Q2 2022 FreightCar America Inc Earnings Call
Greetings and welcome to the freight car America second quarter fiscal 2022 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.
Reminder, this conference is being recorded I would now like to turn the conference over to your host Stephen Pope Investor Relations for freight car America. Please go ahead.
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.
As defined under the private Securities Litigation Reform Act of 1995 artists.
Participants are directed to freight car Americas Form 10-K for a description of certain business risks some of which Wayne 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 to our forward looking statements whether as a result of new information future.
Events or otherwise.
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 comparable GAAP measures are included in the earnings release issued yesterday afternoon.
Our earnings release for the second quarter 2022 is posted on the company's website at freight car America Dot com, along with our 10-Q, which was filed yesterday after market close.
With that let me now turn the call over to Jim for a few opening remarks, Jim. Thank you Steven Good morning, and thank you all for joining us today.
As you saw on yesterday's earnings release freight car America continued to build momentum in the second quarter by delivering another quarter of top line growth double digit gross margins and positive adjusted EBITDA.
For the first six months of the year, our revenues are up 115% year over year.
And with the completion of the second quarter. We are now adjusted EBITDA positive for the trailing 12 months.
We produced and delivered 468 railcars in the second quarter.
The exact number that was planned.
As you know we are still operating on just two production lines and as we informed you last quarter.
With lines went through a major product changeovers during the period.
Even with the extended downtime associated with the changeovers and the resulting curtailment of deliveries in the quarter. The team delivered an adjusted EBITDA of $2 $3 million.
Our revenue for the second quarter was up 52% year over year and along with the strong topline growth. We achieved a gross margin of 11, 6% and gross profit of $6.6 million and again this was on less than 500 railcars.
Yes.
We are very proud of the team's work in their results, which continue to demonstrate that our manufacturing footprint in northern Mexico is built for efficiency and profitability.
On the commercial front.
Our sales team remain focused on business that is good for the company.
And ensure that the business, we accept that offer a fair and appropriate opportunity to earn a profit.
During the quarter and as Matt will discuss in more detail. We were awarded 1045 new orders.
We did this while turning down a comparable number of orders.
As we run our company with a high degree of discipline, we are simultaneously focused on scaling the business driving profitable growth.
And achieving our commitment to become a world class manufacturing company.
Along these lines our expansion projects continue to progress.
The larger scaled wheel and axle shop, and 162000 square foot fabrication shop are beginning to come online at this time.
Additionally, we still expect to complete the new Assembly building with additional production lines within the next six months.
When complete and as currently envisioned.
We will have approximately 1 million square feet under roof on our 125 acre campus located just 160 miles from the cities of Laredo and Eagle Pass Texas.
Okay.
While our financial results are improving significantly we continue to navigate substantive supply chain and inflationary headwinds that persist and put downward pressure on both us and the industry.
Today the team has done an excellent job in mitigating the associated effects of these headwinds our fell and expect it to challenge us through at least the end of this year.
Even so we believe we are better positioned than at any point in our recent history to address headwinds of all types.
We also continue to be impressed by the production volume that our new footprint is able to produce which is close to double what we originally anticipated.
For this reason, we can provide further improvement to our outlook.
For the full year 2022 we are now forecasting revenue to be between $340 million and $360 million up approximately 72% year over year at the midpoint of the range and.
And up from our previously stated range of 320 million to $340 million.
We are also now projecting deliveries to be between 3000, and 3200 railcars and.
An increase of approximately 79% year over year at the midpoint of the range.
Up from our previously stated delivery guidance of between 20 803000 railcars.
In summary, the second quarter of 2022 serves as an additional proof point of the strength and efficiency of our manufacturing footprint and cost us.
We expect to deliver upwards of 2000 railcars in the second half of the year, while we continue to build out the new footprint with a focus on meeting our future anticipated demand levels and achieving world class manufacturing excellence.
With that I would like to now turn the call over to Matt for a few commercial comments related to the second quarter and moving forward Matt.
