FreightCar America Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 7 speakers on the call.

Operator

Greetings and welcome to the FreightCar America Third 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Victoria Roseman, Investor Relations.

Operator

Thank you, Ms. Roseman. You may begin.

Speaker 1

Thank you and welcome. Joining me today are Jim Mayer, President and Chief Executive Officer Mike Reardon, Chief Financial Officer Matt Taun, 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 ks 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 will also be a discussion of some items that do not conform to U.

Speaker 1

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 Q3 2023 is posted The company's website at freightcaramerica.com along with our 8 ks, which was filed yesterday after market. With that, let me now turn the call over to Jim for opening remarks.

Speaker 2

Good morning, everyone, and thank you all for joining us today. FreightCar America delivered another quarter that highlighted our team's operational and commercial discipline, Contributing favorably towards our continued focus on enhancing our quality of earnings. This comes Despite headwinds in the quarter related to the halt of railroad services in Mexico due to migrant issues that limited shipments as well as 3 large line changeovers, which together muted our top line. Revenue generated during the quarter 28% year over year to $61,900,000 on deliveries of 503 railcars, both lower than expected and both simply timing related. At the same time, we expanded our gross margin file by an additional 30 basis points from last quarter, achieving an industry leading 14.9% during the 3rd quarter.

Speaker 2

Adjusted EBITDA increased versus the same quarter of the prior year to $3,500,000 or approximately $7,000 per railcar. I am extremely pleased to see the fruits of our labor from the last several years Begin to materialize, particularly in the face of a more muted top line driven by the aforementioned headwinds. The operational groundwork we laid and the commercial groundwork we continue to lay is, we believe, spot on for this company. Most importantly, while we do not expect progress to be achieved in a perfectly straight line, we do believe there is ample room to continue to improve the quality of our business visavis gross margin and profitability per railcar. This belief along with us now being in a position to scale the business creates the potential we have been working towards.

Speaker 2

The completion of the 4th production line at our Castanos manufacturing campus during the Q3 Signifies the long anticipated completion of the facility and all of us are beyond pleased and beyond proud. FreightCar America now has the capacity to seamlessly manufacture annual volume ranging from 4000 to 6000 railcars across four production lines. We are now starting up this 4th line and in yet another milestone moment for the company, We will see the first deliveries produced from this line in the Q4. When we speak about operational excellence, for us, It is invariably measured in gross margin and profitability per railcar. To put a finer Point operational excellence and what it means to us, we are talking about railcar design and the ease in which our rail cars can be manufactured supply chain management and achieving the right levels of vertical integration The quality and flexibility of our tooling, jigs and fixtures and of course, how we train, Empower and mobilize are nearly 2,000 production team members.

Speaker 2

This is the bedrock of our company And represents continued and we believe significant opportunity in an industry with deep traditions. Complementing the company's growing and successfully differentiated position and operational excellence It is our concurrent work to establish a unique commercial position. It is important that We begin to share another and equally important undertaking in the remaking of FreightCar America And that is where and how we fit in an industry dominated by a very small number of much larger competitors. It is true that we now have a diverse portfolio of products, some of which have achieved market leading positions. Our goal with respect to our product offering is simple and that is to offer the products that customers want most And not simply as an alternative consideration or as part of a larger bidding process.

Speaker 2

Like our operations, our products are under constant review and are constantly being improved. Continuous improvement is not simply a factory concept, it applies equally to engineering and product development. It is also true, we believe, that as a smaller company, we are better equipped to invest all the time required Between our commercial and technical teams and current and prospective customers in order to deliver product solutions that best match each customer's specification specific needs. We are not a one size fits all manufacturer. Our customers make substantial and long term investments when buying railcars and our goal every time is to give them the exact Thirdly, our team has worked incredibly hard to align our business with customer groups that value the aforementioned Along with the fact that we do not compete on leases, our approach is to partner with instead of compete with This very important group of customers.

Speaker 2

Fourthly and finally, we Continue to focus on providing what we believe to be the optimal balance between backlog and readiness to respond to customer needs. Backlog is critical to planning, but we are mindful of the drawbacks when acquiring backlog in quantity so large that it takes years to fulfill or backlog acquired as a result of large discounting practices. This is not our business model. A perfect order book for us is one that is long enough So in summary, our commercial excellence is focused on having the best value proposition for individual customer needs, At this point, I would like to address our guidance for the year. Due to our continued concerns over rail service disruption, We are lowering our fiscal 2023 guidance for revenue to be in the range of $365,000,000 to $380,000,000 which is based on a forecasted production of 3,150 Importantly, our full year adjusted EBITDA guidance range remains unchanged.

