FreightCar America Q4 2023 Earnings Call Transcript

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March 19, 2024

There are 7 speakers on the call.

Operator

Welcome to FreightCar America's 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note this conference is being recorded and an audio replay of the conference call 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'Dea with Riverton Investor

Speaker 1

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 ks for a description of certain business risks, some of which may be outside of the control of the company and 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.

Speaker 1

During today's call, there will also be 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 Q4 2023 is posted on the company's website at freightcaramerica.com along with our 10 ks which was filed yesterday after market.

Speaker 1

With that, let me now turn the call over to Jim for opening remarks.

Speaker 2

Thank you, Chris. Good morning, everyone, and thank you all for joining us today. FreightCar America achieved many significant milestones last year as part of our multi year transformation, and I believe that we are now positioned to scale the business and generate compelling results. To support this belief, I will lead off with one very important metric. For 2023, FreightCar America earned $6,658 of adjusted EBITDA per railcar.

Speaker 2

This compares to a loss of $18,020 of adjusted EBITDA per railcar in 2019, which was our last full year of operation prior to beginning the transformation. During this timeframe, the company eliminated very important levels of both fixed and variable costs. In addition, our prior manufacturing footprint limited the types of cars we were able to produce as well as access to the skilled labor we needed for expansion. Fast forward and back to 2023, we achieved the just mentioned adjusted EBITDA per railcar on just over 3,000 deliveries and a footprint now capable of producing 5,000 or more railcars per year. As we ramp up production, we expect to gain new operating efficiencies driving more adjusted EBITDA per railcar on more railcars in total.

Speaker 2

In my view, this is the most important message today. Now to touch on a few key highlights for the full year. We delivered revenues of $358,100,000 a decrease of 2% year over year on deliveries of 3,022 railcars, a decrease of 5% year over year. The modest decline in top line numbers can be attributed to disruption in the movement of rail traffic at the U. S.

Speaker 2

And Mexico border at the end of the year. Following the border issues we experienced during the Q3, the government closed the border at Eagle Pass, Texas from December 18 to 27, which created a multi week impact on our ability to both ship and produce railcars. Furthermore, recall that our 4th production line started just prior to year end, which prevented significant additional scaling in 2023. With the resumption of rail service at the border combined with our manufacturing facility now fully online, our teams are well prepared to meet demand. In addition to these headwinds, foreign exchange also impacted our results, but despite these, which combined were approximately $5,000,000 in headwinds for the full year, we delivered full year adjusted EBITDA of $20,100,000 versus $8,400,000 in 2022, an improvement of 11 point $7,000,000 or approximately 139 percent on slightly less revenue as we expanded our gross margin profile by 4 60 basis points from the prior year, achieving an industry leading 11.7 percent for the full year.

Speaker 2

In terms of our operations, we achieved several key milestones in 2023. Notably, we completed the build out of our manufacture annual volume of 5,000 plus railcars or 10% to 15% of the annual demand for North America. Moreover, I am extremely pleased with the high level of operational excellence our team has already been able to demonstrate. Coupled with the ongoing execution of our commercial strategy, I am confident in our ability to further enhance the quality of our earnings as we flex the full potential of our capacity and operational and commercial strategies, some of which will be evident when Nick speaks to our outlook for 2024 in a few minutes. Turning to the 4th quarter, revenue decreased 2% year over year to $126,600,000 on deliveries of 10 21 railcars, both lower than expected, purely due to challenges around the already mentioned border closure and rail service disruption.

Speaker 2

Despite these headwinds, our gross margin increased 600 basis points to 9.6% compared to the Q4 of 2022 and adjusted EBITDA increased $5,300,000 versus the same quarter of the prior year to $6,500,000 which equates to $6,357 per railcar. And this is in the face of an approximately $2,700,000 impact in the quarter on adjusted EBITDA from the last end of year shipments and FX. As you are most likely aware from other industry participants, order activity took a pause in the 4th quarter with FreightCar 100 and 35 orders. I will say that activity has picked up significantly since the start of the New Year, but it's still facing inertia from the high levels of caution being exercised by customers. We believe this inertia is due to caution with CapEx spending in view of mixed confidence in the economic outlook, elevated interest rates which directly impact leasing costs and improvement in railroad performance metrics, which has led some buyers to reevaluate new quantities needed.

