FreightCar America Inc (RAIL) 2021 Q1 法說會逐字稿

Greetings, and welcome to FreightCar America's First Quarter 2021 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lisa Fortuna, Investor Relations. Thank you. You may begin.

Thank you and welcome. Joining me today are Jim Meyer, President and Chief Executive Officer; Terry Rogers, Chief Financial Officer; and Matt Tonn, Chief Commercial Officer.

I'd like to remind everyone that statements today during this conference call relating to the company's expected future performance, future business prospects or future events or plans may include forward-looking statement as defined under the Private Securities Litigation Reform Act of 1995. Participants are directed to FreightCar America's 2020 Form 10-K for a description of certain business risks, some which may be outside of the control of the company that may cause actual results to differ materially 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 press release issued this morning. Our 10-Q and earnings release for the first quarter of 2021 are posted on the company's website at freightcaramerica.com.

With that, let me now turn the call over to Jim for a few opening remarks.

Thank you, Lisa. Good morning, and thank you all for joining us today. When we reported our full year 2020 results just a few months ago, we spent considerable time discussing the transformation of FreightCar America, our ambitions to become the most efficient, highest quality railcar producer in North America and how 2020 and 2021 would fundamentally transform us as a company and set us up for the future. Our goal was to get ahead of an industry recovery and put ourselves in pole position for the start of the upturn, and we believe we have done that.

For the first quarter of 2021, we delivered revenues that were up significantly year-over-year, and we achieved positive gross margin for the second consecutive quarter. We executed directly against our scheduled production plan and did so during an operationally difficult period as we completed the final stages of the production wind down and closure of the Shoals plant while also continuing to ramp up and build out the Castaños footprint. While it is still early days, we are confident in our direction and the pace of what we believe will be our renewed growth. And for this, I would like to thank all our dedicated and talented employees who are key to what we are accomplishing. Our talent base has never been stronger.

Last quarter, we also announced that our Board had approved the construction of our own fabrication shop, which we believe will allow us to make the large majority of our fabrications in-house starting within 12 months as well as in addition to our wheel and axle shop. Each of these new facility additions will bring additional capability and efficiencies. The project is moving along according to plan, and we expect to be fully operational no later than early next year.

In addition, and as we have discussed before, the facility in Mexico was purposefully built to expand as the industry and market dynamics dictate. We are now in the early stages of planning for additional lines. It is premature to discuss the time line and costs for what will almost certainly be the next phase of expansion. However, I do expect to be in a position to outline more details on this topic on the second or third quarter calls.

On the operational side, there are headwinds that we and the industry are facing. Steel prices remain at all-time high levels, more than double over the past year, and we need to continue to work very hard to both protect, supply and find ways to mitigate these cost pressures.

In addition to the tight and expensive steel supply, the competitive landscape continues to be intense with manufacturers anxious to fill their factories. The good news is that orders are increasing and demand recovery seems to be gaining momentum. However, during the near term, pricing intensity and steel cost will put pressure on margins until things begin to fall back into balance. In the meantime, there is even more reason for us to be pleased to be in the Castaños facility.

As we previously noted on our last earnings call, there were significant costs associated with the exit from Shoals and transition to Castaños, and these impacted our results in the first quarter. Terry will discuss the details, but it is important to note that this was the main headwind for the quarter. And without these onetime costs, our margins would have been even higher.

Matt will speak about the broader macro environment in more detail during his part of today's call, but we continue to be encouraged by the increasingly positive trends we are seeing across the industry with railcars and storage declining and rail traffic increasing. Order activity is starting to move in the right direction, and we are seeing continued positive dynamics in our conversion business.

As we also noted back in March, we are very encouraged by the number of new sales inquiries since the start of the year. We are also now starting to close new orders with activity continuing to pick up pace. As a result, we have raised our 2021 delivery guidance to between 1,600 and 1,750 railcars, up from our original outlook of between 1,400 and 1,600 railcars.

