Q1 2021 FreightCar America Inc Earnings Call
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Greetings and welcome to freight car America's first quarter 2021 conference call.
At this time all parts of events are in a listen only mode and.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Lisa Unfortunately, not investor relations. Thank you you may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Jerry Rogers, Chief Financial Officer, and Matt Tonn, Chief Commercial officer.
Like to remind everyone that statements made during this conference call relating to the company's expected future performance and future business prospects or future events or plans may include forward looking statements as defined under the private Securities Litigation Reform Act of 1995 participants are directed to freight car America 2020 form 10-K.
A description of certain business risks.
And which may be outside of the control of the company that may cause actual results to differ materially from those expressed and the forward looking statements.
We expressly disclaim any duty to provide updates per 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.
Conciliations, but these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning.
Our 10-Q and earnings release for the first quarter 2021 are posted on the company's website at freight per America Dot com with that let me now turn the call over to Jim for a few opening remarks.
Thank you Lisa good morning, and thank you all for joining us today.
When we reported our full year 2020 results, just a few months ago.
We spent considerable time discussing the transformation of freight car America. Our ambition is to become the most day session and highest quality railcar producer in North America and.
<unk> 'twenty 2020 'twenty, one what fundamentally transform us as a company and set us up for the future.
Our goal was to get ahead of and industry recovery and put ourselves in pole position for the start of the upturn and we.
We believe we have done that.
For the first quarter of 2021, we delivered revenues that were up significantly year over year, and we achieved positive gross margin for the second consecutive quarter.
We executed directly against our scheduled production plan and did so during and operationally desk.
And that's a call period as we completed the final stages of the production wind down and closure of the Shoals plant.
And I'll also continuing to ramp up and build out because donald's footprint.
While it is still early days, we are constant and our direction and the pace of what we believe will be our renewed growth and for this I would like to thank all our dedicated and talented employees, who are cheat and what we are accomplishing.
Our talent base has never been stronger.
Last quarter, we also announced that our board had approved the construction of our own fabrication shop, which we believe will allow us to make the large majority of our fabrications and how starting with and 12 months as well as in addition to our wheel and axle shop.
Each of these new facility and dish will bring additional capability and as such and since the.
And the project is moving along according to plan and we expect to be fully operational no later than early next year.
And then dish and as we have discussed before the facility in Mexico. It was purposefully built to expand as the industry and market dynamics dictate.
We are now and the early stages of planning for additional lines.
It's premature to discuss the timeline and cost for.
What will almost certainly be the next phase of expansion. However, I do expect to be and our position to outline more details on this topic on the second or third quarter calls.
On the operational side.
There are headwinds that we and the industry are facing.
<unk> prices remain at all time high levels more than double over the past year and we need to continue to work very hard to both protect supply and find ways to mitigate these cost pressures.
In addition to the tight and expensive steel supply the competitive landscape continues to be intense with manufacturers anxious to fill their factories.
The good news is that orders are increasing and demand recovery seems to be gaining momentum.
However, during the near term pricing intensity and still cost will put pressure on margin.
Margins until things began to fall back into balance.
And let me tie and there is even more reason for us to be placed to be America steinhaus facility.
As we previously noted on our last earnings call. There were significant costs associated with the exit from Shoals, and transition took a stance and ease and impacted our results and the first quarter.
Jerry will discuss the details, but isn't it and it is important to note.
And this was the main headwind for the quarter and without these one time costs, our margins would have been even higher.
Matt will speak about the broader macro environment and more detail during his part of the day Paul.
We continue to be encouraged by the increasingly positive trends, we are seeing across the industry with railcars and storage declining and rail traffic increasing.
Order activity is starting to move and the right direction and we are seeing continued positive dynamics and our conversion business.
As we also noted back in March we are very encouraged by the number of new sales inquiries since the start of the year. We are also now starting to close new orders with activity continuing to pick up pace. As a result, we have raised our 2021 delivery guidance to between <unk> hundred and <unk>.
1700, and 50 railcars up from our original outlook of between 14, and Honduras and 1600 railcars.
The ear 2021 it was about building momentum and support of expansion and profitable growth as we move forward.
We're very pleased with how the new operations performing.
And the new cost structure and most of all the new chain.
We believe that that we are and a good position to start winning.
