Welcome to FreightCar America Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. An audio replay of the conference 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 Riverton Investor Relations. Over to you, Chris.

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 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 their most directly comparable GAAP measures are included in the earnings release issued yesterday afternoon. Our earnings release for the second quarter of 2025 is posted on the company's website at freightcaramerica.com, along with our 8-K, which was filed premarket this morning. With that, let me now turn the call over to Nick for a few opening remarks.

Thank you, Chris. Good morning, everyone, and thank you all for joining us today. I am proud to share another quarter of strong performance of FreightCar America, marked by execution and resilience as we expanded our margins through operational efficiency and delivered solid profitability. This quarter also marks our fifth consecutive quarter of positive operating cash flow generation, finishing Q2 with over $61 million of cash on hand, while we have maintained strong commercial momentum with orders, adding 300 units to our healthy backlog for the year despite a challenging industry backdrop. Gross margins for the quarter expanded to 15% on 939 deliveries, up from 12.5% on 1,159 deliveries a year ago. Adjusted EBITDA margins increased 20 basis points compared to the prior year, and we generated adjusted free cash flow of $7.9 million. While revenues and deliveries were lower year-over-year, we have continued to utilize our lines effectively and deliver increased profitability as these strong results demonstrate the effectiveness of our manufacturing strategy and the operational commitment of our team. On the commercial side, our broad product portfolio and value-added solutions continue to prove themselves as competitive differentiators. We secured 1,226 new orders in the quarter, largely driven by rebuilds and conversions. These orders increased our backlog to 3,624 units, up approximately 300 units from the prior quarter, though the dollar value of the backlog remained stable, reflecting a higher proportion of rebuild and conversion work. Importantly, rebuilds and conversions continue to deliver excellent value for our customers in these market conditions. This type of work exemplifies the strength of our flexible manufacturing model, enabling us to adjust quickly to customer needs while maintaining healthy profitability. Operationally, we continue to run all 4 production lines throughout the quarter, improving productivity and supporting high throughput even at a lower volume…

Thank you, Nick, and good morning, everyone. For the second consecutive quarter, we continued to see consistent inquiry level activity and conversion to orders. During the second quarter, we booked orders for 1,226 railcars valued at $107 million. This order intake represents back-to-back quarters with a book-to-bill ratio of 1.3 and further supports that our purpose-built commercial strategy of engineering, manufacturing, and delivering high-quality railcars resonate with our broad customer base. Our commercial strategy is focused on maintaining share while remaining responsive to changing market conditions. As new railcar demand softens and customers seek a rebuild or conversion option, we leverage our expertise in flexible plant operations, providing value and optionality to our customers. Railcar conversions has been a foundational component of our heritage with over 15,000 conversions and rebodies completed in the last 20 years. Further, our tank car retrofit program and plant readiness is advancing and on track for primary production beginning in 2026. This added capability, coupled with our modern manufacturing infrastructure, serves as a key competitive advantage, providing value to our customers, a flexible mix of new car production, conversions and rebuilds, and solid gross margin returns. From an industry perspective, we are beginning to see a softer new railcar demand environment due in large part to uncertainties around tariff policies. Although we view these economic realities as short-lived, they are affecting customer order timing, and we do expect that total 2025 industry deliveries will fall below the previously expected 40,000 units per year average. It is important to note, with over 160,000 railcars projected to reach their mandated retirement in the next 4.5 years, we fully expect overall industry annual demand to fall within the 35,000 to 40,000 range. Despite short-term extended decision cycles in certain freight segments, our team continues to drive steady quote volume by emphasizing versatility, value, and delivery certainty. Looking ahead, we remain committed to driving high-value opportunities that align with our customers' dynamic needs. We continue to prioritize margin performance, manufacturing flexibility and a diversified order book, all factors that we believe will set us apart in moderating demand environment. With that, I'll turn it over to Mike for comments on our financial performance. Mike?

