience in building great freight cars. I'm truly proud of what the team has delivered in the second quarter. Jim, Mike, and Matt have covered all those details already, and I look forward to continuing on this journey and leading my team to greater success for the benefit of Freight Car America.

Thank you, Nick. And we're, again, all very fortunate to have you on the team. That concludes our discussion for this morning. So once again, thank you all very much for calling in, and we look forward to talking to you again on our Q3 call. Thank you.

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