Q4 2021 FreightCar America Inc Earnings Call
Greetings and welcome to the freight car America fourth quarter and full year 2021 earnings 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'll now turn the conference over to your host Lisa Fortuna of Investor Relations you may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Mike Riordan, Chief Financial Officer.
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 create part of America. Its Form 10-K for a description of certain business risks some of which may be outside the control of the company that may cause actual results to materially differ from those expressed in the forward looking statements.
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.
Will it be.
A discussion of some items that do not conform to U S generally accepted accounting principles or GAAP reckon.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the press release issued this morning.
Our earnings release for the fourth quarter 2021 is posted on the company's website at freight car America Dot Com and our 10-K, which was filed before the market opened earlier today.
With that let me now turn the call over to Jim for opening remarks.
Thank you Lisa good morning, and thank you all for joining us today.
I'm very pleased to start today's call with the introduction of Mike Riordan.
Who has been promoted to serve as our new Chief Financial Officer.
This changing of the guard became effective yesterday, which allows us to introduce him to you. This morning, Mike.
Mike previously served as the company's controller and Chief Accounting Officer and has been a member of the senior team since 'twenty 'twenty.
He has been instrumental in everything that we have accomplished over the past couple of years and it was our hope when we recruited him that we would get to this day.
I also want to extend a sincere. Thank you to Terry Rogers, who joined US on very short notice last year and guided our finance function. So it was still very much a transition year for the company.
Terry will remain part of the team until May.
With that let's get started.
I am extremely proud of what we have accomplished this quarter and then the full year 2021 .
Because we had a strategic update call with you just last month I will be briefer with my comments.
This past year was truly a remarkable one.
The move of our manufacturing operations to Costano is now complete and.
And we have transformed freight car America until a much healthier growing company with a significant opportunity to drive shareholder value.
Our revenue was up 87% year over year.
Our order book at year end was up 67% versus the prior year at <unk>.
Even so we believe that we are just getting started.
We continue to have high quality discussions with customers and we continue to expand our manufacturing footprint with added we'll let axel capability, our large fabrication shop.
Additional production lines.
What this says about freight car America is that we are competing and winning in the marketplace and that we are confident about the future and our ability to make money going forward.
As you saw in our press release today, we reported results that were in line with the expectations, we communicated on the February call.
This included a fifth consecutive quarter of positive gross margin as.
As well as positive manufacturing operating income for the third quarter in our world.
During the fourth quarter, our revenue was up 23.8% year over year, and we delivered 604 railcars versus 477 in the same period of 'twenty 'twenty.
The full year over year improvement was a direct result of our improved cost structure.
Operating capabilities ethical Startles factory facility.
And overall our ability to compete.
The transition of our manufacturing footprint to can start offs translated to approximately $20 million in annual fixed cost savings in 2021 versus the prior U S base footprint.
And we expect annual fixed cost savings versus the prior U S based footprint to remain above $17 million going forward.
Additionally, we lowered our labor cost per unit by 60% on average and 2021 compared to the previous U S based footprint.
The Costano as factory is running well and our team is performing at a high level.
As stated on our third quarter earnings call like a start up his team of nearly 1000 individuals.
Essentially 100% vaccinated against COVID-19.
And the personal and workplace disruptions from Covid have been largely avoided to date.
Our workforce is one of the main reasons, we believe that we stand out from our competitors.
Additionally, our collective chain has been superb and helping us navigate persistent supply chain constraints and raw material cost inflation, particularly as it relates to steel.
So the demand environment across all our end markets continues to strengthen and is in line with the return to growth strategy, we laid out in 2021 .
We are continuing to see increasingly positive trends across the industry.
Specifically with railcars and storage declining and traffic increasing we are expecting an ongoing recovery of the cycle, which will allow freight car America. The capitalized of heightened demand with additional capacity coming later this year and in 2023.
I will let Matt dig more into the details of the demand environment in a few minutes.
Turning to our capital structure and future cash needs.
We are focused on improving our cash cushion.
Improving on our various long terms and conditions and.
Ensuring there is ample funding to complete the expansion of our <unk> facility.
And eventually funding an entrance into the tank car market.
We appreciate the confidence our current financial partners have in providing the funding and liquidity, we need to complete our business transformation.
