RAIL - NASDAQ

Welcome to FreightCar America's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. An audio replay of the conference call will be available on company's website within a few hours after this call. I would now like to turn the call over to Chris O'Dea, Riverton, Investor Relations. Please go ahead.

Thank you, and welcome. Joining me today are Nick Randall, 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 the conference call related 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 first quarter of 2024 is posted on the company's website at freightcaramerica.com along with the 8-K, which was filed yesterday after market. With that, let me now turn the call over to Nick for opening remarks.

Thank you, Chris. Good morning, everyone, and thank you, all, for joining us today. I would like to begin by saying how pleased I am to join you for my first earnings call as President and CEO of FreightCar America. I would like to recognize Jim Meyer for his support and mentorship as we look to continue to execute our strategic priorities. In just a few years, the company has undergone a significant transformation in both its earning potential and capital allocation, achieving impressive milestones during our restructuring efforts as a pure-play manufacturer. Today, we are at an inflection point with both the build-out of our new facility and rightsizing of our capacity is now complete. We have a proven manufacturing platform to build upon, coupled with FreightCar's long history of industry expertise, which allows us to remain highly focused on both our operational excellence and our commercialization strategy. We have laid the groundwork for our next phase of growth and by diligently executing our strategy, I am confident we will be able to achieve the power of scale and leverage that I believe exists in this business. With that, let me provide an update on the industry dynamics at play during the first quarter. As a reminder, demand for rail equipment depends on factors like downstream rail activity, the profitability of Class 1 railroads, freight volumes, public policy. Industry volatility is rooted in the dependence on industrial, energy and farm production, which can vary with economic -- changing economic and weather conditions. Volatility in the railcar industry is further influenced by fluctuations in quality prices and the extended useful life of railcars. During the first quarter, we saw an increase in service levels and throughput of railroads, allowing the shippers to be more consistent and resulting in improvements to the supply chain. Based on a competitive industry environment, we maintained our market presence in the first quarter, which Matt will speak to in a few minutes. Overall, we continue to view these metrics as positive for a healthy rail environment that will drive more freight to rail, reinforcing our growing confidence in the secular trends we see important to this business. With that, let's turn to the discussion of our first quarter results. FreightCar America delivered a solid first quarter performance in line with our expectations. Revenue generated during the first quarter increased 99% year-over-year to $161 million and record quarterly deliveries of 1,223 railcars, which includes roughly 200 cars from the year-end that were impacted by the border closure in December. This marks our second consecutive quarter of producing and shipping more than 1,000 units at our newly completed facility in Mexico, which truly validates our operating capabilities. This record is also a testament to our expanded manufacturing footprint that is now capable of producing 5,000 or more railcars per year. Moving forward, it has always been our intention to bring build rates back to optimal levels to meet customer demand, which is in line with our guidance for the year. With the build-out of facility complete, we are well positioned to focus on operational excellence, i.e., efficiency and scale in accordance with our market momentum. In addition to top line strength and robust deliveries, we reported gross margins of 7.1% in the first quarter of 2024, while adjusted EBITDA increased versus the same quarter of the prior year to $6.1 million. Turning to orders. As with other industry participants, activity picked up, albeit slowly in the first quarter. We received orders of 384 units valued at $45.2 million. We anticipate orders to pick up in the second half of the year and our full year expectations for 2024 are unchanged, continuing to support replacement rates between 35,000 and 40,000 units per year. Switching gears now to touch on our operations. Echoing my opening comments, I believe that we are optimally positioned to drive enhanced earnings moving forward. As a reminder, the strategic repositioning we have undertaken over the last few years allows us to leverage the cyclical nature of the railcar industry, differentiating us from other industry participants. Our variable cost structure enables swift adjustments in production and operational capacity to align with fluctuating demand and reducing risk during downturns by optimizing resource [ allocation ]. With our facility now complete and the start-up costs associated with the fourth production line behind us, we are focused on driving further efficiencies at our plant. Now that we have 2 consecutive quarters of higher levels of production under our belt and have successfully tested our operations, I am extremely confident in our ability to produce a full array of railcar products at higher capacity to meet demand as the industry picks up. Likewise, we remain confident for the full year and reiterate our stated guidance for 2024. With that, I will turn -- next turn the call over to Matt to discuss the market, and then to Mike for more detail on our financial results.

