Q2 2021 FreightCar America Inc Earnings Call
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Greetings and welcome to the freight car America second quarter 2021 conference call. At this time all participants are in a listen only mode. 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.
Of note. This conference is being recorded I will now turn the conference over to your host Lisa fortunate. Thank you you may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Terry Rogers, Chief Financial Officer, and Matt <unk>, Chief Commercial officer.
I'd like to remind everyone that statements made during this conference call relating related 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 to private Securities Litigation Reform Act of 1995.
Participants are directed to freight car America's 2020 Form 10-K for a description of certain business risks some.
Which may be outside of the control of the company that may cause actual results to materially differ from those expressed in the forward looking statements.
We expressly disclaim any duty to provide updates to our forward looking statements, whether as a result of new information future events or otherwise.
During today's call. There will also be a discussion of some items that do not conform to U S generally accepted accounting principles or GAAP.
Reconciliations of these non-GAAP measures to their most directly.
Parable GAAP measures are included in the press release issued this morning.
Our earnings release for the second quarter 2021 is posted on the company's website at freight car America Dot Com and our 10-Q will be posted later today after the market close with that let me now turn the call over to Jim for his opening remarks.
Thank you Lisa good morning, and thank you all for joining us today.
Over the last year, we have talked extensively about the transformational journey that we're on and that our investors should measure us by the progress we make each quarter.
Proud to say that the second quarter was a very strong example of making progress and also in continuing to build momentum.
To execute such a sizable transformation, which has included the radical overhaul of our manufacturing footprint and creating our Costano Mexico facility, there will always be successes and challenges along the way however in order to claim victory.
<unk> will need to significantly outweigh the challenges in our second quarter was a great example of this.
Let's go through the quarter and talk about what it means for the future.
First our revenue was up 114% year over year and 15% sequentially.
We delivered 313 railcars versus 100 in the same period last year.
What does this mean to us it means that our brand new footprint is up and running and capable. It also means that our customers are embracing the new footprint.
We delivered our third consecutive quarter of positive gross margin at $3.6 million.
This is significant and that our cost structure is now right side up instead of upside down.
Our factory size and fixed cost are much more closely aligned to our needs.
Also significant and for the first time in three years.
We were profitable at the manufacturing operating income level.
That's right and that is also significant in that it is the next step in our return to company level profitability.
The significance of this is that we are now approaching a phase where a little more of the right volume can push us across the line.
And a final thought on the progress of our financials.
For the first half of fiscal 2021, our adjusted EBITDA loss decreased to $2 million compared to a loss of $23.2 million in the same period of 2020.
This improvement in the face of multiple supply chain constraints and significant raw material inflation.
Truly highlights just how far we have traveled in a year.
Shifting topics.
The demand environment across almost all of our end markets continues to gain strength and as Matt will tell you about in a few minutes, our order intake and sales inquiries remain robust.
Our customers are very excited about what we are building castano and truly want us to succeed.
They have worked with us in countless ways in order for us to get to where we are and it is very appropriate to say, thank you to all of our customers.
We are increasing our guidance for railcar deliveries for the second quarter in a row and now expect to deliver between 750 and <unk> hundred 50 railcars in fiscal 2021.
This was up 20% at the midpoint compared to our original outlook of 14 to 1600 railcars at the start of the year.
During the quarter, we continued to make progress on the construction of our all of our own fabrication shop as well as our new wheel on actual shop at the styles, which we have spoken about in previous calls.
When these work streams are completed in early 2022.
It will allow us to take a large majority of our fabrications in house and do additional finishing operations on our wheel and axle assemblies.
Each of these new additions will bring additional and meaningful efficiencies.
And Anna and another indication of our progress and where we are ultimately had it I'm very happy to announce that our board of directors has approved our plans to enter the next phase of expansion active stance.
Two additional manufacturing lines numbers three and four.
When completed this will expand our production capabilities from approximately 2000 cars per year to 4000 cars per year.
What the new lines, we will do is dramatically improve the earnings profile of the company with.
With the new lines will not do is cause us to Australia off the target of being a much leaner company with much lower with a much lower cost structure that we work so hard to achieve.
We will be finalizing these plans over the next month or so with our partners in Mexico, The Gill family and we would expect to be operational in late 2022.
As a reminder, the gills family continues to be a strong partner to freight car America that are invested in our success as one of our largest shareholders.
They will be providing a large portion of the capital required to build out the facility and we will lease the new edition just as we are now leasing the current footprint.
