Q3 2021 FreightCar America Inc Earnings Call
Greetings and welcome to the freight car America third 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. Please note. This conference is being recorded I will now I'll turn the conference over to your host Lisa fortunate 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 Tonn, Chief Commercial 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 freight car Americans Twenty-twenty Form 10-K for a description of certain business.
Risks some of which maybe 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 on 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 are that do not conform to U S. Generally accepted accounting principles or GAAP reconciliations of these non-GAAP measures to their most directly GAAP net GAAP measures are included in the press release issued this morning.
Our earnings release for the third quarter 'twenty 'twenty. One is posted on the Companys website at freight car America Dot Com and our 10-Q will be posted later today after the market close.
Let me now turn the call over to Jim for some opening remarks. Thank you Lisa good morning, and thank you all for joining us today.
As you saw in our third quarter earnings press release today, we reported our fourth consecutive quarter of positive gross margin.
As well as positive operating income at the manufacturing level for the second quarter in a row.
During the third quarter, our revenue was up 131% year over year and 56% sequentially we.
We delivered 505 railcars versus 163 in the same period last year.
These results come in while our team continues to build out the new facility and cause Donald Mexico, refine all aspects of our manufacturing operations heavily focus on material cost reduction and deal with the ongoing challenges of the pandemic and global supply chain.
We delivered the fourth consecutive quarter of positive gross margin at $1.5 million. Despite incurring significant expense related to the launch of a new car model.
Without this extra expense and the associated challenges.
We estimate that our gross margin would have been approximately two and a half times higher during the quarter.
And a company like ours that is currently running two production lines the impact of Alessi launch has the potential for an outsized impact.
With that said this is now well behind us and we are determined not to buy a car or something like this again.
Yeah.
Additionally, and similar to many other manufacturing companies, we continue to face challenges related to the supply chain and raw material inflation.
Specifically higher steel prices have persisted and appear to be having a temporary impact on order closings.
Over the last 12 months, we have seen steel prices appreciated by roughly 225%.
And still is of course, the largest input to our manufacturing cost.
In response to this our team is doing everything they can to protect margins mainly through a renewed focus on material cost reduction across the board.
Passing through cost increases where possible.
And being more selective on the business we accept.
As we mentioned last quarter, given our now smaller size and lower fixed cost structure.
Not every piece of business needs to be treated as must win business.
Additionally, and most importantly, our business remains operationally profitable at the manufacturing level, despite the significant headwinds.
Given the transformation of our manufacturing footprint that we have successfully completed.
Once the environment normalizes couple weather, coupled with additive manufacturing lines and capabilities anchor steinhaus, we should be positioned for a great future.
The demand environment across our end markets are strengthening and is congruent with the return to growth strategy, we laid out at the beginning of this year.
That said, we believe some customers are delaying orders temporarily.
With the hope that the inflationary environment cools.
The pent up demand is evident to us and we believe that our market recovery is forthcoming.
For the fourth quarter, we will continue at a production rate that supports our prior guidance, which was raised last quarter to 1700, and 52 1800 50 railcars for fiscal 2021.
As noted on the last call. This is up 20% at the midpoint compared to our original outlook of 1400 six to 800 railcars at the beginning of this year.
During the quarter, we continued to make progress on the planning and construction of our own fabrication shop, and an expansion to our wheel and axle shop.
Each of these work streams will bring additional meaningful efficiencies to our production process, one brought online and 2022.
Further we have also broken ground on the two additional production lines Echostar dose and continue to expect to have both online starting late next year.
As we emphasized during last quarter's call. We remain excited about our workforce incur styles and believe it to be a real differentiator for the company.
The casinos team is approximately 950 individuals.
And it is approaching nearly a 100% rate a voluntary full vaccination against COVID-19.
Our workforce is readily scaled as we continue to grow and is well trained healthy and committed to our future just as much as the rest of us are.
Shifting gears subsequent to the quarter end, we received our first Mexican V. A T rethought.