Thanks, Matt, and good morning, everyone. I'd like to begin by sharing a few second quarter highlights. Consolidated revenues for the second quarter of 2025 totaled $118.6 million with deliveries of 939 railcars compared to $147.4 million on deliveries of 1,159 railcars in the second quarter of 2024. Lower deliveries and revenue in the second quarter of 2025 were primarily driven by producing railcars during the quarter that will deliver throughout the second half of 2025. Gross profit in the second quarter of 2025 was $17.8 million with a gross margin of 15% compared to gross profit of $18.4 million and gross margin of 12.5% in the second quarter of last year. Higher gross margin performance was driven primarily by a favorable product mix and increased production efficiency. SG&A for the second quarter of 2025 totaled $10.1 million, up from $8.5 million in the second quarter of 2024. Excluding stock- based compensation, SG&A as a percentage of revenue increased approximately 260 basis points, primarily due to the timing of spend on various professional services. We expect SG&A, excluding stock-based compensation, to decrease in the second half of the year and normalize for the full year. In the second quarter of 2025, we achieved adjusted EBITDA of $10 million compared to $12.1 million in the second quarter of 2024, driven primarily by lower deliveries. Despite the lower volume of deliveries, adjusted EBITDA margin expanded by 20 basis points in the second quarter of 2025 compared to the second quarter of 2024. Adjusted net income for the second quarter of 2025 was $3.8 million or $0.11 per share compared to adjusted net income of $3.5 million or $0.10 per share in the second quarter of last year. During the second quarter of 2025, we recorded a noncash tax benefit of approximately $52…

[Operator Instructions] Our first question comes from Mark Reichman with NOBLE Capital Markets.

Compared to the prior year period, railcar sales fell about 26%, while aftermarket sales increased almost 61%. And I was just wondering how much of that is due to productive capacity being dedicated to custom fabrications versus the timing of rail orders within the year? And what are your expectations for the third and fourth quarters?

Mark, it's Nick. I'll answer that one and then Mike may do some follow-up on some of the timing issues of it. So I think, yes, a couple of things to unpack in that question. So in Q2, we did produce a higher volume than we shipped in Q2. We produced some products that were shipped in a subsequent quarter. So from a production perspective, we are firing up, our planning process leveled out so that we don't have large swings in labor up or down. So we really utilize our capacity in an effective manner to drive our business. So that kind of really explains why there's a difference year-on-year Q2 to Q2 in the volume shipped. So yes, you'd expect to see those ship in a later quarter in the year and see that sort of smooth off. I would just clarify, though, our production capacity wouldn't be a constraint on sales. The customer demand dictates our sales rather than any capacity concerns. But the aftermarket piece, I'll let Mike add on to that.

So on a quarter-over-quarter, we continue to expand our presence in the aftermarket, and we're just seeing sales growth there that we continue to like and see in the future. But to Nick's point, production was higher in the second quarter than you'll see in the delivery numbers with a balance of cars produced and we'll deliver throughout the second half. And you'll see that maintaining the full year delivery guidance, you'll see Q3 and Q4, we expect to be much higher deliveries than what you've seen in Q1 and Q2. And all of that is simply timing to customer schedules and when they want to take cars.

And the second question is just manufacturing segment gross margins. If you look at them kind of historically, but in the first and second quarter, 13.4% and 13.5%, while the aftermarket margins were 37.4% and 36.8%. So do you think the first and second quarters are indicative of forward gross margin expectations? And how are the tank car retrofits expected to impact revenue and margin in 2026 and 2027?