As our results improve we expect to look for ways to lower our long term cost of capital.
In summary, the entire team is performing well and we are pleased by the progress we have made and the results we produced in the fourth quarter and full year.
Despite the inflationary challenges.
We are confident in our future growth and believe 2022 is shaping up to be the year, where we start to deliver the strong performance that everyone expects and we believe that we're capable of.
But that said I would now like to turn the call over to Mike for a review of our financials Mike.
Thanks, Jim and good morning, everyone.
First and foremost I'm very excited to be in my new role as Chief Financial Officer.
The past two years of working with the company's control has prepared me well for this position as our entire team has worked hard and helping to transform the company.
I also want to thank Terry for his support and Mentorship and helping to prepare me for this role.
We are excited about the future growth ahead in our fourth quarter and full year 2021 financial results highlight the significant progress we've already made with the manufacturing transition.
Consolidated revenues for the fourth quarter, 2021 totaled $75 million compared to $58 3 million in the third quarter of 2021, and $60 6 million in the fourth quarter of 2020.
The company delivered 604 railcars in the fourth quarter of 2021 compared to 505 railcars in the third quarter of 2021, and 477 railcars in the fourth quarter of 2020.
Yeah.
Our gross margin in the fourth quarter was $6 6 million the fifth consecutive quarter of positive gross margin for the business.
Gross margin was significantly higher compared to $1 5 million in the third quarter 2021, and $5 5 million in the same period the prior year.
SG&A for the fourth quarter totaled $6 4 million up from $5 7 million in the third quarter of 2021 down from $8 7 million in the fourth quarter of 2020.
The sequential increase in consolidated selling general and administrative expenses during the quarter was primarily due to an increase in the reserve accrual for bonuses.
Consolidated operating income for the fourth quarter of 2021, 63000 compared to an operating loss of $4 2 million in the third quarter of 2021.
An operating loss of $9 2 million in the fourth quarter of 2020.
Operating income in the fourth quarter was driven by stronger manufacturing operating income, partially offset by corporate and other operating loss.
Manufacturing operating income for the fourth quarter was $4 9 million.
Positive for the third consecutive quarter and significantly higher manufacturing operating income of $1 2 million in the third quarter of 2021, and a loss of $2 1 million in the fourth quarter of 2020.
We now manufacture all railcars and cause tonya's.
Railcar volumes allowed us to leverage the operations of the business directly impacting our manufacturing operating income.
Now I'd like to remind investors again, the implication to the warrants issued with our November 2020 financing. The December 2020 delayed draw loan and the contingent warrant associated with our May 2021 financing and how these impact our financial statements.
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.
For the fourth quarter of 2021, the noncash gain on change in fair market value of the warrant liability was $4 1 million.
Compared to a noncash charge of <unk> 3 million in the third quarter of 2021.
And a noncash charge of $3 7 million in the fourth quarter of 2020.
Again this is a noncash item, primarily reflecting the change in our stock price during the quarter.
Interest expense in the fourth quarter was $4 million compared to $3 6 million in the third quarter of 2021 and $1 6 million in the fourth quarter of 2020.
Further just over half of our interest expense in the fourth quarter of 2021 is noncash and includes amortization of financing fees. This kind of on that and pick interest.
This is detailed on the statement of cash flows.
As forecasts are call. It few weeks ago, we achieved positive adjusted EBITDA in the quarter of $1 2 million.
Now moving to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of $26 2 million compared to $27 5 million at the end of the third quarter of 2021.
In addition, we have $15 million available under the delayed draw loan, which can be drawn anytime through January 31 2023.
Also we have made significant progress and manage our VAT receivable subsequent to the end of the fourth quarter.
Through today, we have received refunds of approximately $10 3 million in the first quarter of 2022 related to VAT payments made in the first half of 2021 .
Additionally, we received our Bachelor to certification earlier this month.
This will effectively eliminate a requirement to pay that upfront on goods imported into Mexico that'd be subsequently applied to be refunded.
As a result of both certification and refund process, we now anticipate our VAT receivable to be in the $7 million to $10 million range by the end of 2022 down from approximately 31 million at year end 2021 generated a significant improvement in working capital.