Thank you, Nick, and good morning, everyone. The improved rail service metrics the industry saw in 2023 have continued through the first quarter of 2024. Rail velocity remains above its 5-year average and drill times have seen a noticeable 3% decline year-over-year, also trending below the 5-year average. These improved service metrics equate to better turn times of rail equipment and ultimately improve shipper confidence. Overall, carload volume revised forecast models point to a 1.1% year-over-year improvement in car loadings for the full year 2024. Chemical agricultural products and metals are driving much of the expected volume growth in the forecast, and we see this in our [ inquiry ] activities, growth of the pipeline and recent order bookings. In summary, we see positive signs for rail and the associated drivers for new railcar demand. Moving to order activity. For the first quarter of 2024, we closed orders for 384 railcars valued at approximately $45.2 million. As Nick touched on earlier, for many freight segments, customers are still taking longer to fully analyze the timing of their new railcar purchases. As mentioned during our fourth quarter earnings call, we expected this dynamic to continue into the beginning of 2024, which is reflected in our outlook. We ended the first quarter with a backlog of 2,075 railcars valued at approximately $238 million. Our record quarterly delivery performance of the Mexico plant underscores our ability to operate at higher capacity levels to meet customer needs when the industry picks up and as our sales team continues to build our pipeline. As a reminder, our facility was purpose-built to not only scale to industry demands, but to remain nimble enough to meet niche customer needs around timing and our range of railcar types. On the commercial front, our [ inquiry ] activity remains steady with a healthy pipeline that includes a diverse mix of car types. Our strategy to provide customers with tailor-made solutions, coupled with a disciplined and straightforward approach to the deal, has proven successful in our efforts to grow market presence. Despite lower levels of order activity across the industry as reported by ARCI, we expect to remain in the cycle of new car -- new railcar demand tied closely to replacement levels. We do not see any changes in forecasts [ calling ] for total railcar deliveries falling in the range of 35,000 to 40,000 railcars for the full year 2024. I'll now turn the call over to Mike for comments related to our financial performance. Mike?

Thanks, Matt, and good morning, everyone. I'll begin with an overview of the first quarter financials. We are pleased with our first quarter results as we delivered year-over-year revenue growth and record quarter deliveries for our Mexico facility. Consolidated revenues for the first quarter of 2024 totaled $161.1 million with deliveries of 1,223 railcars compared to $81 million on deliveries of 738 railcars in the first quarter of 2023. Gross profit in the first quarter of 2024 was $11.4 million with a gross margin of 7.1% compared to gross profit of $7.5 million and gross margin of 9.2% in the first quarter of last year. The lower gross margin performance was driven primarily by start-up costs associated with launching our fourth production line, which started late in the fourth quarter of 2023 and included natural labor cost inefficiencies as we completed the hiring of 2 shifts of new team members during the first quarter of 2024, which includes a significant amount of training time. Further, the mix of railcars delivered during the quarter was more heavily weighted towards lower-margin profile cars. Despite the decrease year-over-year, we anticipate our freight car gross margin will remain at industry-leading levels for the full year as we realize the operational efficiencies associated with our fully staffed and built facility. SG&A for the first quarter of 2024 totaled $7.5 million, up from $6.3 million in the first quarter of 2023, primarily due to an increase in stock-based compensation as the first quarter of 2023 had a favorable fair market value adjustment for certain cash settled awards. In the first quarter of 2024, we achieved adjusted EBITDA of $6.1 million compared to $2.1 million in the first quarter of 2023, primarily driven by increased railcar deliveries between the comparable periods. For the first quarter of 2024, our adjusted net income was $4.9 million or $0.02 per share compared to an adjusted net loss of $5.7 million or $0.21 per share in the first quarter of last year. Adjusted net income accounts for the impact of certain non-cash items and non-recurring charges, such as the change in fair market value of warrant liability, which fluctuates each quarter in line with the change in our share price during the period. Capital expenditures for the first quarter of 2024 were approximately $1 million, primarily related to the timing of payments for work that was finished at the end of 2023 to complete the fourth production line at our Mexico facility. I would like to reiterate that with the completion of our fourth production line, we expect future capital spend to decrease and to be in a maintenance cycle. We estimate the maintenance cycle to be approximately 0.5% to 0.75% of revenue. Looking ahead, we expect to be well positioned to be on the path to free cash flow generation, allowing us to service down the debt we took out to support our transformation. With that financial overview, I'd like to now turn the call over to Nick for a few closing remarks.

