FreightCar America, Inc. (RAIL) Q2 2021 Earnings Report, Transcript and Summary

Greetings. Welcome to FreightCar America's Second Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I'll now the conference over to your host, Lisa Fortuna. 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 made during this 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 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 materially differ from those expressed in the forward-looking statements. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. During today's call, there will also be a discussion of some items that do not conform to U.S. Generally Accepted Accounting Principles or GAAP. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the press release issued this morning. Our earnings release for the second quarter 2021 is posted on the company's website at freightcaramerica.com and our 10-Q will be posed later today after the market close. With that, let me now turn the call over to Jim few opening remarks.

Thank you, Lisa. Good morning and thank you all for joining us today. Over the last year, we have talked extensively about the transformational journey that we are on and that our investors should measure us by the progress we make each quarter. I'm proud to say that the second quarter was a very strong example of making progress and also in continuing to build momentum. To execute such a sizable transformation, which has included the radical overhaul of our manufacturing footprint and creating our Costanos Mexico facility, there will always be successes and challenges along the way. However, in order to claim victory, the successes will need to significantly outweigh the challenges. And our second quarter was a great example of this. Let's go through the quarter and talk about what it means for the future. First, our revenue was up 114% year-over-year and 15% sequentially. We delivered 313 rail cars versus 100 in the same period last year. What does this mean to us? It means that our brand new footprint is up and running and capable. It also means that our customers are embracing the new footprint. We delivered our third consecutive quarter of positive gross margin at $3.6 million. This is significant and that our cost structure is now right side up instead of upside down. Our factory size and fixed cost are much more closely aligned to our needs. Also significant and for the first time in three years, we were profitable at the manufacturing operating income level. That's right. And that is also significant in that it is the next step and our return to company level profitability. The significance of this is that we are now approaching a phase where a little more of the right volume can push us across the line. And a final thought on the progress of our financials, for the first half of fiscal 2021, our adjusted EBITDA loss decreased to $2 million compared to a loss of $23.2 million in the same period of 2020. This improvement in the face of multiple supply chain constraints and significant raw material inflation truly highlights just how far we have traveled in a year. Shifting topics, the demand environment across almost all of our end markets continues to gain strength and as Matt will tell you about in a few minutes, our order intake and sales inquiries remain robust. Our customers are very excited about what we have built in Costanos and truly want us to succeed. They have worked with us in countless ways, in order for us to get to where we are and it is very appropriate to say thank you to all of our customers. We are increasing our guidance for rail car deliveries for the second quarter in a row, and now expect to deliver between 1,750 and 1,850 rail cars in fiscal 2021. This is up 20% at the midpoint, compared to our original outlook of 1400 to 1600 rail cars at the start of the year. During the quarter, we continue to make progress and the construction of our own fabrication shop, as well as our new wheel and axle shop Castonas, which we have spoken about in previous calls. When these work streams are completed in early 2022, they will allow us to take a large majority of our fabrications in house and do additional finishing operations on our wheel and axle assemblies. Each of these new additions will bring additional and meaningful efficiencies. And in another indication of progress and where we are ultimately headed, I'm very happy to announce that our board of directors has approved our plans to enter the next phase of expansion at Castonas, namely two additional manufacturing lines numbers three and four. When completed, this will expand our production capabilities from approximately 2,000 cars per year to 4,000 cars per year. What the new lines will do is dramatically improve the earnings profile of the company. What the new lines will not do is cause us to stray off the target of being a much leaner company with much lower -- with a much lower cost structure that we work so hard to achieve. We will be finalizing these plans over the next month or so with our partners in Mexico, the Gill family, and we would expect to be operational in late 2022. As a reminder, the Gills family continues to be a strong partner to FreightCar America and are invested in our success as one of our largest shareholders. They will be providing a large portion of the capital required to build out the facility and we will lease the new addition just as we are now leasing the current footprint. FreightCar America's portion of the CapEx will be fairly modest and is expected to be in the $5 million range. This next step is fully consistent with the vision we outlined for you late last year, namely building the Castonas facility with the ability to flex as the market demand dictates. We are now preparing for when we'll flex. Shifting gears, I want to talk about another benefit and important reason for our commitment to Costanos. You have undoubtedly heard other public companies talk extensively about labor shortages and wage inflation throughout this earning season. I am pleased to report that we have been able to avoid such issues. We have built one of the best and most experienced teams in the region and within our industry. Furthermore, I am extremely proud of the team's response to COVID-19 through ever changing health and safety protocols. Our workforce's vaccination rate is high increasing each week with one age group now at 100% vaccinated. In short, our workforce is on board, well-trained, committed and healthy. In line with my opening comments, this is strong list of successes for Q2, and I'm extremely proud of our entire team who have embraced and led all of the changes to help build a much stronger FreightCar America. Now let's talk about a few of the challenges we had to work through in the second quarter. First our industry continues to face significant inflationary pressures and various supply chain constraints. Higher steel prices have persistent and acted as an operational headwind to our business along with significant increases in ocean freight cost. As the global -- as global demand for ocean freight is far outpacing available capacity, we have seen prices at historic at -- at triple historical levels, adding significantly to our COGS. This is obviously not unique to FreightCar America nor to our industry, but rather a broad reaching fact of life for the moment. As we navigate an extremely unfavorable inflationary environment, our team is taking the necessary steps to combat material and freight cost increases the best they can. This includes renewed focus on material cost reduction across the board, price adjustments where possible and being more selective on the business we accept. Given our now smaller size and lower fixed cost structure, not every piece of business needs to be treated as must win business. During the second quarter, we also had some extra expenses and inefficiencies related to the launch of a new car type. Without this, we would have likely delivered a higher number of rail cars this period. Lastly, we also addressed our growing working capital needs as the business continues to expand. Much of the new needs stem from the fact that we have a large outstanding Mexican VAT receivable that total $21.3 million as of the end of Q2. We expect the associated refund payments to start flowing back to us soon. In the interim, we are fortunate to have a strong financial partner willing and able to step in. Terry will outline the details in a few minutes, but as you saw in our SEC filings a week and a half ago, our financial partner has amended their agreement with us, which opened up a $25 million line of credit. In summary, we are pleased by the progress and results in the second quarter and are confident in the prospects for the second half of 2021. With that said, I'd now like to turn the call over to Terry for a review of our financials. Terry?