In summary, this certification will both reduce our administrative requirements related to monthly that filings and generate working capital improvement throughout the balance of fiscal 2022.
Capital expenditures for the fourth quarter of $2021 3 million compared to $1 6 million for the fourth quarter of 2020.
In 2022, Capex levels will increase to complete the previously announced expansion of our internal fabrication capabilities by mid year and production lines, three and four by year end 2022, and 2023, respectively.
We expect it will range between seven and $8 million for the year.
With that financial review I'd like to now turn the call over to Matt for a few commercial comments related to the fourth quarter and moving forward Matt.
Thanks, Mike.
As I highlighted in our February update call. The rail industry continues to show improving fundamentals, despite supply chain headwinds and higher steel costs, both of which still exists today.
Cars in storage have fallen by over 200000 units since the peak of 520000 cars in July of 2020, with a consistent reduction over a year over year and the last pardon me a year or month over month in the last over the last 21 months.
Today, there are just over 300000 cars in storage.
Railcar scrapping rates are also pointing in the right direction for a strengthening railcar demand cycle.
2020, railcar annual scrapping fingers have outpaced deliveries and historical replacement demand as customers retire older and less efficient railcar assets with scrap rates that remain historically high we expect this trend to continue into 2022.
Lease rates are also improving across multiple car categories, we're seeing utilization of the North American fleet, improving with some customers reporting near 100% of fleets and use more under lease we see these key indicators coupled with opportunities for improved real efficiencies and traffic growth is very positive signs for a sustainable railcar.
Demand cycle.
All of this supported by inquiry and order activity.
Railcar orders booked in the fourth quarter were 1032 versus 90 in the fourth quarter of 2020.
Order inquiries are up year over year and demand in Q1 continues to be solid across our diverse railcar portfolio further interest in our designs that offer reduced weight and increase capacity are gaining momentum keep.
Keep in mind that nearly two decades ago freight car America led the industry in lightweight cool car designs and prioritize these design attributes on other car types, including mill gondolas coil cars and green cars.
While there remains some economic uncertainties and our global economy, particularly around the supply chain disruptions and raw material inflation demand for our railcars continues to improve and we fully expect to capitalize on this demand with our improved Cassandra manufacturing footprint.
Which will bring on additional production capabilities starting this year.
With that I'll now turn the call back over to Jim for a few closing remarks, Jim Thanks, Matt.
Now, let me briefly remind everyone of our expectations and strategic priorities for 2022 that we laid out during our February update call.
First we expect to be profitable on an adjusted EBITDA basis for the full fiscal year 2022 .
Second we will continue to expand the new Costano facility.
By mid 2022 we expect that we will have completed the expansion of our wheel and axle shop at our 162000 square foot fabrication shop.
Have both online.
We are also on pace to have production line number three operating by the end of the year and expect our fourth line to be ready in 'twenty two 'twenty three.
Also we as we have previously mentioned we plan to have a fifth production line at their ready also sometime in 2020 three.
And Tani twenty-three, we expect that we will have doubled our capacity to approximately 4000 to 5000 units per year and be making most of our fabrications in house.
These operational enhancements, we expect the benefits on the scaling effects of our units produced and substantial additional cost savings from producing our fabrications in house.
And clothing profitability and scale are the future of freight car America and it truly comes down to the hard work of our entire team.
I can't thank the team enough for their efforts today the.
The benefits of which are just beginning to bear fruit.
We're looking forward to seeing continued acceleration of the business and sharing this with all of you and thank you for your continued support.
That concludes our prepared remarks, and I'll 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. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
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.
Good morning.
I wanted to follow up on the comment about inquiry levels improving year over year could you provide some more color on how inquiries have progressed on a sequential basis for Q1, Q and given where we are in the quarter any commentary you can provide on year to date or.
Quarter to date order activity.
Yeah, Justin Good morning, I guess, what I can share is that we continue to see our levels of inquiries improved from quarter to quarter I won't get into the specifics, but I'll, but just characterize that they're up.
And we're obviously starting to see as a result of the inquiry levels an improvement in order activity as well.
Looking at what we saw from Q3 to Q4, obviously, a lot of additional order and order activity occurred and we're seeing similar activity in Q1.
