Q2 2023 FreightCar America Inc Earnings Call

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Yeah.

Welcome to the freight car America second quarter 2023 earnings conference call. At this time all participant lines are in a listen only mode.

For those of you participating on the phone on the conference today, there will be an opportunity for your questions at the end of today's prepared comments. Please.

Please note that this conference is being recorded and audio replay of the conference.

He will be available on the company's website within a few hours after this call.

I would now like to turn the call over to Chris So day with Richardson Investor Relations. Please go ahead.

Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Mike Riordan, Chief Financial Officer, Matt Tonn, Chief Commercial Officer, Nick Randall Chief operating officer, I'd like to remind everyone that statements made during this conference call relating to the Companys expected.

Performance future business prospects or future events or plans may include forward looking statements as defined under the private Securities Litigation Reform Act like 95 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.

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 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 second 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 after market with that let me now turn the call over to Jim for a few opening remarks. Good morning, everyone and thank you all for joining us today freight for America.

<unk> delivered an impressive second quarter results as we continue to pursue and realize our efforts to become world class at what we do.

Revenues for the quarter increased 56% year over year to $88.6 million on deliveries of 760 railcars.

During the quarter, we continued to work to finish the construction and the dialing in of our still new manufacturing operations and thereby improve performance what starting in the second quarter produced a very respectable gross margin of 14.6%.

I will add that the impact of foreign currency headwinds absorbed during the quarter make our results all the more commendable.

And best of all we still have much much more that we plan to do to further leverage our operations and further improve the efficiencies.

As we have stated before our goal is to be the best manufacturer in the industry setting new standards for our peers in quality efficiency and overall performance.

This quarter I characterize these efforts well, allowing us to achieve strong results, while delivering even stronger values to our customers.

As part of our commitment to operational excellence, we announced during the quarter. The appointment of our first Chief operating officer, Nick Randall.

Nick brings extensive manufacturing experience and a track record for delivering superior customer satisfaction at Premier companies.

He is a great addition to our leadership team and will guide us to even higher levels of performance that goes with us on the call today and will be available as part of the Q&A.

After approximately four years of construction and three of those years in which we were simultaneously producing railcars.

We are finally nearing completion of the vertically integrated manufacturing campus thing to start ups.

And just think about this for a minute.

In the midst.

The extremely challenging business conditions, and our three years long global pandemic.

The freight car America team envisioned and undertook to complete a state of the art manufacturing campus in Mexico.

Got it online on time.

Transfer at all U S railcar manufacturing operations to Mexico.

And is now generating the best manufacturing margins in the business.

I might add by a substantial amount.

With the completion of our World class fully functional facility. We can readily produce 4000 to 5000 cars per year without strain and expect to maintain industry, leading manufacturing margins.

As we defined it in prior calls to us World class means achieving the best quality.

That's the efficiency that's the on time delivery, while preserving the flexibility to produce different types of products.

During the quarter, we reached another key milestone by delivering on our planned exit from the leasing part of the business and successfully selling off the majority of our remaining lease fleet, which included just over 400 cars.

Furthermore, as we have discussed during the last couple of calls in the quarter. We completed the transaction with Pacific investment management company that converted our term loans and two preferred shares.

These two steps the excess probably saying in a financing transaction Mark significant progress as we work to further strengthen our financial position yet.

The debt on our balance sheet has been reduced to that of just the a b L.

Which gives us much greater financing flexibility for the future and allows the team to remain focused on core growth initiatives.

So in total the second quarter, representing an important progress in driving our revenue growth margin expansion and strengthening our balance sheet.

At this point I'll address our guidance for the year, we are raising our previously stated full year adjusted EBITDA guidance from our guidance range from between 15 million and $20 million.

To a range of between 18 million and $22 million.

In addition, we are reaffirming our fiscal 2023 guidance for revenue to be in the range of between 400 million and $430 million.

What just based on forecasted production of between 30 430 700 railcars.

I'll now turn the call over to Matt for a few commercial comments.

Thank you Jim and good morning, everyone during the quarter, our level of inquiries order activity and demand for our products remains solid with industry demand largely tied to the replacement of easy railcar fleets.

The second quarter 2023, we closed orders for 381 railcars valued at $51 million with first half orders totaling 2341 railcars valued at 256 million.

This represents an order increased 23% versus the first half of fiscal 2022.

