Q3 2022 FreightCar America Inc Earnings Call
Greetings and welcome to freight car Americas third 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 as a reminder, this conference.
Is being recorded it is now my pleasure to introduce your host Stephen Po Investor Relations. Thank you you may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Mike <unk>, and 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 1095.
Participants are directed to freight car Americas 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. We expressly disclaim any duty to provide updates to our forward looking statements, whether as a result of new information future events or otherwise.
<unk>.
During today's call. There will also be a discussion of some items that do not conform to U S. Generally accepted accounting principles or GAAP reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the earnings release issued yesterday afternoon.
Our earnings release for the third quarter 2022 is posted on the company's website at Great America Dot Com, along with our 10-Q, which was filed yesterday aftermarket with that let me now turn the call over to Jim for a few opening remarks.
Thank you Steven good morning, and thank you all for joining us today.
Before I discuss the quarter I would like to begin by thanking our freight car America employees for their continued dedication and hard work as we continue to scale, our company and execute on our strategic priorities.
Credibly proud of this team as we continue to work to build a world class manufacturing campus interest on us.
The power and potential of our new campus was evident once again this quarter as we produced.
Another record number of railcars.
Our transformation is on pace and we are continuing to invest to prudently expand our capabilities as we produce more and more railcars at the highest levels of quality and on time performance.
Talk more about the transformation in a few minutes.
Now, let me provide an overview of our third quarter results.
As you saw in yesterday's earnings release freight car America delivered 47% top line growth.
783 cars in the third quarter, an increase of 55% year over year, which again set a new high watermark for deliveries out of our new facility.
Manufacturing operating income grew to $3 $1 million from $163000 a year ago.
And we achieved adjusted EBITDA of $1 $6 million compared to a loss of $3 $5 million during the same period a year ago.
That said, our third quarter financial results were muted by deliveries of lower margin railcar orders that were accepted earlier in the year and at the bottom of the cycle as well as elevated freight cost.
These items put downward pressure on our profitability and made adapt to our gross margin, which had been double digits during the prior two quarters.
We expect these legacy orders to be completed before year end and for our margin profile has strengthened beginning in the fourth quarter.
In addition, we are actively exploring alternative freight strategies with the goal to reduce these costs.
Overall, the railcar environment is more positive than not.
More positive aspect comes from both what we're seeing in terms of industry fundamentals and sales inquiries.
And then not aspect is our caution as it relates to overall macroeconomic uncertainties, including high inflation and persistent supply chain challenges.
Unlike so many other companies, we are not experiencing issues related to hiring and retaining skilled workers.
Our sales team remains intently focused on winning business that is good for the company and accretive to margins.
I've highlighted on previous calls our cost structure and size provides us with some flexibility in how we select on schedule business.
As we build railcars and run the overall business. We also continue to make significant and very important progress on the company's strategic and performance initiatives and Costano OS.
And we firmly believe that we are successfully positioning ourselves as a world class manufacturer in northern Mexico with increasing benefits to come.
Construction of our new fabrication shop is now complete and we started bringing it online during the third quarter.
We also completed the expansion of our wheel and axle shop, and now have AAR certification that allows us to machine axles in house.
As we have alluded to in previous calls both of these additions will bring meaningful efficiencies. In addition to the benefits from further scaling and producing more units.
Additionally, as I mentioned in my opening remarks, we continue to be impressed by the volume of railcars that are new footprint can produce and deliver which is on pace for substantial growth over last year.
And the first nine months, we delivered 2034 railcars more than in all of 2021.
As a reminder for the full year 2022, we are forecasting revenue to be between $340 million at $360 million.
Approximately 72% year over year at the midpoint of the range.
We are also projecting deliveries to be between 3030, 200 railcars, an increase of approximately 79% year over year at the midpoint of the range.
In summary, while there is much more work to be done to achieve our full potential as we envision that we believe that freight car America is poised to continue delivering growth and improved profitability as we continue to scale, our new facility and also as the macroeconomic environment and.
Supply chains normalize.
With that I would like to now turn the call over to Matt for a few commercial comments related to the third quarter I'm moving forward Matt.
Thank you Jim and good morning, everyone on the commercial front, we continue to see mostly positive signs in the rail marketplace that support demand for new railcars <unk>.
Industry orders for the third quarter are in line with the replacement demand cycle of 40000 railcars annually, which is consistent with the feedback from our customers on their specific needs.
Largely speaking our leasing customers are reporting strong utilization of the lease fleets with improving rates on lease renewals. Additionally, there are multiple car types that remained in tight supply.