Thanks, Jim. And good morning to everyone. So as Jim alluded to, our business is reaching a turning point, and we are excited about our long-term growth prospects. Turning to our financial results, consolidated revenues were $37.4 million in the second quarter of 2021 compared to $32.4 million in the first quarter of 2021 and $17 million in the second quarter of 2020. The company delivered 313 rail cars in the second quarter of 2021 compared to 309 rail cars in the first quarter of 2021 and a 100 rail cars in the second quarter of 2020. Our gross margin in the second quarter was $3.6 million, the third consecutive quarter of positive gross margin for the business as Jim previously noted. Gross margin was higher compared to $2.6 months in the first quarter, 2021. The first quarter included the final transition costs associated with the move to Castonas from shells and the second quarter included the effect of a challenging new product launch. SG&A for the second quarter, totalled $6.3 million down from $9.2 million in the first quarter of 2021 and $6.5 million in the second quarter of 2020. The quarter-over-quarter decrease can be attributed to non-cash compensation accruals, and higher professional fees that were recognized last quarter. Consolidated operating loss for the second quarter of 2021 was $2.5 million compared to an operating loss of $13.2 million in the first quarter of 2021 and operating loss of $12.9 million in the second quarter of 2020. The operating loss in the second quarter included $0.1 million of restructuring and impairment gains while operating loss in the first quarter of 2021 included $6.7 million of restructuring impairment charges and operating loss for the second quarter of 2020 included $0.3 million of restructuring and impairment charges. Manufacturing operating income for the second quarter was $1.9 million compared to manufacturing operating loss of $4.7 million in the first quarter of 2021 and a manufacturing operating loss of $8.3 million in the second quarter of 2020. As Jim indicated, this was the first positive result in over three years, providing further evidence that the shift to the new manufacturing footprint in Mexico was the right strategic direction. But that's -- with that said, we still have plenty of opportunity to align our corporate and other expenses. Similar to previous quarters the warrant issue with our November, 2020 financing will continue to have an impact on our financial statements. The warrant liability is marked to fair market value each quarter with the change in value impacting our net income in earnings per share calculations. For the second quarter of 2021, the gain on change in the fair market value of the warrant liability was $3.5 million compared to a loss of $22.1 million in the first quarter of 2021. As a reminder, this is a non-cash item, reflecting the change in our stock price during the quarter. Interest expense in the second quarter was $3.2 million compared to $2.5 million in the first quarter of 2021 and $0.2 million in the second quarter 2020. As stated in previous calls, we expect interest expense to remain elevated compared to historical levels based on the changes to our capital structure and recent financing arrangements. However, as Jim mentioned earlier, our business continues to pick up positive momentum, which we expect will allow us to establish a conventional revolving credit agreement with lower cost terms in the future. For the second quarter of 2021 adjusted EBITDA loss was $1.5 million compared to adjusted EBITDA loss of $0.5 million for the first quarter of 2021. In the second quarter of 2020 adjusted EBITDA loss was $10.3 million when adjusting for the items previously discussed when reporting on the operating loss and other non-cash or non-recurring items. When comparing the year to date adjusted EBITDA results for the same period of 2020, it is further evidence that our plan is working. Adjusted EBITDA results for the first half of 2021 were a loss of $2 million compared to a loss of $23.2 million in the same period of 2020, singling a much healthier long-term earnings profile aided by the transformation of our manufacturing footprint. Now moving to the balance sheet, we finished the quarter with cash and cash equivalents, including restricted cash and certificates of deposit of $20.7 million compared to $31.7 million at the end of the first quarter of 2021. The main drivers of the decrease included approximately $8 million of value added tax paid to Mexico -- paid in Mexico, excuse me, and approximately $3 million in working capital investment to support higher production levels in the second half of the year. As Jim noted, the total VAT receivable is $21.3 million at the end of the second quarter and we are in regular communication with the Mexican regulatory officials who will process the refund. Capital expenditures through the second quarter of 2021, we're $1.4 million compared to $7 million through the second quarter of 2020. We maintain our view that fiscal year 2021 CapEx will be significantly lower in 2021, compared to 2020 and believe it will range between $2 million and $3 million. Finally, as Jim noted and was heightened on our press release today and recent SEC filings, we have entered into an amended financing arrangement with our financial partners opening up a $25 million line of credit. This is an addition to the $16 million of financing that was provided in May. Some of this funny may not have been required had we better understood the VAQ [ph] refund process earlier on. That said, our primary financial lenders commitment to FreightCar America has allowed us to remain on offense and stay focused on our strategic initiatives. Further as the 8-K filed outlines, our financial partner is charging us a fee for this new support, which they will be partially taking in stock. We do intend to repay the $60 million borrowed in May 2021 before March 31, 2022, which will avoid additional equity consideration on that borrowing. Finally, after quarter end, we received formal notification in early July that the small business administration have forgiven our $10 million PPP loan, which further strengthens our balance sheet. With that financial overview, I'd like to now turn the call over to Matt for a few commercial comments related to the second quarter and moving forward, Matt.