So I'll split that into two separate pieces, Mark. One is the current year of 2025, and then the other one is future years. Typically, we don't make too many comments on future years, but we've mentioned tank car retrofits, so we can talk a bit about the timing of that at least. So in this year, the margins we've seen in Q1 and Q2 have been a mix between product mix and really accelerating our productivity, our operational productivity, at least on the whole goods side, which has been favorable for us. I would expect to see those carry through in Q2 and Q3 -- sorry, Q3 and Q4 for the balance of the year. So I don't expect to see too many changes from what we've demonstrated in Q1 and Q2. Certainly, with the volume going up, you'll see the shipments go up, but the margins should stay pretty consistent. And as mentioned before, we try and -- we haven't been communicating large layoffs or changes in our organization. We've been able to be consistently retaining that well-trained workforce so that we can build on the margins we get each quarter. So that's -- I would just use that as an indicator of what Q3 and Q4 will look like and what the whole year will look like. As it comes to future years, we don't generally communicate on those. We do have the tank car retrofit program, which we've communicated. And as Matt and Mike both commented in the prepared notes, that sort of starts partway through 2026. We've got a -- I think last quarter, you asked about a fifth line. We would look at our latest increment -- order quantity is about 1200 units a year each quarter -- sorry, 1200 units per quarter coming through. If we sustain quarters like that, then we'd obviously look to add that fifth line to produce those retrofits, and that would obviously alter the performance accordingly. But we'll know more about that as we enter into 2026 rather than sort of the summer of 2025, if that helps.

No, it's very helpful.

We have our next question from Aaron Reed with Northcoast Research.

So what I want to know little bit more about, and I know you mentioned it was you said the tank line is expected to add around $6 million in EBITDA here in '26 and '27. I just want to make sure I heard that right, as well as if you give a little more color around the timing of what that might look like would be helpful.

Yes. Just for clarification, obviously, it's $6 million over 2 years, right? So that's -- we've been talking about our plant will be ready to the tank car conversion program in a matter of months. And we will -- the contract we have start sort of mid to end Q2 of 2026 and then bleeds over into 2027 as well. But we've got inquiries and other orders we may add to that, but the specific one that you referenced is really scheduled to start in the back half of Q2 of 2026.

Perfect. the other question I have is, I know there's been a lot of talk, especially in terms of mergers between some of the Class 1 rail carriers. How is that expecting to impact you? Or is that kind of not really going to impact you one way or another? I'm getting a lot of questions on that.

I'd say it's a difficult one to say for sure. Will it impact the industry? I would expect so. I expect there's a couple of things. One is I would expect there to be some productivity and customer enhancements in the railroad industry. That will ultimately help railroads, just the industry overall. Improved productivity and improved customer service levels always help from that perspective. From a builder's perspective, what's good for rail is good for a builder. That's the way I always look at it. I think it's too early to say on any timing or orders or content or product types. That would still get to be seen. But I think it's -- if there's an enhancement or improvement for customers and end users in rail, I think that rises the tide for the rail industry. It's the way I would look at it. But it's very early days, Aaron. So it's not something that a lot of people have had a lot of time to digest and look at the true details behind it.

That makes sense. And then one more quick question is one of the things that we're seeing a lot of interest in, obviously, is AI and the massive demand and uptick in energy needed. So it looks like there's been a bit of a resurgence in coal. And my understanding is a lot of those cars have been retired as the expectation was that coal is going to kind of fizzle out. Is there a potential for increased demand in either repairs or even maybe new opened up hoppers that might develop here in the next coming quarters or even year that wasn't necessarily expected a year or 2 ago? Or is there still, would you think, ample supply that means that wouldn't necessarily be required to get additional or repaired cars?