Thanks, Mike. I would like to comment briefly on our outlook for the remainder of 2024. We would like to remind everyone that the first quarter played out as we expected and we anticipate a progression throughout the year. Reiterating my earlier comments, our first quarter performance supports our initial outlook, and we remain positive regarding our market position. This has given us confidence in reaffirming our previous stated guidance ranges. As a reminder, we are maintaining our forecasted revenues between $520 million and $572 million, up approximately 52.5% year-over-year at the midpoint of the range. This expectation is based on expected deliveries between 4,000 to 4,400 railcars, an increase of approximately 39% at the midpoint of the range. We are also maintaining our forecasted adjusted EBITDA guidance of between $32 million and $38 million for the full year, representing a year-over-year increase of 74.1% at the midpoint and further underscoring the power of our transformation strategy. Finally, we expect positive operating cash flow for the third consecutive year. With the heavy lifting of our plant expansion and testing behind us, we remain committed to executing our operational and commercial strategies to continue building our backlog into the fiscal year. With the benefits of higher productivity at our fingertips, I'm excited about the year ahead. I believe we will drive progressively better results as we realize the benefits of our business model. We remain focused on incremental cash generation and creating profitable growth for all of our shareholders. With that, I will ask the operator to open the lines for some q&a.

[Operator Instructions] The first question comes from the line of Justin Long with Stephens Inc.

So I wanted to start with production levels. You mentioned the 200 units that were pushed from fourth quarter into the first quarter in terms of sales activity. So if you take that out, production was right around 1,000 units. Are you assuming that the quarterly cadence going forward continues around that 1,000 unit level? Or is there any reason to think we flex up or down meaningfully in the quarters ahead?

Sorry, Mike. Mike is going to answer that question for us.

Yes. Based on the guidance, you can see out there, 1,200 in the first quarter, 4,200 at the midpoint, we would expect the production levels to be right around 1,000 or higher per quarter going forward for the remainder of the year.

Okay. Got it. So we should be pretty steady on that front. And I guess from a gross margin perspective, to get to my second question, Mike, you mentioned mix maybe being a little bit of a headwind here in the first quarter. Can you talk about what changes going forward to improve gross margins? Is this solely a function of better mix that's secured in the backlog? Or is there anything else that's driving that? And I think you talked last quarter about an expectation for full year gross margins to improve relative to 2023. So I'm curious if that's still your expectation?

Yes. As -- the guidance for the full year hasn't changed. And given our -- you mentioned before, SG&A is relatively flat, you can kind of back into where we expect gross margin percentage to be on the revenue and adjusted EBITDA. So that hasn't changed. So we expect sequential improvement from Q1 into Q2, Q3, Q4. That's going to be driven by 2 things. One, the mix of cars in the backlog shifts after Q1, and second, in Q1, as mentioned, we had start-up costs and a slower ramp on our fourth production line, which actually held back production levels from where they could have been. And so as that's fully ramped up now with the full hiring of both shifts. You'll get natural labor cost efficiencies and production efficiencies for the balance of the year on that production line, which will, in turn, be accretive to gross margin.

Very helpful. And I guess the last one for me is on [ inquiry ] and order levels that you're seeing in the market. I think you made a comment that things are pretty steady, but I was wondering if you could expand on what you're seeing thus far in the second quarter on that front? And Nick, I think you made a comment about the backlog building. So should we read into that, that you feel like demand is strong enough to support a sequential improvement in the backlog over the remainder of the year?

So just -- I'll let Matt comment on the industry and the market. I'll just reiterate kind of what Mike said that we've issued our guidance. We're still holding our guidance between 4,000 and 4,400 units. So that's where we expect us to be able to shift this year. But Matt can give us a bit more color around the industry and inquiry levels.