I'll now turn the call over to Terry to provide more detail on the financials.
Thanks, Jim and good morning to everyone Tycho Jim's opening remarks, our business is clearly building momentum and we believe we are only beginning to see the true potential of the cusano facility.
Turning to our financial results consolidated revenues were $32 4 million and the first quarter of 2021 compared to $66 million and the fourth quarter of 2020, and $5 2 million and the first quarter of 2020 the cash.
Company and delivered 309 railcars and the first quarter of 2021 compared to 477 railcars and the fourth quarter of 2020, and 11 railcars and the first quarter of 2020.
Our gross profit and the first quarter was $1 8 million second consecutive quarter of positive gross margins for the business as Jim previously noted gross margin was lower compared to $5 5 million and in the fourth quarter 2020. However, the first quarter includes the final transition costs associated with the move to Chris Donald's from Shoals and.
Importantly, this was only our third quarter, a positive gross margin and the last three and a half years.
We remain focused on maintaining this financial momentum.
Yes.
SG&A for the first quarter totaled $9 2 million up from $8 7 million and in the fourth quarter and seven 4 million and the first quarter of 2020.
The increase in SG&A was attributable to noncash compensation accruals related to the rise and the company's stock price as well as higher professional fees, we expect SG&A expenses to be approximately $7 million per quarter for the remainder of 2021.
Consolidated operating loss for the first quarter of 2021 was 14 million.
Per to an operating loss of $9 2 million and the fourth quarter of 2020, and operating loss of $17 1 million and the first quarter of 2020.
The operating loss from the first quarter of 2021 included $6 7 million and restructuring charges.
Operating loss and the fourth quarter of 2020 included $19 million of impairment charges related to leased railcars, which was partially offset by $12 9 million noncash restructuring gains largely related to the termination of the lease at the Shoals manufacturing continuity during the fourth quarter of 2020.
Operating loss for the first quarter of 2020, including included 0.9 million and restructuring and impairment charges.
Last quarter I walk you through how the warrants issued with our November 2020 financing would have an impact on our financial statements and move forward, namely that the warrant liability will be marked to fair market value each quarter with the change and value impacting our net income and earnings per share calculations.
From the first quarter of 2021, the loss on change in fair market value of warrant liability was $22 1 million compared to $3 7 million and the fourth quarter of 2020. As a reminder, this is a noncash item, reflecting the appreciation of our stock price during the first quarter.
Interest interest expense and the first quarter was $2 5 million compared to one 4 million and the fourth quarter of 2020, and zero point $3 million and the first quarter 2020.
Interest expense reflects the close of the new debt agreements and the fourth quarter of 2020 going forward interest expense is expected to remain at higher than historical levels based on those changes to our capital structure last year, and the additional funding, which will which I will speak to shortly.
And the first quarter of 2021, adjusted EBITDA loss was $1 3 million compared to adjusted EBITDA of a positive $1 7 million for the fourth quarter of 2020.
And the first quarter of 2020, adjusted EBITDA loss was $12 9 million when adjusting for the items previously discussed one reporting and the operating loss and other noncash and nonrecurring items.
Like last quarter adjusted EBITDA was generally impacted by the same large non operating adjustments just mentioned that impacted our consolidated operating loss as well as the noncash loss on change in fair market value of the warrant liability that was also previously noted.
Moving now to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of $31 7 million compared to $54 2 million at the end of 2020 as previously discussed our cash balance declined as we completed the transition and Mexico closed our shoals facility and and.
<unk> increased working capital expenditures to meet future production targets.
The main drivers of the decrease included $8 8 million and value added tax paid.
Paid and Mexico, which the company expects to recover once the return application and review process is complete.
One time freight and labor expenses associated with the move and physical equipment was approximately $5 million and prepaid expenses of approximately 4 million were made mainly to lock in steel prices.
Paid and Mexico.
Receivable totaled $13 2 million at the end of the first quarter and we brought on a partner to make sure that we can collect these funds and a timely manner as well as obtain certification for future periods.
Capital expenditures for the first quarter of 2021 was zero point $5 million compared to $3 7 million and the prior year period is the heavy lift investments for the current phase and the facility in Mexico is now largely complete.
We stated at our full year 2020 earnings call given our smaller footprint, we expect our capex to be significantly lower in 2020 one.
