FreightCar America, Inc. (RAIL) Q3 2025 Earnings Call Transcript

Welcome to the Freight Car America's third quarter 2025 earnings conference call. At this time, all participants' lines are in listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note this conference is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Chris O'Day with Riveron Investor Relations. Please go ahead, sir.

Thank you and welcome. Joining me today are Nick Randall, President and Chief Executive Officer, Mike Reardon, Chief Financial Officer, and Matt Thon, 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 Reformation Reform Act of 1995. Participants are directed to Freight Car America's Form 10K for 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 earnings release issued yesterday afternoon or this morning, excuse me. Our results for the third quarter 2025 is posted on the company's website freightcaramerica.com along with our 8k which was filed pre-market 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. Freight Car America delivered an exceptional third quarter, highlighted by strong deliveries, revenue growth of over 42%, and a recent record for the third quarter adjusted EBITDA at our new facility of $17 million, growing 56% versus the prior year. We achieved gross margin of 15.1% and adjusted EBITDA margin of 10.6, up approximately 80 basis points and 100 basis points respectively versus the prior year, representing our most profitable quarter since relocating production to Mexico. This performance highlights the strength of our flexible manufacturing model and the disciplined execution of our commercial strategy. During the quarter, our team remained focused on building value and solving complex customer needs. While others in the industry may rely more heavily on commoditized orders, our adaptability and ability to deliver custom, high-value solutions continues to drive sustainable profitability across market conditions. Operationally, our team in Kostanos continues to execute at a high level. Improvements in safety, quality, throughput, and cost structure remain consistent quarter after quarter. These efficiency gains and the reliability of our processes have been instrumental in supporting our record EBITDA performance at our facility. As we scale, we are reinforcing that culture of execution, one that emphasizes continuous improvement, customer responsiveness, and long-term value creation. Strategically, we remain focused on initiatives that position us for durable growth. We are excited about the progress and development we have deployed is displayed with our TrueTrack process, integrating digital tracking and monitoring capabilities across each production step, ensuring on-time deliveries, increased efficiencies across all of our manufacturing lives, and most importantly, delivering high quality and reliability in every rail car we produce. In addition, we are also moving forward with enhancements to our plant layout. This initiative is all about improving flow, increasing productivity, and driving higher throughput. It will enable stronger margins per car, expand our ability to meet growing customer demand, and establish a strong market position. It's another great example of how we are executing on the opportunities within our footprint to build a more efficient and capable operation for future growth. At the same time, we continue to explore ways to vertically integrate our capabilities, continue to invest in automation and process control, and strengthen our readiness for future tank car conversions, which is already well ahead of schedule. Together, these actions reflect the continuous progress we are making since transforming our production footprint, and it's laying the groundwork for more consistent profitability through future cycles. From a market standpoint, as we noted last quarter, the broader rail car industry continues to operate below long-term replacement levels, with total deliveries expected to remain under 30,000 rail cars this year versus a normalized rate closer to 40,000 units. While this softness has limited overall new car volumes in the industry, our ability to serve more complex customer orders beyond standard new car builds has helped offset that trend. We continue to capture opportunities through conversions, retrofits, and other specialized rail car solutions, all areas where we bring value and deepen our customer partnerships. While industry demand is temporarily muted, the replacement cycle gap is widening, creating pent-up demand that we are well positioned to capture early once the market begins to normalize as we enter the final quarter of 2025 our priorities remain clear deliver enhanced quality of earnings generate positive free cash flow and maintain our disciplined approach to growth our backlog remains healthy and diversified at 2,750 units valued at approximately 222 million dollars and our commercial pipeline continues to build across both conversion opportunities new rail cars which reinforces our view of the recovery towards normalized replacement levels. Looking ahead, we see numerous opportunities on the horizon and are excited about strengthening our position in the market. Operationally, we're excited to reap the benefits of improvements to our manufacturing lines and deliver on our adjusted EBITDA guidance for the fiscal year. We expect to maintain strong margins and close the year with solid positive gas generation. With that, I'll turn to Matt to discuss the industry dynamics.