Speaker 2

Despite the softness, we have line of sight to production of 4,000 to 4,400 railcars in 2024, which will allow us to achieve some of the scaling and levering we are so eager to demonstrate. With that, I will next turn the call over to Matt to discuss the market, then Mike for a more detailed view of 2023, and finally to Nick to preview 2024. Matt?

Speaker 3

Thank you, Jim, and good morning, everyone. Throughout the majority of 2023, we experienced healthy inquiry activity with an increase in total orders booked versus the prior year. For the full year 2023, we won orders totaling 3,491 railcars, diode at approximately $397,000,000 This represents the largest annual order total since 2019 and a 5% increase in order intake compared to 3,306 orders booked during the prior year. Orders in 2023 by customer segment, including Class 1 railroads, lessors and shippers have remained consistent as has the continued addition of new customers. We ended the year with a backlog of 2,914 railcars valued at approximately $348,000,000 representing increases of approximately 19.2% and 20.9% year over year respectively.

Speaker 3

For the Q4, we booked orders of 135 cars, which highlights the lumpiness we sometimes see from quarter to quarter. For many freight segments, as Jim alluded to earlier, customers are simply taking longer to fully analyze the timing of their new railcar purchases. From a market perspective, rail service including rail velocity and dwell times are trending above their 5 year averages. Overall, we view these metrics as positive for a healthy rail environment that will drive more freight to rail and ultimately increase new railcar demand. Customer feedback indicates that the balancing of improved rail service and its impact on fleet utilization, higher commodity and raw material prices and the commensurate increases in lease rates for new equipment along with general uncertainties of the economy all factor into their decision and timing of new railcar acquisitions.

Speaker 3

It isn't a matter of when or if, but when customers will make buy decisions. As an industry, we expect to remain in the cycle of new railcar demand tied closely to replacement levels, and we are aligned with most other forecasts for total railcar deliveries falling in the range of 35,000 to 40,000 plus railcars for the full year 2024. As Jim mentioned, the Castanos plant is sitting in stride now with four lines of production fully operational. The completed Tristanos campus is truly a differentiator for our brand and positions FreightCar America for growth with the ability to deliver both more volume and a broader range of car types to our customers. Back to the commercial front, we are seeing solid momentum again in bid activity in Q1.

Speaker 3

However, as I referenced earlier, the environment may remain somewhat lumpy quarter to quarter as customers manage through the aforementioned factors and dial in the timing of when new railcars are needed. As a company, we will continue to maintain a disciplined commercial process, a collaborative approach to developing solutions for our customer specific railcar needs and secure business that aligns with our financial goals. 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. I'll begin with an overview of the Q4 financials and then touch on the full year 2023 highlights, some of which Jim already mentioned in his opening remarks. First, let's turn to the Q4 results. Consolidated revenues for the Q4 of 2023 totaled $126,600,000 with deliveries of 10 21 railcars compared to $129,000,000 on deliveries of 11 50 railcars in the Q4 of 2022. Gross profit in the Q4 of 2023 was $12,100,000 with a gross margin of 9.6 percent compared to gross profit of $4,600,000 and gross margin of 3.6% in the Q4 of last year.

Speaker 4

Despite relatively flat deliveries due to the adverse impact of the border closure in the quarter, we significantly expanded gross margin supported by an even more efficient production process and robust commercial strategy. With our facility entering a new phase with all production lines operating beginning December 2023, we anticipate further gross margin improvement throughout 2024.