<unk> freight car Americas portion of the Capex will be fairly modest and is expected to be in the $5 million range.
This next step is fully consistent with the vision, we outlined for you late last year, namely building that Gustavo facility with the ability to flex as the market demand dictates.
We are now preparing for what we will flex.
Shifting gears I want to talk about another benefit and an important reason for our commitment to give stonehouse.
You have undoubtedly heard other public companies.
Talk extensively about labor shortages and wage inflation throughout this earnings season.
I am pleased to report that we have been able to avoid such issues.
We have built one of the best and most experienced teams in the region and within our industry.
Furthermore, I am extremely proud of the team's response to COVID-19 through ever changing health and safety protocols.
Our workforces vaccination rate is high increasing each week with one age group now at 100% vaccinated.
Sure, our workforces onboard well trained committed and healthy.
Yeah.
In line with my opening comments. This is a strong list of successes for Q2 and I'm extremely proud of our entire team who have embraced all of the changes to help build a much stronger freight car America.
Now, let's talk about a few of the challenges we had to work through in the second quarter.
First.
Our industry continues to face significant inflationary pressures in various supply chain constraints.
Steel prices have persisted and acted as an operational headwind through our business along with significant increases in ocean freight cost.
As the global as global demand for Ocean freight as far outpacing available capacity, we have seen prices at historic.
At Triple historical levels, adding significantly to our Cogs.
This is obviously not unique the freight car America, nor to our industry, but rather a broad reaching fact of life for the moment.
As we navigate an extremely unfavorable inflationary environment. Our team is taking the necessary steps to come combat material and freight cost increases the best they can.
This includes renewed focus on material cost reduction across the board.
Price adjustments where possible.
And being more selective on the business we accept.
Given our now smaller size and lower fixed cost structure, not every piece of business needs to be treated as must win business.
During the second quarter. We also had some extra expenses in any efficiencies related to the launch of a new car type.
Without this we would have likely deliver a higher number of railcars this period.
Lastly, we also addressed our growing working capital needs as the business continues to expand.
Much of the new need stem from the fact that we have a large outstanding Mexican VAT receivable that total $21.3 million as of the end of Q2.
We expect the associated refund payments to start flowing back to us soon and.
The interim we are fortunate to have a strong financial partner willing enable to step down.
Gary will outline the details in a few minutes, but as you saw in our SEC filings, a week and a half ago or financial partner has amended their agreement with us, which opened up a $25 million line of credit.
In summary, we are pleased by the progress and results in the second quarter and are confident in our prospects for the second half of 2021.
With that said.
I'd now like to turn the call over to Terry for a review of our financials Gary.
Thanks, Jim and good morning to everyone.
Jim alluded to our business is reaching a turning point and we are excited about our long term growth prospects.
Turning to our financial results consolidated revenues were $37.4 million in the second quarter of 2021 compared to $32.4 million in the first quarter of 2021 and $17 million in the second quarter of 2020.
Company delivered 313 railcars in the second quarter of 2021 compared to 309 railcars in the first quarter of 2021 and 100 railcars in the second quarter of 2020.
Our gross margin in the second quarter was $3.6 million the third consecutive quarter of positive gross margin for the business as Jim previously noted.
Gross margin was higher compared to $2.6 million in the first quarter 2021 first quarter included the final transition costs associated with the move to this donald's from Shoals in the second quarter included the effects of a challenging new product launch.
SG&A for the second quarter totaled $6.3 million down from $9.2 million in the first quarter 2021, and $6.5 million in the second quarter of 2020.
Quarter over quarter decrease can be attributed to non cash compensation accruals and higher professional fees that were recognized last quarter.
Consolidated operating loss for the second quarter of 2021 was $2.5 million.
Compared to an operating loss of $13.2 million in the first quarter of 2021 and operating loss of $12.9 million in the second quarter of 2020.
The operating loss in the second quarter included $0.1 million of restructuring and impairment gains.
While operating loss in the first quarter of 2021 included $6.7 million of restructuring and impairment charges and operating loss for the second quarter of 2020 included <unk> 3 million of restructuring and impairment charges.
Manufacturing.
<unk> operating income for the second quarter was $1.9 million compared to manufacturing operating loss of $4.7 million in the first quarter of 2021, and our manufacturing operating loss of $8.3 million in the second quarter of 2020.