We're a couple of months away from reporting on that we'll have some more clarity to provide them.
Okay. That's helpful and just to clarify it sounds like just directionally orders in the first quarter are likely to be up.
Maybe you could just say if that's correct and if so is that the reason why we saw the delivery guidance raise and I just wanted to get more color around that increase to the guide.
Justin This is Jeff good morning.
You know again as Matt said, I think we're less than two months, probably more like seven weeks at this point away from having our Q1 call already so we're going to save some of us for that.
What I will say about our delivery guidance and raising our it's a direct reflection of booked orders it's.
No.
Less to do with kind of forecasting and where we see things going as opposed to where things happen that'd be right now.
Understood.
Second question I wanted to ask about revenue per railcar it jumped up a decent amount sequentially.
Here than what you currently have in the backlog as well. So it was there anything unique in the fourth quarter related to mix that drove that and maybe you could just comment on that general pricing environment as well.
Let me start and then maybe Mike can add something to that are our mat I mean, you know quarter to quarter, obviously, a mix moves and you.
You know it.
Yeah.
We also have as you know and our build schedule from time to time rebuilds and obviously that affects revenue.
Or you know the top line revenue.
So it's got more to do with.
The mix and quality in the backlog and less to do with you know a sudden change in kind of the pricing dynamics in the market place for sure.
And I think we're probably even a bit more sort of you see that more on our business right now Kevin just the two production lines.
You know it just all depends on what we're running through that quarter.
Mike do you want to add anything to that I think I think you've touched on the key items you had a couple of things that occurred.
You referenced our product mix.
I think efficiencies and in the plant being more productive and efficient had a lot better with those other Rev. I know, it's really a mix question Ryan.
Okay, Okay got it.
I guess the last one for me as you look out on the horizon and think about the capacity additions that are coming later this year and into 2023 is there anything you can share on kind of the margin targets you anticipate once we're at a more normalized rate of production.
After these capacity adds and I don't know if it's easier to talk to a kind of a gross margin percentage or an EBITDA margin percentage, but just curious how youre thinking about the profitability objectives at production rate.
Well, obviously, we have gross margin targets in mind in our planning.
And <unk>.
We have an advantage now that we didn't have under the prior U S footprint and that it's.
Smaller and more tailored to the size company that we are in all of that translates to we can be more selective on the business that we accept.
I don't want to get into forecasting specific targets, what I'll say, though I think when we get to our Q1 call I got in which.
It's probably only about seven weeks away I think you'll have.
Now what I'll, probably be the best indication yet of the capability of the new business it'll be you know this is really the first year or running out from under the turbulence.
Of of transitioning from the U S to Mexico. So.
I guess I would ask for your patience and let's wait for the Q1 call and you know I think we can you know put more on the context and you'll have a better understanding.
Sounds good I appreciate the time and my congrats on the new role.
Thank you Justin.
Thanks, Jonathan.
Our next question comes from the line of Matt Alcott with Cowen. Please proceed with your question.
Yes.
Good morning, Thank you and Oh my congratulations on the new role you guys delivered 604 cars in the fourth quarter can you talk about more about the cadence of deliveries should we expect that number to progressively go up starting with the first quarter of 2022.
Or is there going to be kind of a lighter first half as you adjust your manufacturing footprint for the higher deliveries for the year any color on the cadence of deliveries would be appreciated.
Okay.
Good morning, Matt This is Jim.
You know, it's it's a bit hard for me to comment and in a meaningful way on a quarter by quarter.
Obviously, the trend over multiple quarters and over the air is where on an increase we were on a substantial increase last year. We're on a substantial increase this year.
We'll have the we'll have the capacity to continue on a substantial increase next year.
But as it relates to a quarter by quarter. This year again, I think without getting drilling down too far and maybe we can talk more about this on the next call. We're still in a period, where we're operating two production lines.
Obviously influenced by mix, which determines ultimately how many units per day are coming off of each of those two lines.
And then were also affected by a changeover one change over in the middle of a quarter. When you have two production line.
As a unit count impact.
Let us see if we can.
Articulate on that a little more in the first quarter call but.
You know I think or are you now.
What the full year delivery guidance is and.
