FreightCar America, Inc. (RAIL) This autumn 2022 Earnings Name Transcript
18 min read
FreightCar America, Inc. (NASDAQ:RAIL) This autumn 2022 Outcomes Convention Name March 28, 2023 11:00 AM ET
Firm Individuals
Stephen Poe – Alpha IR
Jim Meyer – President and CEO
Mike Riordan – CFO
Matt Tonn – Chief Business Officer
Convention Name Individuals
Justin Lengthy – Stephens
Matt Elkott – TD Cowen
Operator
Greetings, and welcome to FreightCar America’s Fourth Quarter and Full Yr 2022 Earnings Convention Name. Right now all members are in a listen-only mode. An issue-and-answer session will comply with the formal presentation. [Operator Instructions] As a reminder, this convention is being recorded.
It’s now my pleasure to introduce your host, Stephen Poe with Alpha IR. Thanks. Chances are you’ll start.
Stephen Poe
Thanks, and welcome.
Becoming a member of me at the moment are Jim Meyer, President and Chief Government Officer; Mike Riordan, Chief Monetary Officer; and Matt Tonn, Chief Business Officer. I’d prefer to remind everybody that statements made throughout this convention name referring to the Firm’s anticipated future efficiency, future enterprise prospects or future occasions or plans could embody forward-looking statements as outlined beneath the Personal Securities Litigation Reform Act of 1995.
Individuals are directed to FreightCar America’s Type 10-Ok for an outline of sure enterprise dangers, a few of which can be outdoors of the management of the Firm that will trigger precise outcomes to materially differ from these expressed within the forward-looking statements. We expressly disclaim any obligation to supply updates to our forward-looking statements, whether or not on account of new info, future occasions or in any other case.
Throughout at the moment’s name, there may also be a dialogue of some objects that don’t conform to U.S. typically accepted accounting rules or GAAP. Reconciliations of those non-GAAP measures to their most instantly comparable GAAP measures are included within the earnings launch issued yesterday afternoon.
Our earnings launch for the fourth quarter of 2022 is posted on the Firm’s web site at freightcaramerica.com together with our 10-Ok, which was filed yesterday after market.
With that, let me now flip the decision over to Jim for a couple of opening remarks.
Jim Meyer
Thanks, Stephen. Good morning and thanks all for becoming a member of us at the moment.
FreightCar America completed one other essential yr and its transformation and transition from a turnaround story to a progress story. Listed here are a few of our most necessary accomplishments for the total yr.
We delivered revenues of $364.8 million, a rise of 80% year-over-year and above our beforehand supplied outlook on deliveries of three,184 railcars, a rise of 84% year-over-year. We delivered full yr adjusted EBITDA of $8.4 million versus a lack of $7.2 million in 2021, an enchancment of $15.7 million.
We delivered our first optimistic full yr of working money circulation since 2017, producing $11.5 million versus a use of $55.4 million in 2021, an enchancment of $66.9 million. Together with orders acquired shortly after the top of the yr, our present manufacturing schedule for 2023 is actually full, and we at the moment are targeted on our 2024 order guide.
Whereas we proceed to observe the rail business with cautious optimism, the actual fact is that demand for railcars constructed by FreightCar America is powerful. We proceed to put money into and construct a world-class manufacturing campus situated lower than 3 hours by automotive from Texas. We now have 3 manufacturing strains, a paint store and absolutely succesful fabrication and wheel and axle outlets. By late summer time this yr, we count on to have 4 manufacturing strains and to double our paint store capability. In whole, we’ll then have a facility absolutely in a position to produce 5,000-plus models per yr with out undue stress.
Additionally, as introduced yesterday, we entered into a vital refinancing, which, when closed in Might, will extinguish all of our time period debt and change it with a nonconvertible most popular inventory with our present financing companion, an affiliate of Pacific Funding Administration Firm. Listed here are a number of of the extra necessary features of this monetary transaction.
In the beginning, this transaction demonstrates the boldness of our monetary companion, PIMCO, which has continued to assist the expansion and future potential of the enterprise. This confidence is particularly true, given the state of the capital markets, unsure financial system and present volatility in banking.
Subsequent, this transaction supplies us with extra capital to put money into new initiatives to speed up the following part of progress. The extra capital is supplied by extra money on the closing of the deal, a big discount in charges tied to our ABL facility. And we can have the choice to pay the dividend on the popular inventory on a payment-in-kind or PIK foundation. This equates to roughly $15 million in extra money at closing plus a further roughly $10 million per yr in anticipated enchancment in working money flows. We may also transfer from a variable fee mortgage construction on the extinguishing time period mortgage to a hard and fast dividend on the popular, which is clearly anticipated to be useful within the present market setting.