Jim indicated this was the first positive result in over three years, providing further evidence that the shift to the new manufacturing footprint in Mexico was the right strategic direction with that.
With that said, we still have plenty of opportunity to align our corporate.
And other expenses.
Similar to previous quarters to warrant issued with our November 2020 financing will continue to have an impact on our financial statements.
Our liability is mark to fair market value each quarter with the change in value impacting our net income and earnings per share calculations.
For the second quarter of 2021, the gain on change in the fair market value of the warrant liability was $3.5 million compared to a loss of $22.1 million in the first quarter of 2021. As a reminder, this is a noncash item, reflecting the change in our stock price during the quarter.
Interest expense in the second quarter was $3.2 million compared to $2.5 million in the first quarter of 2021, and <unk> 2 million in the second quarter 2020 as stated in previous calls we expect interest expense to remain elevated compared to historical levels based on the changes to our capital structure and recent financing arrangements.
As Jim mentioned earlier, our business continues to pick up positive momentum, which we expect will allow us to establish a conventional revolving credit agreement with lower cost terms in the future.
For the second quarter of 2021, adjusted EBITDA loss was $1.5 million compared to adjusted EBITDA loss of <unk> 5 million for the first quarter of 2021, and the second quarter of 2020, adjusted EBITDA loss was $10.3 million when adjusting for the items previously discussed.
When reporting on the operating loss and other noncash and nonrecurring items.
When comparing the year to date adjusted EBITDA results for the same period of 2020 is further evidence that our plan is working adjusted EBITDA results for the first half of 2021 were a loss of $2 million compared to a loss of $23.2 million in the same period of 2020 seemingly in a much healthier long term earnings profile aided by the transformation of.
Our manufacturing footprint.
Now moving to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of $20.7 million compared to $31.7 million at the end of the first quarter 2021. The main drivers of the decrease included approximately $8 million in value added tax paid to Mexico eight in Mexico.
Excuse me and approximately $3 million in working capital investment to support higher production levels in the second half of the year.
As Jim noted the total receivables $21.3 million at the end of the second quarter and we are in regular communication with the Mexican regulatory officials, who will process the refund.
Capital expenditures through the second quarter, 2021 were $1.4 million compared to 7 million through the second quarter of 2020.
We maintain our view that fiscal year 2021, capex will be significantly lower in 2021, compared to 2020, and believable will range between 2% and $3 million.
Finally, as Jim noted it was hydro in a press release today and recent SEC filings.
We have entered into an amended financing arrangement with their financial partners opening up a $25 million line of credit this.
This is in addition to the $60 million of financing that was provided in may.
Some of this funding may not have been required as we better understood the VA.
Refund process earlier on that said our primary financial lenders commitment to freight car America has allowed us to remain on offense and stay focused on our strategic initiatives.
Further as the 8-K filed outlines a financial partner is charging us a fee for this new support which they will be partially taking in stock we do and we do intend to repay the 60 million borrowed in May 2021, before March 31, 2022, which will avoid additional equity consideration of that borrowing.
Finally after quarter end, we received formal notification in early July that the small business administration have forgiven or 10 million PPP loan, which further strengthens our balance sheet.
With that financial overview I'd like to now turn the call over to Matt for a few commercial comments related to the second quarter and moving forward. It's Matt Thanks, Terry and good morning, as Jim mentioned, we continue to see encouraging signs in the overall economy as well as the railcar industry railcars and storage declined for the 12th consecutive month fleet utilization trends.
Remain positive and far scrapping is on the rise signaling and improve improving railroad environment. Again. These are all key indicators that we track and it's evident that the industry is on a recovery trajectory.
Order inquiry levels during the quarter were up sequentially versus the first quarter of 2021 and double that of any quarter since 2018.
In the second quarter of 2021, we booked a 133 car orders compared to 300 in the first quarter and zero in the second quarter of 2020, clearly this was a significant jump sequentially as we successfully converted a good number of inquiries to orders during the quarter.
Ongoing strength of inquiries and order activity are positive indications that we are starting to enter a market upturn.
Inquiries and orders for conversions also continued to be robust given freight car America's variety of conversion options and engineering expertise in this segment as the industry leader of railcar conversions, we will continue to invest in this space, including our infrastructure capabilities that custodial and expansion of our offerings leveraging both our engineering and <unk>.
<unk> expertise.
As we have previously stated our conversion capabilities to provide our customers solutions to upgrade underutilized rail assets into the latest car designs that generate new revenue opportunities for them.