At the end of the quarter. The V. A T receivable totaled $31 million in the first refund was for $10 2 million of the outstanding balance.
We anticipate that the remainder of this balanced plus additional money paid out since the quarter end will be made in 2022.
Furthermore, we believe that we are on track to receive the remainder of our certifications with in the next three months, which will both greatly reduce the amount paid in each month and further speed up the refund cycle.
As it relates to our capital structure of future cash needs. We are focused on all of the following.
Improving our cash cushion.
Improving on our various loan terms and conditions.
Ensuring ample funding to complete the expansion of ARCUS Donald's facility and eventually funding an entrance into the tank car market.
Furthermore, we feel there are multiple means in which to support all of these.
In summary, we are pleased by the progress we have made and the results we produced in the third quarter. Despite the challenges mentioned.
We are confident that our plans to return to growth and profitability are taking hold.
With that said I'd now like to turn the call over to Terry for a review of our financials Terry.
Thanks, Jim and good morning to everyone.
As Jim mentioned, our third quarter results demonstrate continued progress and we remain excited about the long term growth prospects consolidated revenues were $58 3 million in the third quarter of 2021 compared to $37 4 million in the second quarter of 2021, and $25 2 million in the third quarter of 2020.
The company delivered 505 railcars during the third quarter of 2021 compared to 313 railcars in the second quarter and 163 railcars in the third quarter of 2020.
Our gross margin in the third quarter was $1 5 million the fourth consecutive quarter of positive gross margin for the business.
Gross margins gross margin was slightly lower compared to 2 million in the second quarter of 2021 as Jim has already alluded to our third quarter results were impacted by the challenging launch of a new car model.
SG&A for the third quarter totaled $5 7 million down from $6 3 million in the second quarter, 2021, and $7 2 million in the third quarter of 2020.
Consolidated selling general and administrative expenses during the quarter included decreases in stock based compensation of <unk> 6 million.
Bad debt expense of <unk> 4 million in legal cost of zero point $5 million.
Consolidated operating loss for the third quarter of 2021 was $4 2 million compared to an operating loss of $4 2 million in the second quarter of 2021, and an operating loss of $41 3 million in the third quarter of 2020.
The operating loss in the third quarter of 2020 included $30 1 million of restructuring and impairment charges.
Manufacturing operating income for the third quarter was 0.2 million equivalent to the manufacturing operating income in the second quarter of 2021.
The manufacturing operating loss was $36 8 million in the third quarter of 2020. This.
This was the second consecutive quarter of positive manufacturing income.
While theres still work to be done. This is evidence that our manufacturing footprint you can start us is putting us in a strong position to succeed.
Similar to previous quarters, the warrants issued with our November 2020 financing as well as the contingent word issued with our May 2021 financing will impact our financial results.
The warrant 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 third quarter of 2021, the loss on the change in fair market value of the warrant liability was <unk> 3 million compared to a gain of $3 5 million in the second quarter of 2021.
As a reminder, this is a noncash item, reflecting the change in our stock price during the quarter.
Interest expense during the third quarter was $3 6 million compared to $3 2 million in the second quarter of 2021, and 0.2 million in the third quarter of 2020.
For the third quarter of 2021.
Adjusted EBIT loss EBITDA loss was $3 5 million compared to an adjusted EBITDA loss of $3 1 million for the second quarter of 2021.
In the third quarter of 2020, adjusted EBITDA loss was.
8 million when adjusting for the items previously discussed women 40, 90 operating loss and other noncash or nonrecurring items.
Now moving to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash of $27 5 million compared to $20 7 million at the end of the second quarter 2021.
Also as Jim noted, we made progress on the BHG run refund process. Subsequent subsequent to the end of the third quarter.
As of today, we received $10 $10 2 million and expect that the remainder of the $30 1 million balance at September 30, and any additional phe money paid since the quarter end will be refunded in 2022.
Capital expenditures for the third quarter of 2021 zero point $6 million compared to $1 3 million for the third quarter of 2020, we maintain our view that fiscal year 2021 capex will be significantly lower compared to 2020 and believe it will range between two and $3 million.