Speaker 2

SG and A for

Speaker 4

the Q4 of 2023 totaled $7,700,000 up from $6,300,000 in the Q4 of 2022, primarily due to a year over year increase in stock based compensation as the Q4 of 2022 had a favorable fair market value adjustment for certain cash settled awards. Consolidated operating income for the Q4 of 2023 was $268,000 compared to an operating loss of $6,200,000 in the Q4 of 2022. The increase in consolidated operating income in the Q4 of 2023 was primarily driven by increased gross profit offset by a $4,100,000 impairment charge related to our last tranche of railcars and our lease fleet. In the Q4 of 2023, we achieved adjusted EBITDA of $6,500,000 compared to $1,200,000 in the Q4 of 2022, primarily driven by increased operational efficiencies. Again, as Jim highlighted earlier, our 4th quarter adjusted EBITDA was muted due to the U.

Speaker 4

S.-Mexico border closure in December that prevented shipments of finished goods as well as the continued strengthening of the Mexican peso. In total, these were a headwind approximately $2,700,000 in the quarter. While the effective foreign currency will always exist, we implemented a foreign currency risk management program in the Q3 of 2023 that will reduce the impact on our earnings in future periods. For the Q4 of 2023, our adjusted net income was $2,400,000 or a loss of $0.07 per share compared to an adjusted net loss of $8,100,000 or $0.31 per share in the Q4 of last year. Adjusted net loss accounts for the impact of certain non cash items and non recurring items such as the $4,100,000 impairment on leased railcars as well as the change in fair market value of our warrant liability, which fluctuates each quarter in line with the change in our share price during the period.

Speaker 4

Capital expenditures for the Q4 of 2023 were approximately $3,800,000 related to the timing of payments for work that was finished at the end of the to complete the 4th production line at our Castanhos facility. For the full year, it was 12,700,000 dollars With the completion of our 4th production line, we expect future capital spend to decrease considerably and to primarily be in a maintenance cycle. We estimate our maintenance cycle to be approximately 0.5% to 0.75 percent of revenue. For the full year 2023, we completed our expansion work which included increasing the capacity of our vertically integrated fabrication shop as well as production lines 34. Adjusted EBITDA for the full year was $20,100,000 an $11,700,000 increase or 139% improvement from 2022.

Speaker 4

As Jim mentioned earlier, while we are very pleased with our 2023 results, foreign currency in the December border closure were headwinds to our earnings of approximately $5,000,000 Due to the favorable cost structure of our Cristanos footprint and the operational leverage we designed into our transformed business, we reported our 2nd consecutive year of positive operating cash flow. Cash generated from operating activities was $4,800,000 in 2023 compared to cash flows from operating activities of $11,500,000 in 2022, a $6,700,000 decrease because of the border closure in the final weeks of December that led to a large buildup of inventory as we were unable to ship finished railcars. With that financial overview, I'd like to now turn the call over to Nick for a few remarks on our outlook.

Speaker 5

Thanks, Mike. I want to start by highlighting some key strategic developments from the past quarter. Our team has continued to reach major achievements, successfully doubling our on-site paint capacity, building product across all 4 of our production lines, insourcing the significant majority of fabricated parts and growing our workforce in Mexico. All of this was achieved while making our plants amongst the safest manufacturing facilities in North America. These achievements underscore our commitment to our customers, our employees and our shareholders.

Speaker 5

In terms of operations, despite the challenges we faced in 2023 including border disruptions, we made significant progress in increasing productivity, optimizing the supply chain and improving our assembly processes and capabilities. These improvements are critical to our long term success and reflect our dedication to operational excellence. Our priorities for the upcoming year remain unchanged. The team will continue to focus on executing our operational and commercial strategies, while working to build our backlog and deliver high quality products on time to our customers. We also remain committed to creating opportunities for further improvements in our capital structure and driving continued improvements in our cash generation moving forward.