Sure. I will make some comments on this and then I'll ask Matt and Mike maybe to comment on it as well. So just to put into context, I think for the entire railroad industry, coal is probably still the largest single commodity moved across the railroad networks in its own right. So coal is a very large proportion. And as you mentioned prior to probably 2 years ago, it's been on a constant decline and a very predictable decline from a usage perspective. So any change to that certainly would be a positive for people who are involved in either the repair, the restoration or the extended life of units that are used to move coal. So I think FreightCar America has one of the largest fleet of coal units -- coal railcars out there. So yes, so we would expect to see -- we do see a lot more inquiries about extending the life of existing coal-related assets in the rail network, which is very helpful. I think it's too early to look at whether that would transpire into a new car build. I think there's a lot of rail assets dedicated to coal out there. But I don't know how close to the end of life they actually are and whether people would look to do a conversion into coal or a conversion from coal. So I think the conversion piece is probably more where we would see activity on that. Obviously, we do a lot of conversions, so it's very beneficial for us. But in the near term, it's the extension of life from maintenance repairs and parts, which is clearly well within the remit of our aftermarket business, which feeds that industry. Mike, anything I missed on that?

No.

We have our next question from Brendan McCarthy with Sidoti.

I wanted to circle back to gross margins. I think that you had mentioned we should see a similar gross margin level of right around 15% for the back half of this year. I just wanted to look longer term. I know there's the 1,000 tank car conversion order in the backlog, obviously, higher margin there. Do you see any reason why gross margins may step down from that 15% level long term?

I'll take a stab at that to begin with, Brendan, and then Mike can add any additional detail. So there's a couple of things. So first of all, mix does play a large influence. So when you ask -- when we look outside our lead time window, it's hard to nail mix down. All I know from a planning and from an agile manufacturing perspective, we are confident and capable to adjust to whatever the customer demand is in the future. But the margins will flex, obviously, predicated by mix. So that is somewhat unknown from a mix perspective. So if we look too far out, that's difficult to sort of predict with any certainty. I would say there's no -- we've got some nice pipelines and some nice inquiry levels. I think 15% is at the high end, which is nice. But obviously, we would work, maybe dilute that as well in the out period as well. If you think about this year for the next 2 quarters as we finish for calendar year 2025, I think the biggest thing we look at is our shipments will probably go up in Q3 and Q4 compared to what they've been in Q1 and Q2. We did build ahead in Q2 for some items that we'll ship in the second half of the year. I think that the margins will be similar. So it's going to depend on what ships and exactly when it ships into Q3 and Q4. But it's really mix dependent with an underlying productivity enhancements, which we keep on driving, which is really influencing those gross margins most. Mike, anything to add?

That makes sense. Just looking at gross margin gains maybe year-to-date, I guess, how much of that do you attribute to that manufacturing efficiency? And how much do you attribute to just the product mix in general?

It's difficult to split that out in an easy way. There are certain products that also have a manufacturing productivity mix that go with them -- enhancement that go with them simply because of the length of the order, the size of the order and the volume rates we produce. I would say there's a generic trajectory that we're on for productivity improvement, which incrementally improves our underlying operational productivity quarter-on-quarter, and that's predictable and reliable. And then you have the peaks and troughs of the product margin that ships at any given time, which adds on to that. So I would -- our operational productivity will continue to increase quarter-over-quarter as we offset any incremental pay rise improvements or inflation pressures. And then the product mix margins are really predicated by the product type. Now if you think about output this year, obviously, we talked about tank cars and tank car retrofit, which generally have a more lucrative margin with them. So I'd expect it to go with that product to go up. But I generally -- we're trying to pin it down to which quarter, which we ship, which product in the out periods is a bit more difficult than just looking at the market per se.

That makes sense. one more question for me. I know you talked about an increase in growth CapEx as it relates to the tank car capabilities in your manufacturing. Just wondering if you could provide any color on the tank car conversion pipeline, maybe conversations that you're having with potential customers there. Just curious as to what that pipeline might look like.

