FreightCar America, Inc. (NASDAQ:RAIL) Q1 2023 Earnings Call Transcript May 10, 2023

FreightCar America, Inc. beats earnings expectations. Reported EPS is $-0.19, expectations were $-0.21.

Operator: Greetings, and welcome to FreightCar America First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Stephen Poe, Investor Relations. Please go ahead.

Stephen Poe: Thank you, and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Mike Riordan, Chief Financial Officer; and Matt Tonn, Chief Commercial Officer. I’d like to remind everyone that statements made during this conference call relating to the Company’s expected future performance, future business prospects, or future events or plans may include forward-looking statements as defined under the Private Securities Litigation Reform Act 1995. Participants are directed to FreightCar America’s 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 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. 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 first quarter 2023 is posted on the Company’s website at freightcaramerica.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.

Jim Meyer: Thank you, Stephen. Good morning, everyone, and thank you all for joining us today. FreightCar 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 experienced significant sequential improvement in our gross margin driven by the continued ramp up of our Castaños, 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 2024. The multi-year restructuring we undertook, starting with the closure of the Danville, then Roanoke and finally Shoals factories to remove fixed cost and unneeded capacity and to simultaneously create the campus we now have in Mexico is directly resulting in FreightCar America being able to win the business, best suited for the Company. To a much greater degree than at any time in our recent history, we are making better commercial decisions and no longer living in the days when excessive capacity clouded our decision-making.

When we last spoke, I shared our strategic priorities for 2023 and the FreightCar 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 goal has always been to run four production lines and build 4,000 to 5,000 cars per year. This is expected to be 4,000 to 5,000 units of profitable business and represents a reduction of approximately half of the capacity available on the prior U.S. footprint. The 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 is part of this. It gives us more direct control over our supply chain, quality and cost. We are on pace to complete the Castaños campus as currently envisioned by the end of summer, at which point we will have the fourth production line available, our fabrication shop fully outfitted, and additional infrastructure and material delivery and handling in the exterior areas of the campus. We have put as much thought into how material is received, unloaded, processed, and then taken to the lines as we have to the actual construction of the railcars themselves. Our focus starting about the end of summer will be simply on building railcars and not the combined activities of building both, railcars and the approximately 1 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, an 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. Two, it will 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 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 lower cost financings in the future. I’ll now turn the call over to Matt for a few commercial comments. Matt?

Matt Tonn: 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 order activity and demand for our products by both long-term and new customers. For the quarter, we booked orders for 1,960 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 3,667 railcars valued at approximately $413 million. We are 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.

Railcars stored have leveled off at their five-year average with over 80% of the fleet in active use. Shippers and railroads alike continue to evaluate their fleet needs to — due to near term railcar retirements. All of this has led to a tighter car supply in many segments in an environment favorable to 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. However, continued in-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 that is largely tied to replacement demand and align with 2023 forecast deliveries of between 42,000 and 45,000 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 to 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?

Mike Riordan: Thanks Matt, and good morning, everyone. We are pleased with our first quarter financial performance as our team delivered strong operational execution, successful 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 $129 million on deliveries of 1,150 railcars in the prior quarter, and $93.2 million in the first quarter of 2022 on railcar deliveries of 783. And as Jim already mentioned, we also undertook multiple line changeovers in the quarter. Gross profit in the first quarter of 2023 was $7.5 million with a gross margin of 9.2% compared to gross profit of $4.6 million and gross margin of 3.6% 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 will 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 non-cash 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 compared to an operating loss of $655,000 in the first quarter of 2022.

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. Compared to the prior year, reduced volume was the primary driver as we had three changeovers in the first quarter 2023, compared to one in the first quarter of 2022. For the first quarter of 2023, our adjusted net loss was $5.7 million or $0.21 per share compared to an adjusted net loss of $3.7 million or $0.15 per share in the first quarter last year.

Adjusted net loss excludes the impact of non-recurring income of $613,000 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 expect it 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’d like to now turn the call back over to Jim for a few closing remarks.

Jim Meyer: Thanks, Mike. I will now provide a brief overview of our outlook for the remainder of this year. We remain very positive on the position we are creating for ourselves within the market and also demand for our railcars. Our production schedule for 2023 is essentially full and now growing into 2024, 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 3,400 and 3,700 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 in Castaños, building our backlog even further into 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.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Justin Long with Stephens Inc. Please go ahead.

Operator: Next question comes from Matt Elkott with TD Cowen. Please go ahead.

Operator: There are no further questions at this time. I would like to turn the floor back over to Jim Mayer for closing comments.

Jim Meyer: Thank you all for joining our call today. Have a great day. And we’ll look forward to talking to you on the Q2 call. Thank you.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.