RAIL - NASDAQ

Greetings, and welcome to FreightCar America Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Victoria Roseman, Investor Relations. Thank you, Ms. Roseman. You may begin.

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; 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 performance, 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 FreightCar America's 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. 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 of 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.

Good morning, everyone, and thank you all for joining us today. FreightCar America delivered another quarter that highlighted our team's operational and commercial discipline, contributing favorably towards our continued focus on enhancing our quality of earnings. This comes despite headwinds in the quarter related to the halt of railroad services in Mexico due to migrant issues that limited shipments, 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, both 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, achieving 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 $7,000 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 and the commercial groundwork we continue to lay is we believe spot on for this company. Most importantly, while we do not expect progress to be achieved in a perfectly straight line, we do believe there is ample room to continue to improve the quality of our business vis-à-vis 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 Castaños manufacturing campus during the third quarter signifies the long-anticipated completion of the facility, and all of us are beyond pleased and beyond proud. FreightCar America now has the capacity to seamlessly manufacture annual volume ranging from 4,000 to 6,000 railcars across four production lines. We are now starting up this fourth line and in yet another milestone moment for the company, we 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 of course, how we train, empower, and mobilize our nearly 2,000 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 in operational excellence is our concurrent work to establish a unique commercial position. It is important that we begin to share another and equally important undertaking in the remaking of FreightCar America, and that is where and how we fit in 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. Like our operations, our products are under constant review and are constantly being improved. Continuous improvement is not simply a factory concept. It applies 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's specific needs. We are not a one-size-fits-all manufacturer. Our 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 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 quantities so large that it takes years to fulfill or backlog acquired as a result of large discounting practices. This is not our business model. A perfect order book for us is one that is long enough to allow for well-managed material planning and production scheduling, and short enough to allow us to be responsive to our customers' needs. 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 rail service disruption, we are lowering our fiscal 2023 guidance for revenue to be in the range of $365 million to $380 million, which is based on a forecasted production of 3,150 to 3,300 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 2024. 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 you, Jim, and good morning, everyone. During the quarter, our level of inquiries, order activity, and demand for our products remained healthy. For the third quarter, 2023, we closed orders for 1,015 railcars valued at approximately $122 million, with year-to-date orders totaling 3,356 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 3,800 railcars valued at approximately $452 million, representing increases of approximately 50% and 64% year-over-year respectively. As Jim mentioned, our fourth production line at Castaños is now complete, with the first shipments from that new line scheduled to be delivered in the fourth quarter. The 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 45,000 railcars in 2023. Our sales pipeline remains strong, with customer inquiries indicating that demand is still largely tied to railcar replacements across a diversified range of car types. Order activity by customer segment, including lessors, shippers, and Class 1 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 that delivers substantial value to customers and aligns with the core of our business, furthering our strategic objectives, which includes a healthy, well-managed 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. And I'll turn the call over to Mike for comments related to our financial performance. Mike?

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. 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 5.3% 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 non-cash 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 $0.2 million, or a loss of $0.14 per share, compared to an adjusted net loss of $5.4 million, or $0.21 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 are treated as a reduction to net income available to common shareholders when calculating our earnings per share, resulting in negative earnings per share for the quarter. Capital expenditures for the third quarter of 2023, were approximately $4 million as we completed construction, of the fourth line at our Castaños facility. There will be further cash outflows during the fourth quarter related to the timing of payments for works that finish at the end of the third quarter. However, now that the Mexico buildout is complete, capital expenditure should decrease 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 forecast delivery of 3,150 to 3,300 railcars. At the same time, we are reaffirming our previously stated full year adjusted EBITDA guidance of between $18 million and $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 have been on the past several years, we are very proud of the achievements our business has made 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 managed 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 FreightCar America would have the liquidity necessary for the creation of a new and much stronger future. We aligned with a partner we believed, would not only provide the necessary support, but also the reliability during the uncertainties prevailing at the time. PIMCO 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 FreightCar 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 the team continues to deliver on these goals. I'm very pleased with how we sit as a company today, the prospect of transitioning out of the PIMCO 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. [Operator Instructions] The first question comes from the line of Justin Long with Stephens Inc. Please go ahead.

Thanks, and good morning.

Good morning, Justin.

Maybe to start with the U.S. Mexico cross-border issues that everyone saw 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 deliveries 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?

Yes, 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 guidance adjustment, our top line guidance adjustment is really, you know, based on what we think might happen, based on kind of the ebbing and flowing of this. It's fluid. It's a bit hard to quantify and predict. We're comfortable with the range, the revised range we've given, but it gives us just a little protection against what we really don't know for sure just yet. What I can tell you is we are working with the railroad out of the factory daily, and doing the best we can in a 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 the kind of steady state of what we're seeing today.

Yes. When you do the math on what we're projecting to get out in the fourth quarter, there is actually built into that a level of pessimism, if you will, on the consistency of the outbound freight. We're confident as we sit today in those numbers. And so - we're feeling pretty comfortable with that. It's obviously a lot higher number than we saw in Q3. And that's - we were taken a little bit surprise, surprise towards the end of the third quarter, which prevented a number of shipments at the end. And the other thing you have to factor in with the additional volume 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 second question, or topic I wanted to hit on, 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 originally expected. So, can you talk a little bit more specifically about, what's driving that margin upside?