Thank you Jim and good morning, everyone during the quarter, our inquiry levels remain robust and in line with the strong activity that we experienced last quarter.
With industry demand largely tied to railcar replacement.
In terms of customer type, we are seeing a slight bump in diversity with an increase in shipper inquiries. In addition to the more traditional leasing and class one railroad customers.
Order activity also remains robust with orders of 1045 railcars in the quarter, which is up 38% quarter over quarter. Additionally, our order book is currently filled for the remainder of fiscal 2022, and we are now building our backlog for 2023 and beyond.
On the sales front, we remained very disciplined in our pricing approach and selective on the business we pursue.
<unk>, our cost structure and the size of the footprint in Mexico provides us some flexibility. So we can focus on business that is well suited for freight car America.
More broadly customer sentiment remains positive and in our view can be characterized as cautiously optimistic.
The recent rise in interest rates has some market participants hitting the pause button and has largely place speculative buying on hold with that said continued congestion of the rail network in scrapping of older railcar assets have resulted in many car types being in tight supply.
On the macroeconomic front, we have seen some easing in raw material pricing. Although this has been somewhat offset by increases in other specialty materials and freight costs as the overall supply chain remains challenged with that I'll now turn the call over to Mike for a review of our financial results.
Mike.
Thanks, Matt and good morning, everyone as Jim alluded to in his opening remarks, our financial results in the second quarter, largely exceeded our internal expectations with significant topline and margin improvement year over year.
Despite deliveries being curtailed by the planned production line changeovers are teams prudent cost discipline and continued focus on high quality business proves that the company can achieve profitability, even while producing far fewer units than what we are capable of at full capacity.
As Jim indicated consolidated revenues for the second quarter 2022 totaled $56 8 million compared to $37 4 million in the second quarter of 2021, an increase of 52% year over year.
The company's deliveries increased 50% to 468 railcars up from 313 railcars a year ago.
Our gross profit in the second quarter of 2022 was $6 6 million a significant increase compared to 2 million in the same period the prior year.
Gross margin increased 630 basis points to 11, 6% compared to five 3% last year, which included some amount of benefit from a favorable product mix.
While we expect to continue to perform well on a gross margin basis versus the manufacturing segments of our peers, given our highly competitive and lean manufacturing facilities. We also expect some normalization of our margin profile in the second half of this year due to an anticipated mix shift.
However, we will realize a significant sequential increase in deliveries during the second half of the year as major changeover activity is now behind us for 2022.
SG&A for the second quarter of 2022 totaled $4 1 million down from $6 3 million in the second quarter of 2021.
The decrease in SG&A during the second quarter of 2022 was primarily due to marketing stock based compensation awards to fair value, which decreased in tandem with the company's share price during the quarter.
As a reminder, we're committed to maintaining our current SG&A structure, even while we scale our production and add manufacturing capacity.
Under this structure, we expect our adjusted EBITDA profile to directly benefit from the operational leverage of the expanded footprint and going forward. We expect SG&A to remain relatively fixed at a run rate of seven to 8 million per quarter in the second half of the year, excluding fair value adjustments related to certain stock based compensation awards, while we continued to grow.
Revenue.
Manufacturing operating income for the second quarter of 2022 was $4 9 million compared to manufacturing operating income of 237000 in the second quarter of 2021.
Consolidated operating income for the second quarter of 2022 was $2 5 million compared to an operating loss of $4 2 million in the second quarter of 2021.
Consolidated operating income in the second quarter of 2022 was primarily driven by solid top line performance and a favorable decrease in SG&A due to gains on a fair value measurement of certain stock based compensation awards.
In the second quarter of 2022, we achieved a positive adjusted EBITDA of $2 3 million compared to an adjusted EBITDA loss of $3 1 million in the same period last year.
Again, we are very proud of this performance as it shows the profitability potential and custodians, even while producing less than 500 cars.
Additionally, following our strong performance this quarter marks the first period, where freight car America was adjusted EBITDA positive on a trailing 12 month basis since the second quarter of 2017.
Further signaling that we have turned an important corner and that our operating structure supports our sustainable growth plan.
