Q3 2023 FreightCar America Inc Earnings Call
Greetings and welcome to fight Car America third quarter earnings Conference call. At this time, all participants are in a listen only mode.
Brief 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 at a couch. It is now my pleasure to introduce your host Victoriana Grossman Investor Relations. Thank you Mr.
You may begin.
Thank you and welcome joining me today are Jim Meyer, President and Chief Executive Officer, Mike Riordan, Chief Financial Officer, Mike, Matt Tonn, Chief Commercial Officer, and Nick Randall Chief operating officer, I'd like to remind everyone that statements made during this conference call relating to the company's expected future for four.
<unk> future business prospects or future events or plans may include forward looking statements as defined under the private Securities Litigation Reform Act of 1995.
Participants are directed to freight car Americas Form 10-K for a description of certain business risks some of which maybe outside of the control of the company that may cause actual results material no.
The forward looking statements.
We expect to lead 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 third quarter children twenty-three is posted on the company's website at freight car America dotcom.
Along with our 8-K, which was filed yesterday aftermarket with that let me now turn the call over to Jim for opening remarks, good morning, everyone and thank you all for joining us today.
Freight car America delivered another quarter that highlighted our teams operational and commercial discipline.
Contributing favorably towards our continued focus on enhancing our quality of earnings.
This comes despite had ones in the quarter related to the Hull of railroad services in Mexico due to migrant issues that limited shipments as.
As well as three large line changeovers, which together muted our top line.
Revenue generated during the quarter decreased 28% year over year to $61 $9 million on deliveries of 503 railcars.
With lower than expected and both simply timing related.
At the same time, we expanded our gross margin profile by an additional 30 basis points from last quarter.
Having an industry, leading 14.9% during the third quarter.
Adjusted EBITDA increased versus the same quarter of the prior year to $3 $5 million or approximately $7000 per railcar.
I am extremely pleased to see the fruits of our labor from the last several years begin to materialize, particularly in the face of a more muted top line driven by the aforementioned headwinds.
The operational groundwork we laid in our commercial groundwork. We continue delay is we believe spot on for this company.
Most importantly, while we do not expect progress to be achieved in a perfectly straight line well.
We do believe there is ample room to continue to improve the quality of our business. These are the gross margin and profitability per railcar.
This belief along with US now being in a position to scale the business creates the potential we have been working towards.
The completion of the fourth production line at our customers' manufacturing campus during the third quarter signifies the long anticipated completion of the facility.
And all of US are beyond pleased I am beyond proud.
Freight car America now has the capacity to seamlessly manufacturer annual volume ranging from 4000 to 6000 railcars across four production lines.
We are now starting up this fourth line and then yet another milestone moment for the company, where you will see the first deliveries produced from this line in the fourth quarter.
When we speak about operational excellence for us it is invariably measured in gross margin and profitability per railcar.
To put a finer point on operational excellence and what it means to US we are talking about railcar design and the ease in which our railcars can be manufactured.
Supply chain management, and achieving the right levels of vertical integration.
The quality and flexibility of our tooling jigs and fixtures and.
And of course, how we train empower and mobilize our nearly 2000 production team members.
This is the bedrock of our company and represents continued and we believe significant opportunity in an industry with deep traditions.
Complementing the company's growing and successfully differentiated position and operational excellence is our concurrent work to establish a unique commercial position.
It is important that we began to share another and equally important undertaking and the remaking of freight car America.
And that is where and how we set and an industry dominated by a very small number of much larger competitors.
It is true that we now have a diverse portfolio of products some of which have achieved market leading positions.
Our goal with respect to our product offering is simple and that is to offer the products that customers want most and not simply as an alternative consideration or as part of a larger bidding process.
Our operations are products are under constant review and are constantly being improved.
Continuous improvement is not simply a factory concept.
<unk> equally to engineering and product development.
It is also true we believe that as a smaller company. We are better equipped to invest all the time required between our commercial and technical teams and current and prospective customers in order to deliver product solutions that best match each customer.
Buses location specific needs.
We are not a one size fits all manufacturer.
Customers make substantial and long term investments when buying railcars and our goal every time is to give them. The exact car. They want rarely is this an off the shelf design.
This level of customization is supported by the gains generated from our operational excellence and we believe contributes favorably to our margins.
