FreightCar America Inc (RAIL) 2026 Q3 法說會逐字稿

Greetings. Welcome to FreightCar America's third quarter 2026 earnings conference call. (Operator Instructions) Please note, the 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 JBG Cap Advisory. 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 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 of the control of the company, that may cause actual results to materially differ from those expressed in the forward-looking statements. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events, or otherwise.

During today's call, there will also be a discussion of some items that do not conform to US generally accepted accounting principles, or GAAP. Reconciliations of these non-GAAP measures to their most comparable, directly comparable GAAP measures are included in the earnings release issued yesterday afternoon.

Our earnings release for the third quarter 2026 is posted on the company's website at freightcaramerica.com, along with our 8-K, which was filed at market close yesterday. With that, let me now turn the call over to Nick for a few opening remarks.

Thank you, Chris, and good morning, everyone. Thank you for joining us today. Before discussing where we are headed, I want to acknowledge our performance through the first nine months. Our financial results have fallen short of the expectations we set coming into the year. We addressed the changes to our outlook in October, and our third quarter results were consistent with the preliminary figures we provided.

Our focus now is on translating the commercial progress we have made into a stronger financial performance. There are three areas I want to discuss this morning. First, our aftermarket platform continues to grow and is becoming a more meaningful part of FreightCar America.

Second, industry indicators are improving, although this is yet to translate into broad-based growth in new railcar demand. Third, our backlog is stronger than it was a year ago, even after removal of tank car retrofit order, and provides visibility into production extending into 2027.

Let me start with the aftermarket. Revenue grew 65% year-over-year in the third quarter, reflecting organic growth in parts and components and contributions from our acquisitions. Following quarter end, we completed our third aftermarket acquisition in less than a year, an independent Michigan-based supplier of OEM and replacement railcar components and fastening solutions.

This acquisition brings complementary products and established customers and supplier relationships across North America. It broadens the components available through our network and creates opportunities to serve both new and existing customers.

Building an integrated aftermarket platform with greater scale is central to our long-term strategy. These businesses support customers ongoing maintenance and replacement needs across the life of a railcar. As we bring them together, we see opportunities to expand sales, improve operating efficiency, and increase their contribution to earnings.

While aftermarket remains a smaller part of our overall business today, we believe its stronger margin profile and repeatable demand can improve the resilience of FreightCar America over time.

Turning to the market. Rail traffic and fleet utilization indicators continue to move in an encouraging direction. Traffic has strengthened across a broad range of categories, and fewer railcars are in storage. This, coupled with aging fleets, continues to support replacement needs, which supports the long-term opportunity. However, those indicators have not yet translated into broad-based increased industry-wide new railcar demand. Customers remain measured in their investment decisions and pricing remains competitive.

While we are encouraged by the direction of these underlying signals, we continue to remain disciplined in how we plan production and pursue orders. Matt will discuss the market and our commercial activity in more detail. Now to our backlog. We ended the quarter with 2,660 railcars on order, valued at approximately $284 million. That is 28% above the $222 million reported a year ago, even though the prior-year backlog included the tank car retrofit order that has since been removed.

Through the first nine months of 2026, our new railcar order intake exceeded our total for 2025 by more than 50%. In a market that remains well below placement levels, I believe that represents meaningful commercial progress. Our approach creates value from combined engineering flexibility, flexible and high-quality manufacturing, supported by responsiveness to customer requirements. We continue to earn repeat business and multiyear commitments through that approach. Our priority is to convert those orders into profitable deliveries.

On our financial performance, third quarter deliveries of 662 railcars resulted in lower revenue and profitability for the quarter. The commercial progress I have described has not yet translated into the level of earnings we expect from this business. Our priorities are to deliver against the production schedule, maintain cost discipline, and continue building the aftermarket contribution. We expect the financial progress to become more visible in the fourth quarter, and our attention is on execution. In summary, while improving industry indicators give us reason for cautious optimism, the timing and extent of increase in railcar demand remain uncertain.