Capex will increase in 2022 and to complete the previously announced expansion of our internal fabrication capabilities by mid year and value streams, three and four by the fourth quarter.
Finally, as highlighted in our financials. The small business administration is forgiven or 10 million PPP loan, which further strengthens our balance sheet.
With that financial overview, I would like to now turn the call over to Matt for a few commercial comments related to the third quarter and moving forward Matt.
Thanks, Terry we continued to see healthy signs of recovery in the overall economy as well as the railcar industry over the last year freight volumes have largely recovered to pre print and emmick levels no railcars in storage have declined in each of the previous 15 months signaling an improved rail environment.
Additionally, higher scrap values continue to support the scrapping of older railcars, we see this trend continuing for the foreseeable future.
Further supporting an improved railcar replacement market.
However, as Jim noted, we have seen higher raw material cost, including steel in particular, which has caused some of our customers and buyers in the market to pause and evaluate the inflationary environment. This appears to have temporarily stretch the sales cycle and as you you have heard from our other companies other companies in this space.
Older activity in the current market can be characterized as somewhat choppy.
The good news is order inquiries remained very robust in the quarter and the third quarter of 2021, we booked 200 car orders compared to 1100 and 33 in the second quarter and 100 in the third quarter of 2020, while this is office opposite obviously a decline sequentially. It is worth noting that additional order.
We're booked shortly after quarter end and once more inquiries and bidding activity is strong.
While the speed and cadence of the market recovery remains tough to predict because daniel's footprint allows us to be flexible and disciplined as we are focused on filling our production lines with the best possible business we can't.
Finally, as Jim already mentioned, we have maintained our 2021 outlook at 1700, 50, and <unk> hundred 50 railcar deliveries.
With that I'll now turn the call back over to Jim for a few closing remarks Jim.
Thanks, Matt.
To conclude in the face of some temporary challenges during the quarter our recovery momentum continued to build and we believe that our business transformation is working well.
We look forward to sharing our successes with you as we continue on our journey.
That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.
Thank you and at this time, we will be conducting a question and answer session.
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One moment, please while we poll for questions.
Our first question comes from the line of Justin Long with Stephens. Please proceed with your question.
Thanks, and good morning.
I wanted to go.
Hey, How're you doing I wanted to start with a question on the inquiry levels Youre seeing in the market do you commented that they are still at healthy levels, but how much of the pipeline right. Now would you say is is customers, saying that they are interested in buying railcars just at all.
Lower price than what we're seeing today given commodity costs and.
That's the view that you're hearing from most of your customers do you have any sense for kind of what kind of pull back we need to see in steel prices before people start to pull the trigger.
Good morning, Justin Good question I don't know that we know the specifics breakdown of what customers are holding back because of pricing. The reality is everyone's looking at the marketplace and judging what direction. They want ahead to finalize their their investments in assets.
I think that the reality is is that there is demand.
Man for freight cars, regardless of pricing right now we are booking orders in that in that space and I think we're going to continue to see a mix of customers in both areas right. Those are that are going to hold off for a bit see if theres, a relaxing of raw material pricing and those that simply just have to replace cars.
Yeah. Justin this is Jim I would say kind of describe the market as a little bit conflicted right now.
The demand is there the need is there the inquiries are there.
You know orders are being placed are just not being placed at a rate that's commensurate with the inquiries.
But I don't I'm not sure it's really just a kind of a static.
Idea that if steel comes down to X you know suddenly orders get placed because the longer a potential customer of course is evaluating.
Placing those orders.
The presumably the need to place those orders also increases.
So.
It's.
It's it's coming.
Uh huh.
And the longer there is a level of of pause on the part of placing orders.
Further adds to the demand side of the equation.
So.
You know, it's it's as I said, it's just feeling a little bit conflicted to us right now, but the main emphasis is.
The inquiries are strong there are high quality inquiries and.
So we were quite confident at this point that the inquiries.
Order activity that is out there is a.
