Q1 2022 FreightCar America Inc Earnings Call
Greetings and welcome to seek out and make us the first quarter of fiscal 2022 conference calls.
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These off what's sooner and restoration.
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Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Mike Riordan, 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 per American its Form 10-K for a description of certain business risks some of which may be outside of the control 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 for 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.
And for them to U S generally accepted accounting principles or GAAP.
Conciliation of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning.
Our earnings release for the first quarter 2022 is posted on the company's website at freight car America Dot com and our 10-Q, which will be filed after the market today.
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 today.
As you saw in today's press release freight car America continues to build on the momentum started in 2021.
We delivered our strong quarterly revenue result in nearly five years and first double digit gross margin since the first quarter of 'twenty six team.
As I've said on nearly every call over the last several years our goals are to be the best manufacturer in that business.
And they keep getting better from there.
To us to be the best manufacturer means to be the best in safety quality and efficiency.
Our safety performance in Q1 was flawless.
Quality.
Our quality is good and as manufacturing operating income as a proxy for efficiency.
Then we outperformed our much larger competitors by more than 20 to one on a percentage basis.
And sure our efforts to position the company for a long term growth by recovering the best manufacturer of that business are paying off.
And we look forward to the challenge of further differentiating our performance as we progressed through 2022 and beyond.
Matt will provide more detailed industry comments, but at a very high level, we continue to see more positive trends in the industry than we do warning signs and order inquiries remain relatively strong.
We are however, watching that space carefully as well as trends in the overall economy.
As a reminder, and as we said on the last call. However, all of our decisions related to production planning are based on firm orders.
R R.
Our new manufacturing footprint anchor stars continues to run very well as evidenced by our financial performance in the first quarter of 2022.
We continue to prepare to scale the operation and we will be ready to capitalize on improving demand.
Our revenues for the first quarter or up 188% year over year.
Along with along with strong top line growth, we achieved double digit gross margin of 10, 8%.
Which was $10 $1 million of gross profit on just 783 railcars.
We feel that this is a good barometer of reading of that business currently running with just two production lines, but with two more lines and in in house fabrication shop in the works.
I, specifically mentioned the ladder, because our fabrication shop will bring further improve that benefits to our operational efficiency.
Despite our improving financial results supply chain and inflationary headwinds, we remain very real challenges and continue to put pressure on the company.
But with that said I could not be tomorrow.
Our team's ability to continue to navigate through these challenges and mitigate the effects.
Well, we are pleased with the progress and results achieved during the quarter. We are also still building out the facility hiring training and implementing better processes.
In many respects, we're still ramping up and learning on where and how we can improve.
As you know in the past we have been reluctant to provide much in the way of forward looking targets as we were focused on ensuring the successful transition took a steinhaus.
We are pleased for the first time in at least a long time to introduce our revenue guidance.
For the full year of 2022 we are forecasting revenue to be between $320 million and $340 million up approximately 63% year over year at the midpoint of the range.
This projection is based on expected deliveries of between 2800 to 3000 railcars.
An increase of approximately 68% from the mid point of our range and up from our previously stated delivery guidance of between 2600 2900 railcars.
And as we proceed through the year, we will continue to have a very strong focus on gross margin percentages and gross profit dollars.
In summary, our team is performing well and we expect our performance to only get better as industry conditions improve and we continue to scale our operations with the same level levels of focus on cost discipline and manufacturing excellence.
With that I would now like to turn the call over to Mike for a review of our financials Mike.
Thanks, Jim and good morning, everyone.
We delivered stronger financial results in the first quarter as evidenced by a significant improvement in year over year top line and gross margin.
<unk> revenues for the first quarter 2022 totaled $93 2 million compared to $32 4 million in the first quarter of 2021, an increase of 188% year over year.
The company's deliveries increased 153% from 309 railcars in the first quarter of 2021 783 railcars in the first quarter of 2022.
Further our product mix shifted between the comparable periods, coupled with an increase in steel pricing year over year generated a 14% increase in average selling price of delivered cars.
Our gross profit in the first quarter of 2022 was $10 1 million a significant increase compared to $1 3 million in the same period the prior year.
Gross margin increased 670 basis points from four 1% in the first quarter of 2021 to 10, 8% in the first quarter of 2022 and was the sixth consecutive quarter of gross profit for the business.
SG&A for the first quarter of 2022 totaled $10 7 million up from $9 2 million in the first quarter of 2021.
The increase in SG&A during the first quarter of 2022 was primarily due to an increase in stock based compensation that is largely tied to movement in the company stock price.
Manufacturing operating income for the first quarter of 2022 was $8 5 million compared to manufacturing operating loss of $6 million in the first quarter of 2021 and was positive for the fourth consecutive quarter.