Our existing backlog gives us production visibility extending into next year. Our lower structural cost base and flexible manufacturing footprint position us to execute that work and respond to changes in customer demand. Our focus will remain on the profitability of the work we deliver. In aftermarket, we continue to integrate our three recent acquisitions and believe they will continue to contribute to our growth as we build the aftermarket platform. With that, I'll turn it over to Matt to discuss the market environment and our commercial performance in greater detail.

Thanks, Nick, and good morning, everyone. I'll offer some perspective on the market environment and our commercial activity during the quarter. Industry order activity remains below historic levels, though it has improved in the third quarter with new orders across the industry totaling approximately 6,800 units, compared to approximately 3,100 units in the prior-year period. Industry orders exceeded deliveries for the second consecutive quarter. Within that environment, we continue to see, to gain market share.

On a trailing 12 month basis, excluding tank cars and autoracks, we captured approximately 25% of industry new railcar orders in our addressable market and approximately 17% of the overall market, up from approximately 21% and 13% a year ago, respectively. In addition, our order share of total industry orders has grown every year since 2022. The third quarter further demonstrates our commitment to a disciplined commercial strategy with a clear focus on pricing integrity, margin performance, and the quality of our order book. While we remain aggressive in pursuing new business, we are equally prepared to exercise discipline when market conditions do not support our objectives. We believe sustainable growth is achieved through sound commercial decisions, not simply by securing incremental volume at any price.

Our strategy is not built on being the lowest-priced producer or pursuing market share at any cost. Instead, we compete on the strength of our engineering, product differentiation, manufacturing flexibility and proven execution capabilities. We believe maintaining this commercial discipline, particularly in a competitive pricing environment, positions FreightCar America to deliver stronger long-term performance while building sustainable customer relationships. Importantly, this discipline does not come at the expense of order momentum, including conversions. Total orders through the first nine months of 2026 reached approximately 4,200 units, representing a 44% increase over the approximately 2,900 units ordered during the comparable period last year.

At quarter end, our backlog stood at 2,660 units valued at approximately $284.5 million, compared with 2,750 units valued at approximately $220 million a year ago. This represents a 28% increase in backlog value despite a modest reduction in unit count, reflecting a favorable shift in the value of our committed business. Equally important is the quality of the customers behind that backlog. Our order book is supported by repeat business from established blue-chip customers, including railroads, railcar lessors and industrial shippers. These are sophisticated buyers who recognize the value of our engineering, product quality, and execution capabilities.

Their continued commitment to FreightCar America reinforces the strength of our customer relationships and their confidence in our ability to deliver. Our backlog remains diversified across new railcar builds, conversions, and specialized programs, with every order representing a firm customer commitment. Our commercial philosophy is straightforward: we will compete aggressively for the right business, but we will not allow competitors pricing decisions to dictate our own. Our focus remains on building a high-quality order book, strengthening relationships with industry-leading customers, protecting margins and delivering profitable, sustainable growth. As Nick mentioned, the underlying demand picture continues to improve as well.

In the third quarter, key carload categories tracked by the Association of American Railroads grew year-over-year, matching the second quarter. Weekly carload volume was the highest for any quarter since 2019. Grain carloads grew 5%, petroleum products grew 9% and primary metal products grew 10%, all commodities that move in the railcars we build. Excluding coal, carloads through September were the most since 2018. The fleet data points in the same direction.

Railcars in storage fell to 17.7% of North America fleet on October 1, the lowest share since April 2023, and the fewest cars on an absolute basis since 2022. Those cars are coming out of storage because shippers need them, and as the active fleet tightens, the replacement cycle moves closer. With a mandated 50 year retirement age, we continue to expect industry demand to improve in 2027. As industry demand returns toward long-term replacement levels, we believe our differentiated product portfolio, disciplined commercial execution, and deep customer relationships position FreightCar America to deliver sustainable, profitable growth. With that, I'll turn the call over to Mike to walk through the financials in more detail.