Thanks, Jerry and good morning. As Jim mentioned, we continue to see encouraging signs in the overall economy, as well as the rail car industry. Rail cars and storage declined for the 12th consecutive month. Fleet utilization trends remain positive and car strapping is on the rise signaling an improving rail environment. Again, these are all key indicators that we track and its evidence that the industry is on the recovery trajectory. Order in freight levels during the quarter were up sequentially versus the first quarter of 2021 and double that of any quarter since 2018. In the second quarter of 2021, we booked 1133 car orders compared to 300 in the first quarter and zero in the second quarter of 2020. Clearly this was a significant jump sequentially as we successfully converted a good number of inquiries to orders during the quarter. The ongoing strength of inquiries in order activity are positive indications that we are starting to enter a market upturn. Inquiries and orders for conversions also continue to be robust given FreightCar America's variety of conversion options in engineering expertise in this segment. As the industry leader of rail car conversions, we will continue to invest in this space, including our infrastructure capabilities of Castonas in expansion of our offerings, leveraging both our engineering and manufacturing expertise. As we have previously stated, our conversion capabilities provide our customers solutions to upgrade utilized rail assets into the latest car designs that generate new revenue opportunities for them. As we've discussed in previous calls, pricing pressures remain a headwind, and we expect this to continue for the balance of the year as the market ramps up in rail car builders and look to fill line space. Raw material price volatility increased freight costs and higher component pricing or additional headwinds anticipated for the remainder of 2021. With that said, the Castonas footprint allows us to be flexible and focus on the orders that are best suited and most profitable for the company. The efficient footprint of Castonas not only lend itself to deliver our broad product portfolio, but is also designed with the flexibility to change car types more quickly and run efficiently at lower volumes than in facilities. As Jim had already mentioned, we have raised our 2021 outlook for the second consecutive quarter to between 1750 and 1,850 rail car deliveries up from our most recent guidance of between 1600 and 1750 rail cars. With that, I'll now turn the call back over to Jim for a few closing remarks. Jim?