Consolidated operating loss for the first quarter of 2022 was <unk> 7 million compared to an operating loss of $14 5 million in the first quarter of 2021 <unk>.
<unk> operating loss in the first quarter of 2022 was primarily driven by the strong manufacturing operating income offset by stock based compensation that as previously discussed is largely tied to movement in the company's stock price.
Interest expense in the first quarter of 2022 was $5 7 million compared to $2 5 million in the first quarter of 'twenty one.
This increase was driven by noncash amortization of deferred financing costs associated with refinancing activities that took place in the prior year. After the first quarter of 2021.
As a reminder, the warrants issued with our financing transactions directly 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 the first quarter of 2022, the noncash charge due to the change in fair market value of the warrant liability was $20 7 million.
Again this is a noncash item, primarily reflecting the change in our stock price during the quarter.
In the first quarter of 2022, we achieved positive adjusted EBITDA of $3 3 million compared to an adjusted EBITDA loss of $1 8 million in the same period last year.
Now moving to the balance sheet, we finished the quarter with cash and cash and restricted cash equivalents, including availability under the delayed draw loan of 56 million.
Capital expenditures for the first quarter of 2022 were approximately $1 million compared to <unk> 5 million for the first quarter of 2021.
As stated on our last earnings call, we expect Capex to increase in 2022, as we complete our investments and our previously announced expansion of our internal fabrication and we own axle capabilities by mid year and complete production lines three and four by year end 2022 in early 2023, respectively.
Due to the timing of these projects, we expect the bulk of capital spending to be in the second half of the year for the full year 2022, we still believe Capex will range between seven and $8 million.
We look forward to more than doubling our capacity to between 4006 thousand railcars as you bring on the two additional production lines and.
And we now believe that each additional line will bring on approximately 1500 railcars of capacity per year up from our original projection of approximately 1000 railcars.
Importantly, we are committed to keeping our manufacturing operating structure aligned with our sales as well as maintaining our current SG&A structure.
Therefore, we expect our adjusted EBIT profile to directly benefit from the operational leverage of the expanded footprint.
As noted in Jim's opening comments, we are excited to provide our revenue outlook and reiterate our expectation of positive adjusted EBITDA for the full year 2022.
Looking into the second quarter, we will have multiple changeovers on both production lines, which will lower the pace of deliveries in the short term. However, this is our only period of dual changeovers for the remainder of the year and we will see a significant pickup in production and deliveries during the second half of the year.
With that 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.
Thank you, Mike and good morning, everyone.
As Jim alluded to in his comments the railcar industry continues to see positive activity or inquiries during the quarter remained healthy and on par with the activity. We witnessed beginning early in the fourth quarter of last year. Additionally.
Additionally, the types of inquiries, we're receiving are diverse in nature and a broad range of railcar types another positive industry indicators.
Order activity was also strong and comprised a good mix of business for us during the quarter.
The actual number of booked orders was 855 railcars. These orders were largely a reflection of the customers need to upgrade older fleets and to expand their business in select markets.
By the end of this year, we expect that we will have produced any different car types and more than 4500 total railcars Inca sinus since commencing operation there about 20 months ago.
While we continue to face persistent inflationary headwinds, which directly impact raw material pricing replacement demand for new railcars remains relatively strong in large part due to our continued scrapping activity of AG rail assets.
With that said our conversion business provides us with optionality in this environment and reduces our customers' exposure to high raw material and specialty component pricing.
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 you of our expectations and strategic priorities for 2022 that we laid out at the beginning of this year.
First we remain on track and expect to be profitable on an adjusted EBIT basis for the full fiscal year 2022.
Second we remain on track with and are making good progress on the expansion of our Costano facility.
By mid 2022, we expect to have to have completed the expansion of our wheel and axle shop at our 162000 square foot fabrication shop.
These operational additions bring significant efficiencies that will directly impact our bottom line results.
We are also on pace to start a third production line during the fourth quarter and expect to have a fourth line ready in 2020 three.
As Mike alluded to in his remarks, we expect these lines to double our capacity to approximately 4000 to 6000 units per year.
In closing and as was announced in today's press release I plan to step down from my position as CEO in 2023.
We fundamentally restructured the business starting in the last several years and are now positioning freight car America for profitable and significant growth.
This will be our singular focus I'm working closely with the rest of the board on the search for a successor and we expect to have a comprehensive and smooth transition in due course.
Additionally, I intend to remain heavily involved with the business as an active member of the board of directors once the transaction does occur.
Growth scale and improved product profitability are the future for our business.