The year 2021 is about building momentum in support of expansion and profitable growth as we move forward. We're very pleased with how the new operation is performing, the new cost structure and most of all, the new team. We believe that we are in a good position to start winning. I'll now turn the call over to Terry to provide more detail on the financials. Terry?

Thanks, Jim, and good morning to everyone. To echo Jim's opening remarks, our business is clearly building momentum, and we believe we are only beginning to see the true potential of the Castaños facility.

Turning to our financial results. Consolidated revenues were $32.4 million in the first quarter of 2021 compared to $60.6 million in the fourth quarter of 2020 and $5.2 million in the first quarter of 2020. The company delivered 309 railcars in the first quarter of 2021 compared to 477 railcars in the fourth quarter of 2020 and 11 railcars in the first quarter of 2020.

Our gross profit in the first quarter was $1.8 million, the second consecutive quarter of positive gross margins for the business, as Jim previously noted. Gross margin was lower compared to $5.5 million in the fourth quarter. However, the first quarter includes the final transition costs associated with the move to Castaños from Shoals. Importantly, this is only our third quarter of positive gross margin in the last 3.5 years and we remain focused on maintaining this financial momentum.

SG&A for the first quarter totaled $9.2 million, up from $8.7 million in the fourth quarter and $7.4 million in the first quarter of 2020. The increase in SG&A was attributable to noncash compensation accruals related to the rise in the company's stock price as well as higher professional fees. We expect SG&A expenses to be approximately $7 million per quarter for the remainder of 2021.

Consolidated operating loss for the first quarter of 2021 was $14 million compared to an operating loss of $9.2 million in the fourth quarter of 2020 and an operating loss of $17.1 million in the first quarter of 2020. The operating loss in the first quarter of 2021 included $6.7 million of restructuring charges. Operating loss in the fourth quarter of 2020 included $19 million of impairment charges related to leased railcars, which was partially offset by $12.9 million of noncash restructuring gains largely related to the termination of the lease at the Shoals manufacturing facility during the fourth quarter of 2020. Operating loss for the first quarter of 2020, including -- included $0.9 million of restructuring and impairment charges.

Last quarter, I walked you through how the warrant issued with our November 2020 financing would have an impact on our financial statements as we move forward, mainly that the warrant liability will be marked to fair market value each quarter with the change in value impacting our net income and earnings per share calculations. For the first quarter of 2021, the loss on change in fair market value of warrant liability was $22.1 million compared to $3.7 million in the fourth quarter of 2020. As a reminder, this is a noncash item reflecting the appreciation of our stock price during the first quarter.

Interest expense in the first quarter was $2.5 million compared to $1.4 million in the fourth quarter of 2020 and $0.3 million in the first quarter 2020. Higher interest expense reflects the close of the new debt agreements in the fourth quarter of 2020. Going forward, interest expense is expected to remain at higher than historical levels based on those changes through our capital structure last year and the additional funding, which I will speak to shortly.

In the first quarter of 2021, adjusted EBITDA loss was $1.3 million compared to adjusted EBITDA of a positive $1.7 million for the fourth quarter of 2020. In the first quarter of 2020, adjusted EBITDA loss was $12.9 million when adjusting for the items previously discussed when reporting on the operating loss and other noncash or nonrecurring items. Like last quarter, adjusted EBITDA was generally impacted by the same large nonoperating adjustments just mentioned that impacted our consolidated operating loss as well as the noncash loss on change in fair market value of the warrant liability that was also previously noted.

Moving now to the balance sheet. We finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of $31.7 million compared to $54.2 million at the end of 2020. As previously discussed, our cash balance declined as we completed the transition in Mexico, closed our Shoals facility and incurred increased working capital expenditures to meet future production targets. The main drivers of the decrease included $8.8 million of value-added tax or VAT paid in Mexico, which the company expects to recover once the return, application and review process is complete.

