FreightCar America Inc (RAIL) 2024 Q3 法說會逐字稿

Welcome to FreightCar America's third-quarter 2024 earnings conference call.

Please note, this conference is being recorded.

An audio replay of the conference call will be available on the company's website within a few hours after this call.

I would now like to turn the call over to Chris O'Dea with Riveron Investor Relations.

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 this 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 of the control of the company and 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 it's 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 US 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 this morning.

Our earnings release for the third quarter of 2024 is posted on the company's website at freightcaramerica.com along with our 8-K, which was filed premarket this morning.

And with that, I will now turn it over to Nick for a few opening remarks.

Thank you, Chris.

Good morning, everyone, and thank you all for joining us today.

This quarter marked another strong step in building a momentum from our record-setting start to the year.

I'm pleased to report we remain on track to achieve our annual goals.

We continue to execute our strategy of driving efficiencies at our state-of-the-art facility, it enables us to meet unique needs of our customers by producing premium railcars, conversions and rebodies along with providing exceptional parts and services.

In terms of financial performance, we grew top line sales significantly, increasing 83% over the prior year period and delivered another quarterly and consistently solid gross margins of 14.3% and a second consecutive quarter of robust operating cash flow.

This quarter highlights our differentiated product offerings and ability to deliver on our commitments with operational excellence.

We managed multiple changeovers throughout the quarter, marked by robust shipments to the customers.

During the quarter, we were pleased with our performance as we delivered 961 railcars, just shy of last quarter's record output at our operating facility.

We stand out in the industry due to our unique manufacturing capabilities and our operational flexibility, enable us to meet diverse customer needs.

By delivering differentiated products, we secure new business and improve our earnings quality.

Our commercialization strategy is also distinct with nearly all market routes supported by independent financing options.

This focused approach allows us to stay nimble, efficiently handle smaller orders and take on specialized projects as well as larger orders.

Unlike competitors at both manufacture and lease, our exclusive manufacturing role enhances our appeal as we partner more freely with a wide range of leasing providers.

As proof of our flexibility to meet our customers' needs, we can partner with key shippers positioning ourselves to consistently win high-quality work.

For our large, covered hopper, we have refined design enhancements, including lightweight structure and high cubic capacity that provide additional optimization for our customers.

This will be the first time we've produced this line of covered hoppers at our operating facility, which is being purposely designed to help maximize payloads and transport efficiency.

This underscores the value of our tailored solutions that address specific customer requirements.

In terms of market dynamics, while the third quarter was slower regarding industry activity, we have continued to grow our market presence by capturing a historically strong portion of orders and inquiries.

On a trailing 12-month basis through September, we have gained 3% of share sequentially despite orders across the overall industry being down roughly 20%.

This steady flow of momentum and outperformance has been a hallmark of our commercial discipline this year as we continue to secure high-quality orders across differentiated portfolio.

Demand for railcars remain stable, largely tracking replacement cycles.

And we expect this industry momentum to support our business model further as our pipeline grows.

As we look to close out the year, we are confident in our market position.

We're reaffirming our full year revenue and railcar delivery expectations and raising the midpoint by narrowing our forecasted adjusted EBITDA range between $37 million and $39 million, representing a year-over-year increase of 89% at the midpoint.

Looking ahead, we continue to see strong demand across various product lines and will have a positive impact as we enter 2025 and look forward to executing on our long-term growth prospects.

Our focus remains clear, enhancing our product portfolio, capturing market share and leveraging our proven manufacturing platform to drive sustained growth and cash generation.

In my eyes, delivering strong results year to date is a significant achievement, and we're excited to carry this momentum into the fourth quarter, continuing to build a business that thrives on consistently meeting demand through our operational versatility.

With that, I will 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.

We are pleased with our progress and are well positioned heading into the end of the year.

For the third quarter of 2024, we closed orders for 739 railcars, valued at approximately $94.1 million.

Excluding tank cars and auto racks, we captured 22% of industry orders on a trailing 12-month basis, led by continuing strong performance across open-top hoppers and improvements in flat cars, gondolas and large cube covered hoppers.

Our improving market share is a testament to our team, executing our commercial strategy that delivers value at every stage of the process.

Our route to market as a pure-play manufacturer, as well as our product offering focused on providing options to meet specific customer requirements is a true differentiator.

Our current product portfolio served better than 60% of all car types by volume.

Further, as reported on our Q2 earnings call, our recent order for tank car conversions of existing DOT-111 to DOT-117R tank cars, is evidence of our capabilities to expand our offerings.

And finally, we continue to strengthen our portfolio, including rail enhancements -- railcar enhancements that include carload efficiency and reduce long-term cost of railcar ownership.

All of these efforts equate to a healthy mix of car types that ensure we meet diverse customer needs.

We ended the third quarter with a backlog of 3,611 railcars valued at approximately $372 million.

We have experienced healthy inquiry activity and maintain a solid pipeline spending many car types, including strong interest and conversions.