Speaker 5

With the disruption associated with our 2023 plant expansion work behind us, I believe we can expect a progressively better year especially when considering the combined benefits from more volume, more productivity and putting even more operational excellence initiatives to work. For the full year 2024, we are forecasting revenues between $520,000,000 $572,000,000 up approximately 52.5 percent year over year at the midpoint of the range. This expectation is based on expected deliveries between 4,000 to 4,400 railcars, an increase of approximately 39% at the midpoint of the range. We expect adjusted EBITDA guidance between 32,000,000 dollars $38,000,000 for the full year, representing a year over year increase of 74.1% at midpoint and further underscoring the power of our transformation strategy. Finally, we expect positive operating cash flow for the 3rd consecutive year.

Speaker 5

I am truly excited about the opportunities that underpin our guidance for 2024 and also mindful of the potential challenges that we need to prepare to manage through. I want to express my gratitude to our customers, our employees, partners and shareholders for your continued support. I will now turn over to Jim for a few closing remarks.

Speaker 2

Thanks, Nick. I will come back to the theme we started today's call with and that is today FreightCar America is a vastly better company defined by a full array of railcar products with some of those products being the preferred car type in the industry. We are also a company defined by our people and their commitment to give our customers what they want and 20 fourseven accessibility to the leadership team. We're also defined by our manufacturing campus in Castanos, the newest and most efficient factory in the industry. Our factory is our showroom and it is the place we want our customers to experience before they're making their purchase decisions.

Speaker 2

And finally, we are defined by a transformed cost structure and competitiveness. As a result, our customer base is growing, our repeat customer base is growing and shareholders and the industry will be better off for it. As Nick pointed out, our priorities for the upcoming year remain unchanged. The team will continue to focus on executing business. We also remain committed to improving our capital structure and driving incremental cash generation.

Speaker 2

All of us have great expectations for FreightCar America and given what has been achieved under the most difficult of circumstances, I am extremely confident in the team and direction of the company. In closing, and as first mentioned quite some time ago now, we have been planning for the next generation of leadership and continuity. So let me also comment on the other press release issued last night. I will be stepping down as President and Chief Executive Officer effective May 1. Nick, our current Chief Operating Officer, will assume the role of President and CEO and join our Board of Directors at the same time.

Speaker 2

Nick has been second in command for 9 months now and I do not believe it necessary to do a full reintroduction. He is an operations expert, customer and product centric and came to us from a division of 1 of the most admired companies in the world, Berkshire Hathaway. Nick shares my values and my vision for the company and I believe that he and Mike and Matt and the rest of the team will deliver for our shareholders. My role will continue with FreightCar America where also starting on May 1, I will begin serving as the company's Executive Chairman, which will allow me in conjunction with Nick and the rest of the Board to focus on strategic and other topics of the utmost importance to our future. With these changes, we are not stopping or changing our agenda.

Speaker 2

Instead, we are preparing to accelerate as a vastly healthier and more formidable company. With that, I will ask the operator to open the lines for Q and A.

Operator

Thank you. We'll now be conducting a question and answer Thank you. And our first question is from the line of Justin Long with Stephens. Please proceed with your question.

Speaker 6

Thanks and good morning.

Speaker 2

Good morning, Justin. Good morning, Justin.

Speaker 6

First of all, let me say to both Jim and Nick, congrats on the transition. And I maybe wanted to start there with a question for you, Nick, as you step into this role. It sounds like from the prepared remarks, the overall strategy isn't going to change. But Jim, I think you mentioned there could be some opportunities to accelerate the trajectory of the business going forward. So Nick, as you make this transition, what are some of the priorities for you out of the gate?

Speaker 6

And do you have any thoughts on ways you can enhance or accelerate the current plan?

Speaker 5

Thanks, Justin. Thank you for the congratulations. Thank you very much. Yes, let me give a as Jim mentioned, I've been here for 9 months now. So I've had a significant amount of time to spend on the ground in our Castanos facility in Mexico to get very integrated and sort of very close to the processes we have, the investments we've made, the facility that exists down there.