Thanks, Matt, and good morning, everyone. I'd like to begin with a few third quarter highlights. Revenue for the quarter was $76.5 million compared to $160.5 million in the third quarter of 2025, and we delivered 662 railcars compared with 1,304 units in the prior year period. Revenue and deliveries were consistent with the preliminary results reported on October 19. Aftermarket revenue was $10.8 million, an increase of 65% year-over-year, driven by organic growth in parts and components, together with the contribution from our acquisitions.

Aftermarket gross margin was 44.5% in the quarter, and the segment generated $4 million of segment income, providing a meaningful contribution to profitability during a period of lower manufacturing volumes. We are pleased with the progress integrating our recently acquired businesses into our broader aftermarket operations, with synergies tracking in line with our expectations. Working with our commercial and operations teams, we are focused on expanding sales across our combined customer base and improving sourcing and inventory deployment across our locations. These efforts support organic growth and better product availability and customer service while maintaining discipline on working capital and returns on invested capital. Gross profit was $6.7 million, representing a gross margin of 8.8% compared with gross profit of $24.2 million and a margin of 15.1% in the prior-year period.

The decline primarily reflects lower delivery volumes and the resulting reduction in fixed cost absorption, partially offset by the higher mix of aftermarket revenue. The third quarter was the first full quarter with the benefit of the workforce realignment we completed in the second quarter. The program is delivering savings in line with the approximately $12 million of annualized structural savings we outlined on our last call. The realignment preserves our installed manufacturing capacity and the critical capabilities needed to scale production, positioning us for operating leverage as volumes recover. Selling, general, and administrative expenses were $9.8 million, or 12.7% of revenue, compared with $9.6 million, or 6% of revenue, in the prior-year period.

The increase as a percentage of revenue primarily reflects lower railcar deliveries and revenue. We expect fourth quarter SG&A dollars to remain broadly consistent with the third quarter. We reported net income of $8,000, or $0 per diluted share. This result included a $4.7 million noncash gain associated with the remeasurement of our warrant liability, reflecting the change in our share price during the quarter. Excluding noncash and other adjusted items, adjusted net loss was $9.5 million, or $0.28 per share, compared with the adjusted net income of $7.8 million, or $0.24 per diluted share, in the prior-year period.

Adjusted EBITDA was $0.1 million compared with $15.9 million in the prior-year period. The decline primarily reflected the lower volumes and fixed cost absorption I described, and the result was consistent with the preliminary range we provided on October 19. Turning to cash flow and the balance sheet. Cash flow from operating activities was $25.4 million in the quarter, and free cash flow was approximately $25 million, with capital expenditures of $0.3 million. A meaningful portion of this cash flow came from favorable working capital timing.

We expect that benefit to reverse during the fourth quarter. We ended September with $86.8 million of cash and cash equivalents and $100.4 million of total debt, with no borrowings under our revolving credit facility. Year-to-date, capital expenditures totaled $1.2 million. For the full year, we now expect capital expenditures of approximately $2 million to $3 million, reflecting maintenance capital and the completion of the vertical integration investments we have previously discussed. Turning to capital allocation.

We completed the acquisition of Trinity Equipment Company in October, our third aftermarket transaction in less than a year. The acquisition is consistent with our disciplined capital allocation framework and expands our participation in customers ongoing maintenance and replacement needs. As previously announced, we expect the transaction to be immediately accretive. Our existing manufacturing footprint provides the capacity to support higher railcar volumes. This positions us to direct growth capital towards opportunities that broaden our aftermarket business and improve the durability of our earnings and cash flow while maintaining the financial flexibility to support our operating requirements.

Moving to our full-year outlook. We are reaffirming the guidance we provided on October 19. We continue to expect railcar deliveries of 3,100 to 3,300, revenue of $370 million to $410 million, and adjusted EBITDA of $15 million to $19 million. Our lower cost base and the growing contribution from aftermarket position us to improve earnings and cash generation as volumes recover. We will continue to balance investments in growth with operating requirements, financial flexibility, and returns on invested capital.