Third to 'twenty, and 'twenty and forecast that it would range between two and $3 million.
Finally, as we noted in our press release today, we have increased our term loan with a financial partner to provide an additional $16 million of financing.
Our primary financial lenders continues to be a great partner for freight car and.
We believe this will be a temporary incremental facility that will help us maintain and momentum. These funds will allow us to work through the refund process and finalize the last steps to secure local financing and Mexico, which will more more appropriately align with our new and growing operations. We currently have over $30 million of inventory and assets in Mexico that do not quality.
And with our domestic ABL, so future financing and Mexico will ultimately be more efficient and we hope to have that process complete within the next few months.
In terms of the structure of the amended term loan.
New funds are not repaid by March 31, 2022, it will require additional equity consideration.
And we are aiming to repay the loan faster as.
As we just discussed we have an aggressive plan and recover the VA coupons and establish direct financing for our Mexico operations. We expect that will be resolved later this year with net financial overview I'd like to now turn the call over to Matt for a few commercial comments related to the first quarter and moving forward Matt.
Thanks, Terry as Jim mentioned, the railcar industry has seen increasingly positive signs, including improved rail traffic and most commodity groups positive freight car utilization trends and a continued reduction and railcar cars and storage all key indicators of and industry priming for recovery and the first quarter of 2021, we booked 305.
Five railcars compared to 90 railcars and the fourth quarter of 2020, and 300 and the first quarter of 2020.
We are seeing increased increasingly stronger inquiry activity and an improved book to build ratio.
And as examples inquiry levels and the first quarter were double all of last year and with a good diversity of railcar types, including conversions.
Do you have a good sign as customer sentiment, which is positive across the majority of railcar types.
As we noted last quarter, our expectations of and aggressive market pricing environment in 2021 and pressure from higher steel cost is playing out and thankfully.
Manufacturing footprint positions us to be more selective on orders in addition.
And footprint of custodial not only lends itself to a deliver a broad product portfolio, but it is also designed with flexibility to change car types more quickly and run efficiently at lower volumes than in past facilities.
We believe further activity and the railcar sector is ripe for a strong pick up the historically low freight car order activity over the last two years has been below replacement demand portions of the rail fleet are nearing end of life and increased scrapping of obsolete railcars is expected to continue due to comparatively high scrap steel prices. These fab.
<unk>, coupled with the improved dynamics of the end markets, we serve industrial metals chemicals and other commodities are all positive signs up and overall improved railcar demand environment.
As Jim already mentioned, we have raised our 2021 outlook to between 1600, 1700, and 50 railcar deliveries up from our initial expectation of between 1400 and 1600 railcars. While this is clearly a step and the right direction and remains well below our historical average the Costar New plant was designed for future expansion.
And with the flexibility to react relatively quick to changes and market demand.
Further as the industry leader of railcar conversions, we will continued targeted investments in this space, including infrastructure and capabilities Echostar and yours and.
And expansion of our offerings and leverage both our engineering and manufacturing expertise.
Or are customers going to a surplus fleets or cars that no longer provides solid lease or revenue returns.
<unk> America provides the solutions to upgrade underutilized real assets and to the latest car designs and generate new revenue opportunities for them. So far in 2020 one our conversion business is performing very well.
With that I'll now turn the call back over to Jim for a few few closing remarks Jim.
Thanks, Matt with our manufacturing transformation and now largely complete we have significantly improved our competitive profile and we are well positioned for future growth.
We are optimistic that the early momentum in 2020, one will continue for the balance of the year and into 2020 to.
This will put us in a position to drive significantly enhanced profitability free cash flow and long term shareholder value.
We are looking forward to sharing that journey with all of you and thank you for your continued support.
That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.
Thank you ladies and gentlemen at this time, we will begin ducking your question and answer session. If you'd like to ask your question and you May Press Star one on your telephone keypad and confirmation tone will indicate and wrong is there and the question queue. You May press star two if you would like to remove your question from the queue.
And for participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star key our first question comes from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning.
So I wanted to start on the increased 2021 delivery guidance.
Curious if that was a function of the first quarter orders being better than you thought or the anticipation and better orders ahead. I know you talked about the inquiry levels picking up and then any orders that you received subsequent to quarter and that you'd be willing to quantify.