Onetime freight and labor expenses associated with the move of physical equipment was approximately $5 million and prepaid expenses of approximately $4 million were made, mainly to lock in steel prices. The VAT paid in Mexico account receivable totaled $13.2 million at the end of the first quarter, and we've brought on a partner to make sure that we collect these funds in a timely manner as well as obtain certification for future periods.

Capital expenditures for the first quarter of 2021 was $0.5 million compared to $3.7 million in the prior year period as the heavy lift investment for the current phase of the facility in Mexico is now largely complete. As we stated at our full year 2020 earnings call, given our smaller footprint, we expect our CapEx to be significantly lower in 2021 compared to 2020 and forecast that will range between $2 million and $3 million.

Finally, as we noted in our press release today, we have increased our term loan with our financial partner to provide an additional $16 million of financing. Our primary financial lenders continues to be a great partner for FreightCar and we believe this will be a temporary incremental facility that will help us maintain our momentum. These funds will allow us to work through the VAT refund process and finalize the last steps to secure local financing in Mexico, which will more appropriately align with our new and growing operations. We currently have over $30 million of inventory and assets in Mexico that do not qualify with our domestic ABL, so future financing in Mexico will ultimately be more efficient. We hope to have that process complete within the next few months.

In terms of the structure of the amended term loan, the new funds are not repaid by March 31, 2022, it will require additional equity consideration. But we are aiming to repay the loan faster than those. As we just discussed, we have an aggressive plan to recover the VAT funds and we established direct financing for our Mexico operations. We expect that will be resolved later this year.

With that financial overview, I'd like to now turn the call over to Matt for a few commercial comments related to the first quarter and moving forward. Matt?

Thanks, Terry. As Jim mentioned, the railcar industry has seen increasingly positive signs, including improved rail traffic in most commodity groups, positive freight car utilization trends and the continued reduction in rail cars and storage, all key indicators of an industry priming for a recovery.

In the first quarter of 2021, we booked 305 railcars compared to 90 railcars in the fourth quarter of 2020 and 300 in the first quarter of 2020. We are seeing an increasingly stronger inquiry activity and an improved book-to-bill ratio.

As examples, inquiry levels in the first quarter were double all of last year and with a good diversity of railcar types, including conversions. The other good sign is customer sentiment, which is positive across the majority of railcar types.

As we noted last quarter, our expectations of an aggressive market pricing environment in 2021 and pressure from high steel cost is playing out. Thankfully, our manufacturing footprint positions us to be more selective on orders. In addition, the efficient footprint of Castaños not only lends itself to deliver a broad product portfolio but is also designed with flexibility to change car types more quickly and run efficiently at lower volumes than in past facilities.

We believe further activity in the railcar sector is ripe for a strong pickup. The historically low freight car order activity over the last 2 years has been below replacement demand. Portions of the rail fleet are nearing end of life and increased scrapping of obsolete railcars is expected to continue due to comparatively high scrap steel prices. These factors, coupled with the improved dynamics of the end markets we serve, industrials, metals, chemicals and other commodities, are all positive signs of an overall improved railcar demand environment.

As Jim already mentioned, we have raised our 2021 outlook to between 1,600 and 1,750 railcar deliveries, up from our initial expectation of between 1,400 and 1,600 railcars. While this is clearly a step in the right direction, it remains well below our historical average. The Castaños plant was designed for future expansion and with the flexibility to react relatively quick to changes in market demand.

Further, as the industry leader of railcar conversions, we will continue targeted investments in this space, including infrastructure capabilities at Castaños and expansion of our offerings, leverage both our engineering and manufacturing expertise. For our customers who have surplus fleets or cars that no longer provide solid lease or revenue returns, FreightCar America provides the solutions to upgrade underutilized rail assets into the latest car designs that generate new revenue opportunities for them. So far in 2021, our conversion business is performing very well.

With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?