Still commensurate with our with our plans as we look to next year and bringing two more production lines on stream.
Understood and I think I heard that there have been some orders received subsequent to quarter and any way you could quantify the number of orders that you've received so far here in the fourth quarter.
Sure at the end of the fourth quarter.
I don't believe we were well.
Well do that I've got excited for a minute.
[laughter], Yeah, we'll save that for and I'll do it in the current quarter on the next call.
And I understand that that's fine.
I wanted to circle back to the headwind associated with the rail car model launch it sounds like Thats behind you. So would it be fair to say that.
We're now seeing quarter to date at gross margin run rate, that's consistent with what you alluded to at the beginning of the call. You know two five times, what you reported in the third quarter, just trying to understand if that impact is now fully behind us and maybe you could help us understand if that's something.
We should expect over the next few quarters from other railcar model launches.
So we are on that particular issue is squarely behind US there is no ongoing residual effect.
And I'm not gonna adult too deep into the specifics, but I think it's fair to say the team.
<unk> learned a lot from launching an all new car design.
Across borders.
So we don't see that.
Coming up in the near future or anyway, and we certainly don't see an issue like this coming again.
I'm pretty confident.
We learned from that.
As it relates to you know can you do the margin math and forecast the fourth quarter I think.
I have to say I haven't actually done that math myself.
But I will say as you know.
You know every every order has its all margin structure on what we're building today is different than what we were building in part.
In the prior quarter. So it would be just a little cautious on delaying straight exact math on that front.
Okay, and then maybe just to follow up on that would you say that the mix of car types. Since we go into the fourth quarter is.
Is that positive or negative relative to what you built in the third quarter.
Yeah, we don't really comment on that.
So.
We're not going to today.
Oh, we've got a tall order book for the quarter as you know FERC.
We're going to hit the numbers, we said we would hit for the year.
And I think we'll just leave it at that we've got a volume ramp for the quarter. That's approaching I think it's about 30 plus percent over Q3.
And if you do the math I think Q3 was a volume increase of probably 70% to 80% over Q2. So we're still very much ramping that facility.
But you know so.
So far so good.
The volume piece of it.
Okay I'll leave it there and pass along thanks for the time.
Thanks, Josh.
Again as a quick reminder, if anyone has any questions you May press star one on your telephone keypad to join the question and answer queue.
Our next question comes from the line of Matt.
<unk> with Cowen. Please proceed with your question.
Good morning, Thanks for taking my question.
Jim I wanted to ask you about the the tank car authorization.
You guys got.
What's a realistic timeline for when.
This could actually be produced going forward.
Yeah, Hi, Matt Good morning, Jim.
What we're not prepared today to lay out what an implementation plan looks like for tank cars.
What I'll say is maybe a little bit of a rehash from the last call.
As you know in the tank car market, it's not a homogeneous market by any sense. There are many many car design permutations.
The first of our designs is fully approved through the E. R. We have additional car designs that are in for approval at this time.
We are we will be unable to do anything in the tank.
Tank car space.
Until we get additional manufacturing lines put on stream.
Which as we've said it'll be late next year.
But we feel.
Good about where we're headed and how it that's what the timing of our business plan from a design approval standpoint.
There's a lot of our supply base aspects to this we feel good about where our where we are on that piece of the timeline.
And.
At some point in the future, we will lay out what our tank.
Tank car introduction for this company does look like.
But I think the you know if there is an additional piece of information to put out today.
It would certainly not be before we get the additional value streams are built and ready to produce the two additional production lines.
Mhm and then the you know.
Jim You mentioned that you guys have learned some lessons from.
Some of the headwinds you faced with the new product launch in the third quarter or are those the types of lessons that would apply to.
To that tank car design and that the tank Powell.
<unk> will be a brand new product for you guys.
Very different from you know from freight cars.
The new product sounds like all the headwinds in the third quarter.
It is more your comfort zone I think.
Yeah. So I mean, it's a very insightful question.
I would tell you in total candor that the issue we had in the third quarter with the launch.