Interest expense in the second quarter of 2022 was $5 8 million compared to $3 2 million in the second quarter of 2021.
This increase was driven by noncash amortization of deferred financing costs associated with refinancing activity that took place after the first quarter of 2021.
As it relates to the warrants issued with their financing transactions that directly impact our financial statements. We recognized a noncash gain due to the change in fair market value of the warrant liability of $18 7 million.
This is a noncash item that fluctuate each quarter, primarily as a result of the change in our stock price during the quarter.
Capital expenditures for the second quarter of 2022 were approximately $1 8 million compared to <unk> 9 million for the second quarter of 2021.
As stated in previous earnings calls, we expect our capital spend to increase in 2022, as we complete investments in our internal fabrication and wheel and axle shafts.
Along with production lines three and four.
Due to the timing of these projects, we expect the bulk of capital spending to occur in the second half of this year.
We still believe Capex will range between seven and 8 million for 2022.
Before providing our outlook for the full fiscal year I'd like to highlight the significant improvement we have made as a company with regard to our cash spend especially at the operating level our.
Our cash used in operating activities has decreased from $44 1 million in the second quarter of 2021, only $2 4 million in the second quarter of 2022 now.
Not only does this signal a significant improvement in production efficiency at the custodial footprint, but this improvement is also expected to further enhance our ability to explore future lower cost financing options.
Turning to our outlook for the full year as Jim already mentioned, we are raising both our revenue and delivery guidance to between 340 and $360 million and 3030 200 railcars respectively.
With that financial overview I'd like to now turn the call back over to Jim for a few closing remarks. Thanks, Mike.
Me conclude by stating our expectations and priorities for the second half of fiscal 2022.
First profitability is the new standard for freight car America.
Second we remain committed and largely on track with the expansion of our <unk> facility by year end we.
We expect to have completed and be operating the wheel and axle shop edition and our new fabrication shop.
These expansion spurring significant efficiencies that will directly impact our bottom line.
Salt.
We are also on pace to start a third production line during the fourth quarter and expect to have a fourth line ready in 'twenty two 'twenty three.
The addition of these production lines will double our production capacity of roughly 4000 to 6000 units per year.
With our expansion progress our projects are progressing well and raising and the raising of our railcar delivery and revenue outlook. It is clear that we are increasingly optimistic about the trajectory of the company.
As we continue our transition to growth and as our financial performance improves we expect to have more flexibility. When we eventually look to refinance our debt and improve our overall financial structure.
Yeah.
Additionally, we recently welcomed three new members to our board of Directors, Roger Boehm, who was elected as a new director at the company's 2022 annual meeting of stockholders in May.
Jose the Negros and Travis Kelley were appointed in June these.
As individuals bring extensive financial capital markets and strategic leadership experience, which will benefit freight car America and its next era of growth.
Before turning the call over to the operator I would like to emphasize just how optimistic we are about the future.
At the same time I would like to emphasize that we are also realistic about the potential temporary impacts of a slowdown in the economy and continuing supply chain disruptions.
We will be producing railcars at approximately twice the rate in the second half of this year than we did in the first half.
And we will continue with the build out of the casinos facility exactly as envisioned.
We will also remain committed to scaling the business profitably and to not let our capacity and fixed costs become burdensome.
We sold out our capacity in 2020 one we.
We scaled our footprint and we sold out again in 2022.
We will remain very mindful of the advantages the springs as we continue to scale for the future.
That concludes our prepared remarks, and I'll now turn the call over to the operator, so we can address questions.
Thank you at this time, we'll 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 is in the question. Kim You May press star two if you'd 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.
Our first question comes from the line of Justin Long with Stephens Inc. Please proceed with your question.
Thanks, and good morning.
Good morning, good morning, good morning.
To start with a couple of questions on the updated guidance for deliveries is there any color you can provide on the quarterly cadence of deliveries you're expecting in the third and fourth quarter. Just curious if you would expect those two quarters to look pretty similar or just given mix.