Lastly, by eliminating many of the debt from our stability sheet, this monetary transaction locations us in a greater place for additional and decrease value refinancings sooner or later. Whereas we’re proud of this necessary first step to reshape our capital construction, we’re nonetheless intently targeted on reaching extra typical and lower-cost financing sooner or later.
I’ll speak about our views on 2023 in a couple of minutes. However first, I’ll flip the decision over to Matt and Mike, beginning with Matt for a couple of industrial feedback. Matt?
Matt Tonn
Thanks, Jim, and good morning, everybody.
We had a well-coordinated yr in 2022, matching gross sales with the accessible capability from two manufacturing strains for the total yr after which a 3rd manufacturing line beginning within the fourth quarter. We have now since finished the identical for 2023. With that in thoughts, for the total yr 2022, we took orders for 3,208 railcars, of which 1,066 had been booked within the fourth quarter. Very importantly, and an necessary inner metric for our firm, we additionally elevated the variety of new clients by 36% in 2022, which is a real testomony to the power of our product providing, gross sales and technical expertise and after-sales service.
We ended the yr with a backlog of two,445 railcars valued at $288 million. And though we sometimes don’t speak prematurely of the following quarter shut, we booked vital orders within the first quarter of 2023. Therefore, even with the extra capability we introduced on-line on the finish of this yr — final yr, our present manufacturing schedule for 2023 is actually full with booked orders now extending into 2024.
Our focus as an organization has been on orders for patrons with distinctive product necessities and who place a premium on high quality and repair. That is our lane. And on account of our efforts, we imagine that FreightCar America is cementing itself as the popular producer within the business.
Whereas some financial uncertainty and headwinds stay, total, the railcar business continues to reveal typically wholesome fundamentals. Railcar storage numbers stay beneath the 5-year common, and railcar retirements have outpaced new automotive deliveries for the previous 3 years. With that mentioned, we proceed to intently monitor key financial indicators and the potential affect on our enterprise and sector. So briefly, we’re cautiously optimistic in regards to the business, however way more optimistic about our personal prospects inside it.
With that, I’ll flip the decision over to Mike for a overview of our financials. Mike?
Mike Riordan
Thanks, Matt, and good morning, everybody. I’ll start with an outline of the fourth quarter financials, after which will contact on the total yr 2022 highlights, a few of which Jim already talked about in his opening remarks. First, let’s flip to the fourth quarter outcomes.
Consolidated revenues for the fourth quarter of 2022 totaled $129 million in comparison with $75 million within the fourth quarter of 2021, a rise of 71.9% year-over-year with railcar deliveries of 1,150, a rise of 90.4% year-over-year. Whereas we had been happy with the variety of models and the standard of the vehicles we produced within the quarter, our gross margins and profitability had been once more impacted by deliveries of lower-margin railcar orders as we mentioned on our earlier earnings calls and continued provide chain pressures.
Gross revenue within the fourth quarter of 2022 was $4.6 million in comparison with $6.6 million in the identical interval the prior yr. And gross margin was 3.6% in comparison with 8.8% final yr. By way of actions taken by the Firm within the fourth quarter, we’ll see margin enchancment starting within the first quarter of 2023 with continued enchancment throughout the stability of 2023.
SG&A for the fourth quarter of 2022 totaled $6.3 million, in keeping with $6.4 million within the fourth quarter of 2021. As a reminder, we’re dedicated to sustaining our present low-cost SG&A construction whilst we proceed to scale our manufacturing and add manufacturing capability.
Consolidated working loss for the fourth quarter of 2022 was $6.2 million in comparison with working earnings of $63,000 within the fourth quarter of 2021. Consolidated working loss within the fourth quarter of 2022 was primarily pushed by decrease gross revenue and a $4.5 million impairment on leased railcars.
Within the fourth quarter of 2022, we achieved a optimistic adjusted EBITDA of $1.2 million, which was equal to the identical interval final yr. For the fourth quarter, our adjusted internet loss was $8.1 million or $0.31 per share in comparison with an adjusted internet lack of $3.1 million or $0.14 per share within the fourth quarter final yr. Adjusted internet loss excludes the affect of sure noncash and nonrecurring costs such because the $4.5 million impairment on leased railcars, the onetime Mexican VAT value of $1.9 million and noncash earnings of $4.7 million because of the change within the truthful market worth of the warrant legal responsibility. As a reminder, the change in truthful market worth of the warrant legal responsibility fluctuates every quarter, primarily ensuing from the change in our share worth throughout the interval.