Speaker 2

We are reaffirming our expectation For full year adjusted EBITDA to be between $18,000,000 $22,000,000 I will now turn the call over to Matt for a few commercial comments.

Speaker 3

Thank you, Jim, and good morning, everyone. During the quarter, our level of inquiries, order activity and demand for our products remain healthy. For the Q3 of 2023, we closed orders for 10 railcars valued at approximately $122,000,000 with year to date orders totaling 3,356 railcars Valued at approximately $379,000,000 This represents an order increase of approximately 200% versus the 1st 3 quarters of fiscal 2022. We ended the quarter with a backlog of 3,800 railcars valued at approximately $452,000,000 representing increases of approximately 50% And 64% year over year respectively. As Jim mentioned, our 4th production line at Castanos is now complete With the first shipments from that new line scheduled to be delivered in the Q4, the sales team continues to build our pipeline for fiscal 2024 And having the 4th line available will increase our ability to better meet customers' needs for new railcars.

Speaker 3

Although weakness in freight loadings, The migrant issue at the border and the overall macro environment continue to pose market uncertainties. We agree with industry forecasts of railcar deliveries of 45,000 railcars in 2023. Our sales pipeline remains strong with customer inquiries indicating that demand is still Largely tied to railcar replacements across a diversified range of car types. Order activity by customer segment, including lessors, shippers and Class 1 railroads has remained consistent and includes the development of new customers who value our commercial Proposition as outlined by Jim. Our sales team continues to operate with discipline.

Speaker 3

Our overarching strategy is to prioritize business that delivers substantial value to customers and aligns with the core of our business, Furthering our strategic objectives, which includes a healthy, well managed backlog. This disciplined approach ensures that each Decision aligns with both the needs of our customers and our long term goals, reinforcing our commitment to growing, providing value, while maintaining a strategic direction that fortifies our business. I'll now turn the call over to Mike for comments related to our financial performance. Mike?

Speaker 4

Thanks, Matt, and good morning, everyone. As Jim discussed in his opening remarks, for the Q3, we delivered significant year over year adjusted EBITDA growth And gross margin expansion. These were achieved despite a decrease in deliveries year over year, proving the success of our cost structure transformation. Our highly variable cost base provides us with the agility to scale our business to industry demand, while maintaining profitability at lower delivery levels. Consolidated revenues for the Q3 of 2023 totaled $61,900,000 with deliveries of 503 railcars Gross profit in the Q3 of 2023 was $9,200,000 with a gross margin of 14.9 percent Compared to gross profit of $4,600,000 and gross margin of 5.3% in the Q3 of last year.

Speaker 4

Despite the lower deliveries and adverse impact Foreign currency in the quarter, we continue to expand gross margins driven by our increased production efficiencies coupled with strong commercial performance. SG and A for the Q3 of 2023 totaled $7,500,000 up from $7,100,000 in the Q3 of 2022 as we continue to recruit and invest in operational talent. Consolidated operating income for the Q3 of 2023 was $1,400,000 compared to an operating loss of $10,700,000 in the Q3 of 2022. The increase in consolidated operating income in the Q3 Non cash charge related to settling historical pension liabilities. In the Q3 of 2023, we achieved adjusted EBITDA of $3,500,000 compared to $1,600,000 in the Q3 of 2022, primarily driven by increased operational and commercial excellence initiatives that Jim discussed previously.

Speaker 4

For the Q3 of 2023, our adjusted net income was $200,000 or a loss of $0.14 per share Compared to an adjusted net loss of $5,400,000 or $0.21 per share in the Q3 of last year. Under U. S. GAAP, accrued dividends related to our preferred shares are treated as a reduction to net income available to common shareholders when calculating our earnings per share, resulting in negative earnings per share for the quarter. Capital expenditures for the Q3 of 2023 were $4,000,000 as we completed construction of the 4th line at our Castanhos facility.