As we've discussed in previous calls pricing pressures remain a headwind and we expect this to continue for the balance of the year as the market ramps up and railcar builders to build line space.
Raw material price volatility increased freight costs and higher component pricing or additional headwinds anticipated for the remainder of 2021.
With that said the custodial footprint allows us to be flexible and focus on the orders that are best suited and most profitable for the company the.
The efficient footprint of <unk>, not only lends itself to deliver our broad product portfolio. But is also designed with the flexibility to change car types more quickly and run efficiently at lower volumes than in past facilities.
Jim has already mentioned, we have raised our 2021 outlook for the second consecutive quarter to between 1750 and <unk> hundred 50 railcar deliveries up from our most recent guidance of between 600 and 750 railcars.
With that I'll now turn the call back over to Jim for a few closing remarks, Jim. Thanks, Matt to conclude this quarter included multiple steps forward along with some challenges still to overcome as any transformation of this magnitude what.
But our long term success as far outweigh the short term the short term challenges that we see and our momentum is clearly up and to the right.
Our industry appears to be in the early stages of a strong cyclical upturn.
Our timing in building and now expanding the newest purpose built manufacturing facility in North America puts us in a strong position to drive long term growth and profitability as we advance our journey.
We have moved the company from struggling to transforming.
So as Terry <unk>.
Starting to play off assets.
On this note and then one final piece of news worth sharing.
<unk> received.
Approval for our first tank car design in May.
We look forward to continuing to share our progress with you that.
That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.
At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line of my question. Kim You May question. Thank you. Thank you remove your question from the queue. Thank you.
Anthony Speaker equipment, it may be necessary to pick up your handset.
Thank you one moment please poll for questions.
Okay.
Yes.
Okay.
Alright, Great question is from Justin Long of Stephens, Inc. Please state your question.
Thanks, and good morning.
So I wanted to start with a question on the orders in the quarter is there any additional color you can provide on the car type.
Ordered and maybe the size of the orders as well just curious if there was a large order included in that total or if it was more kind of a group of smaller orders.
Good morning, Justin This is Matt.
We don't typically provide that type of.
Granular detail on order activity I can tell you that.
Orders were represented by car types that we are strong and have historical history of building.
That meet our financial objectives.
I would say overall the inquiries have been as I mentioned in my opening comments that had been strong.
And we had good success in converting those into orders for the quarter.
Okay, and I guess Bill does it go.
Jim Sorry, Yeah, I was just going to say I think it's fair to say without elaborating too much.
The types of orders in <unk> and <unk>.
Size of each individual order is very representative of.
The place in the market, where we've been targeting and have discussed in the past.
Okay and subsequent.
Subsequent to quarter end is there anything you can share on that level.
<unk> activity and maybe just looking at the guidance anything you could share on the cadence of deliveries in the third and the fourth quarter. If it will be pretty even or if we are going to see a discrepancy between the two quarters.
I think what Youll see in the second half of the year Youll see a ramp up of production and deliveries.
As a result of order activity that we've had earlier in the year.
Okay, and then in terms of orders subsequent to quarter end is there anything you can share now that we're halfway through the third quarter and there have been meaningful orders received.
Yes. This is Jim again, just I don't think we're going to give a lot of information today.
What's happened beyond the quarter end.
Other than to say that.
Our next several quarters are.
<unk>.
Fully booked and we're now taking orders.
Out into next year at this point.
Okay, and I guess last question for me and then ill pass it on.
Could you just share where you're getting the most traction with customers right now in terms of just the mix of customers, whether that's rail leasing companies shippers. If its all three would love to just get some more color around that yes.
Yes, just I think.
You can you can say that we're seeing positive traction with all three there's good order activity.
By each of those those customer segments as they look at their fleets.
And look at how cars are being scrapped and where they need to replace.
Okay. That's good to hear I appreciate the time.
Thank you Jeff Thanks, Jonathan.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line of my question Campbell for participants using speaker equipment, it may be necessary to pick up your handset.
In fact Q.
One moment, please I'll even call for additional questions.
There are no more questions at this time, we have reached the end of the question and answer questions. I will now turn the call back over to Jim Meier for closing remarks.
Thank you all again for joining us today.
Now more than ever we're excited about the future of freight car America and truly believe we are on a path to sustaining long term growth. Thank you and have a great day.
This.
Today's conference you may disconnect your lines at this time. Thank you for your participation and have a great day.