Looking at the macro rail environment during the quarter, rail traffic in terms of car loadings remain relatively flat, just down 1.7% year over year and largely driven by continued declines in coal car loadings.

Petroleum, chemicals and agricultural commodity groups, however, each posted positive year-over-year growth, which supports our continued focus on these car segments.

With carload traffic expected to experience slight improvement as we close out 2024 and railroad key performance indicators, including velocity and dwell, largely tracking within their five-year averages we see industry dynamics supporting new car demand consistent with 40,000 railcars each year for the foreseeable future, principally driven by replacement rates as railcars hit their mandated 50-year retirement.

I'll now turn the call over to Mike for comments related to our financial performance.

Mike?

Thanks, Matt, and good morning, everyone.

To begin, I will talk through an overview of the quarter's financial results.

Third quarter financial results were strong as we delivered significant year-over-year revenue growth and maintained healthy margins.

Consolidated revenues for the third quarter of 2024 totaled $113.3 million with deliveries of 961 railcars, compared to $61.9 million on deliveries of 503 railcars in the third quarter of 2023 Gross profit in the third quarter of 2024 was $16.2 million with a gross margin of 14.3%, compared to gross profit of $9.2 million and gross margin of 14.9% in the third quarter of last year.

Lower gross margin performance as compared to the prior year was primarily driven by a mix shift in railcars delivered with the prior year period, delivering a number of conversion cars.

Additionally, we saw a sequential improvement of 180 basis points from the second quarter of 2024 as we saw a favorable mix in car types delivered between the comparable periods.

We continue to anticipate industry-leading FreightCar gross margins moving forward, driven by the ongoing benefits of our facility operating at full capacity.

SG&A for the third quarter of 2024 totaled $7.5 million, flat to the third quarter of 2023.

Excluding stock-based compensation, SG&A as a percentage of revenue decreased 503 basis points from the prior year, further highlighting the substantial operating leverage we built into our business model.

In the third quarter of 2024, we achieved adjusted EBITDA of $10.9 million, compared to $3.5 million in the third quarter of 2023, primarily driven by increased railcar deliveries between the comparable periods.

For the third quarter of 2024, our adjusted net income was $7.3 million or $0.08 per diluted share, compared to adjusted net income of $0.8 million or a loss of $0.12 per share in the third 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.

During the quarter, we recognized a $110 million non-cash charge for our warrant liability due to the appreciation in our share price during the quarter.

Capital expenditures for the third quarter of 2024 were approximately $1.5 million and our full year forecasted capital spend has been narrowed to a range of $5 million to $6 million.

As I mentioned on last quarter's call, we continue to strengthen our cash flow generation capabilities.

This quarter, we delivered $7.2 million in operating cash flow, representing the second consecutive quarter of positive operating cash flow and the largest operating cash flow generation in back-to-back quarters since the first quarter of 2017.

As a result, we currently hold $44.8 million in cash and have no outstanding borrowings on our revolving credit facility.

As we strengthen our balance sheet through cash -- strong cash flow generation, we are well positioned to enhance our capital structure and invest in continued growth and value creation for our shareholders.

With that financial overview, I'd like to now open the line for questions and answers.

(Operator Instructions) Mark Reichman, NOBLE Capital Markets.

Would you please discuss the key ingredients for a 14% plus gross margin quarter, including the product mix?

And the reason I ask that question is that recognizing that the tank car conversions in 2026 and 2027 could enhance margin along with tank car production beginning in 2028, I was just wondering about the sustainability of base margins ahead of those product introductions.

Sure.

Thanks, Mark.

This is Mike.

So in terms of mix, like we said, we had a very healthy mix, strong gondolas, open-top hoppers and flat cars.

And really, what we saw this quarter was four lines operating at full capacity with a minimal number of changeover.

So it's just a lot of utilization of the facility optimizing the financial results.

And then Matt mentioned that demand continues to track the replacement cycle.

And with the incoming Trump administration, I was just wondering if the expectation for a higher economic growth changes that thought?

Or what are your thoughts regarding the potential for tariffs?

So Matt will take take the first part of it, and I'll take the second part on tariffs.

Yes.

I think as it relates to demand, I still -- it's a little early to tell what will happen from an economic perspective to drive growth.

When we look at overall demand and we look at new plants coming online that may drive new railcar demand, it seems to fall within this 40,000 per year car demand that's really tied to replacements.

Looking out in the horizon, there's 250,000-plus cars that will retire in the next five to 10 years, they're north of 40 years old.

There doesn't seem to be a catalyst beyond the replacement demand that really would drive new cars required for the industry above 40,000.

And in terms of the tariff, to date, the company has not had any tariffs directly affect our business, and we do not currently expect any future impact of tariffs on our business as of today.

And then just one final question.

If you could just provide an update on plans to recapitalize the balance sheet.

Sure.

So that still remains our strategic objective to accomplish this year.