We ended the quarter with a backlog of 3288 railcars valued at approximately 382 million we.

We had a strong quarter with our three current production lines, Julien <unk> 8 million and adjusted EBITDA as Jim mentioned, completing our fourth production line at custodians is insight.

The team continues to build our pipeline for fiscal 2024, and having a fourth one in available should increase our commercial flexibility.

Although weakness in freight car loadings, and the overall macroeconomic environment conditions pose market uncertainties, we affirm industry forecasts railcar deliveries of 45000 railcars in 2023.

Our sales pipeline remains strong with customer inquiries, indicating a railcar demand across a diversified range of car types. We continue to see tight car supply in some segments due in part to high utilization of our lesser customers' fleet.

Combined with railcar retirements.

Our continued exit from leasing supports our unique position as a pure play manufacturer.

With all of our focus on achieving manufacturing excellence and deepening our customer relationships with a high percentage of our customers being direct lessors of railcars, our position as a fully committed supplier and noncompetitive freight car America continues to improve and increasingly attractive partner for these customers.

On the commercial front, we are maintaining a steadfast focus steadfast focus on operating with discipline prioritizing deals that bring substantial value to our customers suit, our business and align with our strategic goals.

I'll now turn the call over to mitral for comments related to our financial performance Mike.

Thanks, Matt and good morning, everyone.

As Jim discussed in his opening remarks for the second quarter, we delivered significant top line growth gross margin expansion year over year.

Consolidated revenues for the second quarter of 2023 totaled $88 6 million with railcar deliveries at 760 compared to $56 8 million on deliveries of 468 railcars in the second quarter of 2022.

Gross profit in the second quarter of 2023 was $13 million with a gross margin of 14, 6% compared to gross profit of $6 6 million and gross margin of 11, 6% in the second quarter of last year.

Well, partially offset by the negative impact of foreign currency fluctuations, we continue to see improvement in our margin profile from the realization of our planned manufacturing efficiencies at our cause Daniel's facility.

SG&A for the second quarter of 2023 totaled $5 9 million up from $4 1 million in the second quarter of 2022, driven by stock based compensation that increase due to a larger movement in the share price during the second quarter of 2022 first the change in share price during the second quarter of 2023.

Moving forward SG&A should be more consistent as we converted certain stock based compensation awards during the quarter from cash to stock settled instruments. This move will eliminate an additional $3 $2 million of liabilities that existed at the beginning of the year that had been subject to mark to market accounting each period.

Consolidated operating income for the second quarter of 2023 was $7 7 million compared to operating income of $2 5 million in the second quarter of 2022.

The increase in consolidated operating income in the second quarter of 2023 was primarily driven by increased gross profit.

During the quarter, we sold a large portion of our legacy lease fleet, which resulted in a $622000 gain on sale and proceeds of approximately $8 $5 million.

Proceeds were used to both fund the continued build out of our Dystonias campus as well as to settle a revolving credit facility that was tied to a portion of our lease fleet.

Additionally, we refinanced our term loan to a preferred share issuance during the second quarter of 2023 that resulted in a $17 $8 million loss on debt extinguishment.

Really offset by a $2 $9 million gain on extinguishing our lease fleet credit facility for a net $14 $9 million loss on debt extinguishment.

The actions taken this quarter to monetize their legacy leads sleep.

Refinance our term loan and convert certain stock based compensation awards are consistent with our ongoing commitment to strengthen our balance sheet.

When combined with our strong gross profit driven by our focus on operational excellence. This should enable us to take advantage of the lower cost of capital in the future and growth focused opportunities.

In the second quarter of 2023, we achieved adjusted EBITDA of $8 million compared to $2 3 million in the second quarter of 2022.

I'm merely driven by increased volume and continued supply chain and manufacturing efficiencies realized by our operating teams.

For the second quarter of 2023, our adjusted net income was $2 $7 million or <unk> <unk> per share compared to an adjusted net loss of $6 $2 million or <unk> 33 per share in the second quarter of last year.

Capital expenditures for the second quarter of 2023 were approximately $3 million as we continued expanding our manufacturing footprint.

Once the Mexico build out is completed capital expenditures should decrease considerably.

We expect recurring capital expenditures to be approximately half to three quarters of a percent of revenue going forward.