Hey, good morning, just that and this is Jim I'll go first and then Matt.
And that can jump on.
So first of all we're not going to.
Preview orders and.
And any specificity as it relates to anything beyond the first quarter.
You know, what we're saying that led us to increase the guidance is really a number of things.
Continued.
Increase that we've already talked about and.
Inquiry activity the general.
The pace of our positive trends.
Trends in the market place and also.
The rate at which our new factory has come up online and.
And is producing so we have you know really two things occur. One is we have a footprint that will support more than what we initially forecasted for full year production and now with our.
Orders take and.
And you know what we're seeing in terms of trends and the marketplace.
And more opportunity for us on the demand side so.
We feel very comfortable with the increase we just made.
Yeah.
Okay, and maybe digging a little bit deeper into the inquiry level increase is there any color around the different car types.
Seeing and those inquiries and.
The thing that stands out.
Hey, Justin this is Matt Yeah, I think the way to put it is we're seeing and across the board are the levels of inquiries on and on a diverse.
A diverse number of car types I won't get into the specifics but.
Overall I think it's in line with what we all anticipated when we look at various forecasts and things will start picking up significantly and the second half of the year.
And that's consistent with what we're seeing and levels of inquiries.
Okay, and lastly from me so if I look at the guidance for railcar deliveries and what it implies the rest of the year on average it seems like we'll be closer to the level you saw in the fourth quarter or maybe slightly below thinking.
Thinking about that should we be thinking about gross margin and the rest of the year getting back to where they were and the fourth quarter around that 9% level or because of the commodity price inflation and pricing and competitiveness that you mentioned will be likely be below that.
Yeah.
And we're not going to give a specific guidance obviously on the gross margin percentage, but we do we do feel confident in what we're starting to see from our per.
Performance and casinos and we would expect that we'll continue to take advantage of the new cost structure, we have and the new performance levels, we expect going forward, but no specific guidance.
Okay I'll leave it at that thanks for the time.
Thanks, Justin.
Thanks Joseph.
Our next question comes from the line of Matt Alcott with Cowen. Please proceed with your question.
Thank you good morning, guys.
And I'm, sorry, if I missed it but did you say you had about 500 orders and look and the first quarter.
Yeah.
No our order activity for first quarter was 305 cars.
Okay got it.
Alright, so no no other no cancellations.
No not not no got it.
And then if you guys can talk a bit more about.
The impact of.
Both the increase and steel prices.
And the disruption of.
Acquiring steel on on your margins I mean are you.
Are your are all of your contracts.
The pass through.
Or do you have any orders that are that were taken at a fixed price.
And anytime in the and the last year.
And most of our contracts are have price escalation clauses and that's certainly what we're putting in and the market moving forward is we're looking at various opportunities.
There were a handful of deals, we and our fixed prices and it but we'd also locked and the price of the metal as well.
But it will continue to be a challenge for the industry with the higher prices.
Got it and what did you say if you were to obtain and I'm sorry go ahead.
Matt This is Jeremy and just kind of add a near term.
And the industry and.
Kind of under pressure from both directions.
We're all dealing with.
Extremely elevated steel prices as we all know and it's a full time piece of work just to manage availability and steel supply these days.
Thankfully, we're able to because we have extraordinarily strong relationships with both our steel distribution.
<unk> centers as well as the mill that we get the majority of our steel from.
But on the flip side you also have you know.
And industry and manufacturers that are coming out of.
Recession period, well, everybody wanting to bring workers back and replenish their factory. So yes, you have pressure on the steel from the one side, but you also have pressure on pricing from the other side.
It's it's gonna be a little bit challenging for the next couple of quarters most likely.
But that's true we would expect a well level out as.
You know things kind of balance out and people get back to work.
Mhm.
And.
Will you say, Jim that steel prices have put an added a 10% to 20% premium to the price of a railcar or does that depend or does that vary by railcar type and if so and you guys give us any insight on yeah.
Yes.
A thing I can share with you is.
You know where price.
Managing our ste.
Steel availability still contracting to the best of our ability as I'm sure others are true.
Or advanced buying and taking advantage of every tool at our disposal.
So that we can secure supply locked down and know what our pricing is and.
And there's always been the case and as Matt has already suggested.
Sorry that is.
We do protect for escalation and the majority of the business, we do and.