We're working towards that, and we'll provide more updates as we have them to provide.

Brendan McCarthy, Sidoti & Company.

I just wanted to start off with the guidance or the guidance increase for the midpoint of adjusted EBITDA for 2024.

What supports that increase there?

Sure.

So the continued strong performance that we've had through the first three quarters with plant optimization, cost optimization.

And then just getting towards the end of the year, we just have a little more visibility in, and see the path to higher anticipated adjusted EBITDA for the full year based on how we performed year to date with the high gross margins thus far.

Got it.

Okay.

And then looking at deliveries in the third quarter, what drove the variability looking at deliveries compared to the second quarter of this year?

Brendan, it's Nick.

Our plant has -- as we do some changeovers and we change from one product to another product.

There's just some timing issues as you complete those changeovers whether those shipments pend over the quarter.

So Q2, we were lighter on changeovers than we were on Q3, which explains the entire variance in total number of cars shipped. 961 cars shipped is a solid throughput for us based on our guidance of 4,300 to 4,500 units.

So we're still on track for that, and I don't expect to see anything that stops us from meeting that expectation.

Understood Nick.

And then looking at gross margins for the full year and just considering the guidance raise on the midpoint of adjusted EBITDA.

Is it still reasonable to expect gross margins for 2024 to come in slightly below that of 2023?

I think that was the expectation heading into the year just with the kind of hiccups in the last quarter with the border issue.

Is that still a reasonable expectation?

I think materially, we'll be in line with last year.

I would say it's a good expectation, materially in line with last year, the low single digits on gross margin for the full year.

And that's mainly held back by Q1, as we talked about on the past couple of calls.

That was a lower gross margin quarter for us.

Right, right.

Okay.

One more question for me.

Just looking at the tank car conversion market.

I guess have you had further conversations with potential customers or customers on just an uptick in deal flow there?

Yes, Brendan, this is Matt.

Overall, the pipeline is very strong across multiple car types, including what we see in terms of activity and interest on the tank car conversion.

So, that is clearly a focus we remain engaged in, as we go forward.

Mark Reichman, Noble Capital Markets.

I just had two follow-ups.

The first is on the parts sales business.

And I was just wondering if, let's say, for example, the Trump administration and does some of the -- like the carbon emissions rule and coal-fired power plants, the retirements get extended or delayed.

Do you see that as having a net positive effect on those rail roads that are basically just hanging on to their existing coal cars and having a greater need to to extend the lives on those through parts sales?

I mean what are the real drivers of your part sales?

Is it coal cars?

If you could just provide a little visibility there and also the growth profile of that business?

Sure.

Mark, this is Mike.

Yes, to your question, the delay in retirements of coal plants would have a net positive impact to our historical parts sales or the core of it, which is replacement parts for the large coal fleet that FreightCar America has out in the market as well as its EVC fleet.

In terms of growth patterns, we've seen substantial growth, as you'll see in the footnotes year over year in our Parts business, and we continue to expand that not only in the coal and ABC markets, but in general, we view there being an attractive growth profile in helping supply aftermarket parts to Class II three railroads and repair shops.

And then the second question is just a follow-up.

You can kind of back into it from your guidance.

But -- so like the first quarter, that was obviously a weak margin quarter.

The second quarter is 12.5%, third quarter, 14.3%.

So, what are your -- kind of your expectations for the fourth quarter?

Do you see those kind of going back in a 12.5% range?

Or what are the kind of the drivers for the fourth quarter?

Sure.

So we don't generally give quarter-by-quarter.

But from the insinuation, you can see we will be expecting gross margins to decrease sequentially from Q3 to Q4 based on our full year guidance.

And a lot of that comes in with the timing of changeover.

So the deliveries were down as timing of changeovers.

It was at the very end of Q3, which prevented some shipments in the last two weeks that otherwise would have had deliveries on pace with Q2.

And some of that's going to be mix-driven as we continue to expand market share and get into the markets.

We'll see a little bit of mix shift away from where we were in Q3, which will bring us down slightly sequentially.

But still north in double digits as we expect to end full year as well.

This will conclude our question-and-answer session.

I would now like to turn the call back over to Nick Randall for further remarks.

Thank you.

I just wanted to close in summary, with couple of things.

We grew our top line significantly, increasing 83% over the prior year period and delivered another quarter of consistently solid gross margins of 14.3%.

We have a strong cash position of $44.8 million with no outstanding borrowings and are well positioned with consistent course of strong operating cash flow generation.

We captured 22% market share on a robust order intake, gaining 3% sequentially on a trailing 12-month basis.

And we raised our midpoint of adjusted EBITDA guidance for the full year, and we continue to see strong demand across various product lines that will have positive impacts as we enter 2025 and look forward to executing on our long-term growth prospects.

With that, I would like to thank everyone for their participation, and have a great day.

Thank you.

This will conclude today's teleconference.

You may disconnect your lines at this time.