With that, we'll now open the line for Q&A.

(Operator Instructions) Mark Reichman with NOBLE Capital.

Just looking at the full-year guidance, that implies fourth quarter adjusted EBITDA of roughly $10.5 million to $14.5 million versus the $0.1 million in the third quarter. I was just wondering how much visibility do you have into your fourth quarter deliveries, your product mix, and profitability at this point? And what would be the wildcards between the low end and high end of that?

Mark, it's Nick. I think as we go into the, as you go into the fourth quarter, from the order security or the backlog, that's booked for Q4. So the wildcard on trying to land orders is limited. Anything we land would be accretive to what was in that guidance. So then it looks down to just, as I mentioned in my notes about the execution piece, typically, we put risk mitigation around weather or rail delays, but that's what we will focus on, being able to drive our plant execution to the SIOP plan is typically where we've been strong at being able to hold that capability in the last couple of quarters.

But yes, I think that's the, it's certainly not on order bookings. The orders in that guidance were secured for Q4, hence, the guidance.

Now, Michael, he did a great job in terms of explaining the gross margin decline to 2.9% He talked about the fixed cost absorption, the lower production volumes, and the product mix. I was just wondering, what manufacturing gross margin would you consider sustainable at normalized production levels?

Mark, this is Mike. I think looking long term, very low double digits is sustainable. If we look back at what we've done on a more normalized demand environment, manufacturing margins have been around 10%, 11%. I think that's a sustainable long term as demand comes back.

And Michael, given your $86.8 million of cash, how are you prioritizing debt reduction versus aftermarket acquisitions and other investment? I think your gross term debt was roughly $104 million at the end of September.

Yes. So as I mentioned, we did have favorable working capital timing in Q3 that will reverse in Q4 (inaudible) a high point in Q3. But we do look at both those on a go-forward basis: what is the most accretive to us if we find a good acquisition that's within our framework, or if it's paydown of the debt, we toggle both and do the one that maximizes the value for shareholders.

And my last question is really for Nick. You've really done a great job of growing the aftermarket business. You have a strong rebodying product business. And I was just wondering, are there any other types of ancillary services or other markets? You've kind of distinguished yourself as not entering the leasing business.

Are there any opportunities to provide services to lessors a cradle-to-grave type of business model that might actually play into your strengths where you can direct customers to your products and services. I was just curious in terms of just outside of the existing sandbox, what you might consider relevant or related that would not only provide a new source of revenue, but also perhaps strengthen your existing businesses?

Mark, that's certainly a subject we spend a lot of time talking about, Mark. The short answer is there are alternatives based on our core competencies. We've built, I think, a wonderful manufacturing footprint in our Castanos facility. We've demonstrated that we've got a strong value proposition with railcars. We've done, historically, we've done adjacent things for the maintenance of [way] items and other manufactured products that support the rail industry.

We've grown the aftermarket business. We've acquired both distributors and people who provide OEM products. And we've got a nice process that we're building together where not only are we supporting our rail customers with new car builds, we do conversions in aftermarket, which supports those railcar customers through the life cycle of a railcar. And there are other areas that are adjacent. It's probably a bit too early to start talking about what they are.

We may talk about those in the future. But certainly, the way you asked the question, the way you described that, yes, we have grown our core competency, and we will continue to add to those core competencies, and we continue to add through that customer network, through the distribution network, and through the industry position we have, because I think as we generate that capital for investment, that's where we'll start to look at it, which ones are most accretive and how do we best integrate it into our organization. So a lot more to come on that, Mark. But I think, yes, that's the right way of thinking about it, for sure.

Brendan McCarthy with Sidoti.

Just a quick follow-up on the aftermarket business. You've done about three acquisitions in the past 12 months. I know we've talked about this industry being highly fragmented. But can you give us an idea of what the runway for additional tuck-in acquisitions might look like? Is three to four per year like a reasonable forecast there?