Speaker 4

There will be further cash outflows In the Q4 related to the timing of payments for work that finished at the end of the Q3. However, now that the Mexico build out is complete, Capital expenditures should decrease considerably in 2024. Now turning to guidance. As Jim previously mentioned, due to the impact Railroad disruptions from the migraine issue, we are adjusting our full year 2023 revenue guidance to be between 365,000,000 $380,000,000 which is based on the lowered forecast delivery of 3,150 to 3,300 railcars. At the same time, we are reaffirming our previously stated full year adjusted EBITDA guidance of between $18,000,000 and $22,000,000 Inherent strength of our business foundation has enabled us to maintain a solid bottom line despite this external challenge.

Speaker 4

Reflecting on the journey we have been on the past several years, we are very proud of the achievements our business has made in such a short time. Our operational and commercial excellence initiatives have laid the foundation for us to achieve industry leading margins. Looking ahead, the combination of our highly variable cost structure and carefully managed SG and A should create significant operational leverage With that financial overview, I'd like to now turn the call back over to Jim for a few closing remarks.

Speaker 2

Thank you, Mike. And let me wrap up our formal remarks with one other piece of work extremely important to our future, And that is our debt structure and relationship with PIMCO. As all of you know, our company was in a challenging position this time 3 years ago. After evaluating multiple options to ensure that FreightCar America would have the liquidity necessary for the creation of a new and much stronger future, we aligned with a partner we believed We'll not only provide the necessary support, but also the reliability during the uncertainties prevailing at the time. PIMCO proved to be exactly that partner.

Speaker 2

Now as we move forward and as our business continues to demonstrate strength, We will look to improve our capital structure, take out the preferred shares held by PIMCO And effectively conclude this chapter of what has been a very beneficial relationship for FreightCar America. This has always been our shared vision. Although I cannot provide you with additional details on when this might occur, I do want to state our intention to get this done just as soon as conditions permit. In closing, we continue to set goals Quarter by quarter and the team continues to deliver on these goals. I'm very pleased with how we sit as a company today, The prospect of transitioning out of the PIMCO financing and what the next several years hold for us.

Speaker 2

With that, I will ask the operator to open the lines for some Q and A. Thank you.

Operator

Thank you. We will now be conducting a question and answer session. The first question comes from the line of Justin Long with Stephens Inc. Please go

Speaker 5

ahead. Thanks and good morning.

Speaker 3

Good morning, Justin.

Speaker 5

Maybe to start with the U. S.-Mexico cross border Shoes that everyone saw in the Q3. Is there a way to think about the delivery impact You saw from that disruption. And secondly, it sounds like those deliveries will be made up in both the 4th quarter and the Q1, but maybe you could talk a little bit more about that cadence.

Speaker 2

Yes. Good morning, Justin. This is Jim. I wish we had more clarity and specifics on this. We experienced, obviously, a level of disruption in the Q3, it has not abated itself.

Speaker 2

It has sort of ebbed and flowed. We're hoping to get this thing behind us as quickly as we can. But our Guidance adjustment our top line guidance adjustment is really based on what We think might happen based on kind of the ebbing and flowing of this. It's fluid. It's A bit hard to quantify and predict.

Speaker 2

We're comfortable with the range the revised range we've given, But it gives us just a little bit of protection against what we really don't know for sure just yet. What I can tell you is we are working with the railroad out of the factory daily and Doing the best they can in a temporarily turbulent situation.

Speaker 5

Got it. And maybe just to put a bow on that, if I look at the full year delivery guidance, it implies More than a doubling of deliveries in the Q4 versus the 3rd. So do you need the disruptions at the border to get Better in order to hit that? Or can you achieve that based on the kind of steady state of what we're seeing today?

Speaker 2

Yes. When you do the math on what we're projecting to get out in the Q4, there is Actually built into that, a level of pessimism, if you will, on the Consistency of the outbound freight, we're confident as we sit today in those numbers. And So we're feeling pretty comfortable with that. It's obviously a lot higher number than we saw In Q3, and that's we were taken a little bit by surprise towards the end of the third quarter, which prevented a number of shipments at the end. And the other thing you have to factor in with the additional volume as in the Q4 is the fact that we're now Starting up the 4th production line.

Speaker 5

Got it. That's a fair point on the 4th line. And 2nd question or topic I wanted to hit on, it was encouraging to see the adjusted EBITDA guidance Was maintained despite the fact that the revenue guidance came down by about 10% at the midpoint. That implies that margins will be better than you originally expected. So can you talk A little bit more specifically about what's driving that margin upside?