Thanks, Matt. With our manufacturing transformation, now largely complete, We have significantly improved our competitive profile, and we are well positioned for future growth. We are optimistic that the early momentum in 2021 will continue for the balance of the year and into 2022. This will put us in a position to drive significantly enhanced profitability, free cash flow and long-term shareholder value. We are looking forward to sharing that journey with all of you, and thank you for your continued support. That concludes our prepared remarks, and I'll now turn the call over to the operator for Q&A.

(Operator Instructions) Our first question comes from the line of Justin Long with Stephens.

So I wanted to start on the increased 2021 delivery guidance. Curious if that was a function of the first quarter orders being better than you thought or the anticipation of better orders ahead? I know you talked about the inquiry levels picking up. And then any orders that you received subsequent to quarter end that you'd be willing to quantify?

Justin, this is Jim. I'll go first and then Matt can jump on. So first of all, we're not going to preview orders in any specificity as it relates to anything beyond the first quarter. What we're seeing that led us to increase the guidance is really a number of things, the continued increase that we've already talked about in inquiry activity, the general pace of positive trends in the marketplace and also the rate at which our new factory has come up online and is producing.

So we had really 2 things occur. One is we have a footprint that will support more than what we initially forecasted for full year production. And now with orders taken and what we're seeing in terms of trends in the marketplace, there's more opportunity for us on the demand side. So we feel very comfortable with the increase we just made.

Okay. And maybe digging a little bit deeper into the inquiry level increase. Is there any color around the different car types that you're seeing in those inquiries? Anything that stands out?

Justin, this is Matt. Yes, I think the way to put it is we're seeing it across the board, the levels of inquiries on a diverse number of car types. I won't get into the specifics. But overall, I think it's in line with what we all anticipated. When we look at various forecasts, things will start picking up significantly in the second half of the year. And that's consistent with what we're seeing in levels of inquiries.

Okay. And lastly for me. So if I look at the guidance for railcar deliveries and what it implies the rest of the year, on average, it seems like we'll be closer to the level you saw in the fourth quarter, maybe slightly below. Thinking about that, should we be thinking about gross margins the rest of the year getting back to where they were in the fourth quarter around that 9% level? Or because of the commodity price inflation and pricing competitiveness that you mentioned, will we likely be below that?

No, we're not going to give specific guidance, obviously, on the gross margin percentage. But we do feel confident in what we're starting to see from our performance in Castaños. And we would expect that we'll continue to take advantage of the new cost structure we have and the new performance levels we expect going forward, but no specific guidance.

Our next question comes from the line of Matt Elkott with Cowen.

Sorry if I missed it. Did you say you had about 500 orders a month in the first quarter?

No. Our order activity for first quarter was 305 cars.

Okay. Got it. All right. So no other -- no cancellations.

No.

Got it. And then if you guys can talk a bit more about the impact of both the increase in steel prices and the disruption of acquiring steel on your margins. I mean are you -- are all of your contracts the pass-through? Or do you have any orders that are -- that were taken at a fixed price at any time in the last year?

Most of our contracts are -- have price escalation clauses, and that's certainly what we're doing in the market moving forward as we're looking at various opportunities. There were a handful of deals we have fixed prices in it, but we'd also locked in the price of the metal as well. But it will continue to be a challenge for us in the industry with the higher prices.

Got it. And would you say if you were to obtain -- I'm sorry, go ahead.

Matt, this is Jim. I'm just going to add when near term, the industry is kind of under pressure from both directions. We're all dealing with extremely elevated steel prices, as we all know. And it's a full-time piece of work just to manage availability and steel supply these days, which thankfully we're able to do because we have extraordinarily strong relationships with both our steel distribution centers as well as the mill that we get the majority of our steel from.

But on the flip side, you also have an industry of manufacturers that are coming out of a high recession period, everybody wanting to bring workers back and replenish their factories. So yes, you have pressure on the steel from the one side, but you also have pressure on pricing from the other side. So it's going to be a little bit challenging for the next couple of quarters, most likely. But this too, we would expect will level out as things kind of balance out and people get back to work.