Thirdly, our team has worked incredibly hard to align our business with customer groups that value of the aforementioned along with the fact that we do not compete on leases.
Our approach is to partner with instead of compete with this very important group of customers.
Fourthly and finally.
We will continue to focus on providing what we believe to be the optimal balance between backlog and readiness to respond to customer needs.
Backlog is critical to planning, but we are mindful of the drawbacks when acquiring backlog in quantity is so large that it takes years to fulfill our backlog acquired as res are as a result of large discounting practices.
This is not our business model.
Oh perfect order book for US is one that is long enough to allow for a well managed material planning and production scheduling and short enough to allow us to be responsive to our customers' needs.
So in summary, our commercial excellence is focused on having the best value proposition for individual customer needs attention and service.
And maintaining the right balance of backlog quality and quantity.
At this point I would like to address our guidance for the year.
Due to our continued concerns over our rail service disruption, we are lowering our fiscal 'twenty two 'twenty three guidance for revenue to be in the range of $365 million to $380 million.
Which is based on our forecasted production of 3150 to 3300 railcars.
This is a shift in timing.
With some of our planned third quarter revenue now shifting into the fourth quarter and some of our fourth quarter revenue shifting into the first quarter of 'twenty 'twenty four.
Importantly, our full year adjusted EBITDA guidance range remains unchanged, we are reaffirming our expectation for full year, adjusted EBITDA to be between $18 million and $22 million.
I will now turn the call over to Matt for a few commercial comments. Thank.
Thank you Jim and good morning, everyone during the quarter, our level of inquiries order activity and demand for our products remain healthy for the third quarter 2023, we closed orders for 1015 railcars valued at approximately 122 million with year to date orders totaling 3356 railcars.
Valued at approximately $379 million.
This represents an order increase of approximately 200% versus the first three quarters of fiscal 2022.
We ended the quarter with a backlog of 3800 railcars valued at approximately $452 million, representing increases of approximately 50% and 64% year over year, respectively.
As Jim mentioned, our fourth production line Daniel is now complete with the first shipments from that new lines scheduled to be delivered in the fourth quarter. The.
Our sales team continues to build our pipeline for fiscal 2024, and having the fourth line available will increase our ability to better meet customers' needs for new railcars.
Although weakness in freight loadings, the migrant issue at the border and the overall macro environment continue to pose market uncertainties, we agree with industry forecasts of railcar deliveries of approximately 45000 railcars in 2023.
Our sales pipeline remains strong with customer enquiries, indicating that demand is still largely tied to railcar replacements across a diversified range of car types.
Order activity by customer segment equally lessors shippers and class. One railroads has remained consistent and includes the development of new customers, who value our commercial proposition as outlined by Jim.
Our sales team continues to operate with discipline.
Our overarching strategy is to prioritize business to deliver substantial value to customers and aligns with the core of our business furthering our strategic objectives, which includes a healthy well manage backlog.
This disciplined approach ensures that each decision aligns with both the needs of our customers and our long term goals reinforcing our commitment to growing providing value, while maintaining a strategic direction that fortifies our business.
Now I'll turn the call over to Mike for how much related to our financial performance.
Thanks, Matt and good morning, everyone as Jim discussed in his opening remarks for the third quarter, we delivered significant year over year, adjusted EBITDA growth and gross margin expansion.
These were achieved despite a decrease in deliveries year over year proving the success of our cost structure transformation are.
Our highly variable cost base provides us with the agility to scale, our business to industry demand, while maintaining profitability at lower delivery levels.
Consolidated revenues for the third quarter of 2023 totaled 61 9 million with deliveries of 503 railcars compared to $85 7 million on deliveries of 783 railcars in the third quarter of 2022.
Gross profit in the third quarter of 2023 was $9 2 million with a gross margin of 14, 9% compared to gross profit of $4 6 million and gross margin of five 3% in the third quarter of last year.
Despite the lower deliveries and adverse impact of foreign currency in the quarter.
We continue to expand gross margins driven by our increased production efficiencies coupled with strong commercial performance.
SG&A for the third quarter of 2023 totaled $7 5 million up from $7 1 million in the third quarter of 2022, as we continue to recruit and invest in operational talent.