Speaker 2

Yes. This is Jim again. And then I'll I'll have Mike or Nick jump on with any additional comments. I think the thing to say about this This is what we've been talking about and working towards for 3 plus years. And our Business is built on the principle of operational excellence.

Speaker 2

And as that has taken root, We have surely expanded it to now encompass what we call internally commercial excellence. So the our business Being the smallest of the big producers, it is about efficiency on the plant side. And We as you know, we have we've built this brand new campus specifically designed to build railcars In the most efficient way we could possibly envision. And then we have proceeded now for 3 And the training of our workforce. So we're Pleased.

Speaker 2

We're very pleased, obviously, with our gross margins where they are right now. We are pleased to see the EBITDA on so few deliveries. And I think what's most exciting for us is this is not work that's finished. There's more opportunity. There's more to come.

Speaker 2

Progress is never a straight line, so don't assume it will be. But the trend has certainly been strongly favorable over the past 12, 18 months. And while it may not stay on the same level of trajectory, we expect further progress and improvement going forward. So this is with us. It's part of us.

Speaker 2

And it's how we envisioned and how we're demonstrating We run the business. So we're very happy with the things that are Obvious to look at like gross margin or gross profit or EBITDA per car. We feel good about all those metrics. Again, knowing that there's still more to come.

Speaker 5

Okay. And maybe last one for me. This one might be more for Mike. But if I look at the implied guidance for the 4th quarter, Big step up in deliveries and revenues, assuming SG and A stays pretty Steady, it seems to imply that gross margins will come down in the 4th quarter relative to the 3rd. So I was wondering If that's a fair assumption and if there's any color you can provide on what's driving that, maybe it's mix Is there something else?

Speaker 4

Sure. That's an astute observation and that's what the numbers would tell you. The one thing that's going to drive that in the Q4 is our Start up with the 4th line. We're going to have a lot of people that we're bringing in training fixed costs before we're actually running on that line. So all that will provide a temporary drag on margin in the Q4 before it abates itself and it's a fully running line at full run rate efficiency in 2024.

Speaker 5

Got it. That makes sense. I'll pass it on. I appreciate the time.

Speaker 3

Thank you, Justin. Thank

Operator

you. Next question comes from the line of Matt Elkott with TD Cowen. Please go ahead.

Speaker 6

Good morning. Thank you. Staying on the gross margin question, I know it's expected to be a bit down sequentially. But Mike or Jim, can you talk about the exit rate in the Q4 for the gross margin? And if it says anything about 2024, how should we think about the margin beyond Q4?

Speaker 4

Sure. So as I just mentioned, in Q4, you will see a sequential step down given the overhead of starting up the 4th line, the start up costs associated with that. But if you're looking at us as a full year in 2023 and that exit rate on an annual basis where you see Q2 and Q3 running efficiently on 2, 3 lines, I think looking holistically at 2023 would be a decent indication of 2024 and beyond and what we're capable of.

Speaker 6

Okay. So you feel comfortable you can match the 2023 gross margin or exceed it in 2024?

Speaker 4

And say that's our with the commercial and operational excellence initiatives we have in place, that's what we're focused on.

Speaker 6

Okay. And then, Mike, just to have you, just want to add a couple of questions on the balance sheet. I know You had a big increase in inventory. How much of that is related to cars being built and unable to be delivered because of the border issues? On the bright side, you had a halving of accounts receivable went down significantly And cash went up, so a lot of moving parts.

Speaker 6

Can you just help us gauge the different dynamics of the balance sheet at the end of Q3?

Speaker 4

Yes, definitely. So inventory is higher than we would have planned in Q3 given the delays at the border and the issue that caused. And as you go through the 10 Q, you'll see a breakout of that inventory in there in the inventory footnote between raw material, WIP and finished goods. You'll see finished goods is elevated compared to last Which is obviously the shipments in transit, but you also see WIP is high and that is unable to ship the products fully off Property, it's much higher than last year, but based on our delivery guidance for Q4 and our outlook, we do expect to get that all off. And importantly, we haven't really come off that we still expect to be operating cash flow positive for the year.

Speaker 6

Are you guys able to tell us how many cars were built and were unable to be delivered in the Q3 because of the border issues?