You know it's not.
Horribly are out of balance if you will quarter to quarter.
Got it thanks, Jim and then I I would imagine I know you're expecting EBITDA to be positive for the full year, but I would imagine it's a similar answer to the quarterly EBITDA cadence.
Yeah, I think my comment to that and I say, that's a little bit tongue in cheek as a as you know, we're just kind of coming out from under our shelves are talking about a full year type guidance information and you know they'll probably be a little more coming out of.
A ourselves before we get into the quarter by quarter type discussions, we're not quite there yet.
Yeah, no well understood.
And then maybe switching back to order as you know Matt you gave some insight.
Can you tell us where most of the orders are coming from is it less or is it shippers.
And our people, calling in and saying I want the cars delivered as soon as possible or are there strategic buyers that are placing orders for deliveries beyond this year for 'twenty 'twenty three or even beyond.
Yeah, Matt Good morning, I would say all of the above order.
Activity has been pretty well mixed between shippers.
<unk> lessors.
Close to the market and you see the you read the tea leaves of demand and what's driving it we're seeing activity on all fronts, but we're also seeing a demand that spreading into into the out years on a more longer term basis.
I can share with you that we were booking orders into into next year.
And we anticipate that to continue there there continues to be demand for orders placed this year in cars to be delivered this year.
Which wherever we can we can look at that we do.
Got it okay and what are some of the I mean, you talk.
Thinking about some car types, but wondering about cars.
Maybe experiencing even shortages right now where people really need the cars are you know as soon as possible and what are some of the other types that people are calling them as strategic orders beyond this year.
Well.
I'll share with you without maybe getting into.
Real specifics, but certainly it's been widely publicized the demands for boxcars continue that looks to be longer term. When you look at the age of the fleet the condition of mill guns. Overall in the industry are are aging and there are some shortage of supply and I think you could say the same for certain types of flat cars as well.
That are in demand.
Okay. Those are three of those are three I think that are probably the ones that that most would say you know if you look at most industry reporting.
Our in demand, but you know the the you know the diversification of our portfolio our ability to do conversions also brings in.
Additional opportunities for a broader product offering.
Yeah.
And you know taking a bit of a longer term view.
Hum.
I know the auto the automotive industry has been hampered by chip shortages, but eventually there will be a pent up production cycle in that industry do you think that could.
Now.
Matt you're breaking up.
Can you can you repeat that question, Matt we come out here you do there the line quality.
Oh, sorry about that can you hear me now just got.
It just got better thanks.
Great I was just saying the longer term question.
Automotive industry has been hampered by all these production issues.
Cause of the semiconductor shortage.
When you know when when the industry starts to build.
Build four to accommodate the pent up demand eventually in the next few years do you think that could lead to a increased demand and for automotive.
On the railcar side.
It seems illogical, Matt I will tell you that would that we don't follow that particular car type very closely but.
But I do know that there's been some activity in that market as of late it seems logical as given the fact that that few auto racks.
And the flats have been provided over the course of the last at least the last two years. It seems logical that you would start to see.
Some demand improvement there.
Okay and then just one last question about the industry, Matt I think the you know.
The numbers in the low eighties, now, which is a huge improvement from 68% back in July of 'twenty 'twenty based on the Scrappage rates and the improved recovering freight demand do you think we could be we could be flirting with high 80 by the end of this year.
Especially you have a lot of our production by the larger builders.
Builders is not going to happen until late this year.
Yeah, that's met I'd I'd be speculating and probably like yourself, obviously with the scrap rates of the last two years being.
At or above replacement rates and deliveries being below that.
Youre going to continue to see solid demand.
Which I think will help a little bit on the utilization front, but the realities are.
There are some customers as I've mentioned in my comments that are that are essentially their entire fleets or are being utilized and or under lease I think that bumping up a higher number of utilization is likely 90 seems like a long way away but.
That's that's it seems it seems like a potential.
I'll leave it at that.
Okay, great. Thank you very helpful. I appreciate it guys.
Thanks, Matt It's Matt.
Sure.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
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. We are excited about the future of freight car America and truly believe we are well on our way to sustaining long term growth.
Have a great day, and we look forward to talking with you on the May call. Thank you.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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