Consolidated operating income for the third quarter of 2023 was $1 4 million compared to an operating loss of $10 7 million in the third quarter of 2022.
The increase in consolidated operating income in the third quarter of 2023 was primarily driven by increased gross profit as well as the third quarter of 2022, having an $8 $1 million noncash charge related to settling historical pension liabilities.
In the third quarter of 2023, we achieved adjusted EBITDA of $3 5 million compared to $1 6 million in the third quarter of 2022, primarily driven by increased operational and commercial excellence initiatives that Jim discussed previously.
For the third quarter of 2023, our adjusted net income was <unk> 2 million or a loss of 14 cents per share compared to an adjusted net loss of $5 4 million or 21 per share in the third quarter of last year.
Under U S GAAP accrued dividends related to our preferred shares are treated as a reduction to net income available to common shareholders. When calculating our earnings per share, resulting in a negative earnings per share for the quarter.
Capital expenditures for the third quarter of 2023 were approximately $4 million as we completed construction of a fourth line at our Keystone use facility.
There'll be further cash outflows during the fourth quarter related to the timing of payments for work that finished at the end of the third quarter.
However, now that the Mexico build out is complete capital expenditures decreased considerably in 2024.
Now turning to guidance as Jim previously mentioned due to the impact of railroad disruptions from the migrant issue. We are adjusting our full year 2023 revenue guidance to be between $365 million and 380 million, which is based on a lower floor gas delivery of 3150 to 3300 railcars.
At the same time, we are reaffirming our previously stated full year adjusted EBITDA guidance of between $18 million in 2020.
$22 million.
The inherent strength of our business Foundation has enabled us to maintain a solid bottom line. Despite this external challenge.
Reflecting on the journey, we've been on the past several years, we are very proud of the achievements of our business is named in such a short time.
Our operational and commercial excellence initiatives have laid the foundation for us to achieve industry leading margins.
Looking ahead, the combination of our highly variable cost structure and carefully manage SG&A should create significant operational leverage as we scale our business to four lines of production.
This in turn we believe should provide significant growth in our bottom line profitability.
With that financial overview I'd like to now turn the call back over to Jim for a few closing remarks. Thank you, Mike and let me wrap up our formal remarks with one other piece of work extremely important to our future.
And that is our debt structure and relationship with pimco.
As all of you know our company was in a challenging position. This time three years ago.
After evaluating multiple options to ensure that freight car America would have the liquidity necessary for the creation of a new and much stronger future.
We aligned with our partner, we believed would not only provide the necessary support but also the reliability during the uncertainties prevailing at the time.
PEMCO proved to be exactly that partner.
Now as we move forward and as our business continues to demonstrate strength, we will look to improve our capital structure.
Take out the preferred shares held by Pimco and effectively conclude this chapter of what has been a very beneficial relationship for freight car America.
This has always been our shared vision.
Although I cannot provide you with additional details on when this might occur I do want to state our intention to get this done just as soon as conditions permit.
In closing, we continue to set goals quarter by quarter and that team continues to deliver on these goals I'm very pleased with how we set as a company today.
Ross back to transitioning out of the PEMCO financing and what the next several years hold for us.
With that I will ask the operator to open the lines for some Q&A. Thank you.
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.
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One moment please poll for questions.
The first question comes from the line of Justin Long with Stephens Inc. Please go ahead.
Thanks, and good morning.
Good morning, gentlemen, maintenance and maybe to start with the U S. Mexico Cross border issues that everyone saw in the in the third quarter is there a way to think about the delivery impact you saw from that disruption and secondly, it sounds like those deals.
<unk> will be made up in both the fourth quarter and the first quarter, but maybe you could talk a little bit more about that cadence.
Good morning, Justin This is Jim I wish we had more clarity and specifics on this.
We experienced obviously a level of disruption in the third quarter.
It has not abated itself it has sort of ebbed and flowed.
We're hoping to get this thing behind us as quickly as we can.
But our our guidance adjustment our topline guidance adjustment is really.
Based on what we think might happen based on kind of the ebbing and flowing of the sets its fluid, it's a bit hard to quantify and predict.
We're comfortable with the range the revised range we've given.
But it it gives us just a little bit of protection against you know, what we really don't know for sure just yet.
What I can tell you is we are working with there.
Railroad are out of the factory and daily and.
