FreightCar America Inc. Q1 2023 Earnings Call
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It is now my pleasure to introduce.
Your host Steven Cole Investor Relations. Please go ahead.
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.
So as defined under the private Securities Litigation Reform Act 1995.
That's attracted to freight car Americas Form 10-K for a description of certain business risks some of which may be outside of the control of the company that may cause actual results to materially differ from those expressed before looking statements.
We 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 first quarter of 2023 is posted on the company's website at freight car America Dot com, along with our 8-K, which was filed yesterday aftermarket with that let me now turn the call over to Jim Burke. Your opening remarks, Thank you, Steve and good morning, everyone and thank you all for joining us today.
Freight car America delivered Q1 results in line with our expectations for the quarter. This included revenues of $81 million on deliveries of 738 railcars and adjusted EBITDA of $2.1 million.
We experience significant sequential improvement in our gross margin driven by the.
The continued ramp up of our Castano, Mexico factory and actions taken to mitigate supply chain challenges, which began to flow through during the quarter.
Also within these results we completed three line changeovers or one per line.
More than we would typically expect in a quarter.
At this point, we remain quite confident in the guidance provided for the full year.
Matt will cover our sales highlights in more detail, although I would like to point out that our inquiry levels and order intake continued to be very strong with a book to bill ratio of 2.6 this quarter.
Our production schedule is essentially full for the remainder of this year and we are now very much focused on building, our order book and setting business goals for 'twenty 'twenty four.
The multiyear restructuring, we undertook starting with the closure of the Danville and Roanoke, and finally shows factories to remove fixed cost and I need a capacity.
And simultaneously create the campus. We now have in Mexico is directly resulting in freight car America being able to win the business best suited for the company.
To a much greater degree than at any time at our recent history, we are making better commercial decisions and no longer living in the days when excess of capacity clouded our decision making.
When we last spoke I shared our strategic priorities for fun and funny three and their freight car America team remains laser focused on executing these initiatives.
I would like to update you on just a few of these priorities.
First we have continued to expand our manufacturing campus both in terms of overall capacity and equally importantly capability.
To be clear on the capacity our ball has always been to run four production lines and build 4000 to 5000 cars per year.
This is expected to be 4000 to 5000 units a profitable business and represents a reduction of approximately half of the capacity available on the prior U S footprint.
That capability, just mentioned refers directly to efficiency and vertical integration.
Our goal is to be the best manufacturer in the industry and even more than that to be a world class manufacturer irrespective of industry.
Making everything we can in house as part of this it gives us more direct control over our supply chain quality and cost.
We are on pace to complete the castano campus as currently envisioned by the end of summer at which point, we will have the fourth production line available.
Our fabrication shop fully outfit at.
And additional infrastructure and material delivery and handling and the exterior areas of the campus.
We have put as much thought as to how material is received unloaded processed and then take them to the lines as we have to the actual construction of the railcars themselves.
Our focus starting about the end of summer.
Will it be simply on building railcars and not the combined activities are building, both railcars and the approximately million square foot facility.
We're getting very close to this day.
As to our balance sheet and as we highlighted during our last call. We executed a term sheet for a very important refinancing during the quarter with our current financing partner and affiliate of Pacific Investment Management Company.
This transaction is expected to close on May 22nd.
In brief and as a reminder, on what this transaction will do for the company. One it will provide the company with approximately $15 million in additional cash to invest in new initiatives to accelerate the next phase of our growth too.
Two well provide the option for the company to pay the dividend on the preferred stock on a payment in kind or pik basis, which equates to approximately $10 million per year improvement in operating cash flows.
Three we will also move from a variable rate loan structure on the exist existing term loan to a fixed dividend on the preferred and finally by eliminating most of the debt from our balance sheet. This final transaction will place us in a better position for further and lower cost financing.
In the future.
I'll now turn the call over to Matt for a few commercial comments Matt. Thank.
Thank you Jim and good morning, everyone. We started off the year on a strong note and continue to be encouraged by the strength of the order activity and demand for our products by both long term and new customers for the quarter, we booked orders for 1960 railcars valued at $201 million and this represents a book to bill.
Ratio of 2.6, and nearly 130% increase in order bookings versus Q1 of 2022.
We ended the quarter with a backlog of 3667 railcars.
Approximately $413 million.
We're now very much focused on booking orders for 2024.
We are encouraged by the continued strength in order inquiries and the quality of the pipeline overall, which includes a broad range of car types.
Turning to overall market conditions, our railcar lessor customers report improvement in lease renewals and increased lease rates, along with near full utilization of their fleets.
Railcar stored have leveled off at their five year average with over 80% of the fleet inactive use.
Shippers railroads alike continue to evaluate their fleet needs to do.
Due to near term railcar Retirant retirements all of this has led to a tighter our supply in many segments in an environment favorable for securing higher quality business.