With that financial overview I'd like to now turn the call back over to Jim for a few closing remarks.

Thanks, Mike.

They're all our second quarter performance and results were strong.

Testing to the inherent qualities of our efforts over the past several years.

As we look ahead to the second half of this year. The team remains dedicated to seamless execution and timely delivery of our current commitments.

And continuing to show an improved level of financial performance.

We're excited by the prospects of our future the team we have and continue to build.

The manufacturing campus now nearly complete and an array of growth topics that may come to fruition.

Well the industry macro economy may generate questions <unk> concerns regarding the near term what is certain is that the freight car America team will deliver on whatever et cetera, its collective mind on.

Our team is determined and committed to setting the right goals for superior operating excellence customer satisfaction and growth.

And then realizing these goals.

I want to thank our entire team for their hard work and you for your support and for joining US today as we look to deliver on our strategic objectives and continue to grow.

That concludes our prepared remarks, and I'll now turn the call over to the operator, so we can address your questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. 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.

Pick up your handset before pressing the star keys are.

Our first question comes from the line of Justin Long with Stephens Inc. Please proceed with your question.

Yeah. Good morning, everyone. This is on for Justin.

I wanted to start with a question on your production outlook for the remainder of the year.

You maintained your full year delivery guidance, which implies just over 2000 cars delivered in the second half of the year could you give us a little color on your expectations on the cadence of those deliveries as it pertains to the third quarter and fourth quarter.

Yeah.

Mike do you want to address that sure.

We see the 2000 spread well will not be even Q4 is gonna be a little heavier than Q3, but consistent with the pass we're not going to get very specific guidance on the number of deliveries, but we will see the ramp up as we complete the <unk> facility.

Okay. Thanks, and maybe I can follow up with a question on gross margins you know in the first quarter call. You. You noted that you expected sequential margin improvement through the remainder of the year given the meaningful step up we saw here in the second quarter could you give some color around your expectations for third quarter and fourth quarter.

As it stands today.

Brady this is Jim.

Try to address your question this way.

Q2, obviously it was a great quarter for that business that really demonstrates what the capability of the businesses at this time.

And that was really driven by.

Operational excellence at the factory.

It's also of course as every quarter as it was influenced by a particular mix as well so this quarter.

It was especially strong.

And I think the so adjusted EBITDA per vehicle produced was about $10500 per car. So that's what that's a very big number.

And if you look at the guidance provided for the rest of the year that steps down a little bit.

And you know.

You can do the math on that so I think in total the takeaway out in the gross margin story as the company.

<unk> expects to perform at a higher level of gross margin that's been performing at but this quarter was a particularly nice for us.

Okay, great that makes sense, maybe I could just finish with a question on some of your order expectations over the second half of the year you mentioned in the release that orders were weaker because of timing could you give a little color around that are you expecting orders to pick up in the second half relative to the first half. Thanks.

Let me start with that and I'll turn it over to Matt.

The.

A smaller company, obviously, a couple of orders can make.

Quarter to quarter and take either like.

A bigger or smaller and Wow like you, we pay attention to our quarterly order intake its probably a little bit more.

Helpful to look over a slightly longer periods of time, if you look over the first half our book to Bill ratio. It was about 1.6.

So I'll just process thus.

Before turning it over to Matt that timing is important and it it particularly.

Inflow and says you know this particular metric in a in any one quarter, but Matt if you want to comment on me.

The quality of the pipeline, Yeah, Youre discussion, yeah, Brady I think probably the best way to answer it is when we think about the current pipeline. The sale someone we have this established the conversations we have with customers we expect.

Strength in order activity as we go out for the rest of the year.

Okay Jim.

To Jim's point, it's really about timing and.

Customers are getting through all of their internal processes for approval, sometimes just pushes things out that's all.

Okay, great that makes sense. Thanks for the time guys I'll leave it there and pass it along.

Thanks, Meredith Thanks for any thank you.

Yes.

Thank you. Our next question comes from the line of Matt Alcott with TD Cowen. Please proceed with your question.

Good morning, Thank you Jim.

I want to understand the capacity question a bit more I think you mentioned one sockets Donald.

And running your capacity goes up to four to 5000.

Cars per year.

When does that kick in that incremental capacity that total output capability does it kick in like in the second half of this year or next year.

Well, so hi, Matt.