Curiosity expense within the fourth quarter of 2022 was $7.9 million in comparison with $4 million within the fourth quarter of 2021. This was primarily pushed by a rise in noncash deferred financing payment amortization between the comparable intervals.
Capital expenditures for the fourth quarter of 2022 had been roughly $4.4 million as we continued increasing our manufacturing footprint. For the total yr, it was $7.8 million. Waiting for 2023, we can have a step-up in capital expenditures and count on it to be roughly $11 million for the yr. This improve in CapEx will assist extra investments, together with elevated blast and paint capability, our fourth manufacturing line and additional enlargement of our in-house fabrication capabilities.
For the total yr 2022, we’re pleased with our achievements, which included vital enlargement initiatives, high line progress and improved profitability. Adjusted EBITDA for the total yr was $8.4 million, a $15.7 million enchancment from 2021. We did this despite producing numerous orders taken throughout a very difficult interval for pricing coupled with inefficiencies generated by provide chain challenges.
This, due to this fact, speaks on to the optimistic operational leverage and favorable value construction of our Castaños footprint. As I’ve highlighted the final two quarters and Jim touched on earlier, our working money circulation has considerably improved with money generated from working actions of $11.5 million in 2022, optimistic for the primary time since 2017 and in comparison with money utilized in working actions of $55.4 million in 2021, a $66.9 million enchancment.
With that monetary overview, I’d prefer to now flip the decision again over to Jim for a couple of closing remarks.
Jim Meyer
Thanks, Mike. Let me conclude by offering an outline of our outlook and priorities for 2023. As soon as once more, we’re cautiously optimistic available on the market. And we’re fairly optimistic on our place inside the market and demand because it pertains to our railcars.
Our manufacturing schedule for 2023 is actually full, and the variety of inquiries we proceed to obtain may be very encouraging. We are going to proceed to broaden in 2023, and we’ll put together for much more progress in 2024.
For the total yr 2023, we’re forecasting income of between $400 million and $430 million, up roughly 14% year-over-year on the midpoint of the vary. This projection relies on anticipated deliveries of between 3,400 to three,700 railcars, a rise of roughly 11.5% on the midpoint of the vary.
Moreover, we’re introducing adjusted EBITDA steering of between $15 million and $20 million for the total yr. This represents a really vital year-over-year improve of 108% on the midpoint and additional demonstrates the fruits of our turnaround.
Lastly, we count on optimistic working money circulation for the second consecutive yr. We have now higher readability on our anticipated outcomes for this fiscal yr than we’ve had in a really very long time and are more and more assured within the outlook.
The important thing focus for our group this yr can be to execute and ship the enterprise in hand, proceed to construct backlog for subsequent yr and create a chance for additional enchancment in our capital construction. Exterior of those necessary priorities, we proceed to have discussions across the future and the way finest to leverage the spectacular manufacturing campus and devoted workforce that we’ve put collectively in Mexico.
That concludes our ready remarks, and I’ll now flip the decision over to the operator in order that we will handle your questions.
Query-and-Reply Session
Operator
[Operator Instructions] Our first query comes from the road of Justin Lengthy with Stephens.
Justin Lengthy
So, perhaps to begin with the commentary round year-to-date orders, once I take into consideration the steering that you just simply laid out for deliveries in 2023 and the backlog that you just ended the yr with, it appears to suggest that you just’ve acquired someplace round 1,000 orders to this point this yr. So, I simply needed to double again and see if that math is right.
Matt Tonn
Sure, Justin, we gained’t get into the specifics, however it’s considerably greater than that.
Justin Lengthy
Okay. Acquired it. That’s useful. And I assume by way of that supply steering, you talked about it’s a rise from 2022. However it seems like your capability to provide railcars could possibly be considerably increased than that steering. So perhaps you possibly can assist us assume by way of potential for upside to that supply outlook or if there’s a strategic motive why you’re type of limiting builds inside that vary?
Jim Meyer
Sure. Justin, that is Jim. Good morning. We’re — the steering we’ve given is what we see and count on to construct at the moment, clearly. It’s steering and quantity that’s related to 3 manufacturing strains working for the total yr.