Railcar loadings have yet to return to their 2019 levels, but recent reporting by the association of American railroads for the first quarter of 2023 indicate key service metrics, including train speed dwell and cars online trended favorably for the first quarter.
Further advances are needed.
Continued and service improvement will drive more freight to rail and ultimately support more demand for new railcars.
For now and as we stated during last earnings calls we remain in a business cycle. It is largely tied to replacement demand and align with 2023 forecast deliveries of <unk>.
Tween 42040 5000 railcars.
While there continues to be some economic uncertainties, our sales pipeline remains robust with customer inquiries and conversations signaling healthy railcar demand across a broad range of car types we remain.
Focused on discipline and on deals that deliver both value to the customer and margins that are aligned with our financial goals.
With that I'll turn the call over to Mike for a review of our financials Mike.
Thanks, Matt and good morning, everyone. We are pleased with our first quarter financial performance as our team delivered strong operational execution.
For building and delivering railcars in line with our anticipated production schedule.
Consolidated revenues for the first quarter of 2023 totaled $81 million with railcar deliveries of 738 compared to a $129 million on deliveries of 1150 railcars in the prior quarter and $93 2 million in the first quarter of 2022 on railcar deliveries of 783 and <unk>.
Jim already mentioned, we also undertook multiple lines changeovers in the quarter.
Gross profit in the first quarter of 2023 was $7 5 million with a gross margin of nine 2% compared to gross profit of $4 6 million and gross margin of three 6% in the prior quarter and gross profit of $10 1 million and gross margin of 10, 8% in the first quarter last year.
We experienced significant improvement in our profitability sequentially largely due to actions taken to mitigate supply chain challenges. We expect to see continued improvement in our margin profile. During the remainder of 2023 from these efforts as well as manufacturing efficiencies that we'll realize as we complete the expansion of our facility over the course of the summer.
SG&A for the first quarter of 2023 totaled $6 4 million down from $10 7 million in the first quarter of 2022.
In the first quarter of 2022, we recorded a large noncash fair value adjustment for stock based compensation.
Sequentially SG&A in the first quarter of 2023 was consistent with the fourth quarter of 2022.
Consolidated operating income for the first quarter of 2023 was $1 1 million.
Impaired to an operating loss of 655000 in the first quarter of 2022 inch.
The increase in consolidated operating income in the first quarter of 2023 was primarily driven by reduction in SG&A between the comparable periods as previously discussed.
In the first quarter of 2023, we achieved adjusted EBITDA of $2 1 million compared to 1.2 million in the prior quarter and $3 3 million in the first quarter of 2022.
Again, the sequential improvement in adjusted EBITDA was driven by the actions taken in the back half of 2022 to address supply chain challenges that we are now realizing.
Impaired to the prior year's reduced volume was the primary driver is we had three changeovers in the first quarter of 2023 compared to one in the first quarter of 2022.
For the first quarter 2023, our adjusted net loss was $5 7 million or 21 per share compared to an adjusted net loss of $3 7 million or <unk> 15 per share in the first quarter last year.
Adjusted net loss excludes the impact of nonrecurring income of 613000 due to the change in fair market value of the warrant liability that is directly affected by movement in our share price during the quarter.
Capital expenditures for the first quarter of 2023 were approximately $2 million as we continued expanding our manufacturing footprint.
As previously communicated we will have a step up in capital spend for the remainder of this year and expected to be approximately $11 million for the full fiscal year.
This increase in Capex will support additional investments, including increased blast and paint capacity.
Our fourth production line and further expansion of our in house fabrication capabilities.
With that financial overview, I'll now turn the call back over to Jim for a few closing remarks.
Thanks, Mike.
I'll now provide a brief overview of our outlook for the remainder of this year where.
We remain very positive on the position, we are creating for ourselves within the market.
And also demand for railcars.
Our production schedule for 2023 is essentially full and now growing into 'twenty 'twenty four.
And the number of sales inquiries, we continue to receive is very encouraging.
The clarity we have on our anticipated results for the remainder of 2023 gives us confidence in reaffirming our previously stated guidance ranges.
As a reminder for the full year 2023 we are forecasting revenue of between 400 million and $430 million up approximately 14% year over year at the midpoint of that range.
This projection is based on expected deliveries of between 30, 430, 700 railcars, an increase of approximately 11, 5% at the midpoint of that range.
We are also forecasting adjusted EBITDA guidance of between 15 million and $20 million for the full year.
This represents a year over year increase of 108% at the midpoint.
Finally, we expect positive operating cash flow for the second consecutive year.
For the balance of this year our team is focused on executing our production schedule.
Improving on an already impressive manufacturing footprint and cost us Bill.
Building our backlog even further in the next year and driving profitable growth.