Let me answer to what it looks like, and then we can think about what a reasonable runway. It is a fragmented market, and there are certainly some unmet needs or some opportunities to enhance service or better service the rail industry across that broader aftermarket network. The 3 in the first 12 months has been a very, I guess, enjoyable process for us, welcoming the new members to our FreightCar family and be able to improve the services for our customers. And as long as those conditions are still true, we would continue to expand that aftermarket acquisition program. As Mike [essentially] mentioned before, we look at our capital allocation, and we look at what's the best way to enhance value for shareholders.

So we will continue to look at that. And sometimes there's a flurry of activity, then there's a pause where work is behind the scenes. So it's a little bit hard to forecast the run rate. But I would definitely characterize our appetite and our interest in it will not wane, and we will continue to look very, very hard and deep at all the opportunities that we see there. And as that appetite turns into potential, obviously, we'll try and expedite those as best as possible without damaging the customers or our own integration.

But it's certainly an area where we see a lot of interest and certainly an area where we see continued appetite and continued interest from our side, for sure. Mike, anything I missed?

No, I think you hit that on the head. We have a strategy for the aftermarket and acquisitions have been a tool to help that. But it's not a, we don't have a mandate for a number of acquisitions to do each period.

Understood. I appreciate that detail, and it makes a lot of sense just looking, especially looking at the Q3 segment gross margin was 45%. It came in meaningfully above that low 30% range that I think you've signaled on prior calls. What drove that increase in the quarter? And is that structural? Or is it more just temporary?

Yes, Brendan. So our aftermarket is now more broad. There are different categories of it. And Q3 was heavily influenced by mix of some of our proprietary products that we sell, which tend to carry a slightly higher margin profile than the distribution side of the business.

And then one quick question on the manufacturing side of the business. And looking ahead to the anticipated recovery in 2027 at the industry level, and I don't want to get into the numbers because I know you haven't given 2027 guidance yet, but maybe you could just talk about maybe from a qualitative perspective and give us an idea of how much of your anticipated 2027 production is already supported by the backlog versus how much additional orders you may need in the coming quarters?

I'll answer that one. We don't typically give guidance on the next out years. I'll just reflect on the comments that Matt made when you think about our order book for this year, the order book for this year compared to where it was last year. By the end of Q3 this year, we'd already exceeded by a large margin, the order intake that we had received during the whole of 2025. And if you think of orders intake as, obviously, as a predictor of deliveries later, whether it's three months, six months or nine months later, that should give a good indication of the trajectory and the size of the order book we have.

We have a much larger backlog now than we did this time last year going into the next year. So if you think about both the rates at which we are acquiring new orders, which is great, and the size of our backlog as it's building, as we move into 2027, we are moving into '27 with one of the highest rates of booked orders as we sit here on early November of 2026. So we will give guidance on 2027, obviously, at the right time. But certainly, the momentum that the commercial organization has built and the order entry and the order booking rates certainly give me confidence that we would finish the end of this year with more of 2027 booked than we did when we entered 2026, if that makes sense.

That's helpful context. And when you look at that backlog, the implied ASP has been on a trend upward in recent quarters. Can you talk about what you're seeing in terms of pricing? And have you had to make any pricing concessions recently, just given the competitive dynamics?

Brendan, one quick clarification on the backlog. So as you know, we did remove a large retrofit order, which is going to dramatically increase the average selling price, as those are, the retrofits cost substantially less than a new car. So part of the big jump from Q2 to Q3's ASP was simply the roll-off of conversion orders and retrofit orders out of our backlog, whether they delivered already or were ones we moved for the future. That's the main driver of the jump you're going to see there. And then I'll turn to Nick for any comments on competitive.

Yes, I think it's similar to the way we think about the orders booked. Even the freight car, as Mike mentioned, we back out the conversions or the rebuilds because they're a different ASP. When you think about the freight cars, there's a large discrepancy between the mix. But really, what we look at is the sectors or the segments that are driving that growth. And as Matt mentioned before, we've seen all those sectors that we're interested in grow across the industry, both in carloads and the amount of cars coming out of storage into the marketplace.