And the third line coming on in <unk>, if we should expect more of a stair step.
Justin This is Jeff I'll start and then maybe Michael until.
<unk>.
Fundamentally our approximately.
I think Q3, and Q4 are going to look pretty.
Comparable in terms of.
The units coming out as indicated we will be bringing the third line on in Q4.
But we're going to bring that on fairly slowly and in a very controlled way.
And so the incremental volume coming off of that third line is going to be a relatively.
Small factor.
Mike I don't know if you want to add anything else to that.
Yeah, just the back half of the year, we'll have the increased deliveries as Jim mentioned with a third line coming on in Q4, you won't see a massive spike, but you will see you would see an expected increase in Q4 compared to Q3.
Okay. That's helpful and I think there was a comment made to about a normalization of margins in the back half of the year due to mix can you help us think through that comment is that a gross margin comment. So just kind of looking back at the last few quarters.
As you know is there a chance we kind of flip back into the single digits from a gross margin percentage perspective, or just any other color you can provide to help us understand what that means.
Sure.
We would expect normalization, we've had a really good Q1, and Q2 and in terms of gross margin based on product mix based on the product mix, we see in the back half we will see normalization back to what we consider more of a steady run rate for where the industry is right now with margin, but we're not going to give specific margin per.
<unk> for the back half guidance.
Okay got it and Jim you alluded to this I think a couple of times in your prepared remarks, but if you just look at the delivery run rate that is implied for the second half of this year on an annual basis. It would be 3700 units in that.
Almost double the capacity that you originally communicated from these first two production lines. So as we get in.
So next year I know you gave that four to 6000 unit range for capacity, but you know is.
Is it reasonable to think that we're going to be at the high end of that maybe above and I guess I just want to understand how much of this is mix and the benefits from that versus productivity and and just the higher capacity number than you had initially envisioned.
Yeah, well you keep reminding me every call that if I go back to when we first started talking about his thanos. We laid out you know think of it as approximately.
1000 units of production per line per year.
And that.
That is.
You know was pretty conservative with the help of the rear view mirror and that's for a bunch of reasons. One is the factory runs are frankly better than.
We planned for.
And that's obviously a very good thing.
And you know that propelled us in the second half of last year, that's propelling us as we speak.
You also have to keep in mind, a railcar is not a railcar.
Some cars process frankly.
Frankly at twice the rate of other rail cars. So there is a.
<unk> component and what you're building there is obviously a component in terms of whether you're running a shift a shift and a half or multiple whole shifts.
So.
I think the best way to think of it as.
You know, we've got a lot of flexibility.
To scale up or put the pud, although the motto and put out more product we need some help of course in terms of the products, we're actually building.
But the facility just continues to run very very well.
Especially when you consider the fact that it's still.
Our new facility and there's construction going on all around it so we couldn't be more happy but to your exact question.
The future book of business lined up.
You know just so.
You know it would probably be at the high range of that four to 6000 units, possibly even higher.
Understood and last quick one for me is just on inquiry and order activity quarter to date, just curious if there's any update or any change relative to the strength that you saw in the second quarter.
Yeah, Justin I would say that we're encouraged by the activity and by the conversations we're having with customers pipeline remains healthy.
Overall, I would say that the activity has been in keeping with what we've seen in previous quarters.
I think I mentioned in my comments that our customers are watching whats happening in the marketplace, but overall remain optimistic.
So we're anticipating.
We're continuing to have a have a solid performance from an inquiry and order perspective.
Okay, Great I appreciate the time.
Thanks, Joe Thanks Joseph.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad.
Our next question comes from the line of Matt Alcott with Cowen and company. Please proceed with your question.
Good morning, Thank you.
Just a couple of maintenance questions to start with Jim if we.
Take even the high end of the delivery guidance for this year you would have 90 849 cars to deliver in the second half, but I think.
Jim You mentioned in your outlook commentary is upwards of 2000 cars.
Does this mean that there's potential upside to the high end of the delivery guidance this year.
No I I would go with the guidance.