Doing the best they can in a.
Hey.
Temporarily turbulent situation.
Got it and maybe just to put a bow on that if I look at the full year delivery guidance it implies.
More than a doubling of deliveries in the fourth quarter versus the third so do you need the disruptions at the border to get better in order to hit that or can you achieve that based on that kind of steady state of what we're seeing today.
Yeah, and when you do the math on what were projecting to get out of it in the fourth quarter.
There is actually built into the you know a level up.
Pessimism, if you will on the consistency of the outbound freight we're confident as we sit today in those numbers and you know so.
Oh, Yeah, we're we're feeling pretty comfortable with that its obviously a lot higher number than we saw in our Q3 and that's.
We were taken a little bit some by surprise towards the end of the third quarter, which are presented on a number of shipments at the end.
And the other thing you have to factor in with the additional volume as in the fourth quarter.
Is the fact that we're now starting up the fourth production line.
Got it that's a fair point on the fourth line and <unk>.
Second question or topic I wanted to hit on you know it was encouraging to see the adjusted EBITDA guidance was maintained despite the fact that the revenue guidance came down by about 10% at the midpoint that implies that margins will be better than you were originally.
We expected so can you talk a little bit more specifically about what's driving that margin upside.
Yeah. This is Jim again, and then I'll well.
Mike or Nick jump on with any additional comments.
I think the thing to say about this as you know this is what we've been talking about on working towards for three plus years.
And our you know our business is built on the principle of operational excellence.
And as that has taken root we have surely expanded it to now encompass what we call internally commercial excellence.
You know they so.
The.
Our our business being the smallest of the big producers.
It is about efficiency on the plant side and.
You know we as you know we have we felt this brand new campus are specifically designed to build railcars in the most efficient way, we could possibly envisioned.
And then we have proceeded now for three years straight since we opened the doors down there.
To just continually invest in our lean manufacturing and you know the training of our workforce. So.
You know where.
Pleased with we're very pleased obviously with our gross margins where they are right. Now we are pleased to see the EBITDA and so few deliveries.
You know and I think what's most exciting for US is this is not work that's finished.
There's more opportunity there is more to calm progress is never a straight line. So don't assume it will be.
But the trend has certainly been.
Then strongly favorable over the past 12 to 18 months and while it may not stay on the same level of trajectory. We expect further progress and improvement going forward. So this is with US that's part of us and.
It's how we envisioned and how we're demonstrating we run the business. So we're very happy with.
You know the things that are.
No obvious to look at like gross margin, our gross profit or EBITDA per car are we feel good about all of those metrics again knowing that.
Theres still more to come.
Okay, and maybe last one for me this one might be more for Mike, but if.
I look at the implied guidance for the fourth quarter you know.
Big step up in deliveries and revenues.
Assuming SG&A stays pretty steady it seems to imply that gross margins will come down in the fourth quarter relative to the third so I was wondering if that's a fair assumption and if there's any color you can provide on what's driving that maybe it's mix or something else.
Sure.
Ah Stewart observation and that's what the numbers would tell you. The one thing that's going to drive that in the fourth quarter as our startup is a fourth line or we're going to have a lot of people that we're bringing in training fixed costs before we're actually running on that line is all of that will provide a temporary drag on margin in the fourth quarter before the base itself and it's a fully running mine.
At full run rate efficiency in 2024.
Got it that makes sense I'll pass it on I appreciate the time.
Thank you Justin.
Thank you next.
Next question comes from the line of Matt.
P D. Goldman Please go ahead.
Good morning. Thank you are staying on the gross margin question I know, it's expected to be a bit down sequentially, but the Mike or Jim can you talk about the exit rate in the fourth quarter for the gross margin and if it says anything about 'twenty 'twenty four how should we.
Do you think about the margin beyond Q4.
Sure.
As mentioned in Q4, you will see a sequential step down given the overhead is starting up the fourth line the startup cost associated with that but if youre looking at us as a full year in 2023 and that exit rate on an annual basis, where you see Q2 and Q3 running efficiently on two three lines you know I think.
Looking holistically at 2023 would be.
A decent indication of 2024 and beyond and what we're capable of.
Okay. So you feel comfortable you can match, the 2023 gross margin or exceed it in 2024.