Thanks, Matt. To conclude, this quarter included multiple steps forward along with some challenges still to overcome as any transformation of this magnitude would. But our long term successes far outweigh the short term -- the short term challenges that we see and our momentum is clearly up and to the right. Our industry appears to be in the early stages of a strong cyclical upturn and our timing and building, and now expanding the newest purpose-built manufacturing facility in North America puts us in a strong position to drive long-term growth and profitability as we advance our journey. We have moved the company from struggling to transforming, so as Terry put it, starting to play offensive. On this note, and then one final piece of news worth sharing, we received AAR approval for our first tank car design in May. We look forward to continuing to share our progress with you? That concludes our prepared remarks. And I'll now turn the call over to the operator for Q&A.

Okay. At this time we will be conducting a question and answer session. [Operator instructions] Our first question is from Justin Long of Stephen Inc. Please state your question.

Thanks and good morning. I wanted to start with the question on the orders in the quarter. Is there any additional color you can provide on the car types that were ordered and maybe the size of the orders as well? Just curious if there was a large order included in that total or if it was more a kind of a group of smaller orders.

Good morning, Justin, this is Matt. Yeah, we don't typically provide that type of granular detail on order activity. I can tell you that order were represented by car types that we are shown in have historical -- history of building that meet our financial objectives. I would say overall the inquiries have been, as I mentioned in my opening comments, they've been strong. We had good success in converting those into orders for the quarter.

Okay. And I guess go ahead, Jim. Sorry.

Yeah, I was just going to say, I think it's fair to say without elaborating too much that the types of orders and size of each individual order is very representative of the place in the market where we've been targeting and have discussed in the past.

Okay. And subsequent to quarter in, is there anything you can share on the level of quarter activity and maybe just looking at the guidance, anything you can share on the cadence of deliveries in the third and the fourth quarter, if it will be pretty even, or if we are going to see a discrepancy between the two quarters,

I think what you'll see in the second half of the year, you'll see a ramp up of production and deliveries as a result of order activity that we've had earlier in the year.

Okay. And then in terms of orders, subsequent to quarter end, is there anything you can share now that we're halfway through the third quarter, have there been meaningful orders received?

Yeah, this is Jim again, Justin, I don't think we're going to give a lot of information today on what's happened beyond the quarter end other than this say that our next several quarters are fully booked and we're now taking orders out into next year at this point.

Okay. And I guess last question from me and then I'll pass it on, but could you just share where you're getting the most traction with customers right now in terms of just that the mix of customers, whether it's rails, leasing companies, shippers, if it's all three would, would love to just get some more color around that.

Yeah, Justin, I think you can, you can say that we're seeing now positive traction with all three. There's a good activity by each of those customer segments, as they look at their fleets and look at how cars are being scrapped and where they need to replace.

Okay. That's good to hear. I appreciate the time.

[Operator instructions] There are no more questions at this time. We have reached the end of the question-and-answer session. I will now turn the call back over to Jim Meyer for closing remarks.

Thank you all again for joining us today. Now more than ever, we're excited about the future of FreightCar America and truly believe we are on the path to sustaining long-term growth. Thank you and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.