Speaker 4

I'm not able to share that number right now.

Speaker 6

Okay. And then just I want to switch To the three line changeover that Jim mentioned on in the prepared remarks, Jim, were they in response to something new that happened or were they already planned for the Q3? And are you anticipating any more line changeovers planned for 4Q and into next year?

Speaker 2

Yes, Matt. Excuse me. No, there was nothing unplanned in these line changeovers. You may recall, our book of business for the year was really cemented In the February type timeframe. So no surprises to us there.

Speaker 2

It was coming. The surprise was it coming at the same time we had some issues with rail service getting product out. In terms of and they were big line changeovers. There's Not all line changeovers are equal and these happen to be larger ones. But again, nothing unplanned in that.

Speaker 2

What we have in the Q4 is a couple of much Smaller, quicker to implement line changeover. So the ability to run Essentially use all of our time for producing product as opposed to using any of the time for setting up product. Again, one of the enablers to why we expect to get so much product out in the 4th quarter.

Speaker 6

Got it. And then switching back to The backlog here, I think this is your highest backlog ASP since 4Q 2019 and Possibly the 2nd highest ever. Is this just purely a function of inflation and higher costs or is there a favorable mix?

Speaker 2

I think it's a little bit of

Speaker 4

a combination of both. Obviously, steel costs are higher than they would have been If you look back a decade, but also the car types we're building, not all car types are the same sell price. So when you look at the higher average selling price, that's going to speak to the mix of cars as well in our backlog.

Speaker 6

Got it. Just one final question from me guys here. I know demand is pretty solid in general. But how concerned are you that if the ability to deliver cars remains Strained by border issues and other supply disruptions that some customers who are not getting cars when they need them might Cancel orders. I mean, it looks like you did not have any cancellations in the Q3, but is there is this a risk if The disruptions continue.

Speaker 2

Matt, we don't view that as a risk. The outbound delivery is On any particular car associated with any particular order is measured in days or weeks. I mean, these aren't like Months long drawn out type things. And we have had a Very steady track record of accepting and delivering orders Without cancellations. I mean, I don't think we've seen a cancellation in the time I've been here, certainly not that I recall.

Speaker 2

So, we would view that as very low risk.

Speaker 6

Got it. And Jim, one final one. As We get to February, I imagine you will be providing guidance for 2024. Do you think you'll be sticking to the same kind of metrics You've been providing for the last few quarters or should we expect any new metrics that you might talk about?

Speaker 2

Well, I mean, we haven't really thought about it. We certainly won't provide fewer metrics. We'll certainly provide the same. And whether or not we expand upon that, I think we'll have those discussions. And Our goal is always provide the most visibility we can Without sort of running Too close to the edge that we might have to pull some of it back later on.

Speaker 2

So the guidance will be at least what it was this year, Possibly enhanced. We'll see.

Speaker 6

That's good to know. Thank you, Jim, and

Speaker 3

thank you, everyone. Appreciate it. Thanks, Manav.

Operator

Thank you. This concludes today's question and answer session. Thank you. This concludes today's teleconference. You may disconnect your lines at this time.

Operator

Thank you for your participation.

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Key Takeaways

  • FreightCar America reported Q3 revenue of $61.9 million on deliveries of 503 railcars, down 28% year-over-year due to Mexico rail service halts and three large line changeovers, yet expanded gross margin by 30 bps to 14.9% and drove adjusted EBITDA to $3.5 million (~$7,000 per railcar).
  • The company completed construction of the 4th production line at its Castanos campus, boosting annual capacity to 4,000–6,000 railcars, with first deliveries from the new line slated for Q4.
  • Commercial discipline delivered a Q3 backlog of 3,800 railcars valued at $452 million (up 50%/64% year-over-year), over 3,356 orders year-to-date worth $379 million (200% increase), underpinned by focused, tailored customer partnerships and disciplined pricing.
  • 2023 revenue guidance was lowered to $365–380 million (3,150 cars) due to ongoing border disruptions, while full-year adjusted EBITDA guidance remains at $18–22 million, with capex set to decline now that Mexico factory build-out is complete.
  • Management plans to improve its capital structure by redeeming the PIMCO preferred shares once market conditions allow, marking a pivotal step in concluding their existing financing arrangement.
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Earnings Conference Call
FreightCar America Q3 2023
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