The upwards of 2000, and I think as a qualitative statement meant to be very consistent with that guidance Matt.
Got it okay. Thanks for the clarification on this.
And in your delivery guidance are you guys, assuming you will get some.
Orders in the second half of the same.
Of the year for sitting here at the luxury I'm just trying to gauge what percentage of the current backlog is for deliveries in 'twenty two versus 23, and you know what percentage if any is for beyond 2023.
Well, let me just start with that.
Over to Matt.
Our our production schedule is.
There's lots of loaded at this point for the balance of the year. There's you know frankly, no assumptions in terms of.
Incremental sales needed to support the delivery guidance, we just gave.
So you know the.
The backlog beyond what we'll produce this year as fundamentally a 2023 backlog at this point, obviously with a lot of.
You know.
Pipeline sales discussions.
Take place normal course every day.
I'll give you a call over yeah, I think I think our math, Jim answered those questions pretty thoroughly.
As I mentioned earlier, we're having the right kinds of conversations the pipeline remains healthy and strong with a diverse a diverse pipeline with both customers and car types.
As we look to 'twenty three we are filling backlog, we are filling space and we are having the right kinds of discussions about long term line space commitments.
Got it that's helpful. And then just a quick balance sheet question. The decrease in cash quarter over quarter is that primarily because of the increase in inventory of which is related to the delivery cadence.
And we can expect that to change in the second half.
That's exactly right and that it's been Oh, we had a heavy working capital infusion into inventory as we ramp up for what will be a very heavy second half deliveries so you're spot on.
Okay, and then I don't know if I don't remember if Mike you said, it or a matched set it but hmm alright.
And maybe I think it might have been Jim to.
That yours, you can see it.
Well, it's definitely one of them one of you [laughter], whereas the degree of your.
I think you had mentioned that you know you ran optimistic but also cautious about what the macro in recessionary concerns might mean for the industry. I was wondering if you think there's incremental risk to the industry production guidance for 2020 three.
Today versus three months ago, I think the industry.
The estimates are probably in the range of low fifties to mid fifties. If I you know I don't know what your internal expectation is but whenever it is do you think there is now incremental risk to the production outlook for 2023.
I think that Oh, Matt.
Overall.
We're seeing a couple of different adjustments made by the different industry.
Industry insiders on looking at what we think we're going to produce this year as an industry.
I think it's a little early.
We are as I mentioned, we're seeing some customers that are hitting the pause button.
But I don't believe we're seeing customers that are overreacting to what we're seeing in the marketplace right now there's still some unknowns.
With what happens with our rail network congestion relief, you've got significant effort by the class ones. We're working on that we still have we had almost three years of scrapping that outpaced new car demand. So overall demand for railcars remains I think healthy.
And I think what's important to take away is we have built a plant that's efficient footprint that allows us to scale up or down depending on market conditions and we're roughly half of the production capacity that we were previously at the Shoals facility and really have moved our manufacturing operations to be in la.
With market conditions, so from our perspective, it's more about making sure that we're meeting the needs not only for our customers, but for us as it relates to to our production capacities and efficiencies.
Matt I would just add to that that we obviously like everyone pay a great deal of attention to.
The industry and the macro economic conditions.
But we do our business planning based on our sales activity.
And you.
You know we.
Our business does its best when it's sold out.
And.
You know it was helpful in 2020 one.
Helpful position in 2022.
And as I said in my closing comments, we're going to be very very careful to keep scaling the business with commensurate with what we see as.
Our our sales activity, so we're paying attention to it all but we're planning based on sales discussions.
Okay.
Helpful and Jim can you talk about the 1000 or so orders that you've turned down why did you turn them down down what kind of orders are there.
No I'm not going to get too specific into that you know I will just simply highlights that.
You know, we're we're benefiting from not having.
Unused too much extra capacity you know there was a day for US what's has been endemic in this industry.
Sure everybody has felt a need to chase a reorder because everybody had open capacity they were trying to sell.
That's not our mindset today, and it's not our mindset because of the way we see.