Think about it this way having the the.

The plant done you know sort of think of it as putting shovels down which we're very very nearly at that point now and the factor in the campus.

Well have a fourth line available they expect over the next really weeks or months.

And then it's how we choose to use that line.

And then it's going to be whether that fourth line is actually producing railcars are being used.

As a swing line in which case well.

We're ramping up on an empty line, while we're ramping down on a producing line and move people. However, we use that and well you know ultimately use it.

And both of those ways, it's enormously beneficial to the business. So from a pure capacity standpoint, as you know is it very much depends on what you're building.

But as we said in the past and I said in the prepared remarks today, we feel.

You know I'm very comfortable of.

Being able to put out Florida 5000 cars per year, if we're in fact utilizing all four lines.

And therefore, not utilizing all four lines on using that fourth line.

More as a swing line as we call. It then it's it's additional efficiencies on.

Ill.

Yeah, the the that business coming off of the other three.

Because you're right you're shrinking the last time in between changeovers.

Yes, no that makes sense.

Hum.

So.

Can you also maybe talk about what percentage of your current backlog is for beyond 2023.

I don't think we have that in front of us at the moment, but.

I think you can kind of do the math with the ranges we've given you.

Uh huh.

You have a backlog in dollar value on the books as of June 30, Yes, and you obviously have our.

You can back into our second half delivery guidance from the full year number.

No.

Yes, the only variables.

Hard to gauge of the order activity in the second half and how much of it would be for like how much are you assuming of the order activity in the second half would be for the first time he or delivery.

Well so so at this point.

Our our fiscal 'twenty three that business for all practical purposes is locked and loaded and booked.

You know, especially when you factor in a supply lead times.

Oh, sorry.

Yeah go ahead.

Yes, Jim I mean, it's good to see that the order activity is still the order and inquiry activity is still solid you had obviously very strong orders in the first half.

Yes.

I guess, it seems pretty feasible to grow deliveries next year pretty meaningfully.

Right.

Well.

At this point, Matt I think you know where we're having a.

Earnings call on the quarter ended June 30th 20, twenty-three and I really don't want us to get ahead of ourselves and start talking about 'twenty 'twenty four just yet.

In terms of the available capacity available capacity is certainly there to do more cars.

They understand as well as the available capacity will be there on a similar order intake to do it with another degree of efficiency because of that swing line concept.

But I'd, rather we would really be speculative to start talking about 2024 at this point, so we're not ready to do that.

Okay fair enough.

Maybe just a couple of more slightly more nitty gritty questions. The ASB went up by 3% is there it's just normal mix stuff.

Yeah, that'd be normal that's mixed driven Matt.

Mhm Okay.

And I know you said the order activity has been has remained pretty solid did you guys receive orders in July and the first week of August .

Well report on that in the next quarter.

It's something we're talking about next quarter.

[laughter] mix makes sense Jim.

Okay.

Got it I think thats it for me, thanks, so much and great quarter appreciate it.

Thanks, Matt Hey, it's talking to you Matt.

Before we end the call I would like to just take a minute and introduce Nick to everybody out there and give nik just.

Couple of seconds here to say a few words.

Thanks, Jim and good morning, first and foremost we've excited enthusiastic about joining the team.

He joined freight car market, because what I see is an incredibly potent mix of unbelievable success and value creation.

We think about it we are an organization with over 120 years of history foundational player in the industry in which we operate but also an agile complete thats just the last four years has gone from breaking ground in Mexico. It's the construction of a flagship campus and simultaneously installing a comprehensive operating system with industry, leading capabilities that deliver increase.

The levels of value from our operations in casinos.

It's really important to me that we continue to build on what we have done is to continually focus on delivering an increasing level of customer satisfaction and to me that comes down to the relentless pursuit of operational excellence across all of our operations and support processes.

It really is a privilege to take on this role as Chief operations Officer. My team has an incredible level of talent fueled by decades of experience in building great freight cars I'm truly proud of what the team has delivered in the second quarter, Jim Mike and Matt I've covered all of those details already and I look forward to continuing on this journey, leading my team. It's a great success the benefit of freight car America.

Thank you, Nick and where again all very fortunate to have you on the team.

That concludes our our discussion for this morning. So once again. Thank you all very much for calling in and we look forward to talking to you again on our Q3 call. Thank you.

Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.