I'd say, that's our you know with the commercial and operational excellence initiatives, we have in place that's where we're focused on.
Okay.
And then Mike just to have you just wanted a couple of questions on the balance sheet right now.
You had a big increase in inventory how much of that is related to cars being built is unable to be delivered because of the border issues on the bright side. You had a you know a halving of accounts receivable went down significantly and cash went up so a lot of moving parts can you.
Just help us gauge.
The different dynamics of the balance sheet at the end of Q3.
Yeah definitely so inventory is higher than we would've planned in Q3, given the delays at the border and the issue that caused and as you go through the 10-Q, you'll see a breakout of that inventory in there.
In the inventory footnote between raw material wasn't finished goods, you'll see finished goods is elevated compared to last year, which is obviously the shipments in transit, but you also see with is high and that is unable to ship the products fully off property, it's much higher than last year, but based on our delivery guidance for Q.
For in our outlook, we do expect to get that all law and.
Importantly, we haven't really come off that we still expect to be operating cash flow positive for the year.
Are you guys able to tell us how many cars were built and who are unable to be delivered in the third quarter because of the border issues.
I am not able to share that number right now.
Okay.
And then just I wanted to switch to the three line changeovers that Jim mentioned on the prepared remarks, we're a gym were they in response to something new that happened or were they already planned for the third quarter and are you anticipating any more aligned.
Joel was plans for <unk> and into next year.
Yeah Man.
Excuse me no there was nothing unplanned in these line changeovers.
May recall or.
Our book of business for the year was really cement, our and February type timeframe.
So no surprises to us there it was coming.
The surprise was it coming at the same time, we had some issues with the rail service getting product out.
In terms of.
And then they were a big line changeovers theirs.
You know not all line changeovers are equal and are these happened to be larger ones.
But again nothing unplanned in that.
What we have in that fourth quarter is a couple of much smaller.
The quicker to implement line changeover. So you know the ability to run.
You know our centrally use all of our time for producing product as opposed to using any of the time for setting up product.
One of the enablers to why we expect to get so much product out in the fourth quarter.
Got it.
And then switching back to <unk>.
The backlog here.
I think this is your highest backlog E S b since <unk>.
<unk> 2019, and possibly the second highest ever is this just purely a function of inflation and higher costs or is there a favorable mix.
Okay.
It gets a little bit of a combination of both obviously steel costs are higher than they would've been if you look back a decade, but also the car types. We're building not all car types are the same sell price and so on.
When you look at the higher average selling price that's going to speak to the mix of cars as well in our backlog.
Got it.
Just one final question for me guys here.
And is pretty solid in general.
But how concerned are you that if the you cannot.
Our ability to deliver cars remains constrained by border issues and other supply disruptions that some customers who you know are not getting cars when they need them might cancel orders I mean, it looks like you did not have any cancellations in the third quarter, but is there is this a risk if the.
Disruptions continue.
I'm not we don't view that as a risk you know the.
The outbound delivery as you know.
Any particular car associated with any particular order is measured in days or weeks I mean, these aren't like months long drawn out type things.
And we have had a very.
Very steady track record of us.
Hum.
Take accepting and delivering orders are without cancellations I mean, I don't think we've seen a cancellation in the time I've been here.
Not that I recall, so we would view that as very low risk.
Got it and Jim One final one is when we get to February I imagine you you will be providing guidance for 'twenty 'twenty four.
You think you'll be sticking to the same kind of metrics.
You've been providing for the last few quarters or should we expect any any new metrics that you might talk about.
Well I haven't really thought about it we certainly won't provide fewer metrics.
We will certainly provide the same.
And.
You know whether or not we expand upon that I think you know we'll have those discussions and.
Now our goal is always provide the most visibility we can.
With you now.
Without sort of.
Running running too close to the edge is that we might have to pull some of it back later on so that the guidance will be at least what it was this year, possibly enhanced we'll see.
No. That's good to know thank you Jim and thank you everyone. Appreciate it.
Thanks, Matt.
Thank you.
This concludes today's question and answer session I would now like to turn the floor over to Jim Meier for closing comments.
Well as always thank you everyone for joining us today. Thank you for your interest and support of the company and we look forward to the next call and keeping everyone abreast of our progress as we proceed forward. So thank you and have a nice day.
Yeah.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
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Hum.
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