And all of this will open opportunities for us to continue to improve our capital structure.
That concludes our prepared remarks, and I'll now turn the call over to the operator, so that we can address questions.
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Yeah.
Okay.
Our first question comes from Justin Long Stephens, Inc.
Please go ahead.
Thanks, and good morning.
Good morning.
Good morning, I wanted to start with a question on the production outlook you alluded to that line changeovers you had in the first quarter. So I was just wondering if you could give a little bit more color in terms of the guidance and how you're expecting production to ramp over the course of the next set.
Oral quarters or maybe it's a situation where you know the implied production for the remainder of the year should be pretty consistent to Q4, Q, but I'd I'd love to get your thoughts around that.
Yes, yes.
Yeah, Justin so.
Are.
Going forward, we would expect the next couple of quarters to look pretty consistent to Q1.
With a further ramp up in Q4 on deliveries.
Okay, Okay got it that's clear.
Yeah.
I'm, sorry, just ask Jim Hi, so yeah, so kind of a smooth.
Smooth next you know consistent next couple of quarters on New unit deliveries and you know as Mike Just said then a ramp in the fourth quarter.
On the AR, that's on the unit count and.
On the margin piece of it we expect a continued to see improving margins for the next couple of quarters as well.
Well that kind of data into my next question about the cadence of gross margin. So is it reasonable to expect sequential improvement each quarter over the remainder of the year or is there anything in terms of mix or our other line changeovers. The rest of the year that we should be aware of.
Yes.
Yeah. So we've been doing this so long I anticipated your question.
It will see improvement over the next couple of quarters are you know will go out that far.
And.
So yes.
Okay great.
And then in terms of the inquiry levels and pipeline. It was encouraging to hear that you're still seeing a good amount of activity on that front, but you know given the fact that <unk>.
823 production is essentially full and you do have some macro uncertainties out there any thoughts around just order flow and in some of those inquiries converting to orders for the next couple of quarters do you think it's reasonable to expect a little bit of a slowdown versus what we have.
Seen in the last quarter or two or do you think this order flow can be sustained given the replacement needs that are out there yeah.
Yeah, I think I think your comment on the replacement needs. It hits the nail on the head right. So I think we expect based on inquiry levels in our conversations with customers to have relatively consistent activity from quarter to quarter there'll be some fluctuation based on timing of needs.
The customer's own approval internal approval processes, but we're not expecting a significant significant changes from quarter to quarter.
We think you know based on the discussions we're having the customer base, we've coveted that AR will have consistent order activity and interest in our in our product offering.
Okay, great great to hear and last one for me is on the balance sheet, Jim I think you mentioned in <unk>.
Expectations for operating cash flow to be positive. This year do you think free cash flow will be positive as well.
Hey, Justin this is Mike.
We do expect operating cash flow to be positive.
I think free cash flow will be a little tougher given we're still expanding that facility as you mentioned, there's an $11 million of Capex.
This is the last year no major capital expenditures to build out that facility down there. So I think that one's a little harder for us to look at.
As we complete the year.
Okay understood I'll leave it there I appreciate the time.
Thanks, Jonathan.
Next question comes from Matt.
P. J Cohen. Please go ahead.
Good morning. Thank you just wanted to understand the dynamic of the backlog and orders going forward are all the orders you're gonna be taking going to be for 2024 or beyond because you're booked for 2023.
Yes, that's that's accurate math.
So I guess, if that's the case you only need about 2900 cars from your current backlog to cover this year's delivery yet even if we take the high end. So you're left with about 700 cars are those mostly for 'twenty to 'twenty four deliveries.
Yeah, We've got we've got orders that go into 'twenty four and beyond so that's your math is factual.
But it's okay.
The great preponderance is 'twenty 'twenty four of what's left from correct.
Okay got it.
And then your order as you know.
That's it's a good order number which is somewhat inconsistent with what we've seen with the other builders are you all.
Order orders look look more solid or their coal car orders and.
And the number.
No.
Well you know, we don't comment on car type, but as we just there's no coal cars than that yeah.
I'll have to say you know just to build on some comments that Matt made or Matt.
The industry seems to be pretty steady around replacement demand levels as everybody out there is articulating.
The demand for our railcars as you.
In all a real positive certainly for us and.
You know so you know not every quarter is going to be like Q1, with a 2.6 book to bill ratio, obviously, but.
Where what do you feel you know very good about not just the number or.
Total size of the inquiries, but also the quality of the discussions and you know the quality of the details behind these discussions so we feel pretty good.
Okay.
Good to know Jim.
Yeah, I know that you know coal cars have seen somewhat of a recovery I mean, if you're talking about lease rates from the ban there is a bit of tightness do you think that they will actually see coal cars getting built in the next couple of years or no.