Speaker 5

And I will tell you that in my 1st 9 months it's truly impressive what a great facility that's been placed in Kastanos and expanded over the last 2 or 3 years. I think the team has done an outstanding job on what they've accomplished in Kastanos. I also believe there is more to come from our continuous operations and our approach to operational excellence. So I think there's we said it's the same priority. Our priority is to drive that operational excellence to benefit our priority is to drive all of those cost takeout initiatives to remove non bio added work in Kustalos.

Speaker 5

So we'll continue to do that. The teams have been embarked on that and we'll continue to push that through so that that reflects in our bottom line from a cost performance perspective in KISTANOS. I think improving operations is not just a one shot deal. It's not something we do over a 3 month period and leave it. It is a process of the continuous process that pursues excellence.

Speaker 5

So we continue to do that from an operational perspective. Our priority is really to now we've built this capacity is to be able to fill that capacity and expand our products to meet what our customers require or what the industry requires. And then thinking externally to spend more time with customers and key stakeholders that we can help our customers win so that we win their work when they're entitled to have their work. And I'll work with existing customers, new customers, Matt and the team to make sure that our products and services clearly meet what our industry needs or expects over the coming 12, 18, 36 months period. So that's what I've kind of learned just over the last 9 months.

Speaker 5

I think that covers your question, but if not, let me know.

Speaker 6

That does and thank you for that. And maybe the shift to the performance of the business, you called out a few times the $5,000,000 impact that you saw from FX and the issues at the border. Could you specifically or could you break that out in terms of how much of that $5,000,000 was related to the border issues? And maybe provide an update on how those issues at the border are playing out year to date?

Speaker 4

Sure, Justin. I'll start with breaking out. So the border contributed about $1,300,000 and over the course of the year it was $3,700,000 on FX for that breakout. In terms of the border closure, I'll turn that one over.

Speaker 5

Yes. I'll do that. So just a minute. So I mean, there's a couple of things on the border closure just to note was at the end of Q4, the timing of the border closure was right at the end of sort of week 3 of December, which gives you little time to sort of respond in time for the quarter. So what we've done since then is we've got a much closer management with the rail operators.

Speaker 5

So we have a better view of what to expect. And we've also got a better closer management daily review of what's happening and where it's going to impact, so we can be better prepared and better mitigated for future or any extended or surprise border closures. I will tell you right now it's better than it was in Q4 from a border and delivery expectation.

Speaker 6

Okay, that's helpful. And I guess the last one from me. You gave the guidance for 2024 and it implies pretty significant growth across the board. But is there any additional color you can provide on the quarterly cadence of that guidance as we think about the timing of deliveries and margin performance of the business, things that may be fluctuating based on mix or other factors?

Speaker 2

Mike, do you want to respond to that?

Speaker 4

Sure. I'll start with from a we're not going to give specific quarterly numbers, but I will say, we'll see sequential improvement throughout the year. Q1 will be our lowest as I mentioned. We didn't start production on our 4th line until December. So you can understand there'll be ramp up production costs etcetera going on in Q1 that will mute those results compared to the rest of the year when that 4th line is fully utilized and running at full capacity and the learning curves over from hiring the new crews.

Speaker 4

So you'll see that scale up throughout the year with Q1 being the low point from a gross margin perspective.

Speaker 6

Okay. And from a delivery perspective, would you expect a similar cadence 1Q being the lowest and then building through the year?

Speaker 4

So on that one, as we talked about with the border closure, there's a hangover from Q4. So deliveries in Q1 will actually be a little higher given how much was kind of sitting on property. And as you look through our financials, you'll see there was just over $23,000,000 of finished goods or about 200 railcars finished on property that would have been Q4 that are going to fall into Q1. So Q1 deliveries will actually be a little high as a result of the border closure hangover falling into Q1.

Speaker 6

Okay, very helpful. Thank you for the time.

Speaker 2

Thanks, Justin.

Speaker 4

Thanks, Justin. Thank you.

Operator

Thank you. At this time, we've reached the end of our question and answer session. And this will also conclude today's conference. You may disconnect your lines at this time. We thank you for your participation and have a great day.

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FreightCar America Q4 2023
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