And will you say, Jim, that steel prices have put on, added a 10% to 20% premium to the price of a railcar? Or does that depend -- or does that vary by railcar type? And if so, do you guys give us any insight on -- yes.

Yes. The only thing I can share with you is we're managing steel availability, steel contracting to the best of our ability, as I'm sure others are, too. We're advance buying and taking advantage of every tool at our disposal so that we can secure supply, lock in and know what our pricing is and has always been the case. And as Matt's already suggested -- or Terry, that is, we do protect for escalation in the majority of the business we do. And it's about managing it best for ourselves, best for our customers.

Our next question comes from the line of Bascome Majors with Susquehanna Financial Group.

I wanted to expand on the prior conversation. I mean I realize, as you alluded to, that you guys are ramping up. You've got two of your larger competitors located very close to the Castaños place as well in the same boat. Although you're in a little bit of a different situation with standing up a new facility versus reramping one that's been there for some time. Can you talk a little bit, without necessarily getting into the time line that you alluded to you'd share with us later in this year, but what is the gating factor on capacity should demand continue to expand? Is it steel supply? Is labor really will going to be where you get stuck? Or is it components? Just anything that you could talk about to really put that in a better anecdotal context, I think, would be helpful.

Well, just to back up and it's nice to speak with you, Bascome. Thanks for joining our call today. This is Jim Meyer, by the way. When we created our footprint in Mexico, we intentionally created a footprint that was certainly significantly undersized with our historical past. And we sized it in a manner and took advantage of the fact that we were in a deep industry recession prolonged by COVID. And what better way to write out the environment then on a smaller footprint where we're only paying for what we're actually using. But it was all done in a thoughtful way such that as things come back, we can expand ourselves and become a bigger company as we all come back out of the industry recession.

So what we have to manage as we go forward are all the things you would expect one would have to manage, which is bringing on additional increments of the facility, namely assembly line, new assembly lines timed correctly, bringing on more people, also timed correctly. And right now, it's not about what's going to gate us or prevent us. It's timing it correctly and managing it properly, which is frankly no different than what we did last year with the creation of the original aspects of the footprint.

So luckily, when it comes to bringing new facilities online and now growing facilities, this is something we've gotten pretty good at. And it's about the orchestration. And it's all predicated on industry activity and sales backlog. So we're going to let the industry fundamentals gate us, but we don't anticipate being constrained or held back from what we want to do by other external factors.

So at this point, you're not feeling an acute labor shortage or you weren't trying to imply that in your prepared remarks.

No. I mean we honestly -- we couldn't be more thrilled with the team we've built and the new footprint. It's really one of our assets. It's part of who we are. And no, we don't anticipate challenges with continuing to bring on people, the quality of people and in the numbers that we need. This time a year ago, I think we had about 5 employees or thereabouts probably down in Mexico. Today, we're at about 450. And they're all incredibly talented people. So this is one of the great advantages of being in the heart of the manufacturing part of the industry. And luckily, we -- this is where it was worked to our advantage. We came in and started ramping up when others in the industry were significantly down.

I'd like to add one more and then pass it on to whoever's next, but you said some fairly constructive commentary towards the end of the prepared remarks around the conversion business. Are there any nontraditional car types being pushed by owners into conversion? Just any thoughts on the kind of car types and how that may be evolving in this marketplace.

Bascome, this is Matt Tonn. I'll just add that from a conversion perspective, it's something that we've perfected over the last 2 decades, perhaps even a little bit longer when we go back to when we kitted cars. But I think overall, our experience level there provides opportunities for multiple car types. There really isn't -- right now, there isn't really any limitations. And given the age of -- or excuse me, some of the available underutilized assets in our industry right now on fleets, we're well positioned to provide optionality on multiple car types to customers.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you again for your time today. We continue to be encouraged and excited about the future of FreightCar America. Already, we are seeing the benefits of our transformation strategy and look forward to the continued positive momentum as the industry recovery evolves. Thank you, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.