Yes. This is Jim again, and then I'll have Mike or Nick jump on with any additional comments. I think the thing to say about this is - this is what we've been talking about and working towards for three-plus years. And 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. Our business being the smallest of the big producers, it is about efficiency on the plant side. And we - as you know, we've built this brand-new campus, specifically designed to build railcars in the most efficient way we could possibly envision. And then we have proceeded now for three years straight since we opened the doors down there, to just continually invest in lean manufacturing and the training of our workforce. So, we're pleased - 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. And I think what's most exciting for us is, this is not work that's finished. There's more opportunity. There's more to come. Progress is never a straight line. So don't assume it will be. But the trend has certainly been strongly favorable over the past 12, 18 months. While it may not stay on the same level of trajectory, we expect further progress and improvement going forward. So, this is with us its part of us. And it's how we envisioned and how we're demonstrating, we run the business. So, we're very happy with, the things that are obvious to look at, like gross margin, or gross profit or EBITDA per car. We feel good about all those metrics. Again, knowing that there's still more to come.

Okay. And maybe last one from me. This one might be more for Mike. But if I look at the implied guidance for the fourth quarter, big step-up in deliveries and revenues. Assuming SG&A stayed 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. That's an astute observation, and that's what the numbers would tell you. The one thing that's going to drive that in the fourth quarter or start-up with the fourth line. 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. And so, all that will provide a temporary drag on margin in the fourth quarter, before it debates itself and it's a fully running line at full run rate efficiency in 2024.

Got it. That makes sense. I'll past it on. I appreciate the time.

Thank you. Justin.

Thank you.

Thank you. Next question comes from the line of Matt Elkott with TD Cowen. Please go ahead.

Good morning. Thank you. Staying on the gross margin question, I know it's expected to be a bit down sequentially, but Mike or Jim, can you talk about the exit rate in the fourth quarter for the gross margin? And if it says anything about 2024, how should we think about the margin beyond Q4?

Sure. As I just mentioned, in Q4, you will see a sequential step down given the overhead of starting up the fourth line, the start-up costs associated with that. But if you're looking at us, as a full year in 2023 and that exit rate on a basis, where you see Q2 and Q3 running efficiently on two, three lines. 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?

And say that's our - with the commercial and operational excellence initiatives we have in place, that's what we're focused on.

Okay. And then, Mike, since I have you, just want to a couple of questions on the balance sheet. I know, you had a big increase in inventory. How much of that is related to cars being built and unable to be delivered, because of the border issues? On the bright side, you had a - having 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?

Yes, definitely. So inventory is higher than we would have 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 and then - in the inventory footnote, between raw material and finished goods. You'll see finished goods is elevated compared to last year, which is obviously the shipments in transit. But you also see width 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 Q4 and our outlook, we do expect to get that all up. 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 were unable, to be delivered in the third quarter, because of the border issues?

I'm not able to share that number right now.

Okay. And then just I want to switch to the three line changeover that Jim mentioned on - in the prepared remarks. Jim, were they in response to something new that happened? Or were they already planned for the third quarter? And are you anticipating any more line changeovers planned for 4Q and into next year?

Yes, Matt. No, there was nothing unplanned in these line changeovers. You may recall, our book of business for the year was really cemented in the February type time frame. 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 they were big line changeovers. There's not all line changeovers are equal and these happen to be larger ones. But again, nothing unplanned in that. What we have in the fourth quarter is a couple of much smaller, quicker to implement line changeover. So the ability to run essentially use all of our time for producing product as opposed to using any of the time for setting up product. Again, 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 the backlog here. I think this is your highest backlog ASP since 4Q 2019 and possibly the second highest ever. Is this just purely a function of inflation and higher costs? Or is there a favorable mix?

I think it's a little bit of a combination of both. Obviously, steel costs are higher than they would have been if you look back a decade, but also the car types we're building, not all car types are the same cell price. And so 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. I know demand is pretty solid, in general. But how concerned are you that if the kind of ability to deliver cars remains constrained by border issues and other supply disruptions that some customers who 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?

Matt, we don't view that as a risk. The outbound delivery is on 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 steady track record of - take accepting and delivering orders without cancellations. I mean I don't think we've seen a cancellation in the time I've been here, certainly not that I recall. So we would view that as very low risk.

Got it. And Jim, one final one. As when we get to February, I imagine you will be providing guidance for 2024. Do 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 new metrics that you might talk about?

Well, Matt, we haven't really thought about it. We certainly won't provide fewer metrics. We'll certainly provide the same. And whether or not we expand upon that, I think we'll have those discussions. And our goal is always provide the most visibility we can without sort of running too close to the edge that we might have to pull some of it back later on. So the guidance will be at least what it was this year, possibly enhanced. We'll see.

Now that's good to know. Thank you, gentlemen. Thank you, everyone. Appreciate it.

Thanks Matt.

Thanks Matt.

Thank you. This concludes today's question-and-answer session. I would now like to turn the floor over to Jim Meyer 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.