We will continue to focus on differentiating freight car America as a best in class manufacturer with the ability to flex product specifications and order sizes to meet customer demand.
We remain determined to be the leader in the industry for quality and customer satisfaction.
That concludes our prepared remarks, and I'll now turn the call over to the operator, so that we can address your questions.
Thank you.
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One moment, please while Paul Farquhar.
Questions.
Our first question is from George Silos with Stephens. Please go ahead.
Thanks, and good morning.
Good morning, good morning, So I guess to start the the updated delivery guidance is at the high end of your annual total capacity. So could you just discuss your confidence in reaching that and then the visibility maybe like your backlog gives you too to the remainder of the year and I guess said a little differently or are you a tie.
Really sold out for the year or do you need to get more orders in 2022 to reach that target.
Matt why don't you address that first yes morning, George I think I think what it says is we've got a very strong backlog for 'twenty. Two there remain some pockets of opportunity on our line space, but a big part of our focus right now is really on.
Addressing inquiries in booking orders for 'twenty three and beyond.
Yeah. George this is Jim as it relates to the rest of your question are we we've said pretty consistently that a good rule of thumb is.
<unk> thousand units of volume per year per line.
A real experience to date has been a somewhat better than that as the factory continues to run a better and better combined with of course, the orders the mix and the number of changeovers executed.
So that's part of the reason we said today.
That we're now sort of describing our future capacity as a range of 4000 to 6000 units per year. Once we get the other two lines onboard.
Starting about the fourth quarter will have a the third line are running and.
So we're quite confident in our volume forecast for the year and we feel good about the corresponding revenue.
Okay. That's that's helpful and then I guess on.
The comments that you made Matt it sounds like you're getting orders that are relates to sort of replacement demand. But then also some some areas areas of growth could you talk about the different industries.
Industries that you're seeing more replacement demand in some areas, where theres more more growth demand.
Yes, I think.
The majority of what we are seeing is on the replacement demand given the number of cars scrapped over the course of the next couple of years, but then in the without getting into specific markets. I think you can you can say that we're seeing demand increase and some select covered hopper markets fertilizer is obviously an area of strength right now.
Steel continues to be an area of strength given demands replacement of specialty gondolas as well as our mill gondolas or both.
As a strength.
And the market.
Got it Okay and then in terms of pricing have you been able to push a little bit more on price as the backlog is in Philadelphia, a little bit or.
Was pricing trended recently.
I think without getting into specifics George what we're seeing is we remain in a relatively competitive marketplace.
We're starting to see some improvement in talking to our customers on the lease front, which is positive signs that theyre starting to be able to capture some improved lease rates as new car here in the market, we anticipate a slight improvement in pricing over time.
We're all still working through some of the challenges on the supply chain and increases in.
Raw materials and specialties, so specifics to price increases or are really hard to to elaborate on at this point.
George This is Jim I would just add that.
You know obviously its still extremely competitive environment on the one end and on the other and we're all dealing with high inflationary pressures and have been with steel for quite some time now.
As we've said in a number of times.
Part of our strategy as we executed the move to Mexico.
Does to keep ourselves right sized with the market.
We've been right sized up to this point or forecasting to stay that way.
As we bring on the other lines a little bit later on in time.
But by keeping ourselves right sized from a capacity standpoint, and also gives us the important opportunity to be a bit more careful a bit more selective and pick the business that.
That's out there that best suits our company.
And I think you'll see that in par.
Our gross margin performance.
Versus maybe what you've seen in some of the others.
Okay. That's that's really helpful. I'll leave it there. Thank you all for the time.
Thanks, Jordan shortly.
Thank you.
Our next question is from Matt I could let.
Colin Please go ahead.
Good morning, and Jim Congratulations on the on the planned retirement and staying on this on this topic can you maybe talk about.
The timing is there something strategic about this or is this just purely personal.
And.
If there is something strategic do you feel like you've gotten the continued it to a point where you can pass the baton to someone else and also maybe talk about the Oh succession process and if you guys have started looking internally and externally for the future CEO .
Yeah, Good morning, Matt.
So I don't quite know, what you mean by strategic or nonstrategic.
You know my my goal has been is and always will be to support this company.
This is.
Then a very interesting past period of time the amount of work that's been accomplished and where we sit today.
Quite frankly I find thrilling.
And for that reason.
I don't plan to be too far away from the action.
I will continue to stay on the board of directors.
I will be an active member of our board of directors and I will be helping the company every way I can hopefully without getting in the way to really push it for growth.
We've been through this phase of.
Restructuring that company fixing what was good about it or what wasn't working correctly.
That's behind US and now we've just got this terrific business platform and so.