Thank you, Nick, and good morning everyone. As Nick mentioned, the third quarter represented another resilient period for freight car America as we continue to prioritize disciplined order intake and profitable growth despite challenging industry dynamics. Industry order activity remains subdued as macroeconomic uncertainties continue to impact customer order timing. The total new car orders for the North American market expected to finish below 30,000 rail cars for the year, well below the normalized rate of approximately 40,000 railcars. Even with this temporary soft backdrop, our commercial team delivered solid results and maintained strong momentum in meeting our customers' needs. During the quarter, we received total orders for 430 railcars, bringing our backlog to 2,750 cars at quarter end, valued at approximately $222 million. Importantly, we maintained our position in the market, achieving over 20% of addressable market order share for new car orders, or 15% of the total market. Our backlog reflects a healthy balance across our broad rail car portfolio, including conversions and retrofits, which remain a core component of our business, as Nick mentioned earlier. Our conversion and retrofit capabilities give customers a cost-efficient alternative to new builds, and are a meaningful driver of margin expansion for freight car America. In a market focused on extending asset life and lowering total cost of ownership, these offerings keep fleets productive while maintaining customer budgets in a challenging market environment. Backed by our deep engineering expertise and flexible and efficient plant footprint, we tailor solutions to each customer's specific needs and operating environments. We continue to see strong engagement from long-standing customers and healthy momentum from new accounts. Interest in 2026 deliveries is strong. We're supported by broad participation across key end markets, including chemical, agricultural, industrial, aggregates, and mining. While the pace of order placement is moderated, customer inquiries and bid activity remain steady, reinforcing our view that replacement cycle fundamentals are intact. Commercially, our focus remains on maintaining pricing discipline and ensuring we continue to deliver the highest quality for our customers. We are achieving several strategic initiatives and enhance our competitiveness and customer responsiveness, as Nick mentioned earlier, including expanded engineering capabilities, improved lead time management, quality initiatives with our TrueTrack quality process, and deeper integration between our commercial and operational teams. We are excited to see these initiatives come together and help strengthen our ability to capture the right business while enhancing the profitability improvements we've achieved over the year. With that, I'll turn the call over to Mike to review our financial results in more detail. Mike?

Thanks, Matt, and good morning, everyone. I'd like to begin by sharing a few third quarter highlights. Consolidated revenues for the third quarter of 2025 totaled $160.5 million with deliveries of 1,304 railcars compared to $113.3 million on deliveries of 961 railcars in the third quarter of 2024. The year-over-year increase reflects higher production and deliveries. Gross profit for the third quarter of 2025 was $24.2 million with a gross margin of 15.1% compared to gross profit of $16.2 million and gross margin of 14.3% in the third quarter of 2024. The improvement in margin was driven primarily by the product mix, including specialty new cars and conversions, as well as continued operational efficiency at our Castanio's facility. SG&A for the third quarter totaled $9.6 million compared to $7.5 million in the prior year period. Excluding stock-based compensation and certain professional service cost, SG&A as a percentage of revenue is approximately 50 basis points lower year over year, reflecting our operational leverage on higher deliveries between the comparable periods. Adjusted EBITDA for the third quarter was $17 million, representing a margin of 10.6% compared to $10.9 million and a 9.6% margin in the third quarter of 2024. This represents our strongest quarterly adjusted EBITDA since relocating operations to Mexico and underscores the benefits of discipline execution and favorable product mix. Adjusted net income for the quarter was $7.8 million, or $0.24 per diluted share, compared to adjusted net income of $7.3 million, or $0.08 per diluted share in the third quarter of 2024. Reported net loss for the quarter was $7.4 million, or $0.23 per share, which includes a $17.6 million non-cash adjustment related to the change in warrant liability due to share price appreciation. As a reminder, this is a non-cash item that does not impact our operating performance, cash flow, or share count. Turning to cash flow, we generated $3.4 million in operating cash during the quarter. Adjusted free cash flow was approximately $2.2 million, an improvement of $1.2 million versus the prior year period. Our continued cash generation reflects disciplined working capital management and improved profitability. We ended the quarter with $62.7 million of cash and no borrowings under a revolving credit facility, maintaining a healthy balance sheet and ample liquidity to support growth investments. Given our capital strength, we are well positioned to build on our platform and look for strategic opportunities to amplify our market position and scale. Capital expenditures for the third quarter totaled $1.2 million, bringing year-to-date capital expenditures to approximately $2.1 million. For the full year 2025, we now expect capital expenditures to be in the range of $4 to $5 million, consistent with our original assumptions for the year. Our updated forecast on the timing of certain spend for projects has shifted into the first quarter of 2026. Overall, our financial performance in the third quarter underscores the success of our commercial strategy, demonstrating the profitability and cash generation capabilities of our business model. We are reaffirming our full year adjusted EBITDA and rail car delivery guidance ranges and adjusting our revenue range down to $500 to $530 million to reflect a product's mixed change. We remain on track to deliver positive free cash flow for the year with a solid foundation heading into 2026. Looking ahead, we're focused on ensuring that every dollar we invest supports scalable high return opportunities. With a healthy balance sheet and steady cash flow, we are well positioned to support future growth and deliver improved profitability. With that, we'll now open the line for Q&A.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

One moment while we poll for questions. Our first question comes from Mark Reichman with Noble Capital Markets.