Really started.
With a level of overconfidence.
And because it didn't feel that the similar.
Tank cars are another animals are that would.
Involve a launch process that is pretty fundamentally different it would include.
What I would call a full and proper prototype manufacturing.
Manufacturing validation phase before we began to ramp up production for sales so.
I would I would certainly not draw that conclusion.
You know the next launch is going to be met with the same challenges as the last one we definitely don't think that's the case.
And I don't think what.
What we stepped on a with the last launch is really a harbinger of what could happen even on the tank cars because the approach would be so different.
Mhm.
And other than the.
The tank car design.
<unk> design in the future what are the areas what are the car types that we could expect from new product launches and and you know next year or the year after.
Just a just an idea on what you guys might be working on.
But we feel that product portfolio is pretty complete and the absence of tank cars at this point and.
You know as as we look to future order intakes and future launches you know I think would really be talking about variations in derivatives of existing products.
As we've said before.
You know our our expectation is we'll thrive.
You know somewhat smaller.
Order sizes.
Thrive on a level and degree of customization.
And again modifying.
Something that we.
We felt before that's fully tooled and are familiar to us.
Is that really a small part compared to launching something new.
So.
And total AR and the absence of a tank car offering.
We feel our portfolio is.
It's pretty complete and are very much right for us.
Got it and then just maybe switching back to the order side I know, we've talked a lot about it so far on the call but.
I'm just you know it's.
Hard to believe that not more shippers or lessors have reached the point of like throwing in the towel and saying listen I need. These cars no matter, what I know, there's a 20 or a 30% steel premium on the cars, but we're starting to hear from from the actual end users of the cars that they are facing shortage.
Yes.
So it is a bit.
<unk> I guess.
Why.
The order uptick has not been has.
Has not been stronger it missed that for Jim and Matt I guess.
Yeah, Matt I would say that I'm speaking.
<unk> specifically for the third quarter, we saw some hesitation I would say as we move forward into Q4.
I think youre, probably getting getting to a point, where many customers have to pull the trigger.
For fear of not getting the cars when they need them. So production space limitations that may be impacted but I think I think you're accurate in that we anticipate seeing some additional activity.
And there are customers that are <unk>.
Having to make decisions just from a replacement market standpoint.
Mhm and Matt are you guys seeing more.
Of the number of pool of inquiries that you're getting are you starting to see more people who have been turning to lessors to avoid the steel premium placed on newly manufactured cars are there more people coming to you guys as lessor utilization basically heads to almost.
Full.
Yeah, I think we're seeing inquiries from our broad customer base I don't know that I would I would characterize it as more and then in that one particular space.
Okay and then just one last question based on all that stuff.
Supply and demand dynamics and the moving parts you guys are watching.
You know is it plausible.
<unk> at 2022 would be a materially higher production year for you guys.
Oh, well, we'll talk about 2022 on the next call.
But you know obviously you might conclude it'll be higher.
Where we're building the two additional production lines if nothing else.
Because we're forecasting.
A man and being able to sell those lines. So.
Each quarter since suites, we brought.
Online has been a quarter of increasing volumes.
We're now.
Can say plateaued with two production lines.
And then the next step will be when we get lines three and four on again later next year.
Assuming the demand is there, but as we see things now and we expect it to be.
Great. Thank you very much Jim Mat Ter.
Thanks, Matt and thank you Matt.
Again as a reminder, if you have any questions from the noncash star one on your telephone keypad.
Doing so will join you in the question and answer keeps happening.
And it looks like we have reached the end of the question and answer session and I'll now turn the call back over to Jim Meier for closing remarks.
Thank you all for joining today's call, where we are excited about the future of freight car America and truly believe we are well on our way to sustaining long term growth our year to date result show that we are already enjoying the benefits of our refined footprint and business strategy.
And we are confident this will lead to continued success as we look to the fourth quarter and that all into 2022.
With that thank you and have a great day.
This concludes today's conference and you may disconnect your lines at this time.
Thank you for your participation.
Yeah.
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