The grain and agricultural ones drive a lot of covered hoppers, and that's very good for us. The aggregate ones drive the gons and our VersaFlood product, which is very good for us. And then you've got the drive on some of the flat car products and the highly customized products building up for next year as well. So there is a, there would be a mix implication as that goes through, some are better than others. But I think as the first question that may have been from you or from Mark, on the, how you should think about the overall gross margins, I think it will be consistent with the answer Mike gave.

That mix would drive that gross margin slightly into that low teens.

Aaron Reed with Northcoast Research.

I was wondering if you could shed a little light. You've had a lot of success in taking market share. I wonder if you could give us a little more color on what's driving your gains in the new railcar orders right now?

Yes, I'll start that, then Matt can add in some color on there. We've said for a long time that we are not trying to be the lowest-cost producer in the marketplace. And we really focus on a strong value proposition. And that strong value proposition really has three tenets to it: one is that we have customer responsiveness, or an ease of doing business, which is unquestionable, that we really respond to what the customers need and how they are being treated; we have an engineering and a configuration option based on the DNA of our shared platforms across our freight car processes, where we can configure and customize a car to exactly what our customer needs without too many compromises needing to be made, and that is very important for our customers; and that we have a build, execution and quality that we are able to deliver on time, in full, to exactly what the customers need when they want it. And I think those three things are consistent, have been consistent over the last couple of years, and will continue to be consistent needs of our customers as the market and the industry responds back to its normal upper 30,000 or 40,000 a year run rate.

So we're not trying to win market share, as Matt said, in an undisciplined manner. We truly want to understand what our customers need and what they want. And we really try and configure all aspects of the package, whether it's the product, the availability, the timing, the quality, the financial support, and introducing the right financial partners to that customer. They're the things that I think customers recognize as value. And that's what translates as a benefit when we see those market share gains even during a trough across the industry.

And then add on to that, a really good sales and commercial team. So I think all those things factors bring us together to demonstrate those results. But Matt, did I miss anything?

I think you touched on all the main components, Nick. The core of our success has been a result of understanding customers needs and then delivering on those needs exactly as they expect, right? So it's been a collaborative effort on developing specific solutions for customers very specific needs, and that resonates with our customer base.

And then my follow-up question is, when we look at manufacturing opportunities, it looks like there's still quite a bit of opportunity in both covered hopper and flat cars. I was wondering if you could give us any more idea as to what is the size of that opportunity? What are you doing in that space to really grow it? Or is that something that you're just pointing out, but you're not proactively trying to take share in? So maybe just give us a little more color around that.

Yes I'll talk a bit about that, and then Matt can add. So when you think about the industry, covered hoppers are typically the largest sector in the industry. And on a normalized 40,000 run rate, they're going to be 15,000 to 16,000 covered hoppers. So it's probably the largest single sector in that overall rail market. There's an amount we want to be able to build.

We don't want to fill our entire plant with covered hoppers, but we want to make sure we have a strong showing in our product portfolio, a unique product that has a value proposition, and we can build those rates. And then you repeat the same process through the different products. Our VersaFlood product, which is an open-top hopper, we have a really strong market share on that. We have a product that is really great for our customers, really fits their needs. So when you look at the different types, we really match our competencies and our capabilities to the size and the volumes that our customers want that overlaps with the value proposition we offer.

The manufacturing configuration is something that we've built a platform where we can reconfigure our manufacturing capabilities I'm going to say with some relative ease, but it can be done. So we can modify our manufacturing footprint and modify our manufacturing capabilities to match what our customers want at the time they want it. So really, it's about understanding which orders and which places in the market we are truly aligned well with in a disciplined way, and then making sure that we satisfy those customer requirements. And we've built a configurable and somewhat modular jigs and fixtures elements in our manufacturing footprint that we can adjust our manufacturing footprint to match the customer demand, as opposed to the other way around, which can be sometimes difficult. Matt?

(Operator Instructions) Ladies and gentlemen, at this time, this concludes our question-and-answer session and also concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.