So Matt I'll just share that there had been inquiries out there it's been quite sometime since gold cards have been built the fleet is pretty well utilized <unk> seen some fluctuation in loadings.
It seems given the current environment politically just I guess, mostly politically it seems unlikely that we would see a significant increase in demand I think eventually they will have to be some level of replacement I don't think coal goes away completely but we don't view that car type is something that is a prime.
Mary focus long term and where you'll see significant demand.
Oh man I would just summarize the whole coal car discussion.
You know, we're still presumably the.
First phone call that someone would make went in the market for new coal cars.
We're never going to forget the past or forget you know that piece of our business.
But I think more importantly, what the last several quarters of order intake.
Quite clearly demonstrate.
The company has successfully transitioned from the days of coal car centric to the broad portfolio. We now have you know I think that.
That's a job well done at this point.
Yeah, no that makes sense I mean, but.
That said I mean, you you would imagine that at some point there wouldn't be.
Modest replacement need if coal is not going to zero, which it's not.
Definitely definitely metallurgical coal is not going anywhere and thermal coal will have a secular decline story, continuing but well need to call.
One other question.
<unk>.
You know many in the industry are expecting deliveries to be 40 to 45000 cars. This year with next year being in a similar range, but maybe towards the lower end of that range Madden and and Jim I'd Love to hear your thoughts on where you think industry deliveries will be this year and next year.
Well I think as I stated in my comments I think you know are probably a little bit closer to the high point of that range 40 to 45, 42% to 45, I think as we look out and following years and the cycle. We're in a replacement demand I think it will stay relatively consistent in that 40 to 45.
Range, there could be some up years and some years, maybe not quite hitting it but I don't see anything in the marketplace. Currently that indicates a strained from those numbers as we look out on the horizon.
Okay and then one question on the labor side, sorry, if I missed this in your prepared comments, but a lot of the builders have had issues with.
Access to labor.
Whats the labor picture from your perspective.
Yeah, Jim again, we feel good about our labor as we've commented in a number of times our workforce is a key strength of the company.
You know as we've ramped up our footprint from essentially nothing three years ago to today.
We brought on around 1500 employees in Mexico, and a skilled employees and you know we feel good about.
You know the labor market as it relates to our demand and the ability to continue to support you.
Now at least reasonable growth expectations.
Jim if we take labor and the rest of the supply chain disruptions and access to components and all that stuff together or do you feel like.
It's largely behind you or do you feel like more efficiencies can be achieved in the coming quarters and you know yeah go ahead.
Love that question look you know who were very serious and they're not just words when we say our goal is to be the best manufacturer in the industry and to be world class by any industry standards.
We are always going to be improving in every aspect including efficiencies.
You know keep in mind.
We are still constructing a essentially 100 acre a million square foot campus around us as we build railcars.
And you know that piece of it will as I said earlier, while the dust if you will little subtle about sometime this summer and then we can focus just running improving and continuing the dial and the operations are we're just still breathing.
Our large fabrication shop in fact, we're already working.
Working to double the capacity, we got out of the fab shop, we're doing the same in our paint shop, all these things make us more efficient.
We're also now very focused on how we receive and process incoming materials.
So no our continuous improvement is going to be always a part of us.
I think it should be especially meaningful.
All over the next 12 to 24 months as we really dial into its new campus.
Okay. That's that's helpful and just one last question Jim.
I know you guys have largely maintained your guidance basically but it sounds like your tone has gotten more positive AR, which was kind of surprising given all the macro stuff and interest rates and rail traffic being down our rail service improving a bit is the source of this and the Siem parents improvement in.
Tone, you're a high inquiry level in your solid order number.
Any more color on this would be helpful.
Yeah.
So great question I'm glad you noticed the time, because we are positive.
Hum.
What we've done over the last three years now.
Is completely reengineer and retool the company.
We were carrying three factories not that long ago with capacity for 10 or 11000 railcars.
And not all of it was a very fixed cost burden. Some as we've talked about any number of times, but it also put us in.
In a position where every order was a kind of a must win an important piece of business to try to get just a.
Keep something running through you know all of the available capacity.
We're done with those days and what we have now is a very cost efficient business with a very efficient factory and it's right sized for what we view as the.
The lane, we're going to play out in the industry and so between adjusting our size right sizing our capacity.
And now being able to focus on smart and best business to fill the <unk>.
New capacity level are it's all just working and that's where you know the confidence, especially as we look out because we are still you know, finishing construction on the on the new campus and that's soon to be behind us and so.
You know, we think it's just going to keep getting better.
Got it thank you very much Mike Thanks, Matt Thanks, Mike.
Thank you Matt.
There are no further questions at this time I would like to turn the floor back.
Richardson for closing comments.
Thank you all for joining our call today have a great day, and well look forward to talking to you.
On the Q2 call. Thank you.
This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Yeah.
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