49 healthy inquiry activity during the quarter.
After a slight increase in railcar storage figures in the second quarter. We have again seen total cars stored fall in the last quarter with just over 275000 railcars or 17% of the North American fleet reported in long term storage. This is almost a 48% drop in total rail asset store.
Since the peak in July of 2020.
Another important indicator as scrap prices, despite a falling scrap prices since their peak in March of 2022 railcar scrapping has outpaced outpaced railcar deliveries for annuity three years with many car types near end of life and the cost of repairs often greater than asset book value. This scrapping activity will continue to support <unk>.
Placement railcar demand.
Our inquiry activity and more specifically formal bids issued saw a double digit increase quarter over quarter and include a wide range of car types as customers remain focused on replacing their aging fleets.
Our sales funnel includes a diverse mix of new and existing customers, whose needs for railcars are well matched to freight car America's product portfolio.
We continue to see inquiry and order activity for conversions with over 16000 railcar convergence convergence deliberate in our history freight car America offers dozens of design options for customers looking to repurpose idled, an underutilized railcar assets are.
Our company's focus on sustainability and engineered lighter weight car designs has been a cornerstone of our brand for over three decades.
As an example, our typical conversion design will reuse or repurposed over 50% of the existing railcar structure and components, but all other materials recycled minimizing the environmental impacts of producing raw materials necessary and the construction of an all new railcar.
Turning to order activity, we booked orders for 340 railcars during the quarter.
For the first nine months of the year total booked orders and backlog each increased over 30% year over year with a backlog total at 2529 railcars with an aggregate value of approximately $276 million at quarter end.
As we have stated previously we remain disciplined in our approach to pricing and acceptance of orders that are well aligned with our profitability guidelines.
Like all industries, we are cognizant of how potential market downturns and interest rate hikes can impact our business.
Despite these macro economic uncertainties shipment by rail remains a strong value proposition with accepted economic and environmental benefits.
With that I'll now turn the call over to Mike for a review of our financials Mike.
Thanks, Matt and good morning, everyone as Jim alluded to in his opening remarks, we delivered significant topline growth year over year, our profitability was impacted in the quarter. However by both lower margin business and elevated freight costs on incoming material within the period.
We anticipate that these lower margin orders will be complete before year end positioning us for sequential profitability improvement further we have a number of projects underway to improve our inbound freight cost component.
Well freight was a relatively small contributor to the downward pressure in the quarter and maybe an important opportunity in the future.
Consolidated revenues for the third quarter 2022 totaled $85 7 million compared to $58 3 million in the third quarter of 2021, an increase of 47, 1% year over year.
The company's deliveries increased 55% to 783 railcars up from 505 railcars a year ago.
Our gross profit in the third quarter of 2022 was $4 6 million a significant increase compared to $1 5 million in the same period the prior year.
Gross margin was five 3% compared to two 6% last year.
Sequentially gross margin decreased from 11, 6% in the second quarter of 2022, primarily due to the lower margin legacy orders.
SG&A for the third quarter of 2022 totaled $7 1 million up from $5 7 million in the third quarter of 2021.
The increase in SG&A was largely noncash related to the mark to market accounting for stock based compensation awards. This value increase in tandem with the company share price during the quarter.
As a reminder, we are committed to maintaining our current low cost SG&A structure, while we scale, our production and add manufacturing capacities.
As a result, we expect our adjusted EBITDA to directly benefit from the operational leverage of the expanded footprint.
Going forward, we expect SG&A, excluding mark to market accounting for certain stock based compensation awards to remain relatively consistent as we continue to grow revenue in the future.
Manufacturing operating income for the third quarter 2022 was $3 1 million compared to manufacturing operating income of 163000 in the third quarter of 2021.
Consolidated operating loss for the third quarter of 2022 was $10 7 million compared to an operating loss of $4 2 million in the third quarter of 2021.
Consolidated operating loss in the third quarter of 2022 was primarily driven by a noncash loss on pension settlement of $8 1 million.
This loss reflects the movement of historical actuarial losses out of accumulated other comprehensive income and into the P&L.
Based on favorable marketing conditions, we were able to offload approximately $27 6 million or 67% of our gross pension liability at no cost to the company.
This action is both significant and further strengthens the company's balance sheet by mitigating its exposure to historical employer benefit plan liabilities.
In the third quarter of 2022, we achieved a positive adjusted EBITDA of $1 6 million compared to an adjusted EBITDA loss of $3 5 million in the same period last year.