It's about managing you know at.
Our best for ourselves best for our customers.
Got it.
Well guys. Thank you very much for the city and said appreciate it.
Thanks, Matt.
Our next question comes from the line and our basket majors with Susquehanna Financial Group. Please proceed with your question.
Yeah. Good morning, and thank you for taking my questions here wanted to expand on the prior conversation and I mean, I realized as you alluded to that.
You guys are ramping up you've got two of your larger competitors located very close to the Keystone and <unk> place as well and the same boat.
Although you're and a little bit of a different situation with standing up a new facility versus re ramping and one that's been there for some time can you talk a little bit without necessarily getting into the timeline that you alluded to you'd share with US you know.
And later in this year, but but but.
What is the gating factor on capacity should demand continue to expand as it is at steel supply as labor really we're going to be where you get stuck or as it is is it components are just just anything that you could talk about to really put that in a and a better anecdotal context I think it would be.
Full.
Yeah.
Well.
Just to back up and it's nice to speak with you Bascom thanks for joining our call today.
This is Jim Meyer and by the way.
When we are.
Created our footprint in Mexico, we intentionally created a footprint that was.
And certainly significantly.
Their size with our historical past.
And waste.
We sized it at about in a manner and took advantage of the fact that.
We were.
Our deep industry recession, prolonged by COVID-19, and what better way to.
All right out the the environment, then on a smaller footprint, where we're only.
And for what we're actually using.
And.
But it was all done.
And a thoughtful way such that as things come back we can expand ourselves and.
You know become a bigger.
Company is we all come.
Back out of.
They they there.
The industry recession.
So what we have to manage as we go forward are all the things you would expect one would have to manage what's yours.
Bringing on additional increments, so that facility, namely Assembly line New Assembly lines.
Timed correctly.
Bringing on more people.
Also time correctly and.
And.
Right now, it's not about what's going to gate us or prevent us it's.
It's timing and correctly and managing it properly.
Which is frankly no different than what we did last year.
And the creation of the original aspects of a footprint.
Yeah.
Luckily when it comes to bringing new facilities online and now growing facilities. This is something we've gotten pretty good at it.
It's about the orchestration and that's all predicated on industry activity and sales backlog so.
We're gonna, let the the industry fundamentals gate us.
But we don't anticipate.
Being constrained or held back from what we want to do.
And our by other external factors.
Yeah.
Yes.
So at this point, you're not feeling and acute labor shortage or you weren't trying to imply that in your prepared remarks.
No.
And we honestly, we couldn't be more thrilled with the team we've built and the new footprint.
It's you know, it's really you know one of our assets and that's part of who we are and.
No.
We don't anticipate.
M.
You know challenges with continuing to bring on people.
You know the quality of people and and and the numbers that we need.
And this time and a year ago, I think we had about five employees and thereabouts, probably down in Mexico today, and we're at about 450.
And they're all incredibly talented people and so.
As one of the great advantages of being in the heart of the manufacturing part of the industry.
And.
Luckily we you know this is where it wasn't you know work to our advantage.
He came in and started ramping up well.
And you know others and the industry were significantly.
Significantly down.
Yeah.
Thank you for that context I'd.
I'd like to add one more and and then pass it on to go over is next but and you said some fairly constructive commentary towards the end of the prepared remarks around the conversion business are there any non traditional car types being pushed by owners into conversion, just just any thoughts and the kind of car types and and.
And how that may be evolving and in this marketplace and thank you.
And you'd be asking this is Matt Tom I'll, just add that from a conversion perspective, it's something that we've perfected over the last two decades.
Perhaps even a little bit longer.
And when we go back to when we Kidded cars, but I think overall our experience level there provides opportunities for multiple car types.
There really isn't right now there isn't really any limitations.
And given the age of or excuse me some of the available under utilized assets and our industry right now on fleets.
Well positioned to provide optionality on multiple car types to customers.
Thank you for the time.
Thanks, Beth Thank you thanks for joining the call.
There are no further questions and the queue I'd like to hand, the call back to management for closing remarks.
Thank you again for your time today, we continue to be encouraged and excited about the future of freight car America already we are seeing the benefits of our transformation strategy and look forward to the continued positive momentum as the industry recovery evolves. Thank you.
And have a great day.
Ladies and gentlemen, and this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.