Is there alternative or upside past that? That’s actually going to come back right down to a query of after we determine to begin ramping up manufacturing line quantity 4 and if we determine this yr to begin ramping up manufacturing line quantity 4. Each time we deliver on a brand new manufacturing line, we add and prepare 1 to 2 shifts’ value of individuals. So, it’s a big funding. And we’ll make that call on the proper time relying on not simply near-term orders in hand however what the longer-term outlook appears like. So the steering we’ve given to summarize is for the three manufacturing strains that we’ve up and working. And whether or not we transfer off of that upwards actually goes to depend upon type of a longer-term view on investing in and ramping up the fourth line.
Justin Lengthy
Acquired it. That’s useful. And I assume by way of the adjusted EBITDA steering that you just supplied for 2023, any approach to assist us assume by way of the gross margin assumption that’s baked into that outlook and the extent of visibility you have got by way of a few of these provide chain points getting higher?
Jim Meyer
Sure. Justin, let me begin, after which I’ll cross it over to Mike. The place I’ll begin is as an organization, we’re targeted very a lot on 2 priorities. One is EBITDA era, and the opposite is working money circulation. And so, as we take into consideration plan and function our enterprise, that’s the place our two priorities are. I’ll let Mike remark additional because it pertains to your query on gross margin.
Mike Riordan
So what I’d say is we’ve given income and adjusted EBITDA, and we’ve talked beforehand about our SG&A and the way we maintain that low value and comparatively mounted quantity. So, I believe from these, you possibly can type of again into gross margin for modeling functions.
Justin Lengthy
Acquired it. However any colour you’ll be able to present on the cadence of these gross margins as we progress by way of the yr? I do know you alluded to the availability chain points persevering with within the first quarter after which getting higher thereafter. Simply needed to ensure I type of understood that development.
Mike Riordan
Certain.
Jim Meyer
Go forward.
Mike Riordan
Certain. In order I discussed, we’re going to see relative to This autumn, a reasonably vital improve in Q1 in our margin fee as we’ve taken a number of actions within the fourth quarter of 2022 to raised ourselves for this and handle these provide chain points. After which the stability of the yr, we’ll proceed to see favorability to the margin we even see in Q1.
Operator
Our subsequent query comes from the road of Matt Elkott with TD Cowen.
Matt Elkott
Useful commentary on the gross margin development all year long. Is there any approach you can provide us perhaps similar to a ballpark of the place you count on perhaps to exit the yr so far as the gross margin?
Jim Meyer
Matt, hello, good morning, that is Jim. We’ve not given steering on gross margin. You’re speculated to congratulate us for giving steering on EBITDA.
Matt Elkott
Congratulations. That’s positively merited. I like seeing that. It’s definitely useful. Okay. So sure, I get to see the EBITDA steering. Is there any approach you guys can provide us perhaps at the very least directionally the place you assume as a result of the capital construction facet has been a bit complicated, clearly, what — directionally, what the curiosity expense line may seem like in 2023?
Mike Riordan
Certain. So, as you’ve seen within the launch, we traded out our — we issued the popular inventory and traded out for the time period mortgage. Each of these are comparatively shut within the charges. As we talked about, the dividend is 17.5%, which from the 10-Ok submitting, you see it’s fairly near the rate of interest on our time period mortgage now. However the important thing there’s it’s buying and selling a variable construction for a hard and fast construction. After which, as well as, we’re going to see a decreasing of our borrowing prices and curiosity expense associated to the discount in ABL charges, which is roughly $3 million a yr on an annual foundation as a part of this refinancing.
Matt Elkott
Okay. Acquired it. And I assume, share depend that — any colour on the share depend? Is there any volatility there?
Mike Riordan
There shouldn’t be any volatility on the share depend.
Matt Elkott
Okay. After which, switching again perhaps to some operational stuff. I do know you guys have a tank automotive authorization or utility in progress right here. Is there any replace on that? And might you give us a bit extra colour as to what the top markets for that tank automotive could be if you finally get it? I do know this isn’t a near-term factor. It’s a long-term factor. However any colour on the top markets and replace on the place it stands?
Jim Meyer
Sure. Matt, that is Jim once more. So, I assume, the primary replace is we now have AAR approval for 3 tank automotive designs, 3 automotive sorts that actually are the core of the market, if you’ll, and canopy a disproportionately favorable share of the tank automotive market.
So, we’ve acquired designs approval this yr. As we’ve already famous, our manufacturing facility is actually full. And so, we don’t count on to be constructing tank vehicles within the present calendar yr. And after we do transfer into that route, we’ll clearly speak about it at the moment. We’re not ready at the moment.
By way of how we enter it, which I — by way of the subsegments of the market, clearly, we want to achieve this within the nonhazardous cargo area, vegetable oils and different forms of liquids that clearly stop — current a considerably diminished danger profile.