So a couple of comments. So on the inquiry level side, when we look at year-over-year activity, it's been on par with what we saw in 2023, which is pretty robust. So we haven't seen significant changes year-over-year in terms of the type of inquiries. I would say that the car mix has changed somewhat. But overall, our demand continues to be driven by a replacement market. And if you think about where we are in the current marketplace and you go back even looking at the last 20 years and the cycles of order activity, we always had a demand catalyst, which we simply don't have today, right? If you go back to the 2000s -- early 2000s, you had energy, plastics and coal, mid-teens, you had crude by rail and you had the fracking boom, which drove up significant demand. And as we look forward and over the course of the next several years in the forecast, we don't see that catalyst. We see replacement demand continuing. So for us, as we look at inquiry activity levels and we look at what the forecast looks like, I think we stay in that 35,000 to 40,000 a year demand cycle with some changes based upon fleet aging out, some changes in the overall mix of cars. But overall, we're seeing some steady inquiry activity from quarter-to-quarter.

Next question comes from the line of Matt Elkott with TD Cowen & Company.

I think this question is for Matt. Matt, can you maybe give us a general idea on the customer mix and how it's trended over the last few quarters, the split between shipper and lessor? The reason I'm asking this is with capacity having been ramped up to over 5,000 cars now, and you have a more diverse product portfolio. Can we expect maybe more multi-year supply agreement with lessors in the coming years than you've had in recent years?

Matt, a couple of things. So on the mix, we continue to hit the 3 primary segments, right? You've got Class 1 shippers and lessors. We're actively engaged with all of those customer segments, and we see pretty good activity historically. From a multi-year perspective, I won't speak to specific deals. But clearly, there's always interest among multiple customers that look to expand their plants, expand their fleets and address the looming, aging fleet profile that they have where those types of opportunities do exist.

Okay. Good. That's helpful. And then, Matt, I think it might have been over 1 year ago when you guys filed for tank car authorization from the AAR. Can you update us on where that stands, if you're still pursuing tank cars? And how that would fit into the 5,000 car capacity you have? Would it [ mean ] incremental to that? Or would it be you have the existing footprint to the flexibility to switch some of the existing 5,000 car capacity to tank cars?

Yes. So a couple of things, Matt. We've got multiple tank car designs that are AAR approved. We're watching that market very closely, and we'll enter at an appropriate time with the right customers that really fits with our capabilities. So there's more to come on that.

It's the question you asked, Matt, on the capacity-wise. So we've got a current capacity which we state about 5,000 units a year, which we're forecasting between 4,000 and 4,400 this year. If -- tank cars, we can include in that 5,000 and there are some opportunities for -- with additional CapEx to increase beyond that 5,000 for any additional tank cars as we see fit. But the short answer is yes, they could fit within the 5,000. There'll be some CapEx to support that. But if we needed to, there's an opportunity to flex higher than that if the demand would justify it.

Just one last question on the broader market. It is good to see rail service improving and that eventually should be a tailwind for a shift from the highway. But as you guys, I'm sure, would agree that rail velocity improving could be a headwind in the intermediate term to railcar demand. Are you expecting that to be a factor at any time in the coming few quarters where we see you need fewer railcars to ship the same amount of freight and that could be a headwind to orders?

Yes. I think I would go back to my earlier comments on the overall market and the efficiency that the railroads bring versus trucking, right? I know you're familiar with the ability for railroads to carry a ton of freight, 450 miles on 1 gallon of diesel. And I think that's a compelling argument and continues to be one of the most efficient modes to carry freight. I don't -- I see where you're headed. I will tell you that I think the only real impact we're seeing is it's just taking a little bit longer as customers make decisions as they analyze their fleets and what they need. But I think the better story is that the growth opportunity as service metrics continue and improve, present a really compelling argument for shippers to look to growth and maybe taking some of that freight off the highways. We see it as an upside, not really as a near-term downside, and I would say our inquiry levels support that.

Just one last follow-up related to interest rates. It's been somewhat of a roller coaster [ ride ] with interest rates over the last few quarters here. Have you seen any -- can you attribute any orders or like thereof or cancellations or conversations you were having with customers and they want a pause now because of interest rate concerns?

Yes. I would say that from the lessor community, which is obviously watching that closely, if you talk to the lessors, I'll tell you that from a majority perspective, each are in the 98% of utilization of their fleets right now and -- which is great. But what is happening is related to interest rates, I think, is the fact that they are all looking very carefully at any speculative build. So I think that's where you're seeing some more discipline in the marketplace, is that previously we had seen significant ramp-up of builds based on speculation. And I think the lessor community and the shippers as well are a lot more careful about speculating on the demand for rail versus not having a lease in hand before they make that decision.