And most significantly through the first nine months of 2022, we generated $7 2 million of adjusted EBITDA of $15 $6 million improvement from the comparable 2021 period.
As was indicated in our earnings press release, we are now reporting adjusted net income and earnings per share biggers to provide further clarity on the effect of the warrant liability to be discussed in a moment stock based compensation and other noncash items. This will provide greater insight to the companys true profitability.
For the third quarter.
Our adjusted net loss was $5 4 million or <unk> 21 per share an improvement compared to an adjusted net loss of $15 million or <unk> 63 per share in the third quarter last year.
Interest expense in the third quarter of 2022 was $6 1 million compared to $3 6 million in the third quarter of 2021.
This was primarily driven by an increase in the amortization of deferred financing fees between periods. As a result of refinancings that took place in the second half of 2021.
During the quarter, we recognized a noncash charge due to the change in fair market value of the warrant liability of $1 3 million.
Again this is a noncash item that fluctuate each quarter, primarily resulting from the change in our share price during the quarter.
Capital expenditures for the third quarter of 2022 were approximately $6 million as we finalize the build out of our fabrication shop during the quarter as.
As we have mentioned in previous earnings calls due to the timing of funding our various project Keystone, Yes, we expect the bulk of capital spend to occur in the fourth quarter of this year.
For the full year, we still expect capex to range between $7 8 million.
And as highlighted last quarter, our cash spend specifically at the operating level continues to improve cash used in operating activity is.
<unk> decreased to $13 6 million through the third quarter of 2022 from $57 million through the third quarter of 2021 sequentially.
Sequentially cash used in operating activities increased from the prior quarter by $11 2 million, primarily driven by increased inventory levels associated with both the startup of our third production line and higher production volume in the fourth quarter.
Turning to our outlook for the full year as Jim already mentioned, we are reaffirming our previously stated revenue and delivery guidance to between 340 and $360 million and 3000 3200 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 Let me conclude by providing an overview of our goals and priorities as we enter the final quarter of 2022 and look ahead to 2023.
First adjusted EBITDA remains a focus for 2022, and we expect that the strengthen in the fourth quarter and allow us to close out the year on a high note.
Satcom as I have already highlighted we remain on track with the expansion of our manufacturing campus in Costar dose and have already completed several important projects.
A third production line is currently in startup and we expect to have a fourth production line at Theyre already starting in the first half of 2023.
These will effectively double our production capacity as well as allow line changeovers to be conducted more efficiently.
We also continue to explore options as it relates to refinancing our debt and improving our overall financial structure. Our continued success and growth will certainly provide us more flexibility and levers to allow this to happen on significantly more favorable terms.
Before turning the call over to the operator, I would like to reemphasize, our optimism for the future.
Even in the face of all the uncertainty surrounding the macroeconomic environment.
As mentioned on our shareholder call in February of this year moving to Mexico has restructured our cost profile, putting us in a better position to succeed in various market environments.
Transition translated to approximately $20 million in annual fixed cost savings last year.
And even after our planned build out of the casinos facility, we expect annualized savings to remain above $17 million.
Looking ahead, we will continue to be prudent and realistic about the potential impacts of a softening market and continued supply chain headwinds.
However, as our plans continue to come to fruition and we expect to be able to capitalize on the next railcar market upswing more so than ever before in our company's history.
We all look forward to completing the build out of the new campus at what the future will bring to us.
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, ladies and gentlemen, we will now be conducting our question and answer session.
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Our first question is coming from the line of Justin long with Stephens. Please proceed with your question.
Thanks, and good morning.
Hi, Jonathan Good morning, Justin.
Maybe to start I wanted to ask about the quarter to date inquiry and order activity and if I look at the guide.
And what it implies for the fourth quarter.
Step up in production. So just wanted to get a sense based on what you're hearing from your customers in the market around demand. If you feel like the backlog can grow as we move into the fourth quarter.
Good morning, Justin Matt here, Yes, I think.
As I reported inquiry activity.
Bid activity has been up and we've got high level of confidence.
And our capabilities to build that backlog as we enter into into next year.
Okay.
Expect backlog to grow in the fourth quarter sequentially.
Sequentially I think.
The other another piece of information to keep in mind is when you look over.
Slightly longer Timeframes, because order intake is not often says can be a little bit lumpy.
When you compare the first nine months of this share to the first nine months of last year, the backlogs up 33% and the order intake is up 37%. So the team is feeling good about the quality and quantity of the sales funnel.