So, it’s — at this level, it’s about timing and sequencing with our different priorities, together with the continued constructing out of the campus and the way we select finest to make use of it close to time period in addition to partnering with the fitting clients. After we enter it, we wish to imagine that we’re getting into and investing in it with a long-term relationship.
Matt Elkott
Okay. Sure, that’s useful. So no flammable liquid tank vehicles, I assume. The…
Jim Meyer
Not — our objective can be to not enter into the market and the flammability.
Matt Elkott
Okay, so initially not in that market. Do you assume the push to maneuver up the date for the retrofitting or substitute of the non-DOT-117 vehicles, do you assume that would create alternatives in nonflammable liquid tank vehicles that you just guys can reap the benefits of perhaps subsequent calendar yr if everyone else is busy making DOT-117J or DOT-117R, you may need a chance within the nonflammable liquids space?
Matt Tonn
Matt, good query. I’ll simply say that we imagine that that regulation is prone to happen, and that can most likely create some alternatives for us. And to Jim’s feedback, we intend to be ready for. However I do imagine that it’s going to have an effect on the demand for vehicles which can be within the nonhazmat service, which might bode effectively for [indiscernible] a yr in the past.
Matt Elkott
Okay. After which only one follow-up. I do know Justin requested about this, however the provide chain points easing in past 1Q. Are you able to simply give us an thought on what the availability chain points are? Are they labor and elements? A number of the different builders have had points on these two fronts. And do you count on the easing to be sudden and dramatic? Or is it going to be a gradual course of, that means even 2Q isn’t going to be optimum, after which we’ll head in the direction of a extra optimum area by the top of the yr?
Jim Meyer
Matt, that is Jim. It’s going to be a bit sooner than gradual. I’ll begin with that. With out getting too pinpointed right here, a number of our provide chain points, not all of them, however a number of them are with the Tier 1s in america which have struggled with labor and hiring. They, in flip, have additionally struggled with their materials suppliers, who can be our Tier 2s and 3s. So, it’s simply — it’s been the entire assortment of points that everyone reads about within the papers on daily basis. And it’s affecting everyone’s output and on-time supply. And clearly, when elements don’t are available in on time, our vehicles don’t get constructed the way in which they had been meant to get constructed, they usually don’t ship once they’re meant to be shipped, so it simply provides all kinds of undesirable inefficiencies on our finish.
A number of the positives in it’s to begin with, by having full visibility for all sensible functions and to what we’re constructing this yr, and albeit, at this level, even what we’re going to be constructing as we take a look at Q1 2024 offers us a a lot, for much longer planning horizon with our suppliers. And that’s tremendously useful to each events. So, that’s an necessary enchancment.
A second piece is we’ve acquired our fabrication store on-line, as Mike talked about in his feedback round the place we’ll be investing additional monies this yr. We’re basically planning to double the capability or inner functionality of our fab store over the course of this calendar yr. And the extra that we will make, the extra that we management, the higher it’s for our on-time efficiency. So, that’s a second massive alternative.
And once more, the primary piece, which is now in impact, is the truth that we’ve a fab store up and working and feeding our meeting strains. However coming as we proceed throughout the yr can be extra functionality to that. So, these are two massive components.
After which, in fact, by way of the historical past and what we went by way of all of final yr, we’ve clearly an excellent understanding of the place the persistent ache factors are. And the availability chain group has labored round that to some extent. So, it doesn’t depart us fully, however we count on it to be considerably higher managed this calendar yr.
Matt Elkott
Okay. Acquired it. That’s very useful perception. After which, perhaps switching again to the stability sheet. Sorry if I missed it, however you guys had a $20 million discount in stability sheet stock. Are you able to simply stroll us by way of what drove that?
Mike Riordan
Certain. That is Mike. So, a part of that stock discount is you’re evaluating year-over-year metal worth. Inside stock was at a really excessive fee in 2021, and as we moved our approach by way of 2022, we noticed a discount in that value of stock circulation itself out because it’s changed with lower-cost metal because the crew moved down all year long.
Operator
There aren’t any additional questions within the queue. I’d like at hand the decision again over to Jim Meyer for closing remarks.
Jim Meyer
I’ll maintain it temporary. Thanks all for becoming a member of at the moment’s name. Have an amazing day, and we’ll speak to you subsequent quarter.
Operator
Girls and gents, this does conclude at the moment’s teleconference. Thanks in your participation. Chances are you’ll disconnect your strains at the moment, and have a beautiful day.