Scaled our our footprint and the way we've adjusted frankly, the mix between being a fixed cost business and a variable cost business.
More variable now and that's that's helpful. It is helpful to our gross margins and obviously then.
The bottom line.
Do you think that the industry as a whole can be more disciplined or are you still seeing some aggressive pricing from your competitors.
I would like to see the industry being more disciplined I was but pricing is very aggressive.
And you know the whole industry I don't think anyone would disagree that.
You know if there was a step change in capacity and.
Supply capacity or supply demand dynamics.
The manufacturers would be better served.
But that's not the way it is right now we can only do what's right for our business and obviously over the last couple of years, we've taken that on and pretty dramatic fashion.
Got it and just one final kind of big picture question.
Still hasn't been the issue keeping people from pulling the trigger for for a while steel has moderated but then now we have interest rates being higher and we have macro concerns and concerns about the slowdown in the economy. If we take all these factors together do you think.
The net impact is a headwind to our railcar demand and production or or still a tailwind or.
It's basically a wash.
Well I'll start and then Matt I'll give you probably the more intelligent response, but.
This is the this is the big thing, we don't really know we don't know the future.
Well you know theres signs in both directions. So there's the macro signs the things we read in the papers every day.
But then with specific to our industry theres congestion and other indicators that Matt mentioned.
And then there's the actual sales in ordering activity that we see as a business.
So you know.
I think if we all could correctly answer your question.
We'd all do we'd all benefit from that Matthew I think I'll just add to that that you know steel is not steel when you think about manufacturing railcars and theres multiple grades and thicknesses, which.
Other aspects that go into the types of steel used in manufacturing plate versus HRC looking at just the pure cost of steel doesn't really tell you the whole picture I guess.
But to your point, we are seeing some easing there, but there are some offsets in other costs. So.
Overall, we remain the supply chain remains challenged.
Whether it's a headwind or tailwind at that point I think it was kind of a toss up well.
Well, that's a good point I'll just add to that you know we consume.
Plate steel and coil steel coil steel has come down pretty significantly from its recent peaks.
Some reason plate has not yet done so.
And so you've got kind of a bifurcated story on steel at the moment.
And then I guess, Matt one other thing just to kind of keep in mind and I don't really know how to call.
Quantify it for you.
Also a hidden cost with the overall supply chain dynamics or any efficiencies at the moment.
Everybody knows all too well the challenges of the global supply chain and every time that pitches you.
You rushed to do alternative sourcing and whenever you rush to do alternative sourcing you do is to keep your factories running which is in your best interest, but it also cost you more.
No. That's a that makes sense, maybe just one quick follow up.
Also related to the industry.
Do you think I guess rail service is expected to begin improving as the railroads are higher Moore M D.
The suboptimal rail service and a lower velocity have been kind of a driver of railcar demand.
For the last year or so.
As service starts to improve and that tailwind sub sides.
Theoretically you should offset that with volume growth is there any way to gauge Jim and Matt.
You know when we get into 'twenty, two 'twenty, three and let's say service rail service improved significantly do you think there's enough volume to make up for the headwind from improving service the headwind to railcar demand.
I think I think the takeaway point here is that there's far fewer.
More efficient modes of transportation and shipping product then there is by rail right. So.
Rail rail continues to be a great value proposition once railroads are able to get back on track and again, they're all working towards that and we'll go ultimate goal.
And customers see improve service levels improve velocity lower dwell.
It absolutely sets itself up for an improvement in overall railcar demand.
Perfect. Thanks, so much.
We all know there's been several consecutive years.
Cars exiting the fleet aging out at a faster rate than new cars coming online so.
Certainly this is all behind a catch up in reverse itself.
And at some point here it Matt.
Makes sense. Thanks, so much Jim and I appreciate it.
Thanks, Matt.
Yeah.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to management for any final comments.
Thank you all for joining today's call. We are increasingly excited about the future of freight car America as we continue to grow our manufacturing capabilities and look for we look forward to sharing our successes with you in the second half of the year and beyond thank you.
Yeah.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.