We're in discussions for sure.
Okay.
I know youre not going to provide 2023 guidance today and Jim to your point there are a lot of cross currents in the market right now but.
When you think about that inquiry activity in the pipeline do you feel like there is a line of sight for your production to be Directionally.
Directionally in 2023.
Well, we're going to talk about 2023, when we finish 'twenty.
The fourth quarter of 2022, so we're going to save sort of.
Teasers specific guidance I think for one more call there.
But.
And.
At the heart of your question are we prudent in our timing of growing our capacity.
Every one of US feels the answer is a definite yes.
Keep in mind, it takes time to put up physical buildings equipped them.
And.
So getting the physicals in place.
As a process that takes time and so.
Based on everything we that we did know and everything we currently know we think that timing was very appropriate.
And then as once we get that on as we step star.
Our staff of an uplift.
With people and then begin to produce.
All of that will be matched to what's in the build schedule at the time the other dynamic which is a really good one for us.
As every quarter that goes by we continue to be impressed by the efficiency and amount of product we've been getting out.
The facility that we do have to date so.
So that's been a real positive so.
As we see it right now and said in our comments <unk> got two lines running full or doing a slow careful ramp of a third line as we speak.
That matches, how we see our production playing out.
And whether we keep going and add a fourth line of people or use it to affect changeovers, which will also bring further efficiencies to the business.
That will depend on how the backlog continues to play out along with just how how much more.
Efficient we get at how much more product we continue to produce on the lines we have.
Okay.
Maybe last question for me just in terms of the cost structure I wanted to see if you could give a little bit more color on how much of that pick up youre anticipating gross margins moving into the fourth quarter and then there were a lot of adjustments.
The release last night, so going back to that comment on SG&A can you just give us a sense for what you're viewing as kind of the clean adjusted G&A number that we should be using as the base going forward.
Sure sure I'll go backwards on that one Justin so for the SG&A.
As mentioned excluding stock comp, we believe that is a relatively consistent number will be able to maintain going forward.
On SG&A and then to the gross margin comment.
We won't give specifics on percentages, but we expect to see sequential improvement in Q4 and beyond as we stated previously.
We like where we're headed in 2023.
And our effort is to get back to the same type of margin profile. We had in the first two quarters and we see that as as the runway.
Okay got it thanks I appreciate the time.
Thanks, Jeff Thanks, Justin.
Thank you. Our next question is coming from the line of Matt Alcott with Cowen <unk> Company. Please proceed with your question.
Good morning, guys. Thank you.
Just to follow up on the <unk>.
<unk> your question.
Good to hear that the lower margin order should be completed before year end now in <unk> are we going to have a higher or lower mix of those lower margin cars than we did in <unk>.
The lower margin cars to be a lower percentage of the mix in Q4.
Okay. That's good to know and then 2023, they should we shouldnt have.
We substantially none of those cars should be in 2023 deliveries.
Matt This is Jim.
Yes, I think the simple answer to your question is no those specific cargo as well as certainly a long process through the factory and have been delivered.
And again at the next call our Q4 call.
We'll talk a fair bit about 2023.
Got it.
That's helpful, Jim and Jim and Mike also.
Any help with what percentage of the backlog is the current backlog is for <unk> versus what percentages for 2023 and beyond.
Well I think based on our delivery guidance and the deliveries to date, you can kind of work back that.
That math on how much of the backlog will play out in Q4.
I wasn't sure. If you guys were factoring in what kind of level of orders for same quarter delivery, you're factoring in or is that because lead times. That's irrelevant lead times, I guess or two along for orders taken within the quarter ticket account into deliveries.
Yes.
If I understood. Your question correctly, we really stopped taking orders for the fourth quarter or some time ago.
All because of scheduling and material ordering.
Lead times.
If I understood your question correctly, yes.
Yes, no I think that I think that answers it so okay. So.
Feedback into the.
Delivery guidance and get to a <unk> number.
Of that remaining backlog can you tell us what percentage of that is 423.
Of the remaining backlog with as well.
So.
I'll answer it this way.
The large majority of it.
Okay got it that's good to know.
Then Jim you mentioned freight cost.
Is this a matter of them not moderating as much as you guys had anticipated or did they actually go up.
You were expecting them to moderate.
And you did mention you are looking into ways to alleviate this can you talk a little bit more about.
What kind of steps you are looking at taking.
Yes, I think I mean, I just answer it.
A little bit general.
We've as we've been reporting for several years now.