I'm going to step out of the I'll call. It the 24, seven swivel chair position.
For personal reasons.
And I'll leave that Oh, somebody younger and but very much planning to stay involved with the company I've always have and frankly more than ever at this point.
First of all I have this very high expectations for this company.
Got it that's very helpful insight Jim.
And then maybe switching back to the market demand.
End market conditions.
Barring unexpected turns in N. The freight environment in the railcar supply demand dynamics, which have been pretty favorable for the last 18 months I you know I would say.
Does it look like you guys should this you know projector you have increased deliveries on a quarterly basis does it look like it will continue into 2023 barring anything.
You know a market downturn.
Yeah, Matt I think inquiry level support that.
None of us have the crystal ball, but when I look at inquiry levels order activity.
And some of the key indicators on demand replacement levels.
I think you know the dynamics in the marketplace still.
Remained very positive as we go into next year.
And then Oh, we should expect gross margins to continue to improve as well with the improvement in the the ryzen deliveries.
Well, Matt we're not.
Going to give sort of further guidance.
And then we've already given.
I think for this year now we've now given volume guidance revenue guidance.
Well, you certainly laid out our baseline expectation for our adjusted EBITDA.
You, obviously have first quarter gross margin.
Uh Huh from what you can.
Work with.
But as you know every piece of business. We take every order we deliver has its own particular economics.
I will tell you.
We remain very heavily focused on gross margin and gross the gross profit dollars that come out of it.
It is a very key part of <unk>.
The day to day running of the business, we are no longer in that position that we found ourselves and several years ago, where.
Our our capacity was such that every piece of business felt like a must win piece of business.
That's just not the world we're working in today with our new company.
So I think I'll kind of leave it at that.
Okay, and Jim and Matt you know the the cycled a railcar cycle for the industry historically has been driven by one or two rail.
Our railcar types.
This one is you guys mentioned earlier is much more broad based so you know just theoretically.
As it relates to margins does this does this limit.
The margin upside relative to previous cycles. When you have to do a lot of line changeovers or or is the case that you know as you mentioned, Jim we are being selective.
And what types of railcars you what types of orders you go after because of that reason, partly because you don't want to do a lot of lines line changeovers.
Well it all factors in and.
As we said in our comments earlier, we've got both our lines going through changeovers in the quarter. We're in now Q2.
And you.
Once we're through those.
We're gonna be.
Ron I'm pretty hot for the at least the remainder of the year and that's partly a again the.
Attributed to a factory that's running very well.
The orders and backlog, which in part.
You know on the orders we go after harder or less hard depends on what we're currently building all this stuff plays into it.
We're managing the business for gross margin for growth and profitability.
Makes sense and then just one last question for you Jim or for Matt.
I think you guys mentioned the covered hoppers and a couple of other types of railcars and historically you guys are the go to for open hoppers.
And you know demand for aggregates sandstone shipments on rail R. R.
Probably the high.
The you know.
Traffic group right now.
Is that a market you guys are participated participating in or are there not cars being built because we have enough already.
Yes.
So that's a market we do participate in and have been known for.
With the infrastructure spending that obviously bodes well for those companies that require cars carrying various types of aggregate install and so while we see some positive signs in that area.
That would that would certainly be a benefit to freight cars entire portfolio.
But its not currently reflected in the AR and the backlog necessarily.
Without getting into specifics I would just say that that's a that's a market. We do participate in we have delivered some of those stars.
That serve those markets.
Okay, and then Matt you did talk about scrapping it continues to be at elevated levels. Despite you know a year and a half of scrapping we're still scrapping more cars.
You know industry utilization for the whole fleet is over 80%.
And we're still you know builds are still below replacement levels.
After two years of being below replacement levels.
Matt would you say that we're at full utilization.
For the industry fleet right now.
I don't know that I would say that what I would say maybe anecdotally the responses we get back from from customers. We talk to is that they are experienced high rates of utilization so I.
I think I think the fact that you mentioned to the scrap rates outpacing replacement rates two solid years in a row, probably almost three if you factor in last year 2000.
2019 was near 50000 cards scrap.
2020, one where both in excess of that outpacing what our deliveries were I think youre looking at you know at least for a period of time.
Continued demand of positive demand cycle, given that fact.
Got it.
Thanks, very much I appreciate it.
Thanks, Matt.
Thank you.
Ladies and gentlemen, we have reached the end of the question and answer session.
And I would like to turn the call back to Jim Miele for closing remarks.
Thank you all for joining today's call.
We are excited about the future of freight car Americas, we enter our next stage of growth and we look forward to sharing our successes with you all in the future have a good day.
Thank you this.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.