Sure. I'll talk a bit about that. So obviously, we secured a large order. We've previously communicated that. There is a federally mandated date, which I think is back end of 2029 by the time that all these cars must be converted for use on across North America. So there is -- I think there's some industry estimates that put somewhere between, I don't know, Matt, somewhere between 10,000 to 17,000 units likely would need to be converted in order to stay operational. The owners of those units have some decisions to make. Do they want to replace them with new or do they want to convert them, and that would depend on how much usable life and what type of usable life is left on them. So there's certainly a significant chunk of customer appetite out there for conversions. We continually have conversations with people. This decision is certainly not a capacity issue for us. We would accommodate orders that any customer would like to get converted in that time frame. The question really is, would they like to -- would they prefer to switch it to a new car as opposed to a conversion? And obviously, we are preparing and readying ourselves to enter into the new car market as well. So we are staying close to those conversations, whether it be a conversion or a new car in that late '26 or calendar year '27 period. But it's the same customers that we talk about the same product. We just provide different routes to solutions depending on what their need is at that time.

We have a follow-up question from Mark Reichman with NOBLE Capital Markets.

This question is for Matthew. According to the RSI, industry-wide orders and deliveries were 11,322 and 15,726, respectively, for the first 6 months of 2025. I'm just kind of curious where -- Matt, where do you think those numbers will fall out for the year?

Yes, Mark, I think we're looking at another year, back-to-back years of total industry order volume that will be sub 30,000 railcars with an upturn in demand when we get into the years '26.

I'll just add that we do see based on pipeline activity, we do have an expected order increase in the second half of the year.

Okay. So like the first quarter, you were 25% of the orders and the second quarter, about 19.7%. So you expect to kind of maintain those levels? Or do you think you can continue to capture market share? And then, of course, you've got the backlog as well?

Mark, we expect to continue to have market share gains. And I would point out that our flexibility and the capabilities to work with customers on specific demands beyond just new cars is something that's not measured in terms of total market share when you compare it to ARCI numbers. However, keep in mind that conversions, rebodies, and rebuilds are a very valuable component of our offering and provide customers that optionality. So the market share numbers themselves don't tell the full story. But we do expect to see continued growth in market share based on our overall offering.

Okay. And then the last one question is just for Nick. In the recent presentation, there's mentioned that the fifth line is expected to increase capacity by 20% or 1,000 units. So you've got the 4 production lines at 1,250. And I was just kind of curious why it would be 1,250 versus 1,000?

Mark, it's a good question. When you look at our capacity, we typically use 1,250 because of the four lines and then the fifth line will be in some way used for preparation for entry into the tank car market, and we would look at that may be a bit of a slower ramp-up. So that's where that sort of slight delta is between a fifth line. Whichever line we convert to tank cars, as a new entrant, we would want to just ease ourselves in a little bit rather go full volume straight away. So that really sort of explains that delta. I would just caveat that capacity constraint would never -- well, I wouldn't say never, but in the foreseeable period, wouldn't be a constraint for us. We are currently running four lines at about 1,250 a line, running about 70% of the work week. So there's obviously shift modifications and changes we could do to increase that capacity if we ever needed to from that perspective. But in answer directly to your question, why is the fifth one coming at 1,000, not 1,250, it's more to do with us being a little bit cautious on a new product type, new segment. We would just have to take that into account when we look at how our capacity looks.

I am not showing any further questions at this time. I would now like to turn the call back over to Nick Randall for any further remarks.

So thank you. I would just like to summarize a couple of bullet points from where we finished. So at the end of Q2, we maintained strong commercial momentum with our orders driven by rebuilds and conversions, adding 300 units to our healthy backlog for this year despite, as people mentioned, a challenging industry backdrop. We expanded our gross margins to 15%, that's 250 basis points through operational efficiency and driven solid profitability. We generated $8.5 million in operating cash flow this quarter, marking our fifth consecutive quarter of positive cash from operations and adjusted free cash of $7.9 million. Our strong cash position provides flexibility to invest strategically while maintaining our financial discipline. We announced a capital investment in our tank car retrofit program, accelerating capability expansion and advancing vertical integration of key components within our manufacturing process. And we are well positioned to capitalize on market opportunities ahead and continue to deliver sustainable shareholder value. And with that, I thank you all for your time. Thank you.

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