We think we have.
Some very strong capability on cost reduction primarily its been on material cost reduction.
Now have a lot of those same resources focused on our freight.
And really.
So I don't want to get too specific into it other than freight has become.
Increasing component of our cost structure.
And.
We are now throwing some pretty heavy resource at it.
Because we fully believe theres opportunity.
But I don't want to get into too many <unk>.
Details on that one it's still a little bit early for us.
Secondly, there are some things, we probably rather not share with our competitors.
Got it okay.
And then maybe a broader market question for you Jim in for Matt, Matt I think you mentioned the order activity is still supportive of replacement demand of 40000 cars for the industry.
Which is basically in line I think.
Most people's expectations for this year, but were you talking about even beyond this year because.
I think we're all expecting deliveries to be up for the industry in 2023.
By at least 10000 cars or so are you a bit more.
<unk> on that industry number then recently because of interest rates going up and inflation and economic uncertainty.
Yes, I think Matt.
To your point, we expect to see improved deliveries next year as well, but I think if you look at the five year trailing average and then based on our discussions with customers on a go forward basis.
We are moving into maybe.
Little bit of suddenly different overall.
Average replacement demand and maybe what we've seen in past years.
So I think somewhere the reality is is that when we look at order activity in that $40 range to your point.
Expectations of orders next year.
A little bit of improved particularly related.
Related to deliveries are improved.
But long term I think we're really in that $40 to 45000 <unk>.
Demand cycle for the for the foreseeable future.
Got it and I think Matt I mean from.
Talking to people to industry people. It seems like there is tightness in sometimes even shortages in.
Our broad base of freight railcars is that still the case I mean, certainly the industry utilization number would suggest so but are you seeing still tightness and maybe shortages in certain types of railcars right now.
We are in I would say that if you canvass the major leasing companies Youll see that.
Utilization is in the upper 90 days, it's been widely reported by some of the largest ones.
And there is absolutely tightness in the marketplace on several car types, where.
The demand is certainly outweighing the availability.
Okay got it and then just maybe going back to Mike with a balance sheet question I think.
This is the I think the fourth consecutive increase in quarter end inventory can.
Can you talk about this a bit and how we should think about inventory going forward Mike.
Sure.
As you've seen throughout the year, we've increased production increased deliveries now we've added a third line and as you can see from the full year guidance Q4 is going to be a very heavy quarter, so inventories grown commiserate with it.
But.
Now that we have the third production line out we would expect some normalization of inventory levels going forward until we start up our fourth production line.
Okay and then just.
Our broader balance sheet question I mean, we did see a bit of a dip.
The decline in cash understandable for some of the reasons you mentioned.
How do you feel in general about your balance sheet going into 2023 do you feel like you may need to.
They need more capital.
And the next year or so or just just any broad questions about how you feel about your financial position would be helpful.
Sure I think we feel very good about our financial position, we're positioned for the business in front of US three production lines cash obviously as I mentioned was used this quarter primarily to fund that expansion into the third production line and inventory is at a high level at the end of the third quarter, but in addition to that rate some of that inventory.
Is still steel from earlier in the year when it was placed at higher prices. So you do start to see a relief on steel input costs as you look out into the future with steel coming down as you replace lower priced steel with higher price steel in your inventory.
Okay got it.
Let me just sneak in just one more question as we look beyond Q4.
It's not unusual for a manufacturer to have.
<unk>.
Deliveries weighted to for the first half of the second half or vice versa do you feel like there.
How do you think of the cadence of deliveries in 2023 based on.
Your your orders and your backlog right now.
Yeah, Matt This is Jim and I'll.
I'll start again with we'll talk about 2023 next quarter.
The sort of the accelerated growth.
Deliveries this year I mean, thats been completely what you would expect with.
Our growing business a growing footprint.
Keep in mind Thats the.
Footprint has now been operational for all of just 24 months.
This has been pretty much I think what one would expect with bringing online a new factory and.
After the we started out with one line we added a second we're now bringing online a third line.
No.
No.
And all of this will get normalized as we sort of come up to sort of our natural run rates in the business.
Great. Thank you so much Jim Thanks, Mike Thanks, Matt.
Thank you thanks, Matt.
Thank you we have reached the end of our question and answer session I would like to turn the floor back over to management for any additional concluding remarks.
Well. Thank you all for joining today's call. We look forward to closing out on a strong.
A strong year for the company and preparing for more growth in 2023 and beyond.
And have a good day.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation you may disconnect at this time.