Good morning. The question I have is the guidance on the CapEx was I think it had been updated to $9 million to $10 million, and so you're kind of back to the $4 million to $5 million, which I understand and I think is reasonable. But could you just kind of walk us through your plans to prepare for the tank car conversions and entrance in the new tank car markets, kind of how those capital expenditures unfold into 2026 and the uses of the expenditures?

Hey, Mark. Good morning. It's Nick. I'll answer that one. And if I miss something, Mike can follow up on that. So a couple of things. So on the CapEx investments, it's not a change of scope. It's just a move of timing. We had some investment for a vertically integrated components for the tank car retrofit that were originally scheduled for late December. They're going to move into early January, just so tips across that new year period. So just a change in timing at the end of the year, but not a change in scope. As it goes for the preparation and readiness for the tank car conversion, we're well ahead of schedule. You know, there's a couple of processes to get AAR certifications at the plant and then a couple of processes on capital equipment. So what I had to schedule, we'll be, you know, talking more about the timing of shipments of that in 2026. But, yeah, they certainly start through our 2026 period. But the change in CapEx allocation this year is just a couple of weeks in timing. I mean, it just so happens it's right at the end of December, which flips into 2026 rather than 2025.

Mike, I don't think I missed anything there.

Just the next question is on the revenue guidance. I mean, if I look at the backlog from the second quarter, you know, it averaged about $87,000 a unit. So if you look at the backlog now, it's about $81,000. But margins have actually improved. So I guess I'm kind of looking at fourth quarter, and I'm thinking, you know, probably somewhere in the 80s, you know, per unit. Would you kind of expect the margins for the fourth quarter to look pretty much like the third quarter?

Let me break that down a little bit more because a couple of questions wrapped up in that one question. So it's on the – because you talked about average selling price. So, yeah, when the average selling price does change when we switch to conversion. So we are holding our guidance on unit count, but you'll see that our revenue dollar guidance dropped down a bit just to reflect that higher proportion of conversions in there. And then when you look at conversions, when you look at the percentage-wise, because it's a lower average selling price, the percentage-wise do go positive in up direction because it's a higher proportion of a smaller revenue price. So I just want to make sure that the guidance we've got for the rest of the year is to hold EBITDA, just EBITDA, and to hold the unit count. The revenue dollar has come down so much just because there's a higher proportion of conversions than we originally forecasted way back at the beginning of the year when we sort of tried to predict what we'd have in Q4. So I'm not sure if that answers your question. Mike can add some more color to it. But it's, you know, the important thing for us is to manage our profitability and cash generation. But revenue is not a great metric, given the nature of conversions in new cars and the change in average selling price between the two of them.

That's great. I really appreciate the color. Thank you.

And our next question comes from Iva Purcello with North Coast Research.

Hi, good morning, guys. I am asking questions on behalf of Aaron Reed this morning. And my first question is, I was just wondering, do you expect your product mix to shift following the change in guidance? Or can you share any additional color on the mix between rebuilds and new builds is going to be trending?

Yeah, good morning. Similar questions to what Mark just asked on the guidance. So when you see our revenue move like that, but the adjusted EBITDA stay the same, that does imply that the average selling price for the unit count stays the same, which would imply compared to our original forecast, there's a higher proportion of conversions. It's not a massive swing, but it does swing it a little bit. From a margin and a sort of percentage guidance, you know, we've got a couple of weeks left to finish off 2025. So, to back end that from the adjusted EBITDA and the revenue kind of pretty gets it pretty calculatable where that's going to end for the balance of the year.

Okay, thank you.

And then could you share more detail maybe on how the demand for coal car repair is? Is that still providing a meaningful lift as you look into 2026 at all?

So coal car repairs, it's in our aftermarket business. We break those two out now between new cars and the aftermarket business. And we have, as in Freight Car America, have the largest fleet of coal cars out there in use on tracks across North America. So obviously there's talk in the news about extension of power stations, extension of life of coal-powered facilities. we would naturally expect that there's a sustained and continued demand on coal car components and coal car repair support items, which we have a very nice product portfolio that matches that. So, yeah, we'd expect to see that continued demand for components, but that's separate to new cars. On the aftermarket business, we'll continue to see those coal car components on the cars we originally built over the last 30, 40, 50 years.

All right, perfect. Thank you so much. And then my last question is that, I guess, have you guys experienced any disruptions or order delays tied to the government shutdown or related policy?

I think, you know, the nature of how we run our business and the nature of the rail industry, it's less susceptible to short-term items like government shutdowns and the gases that you know the sort of things that are being hauled and being moved so we haven't seen anything um now directly affects uh us from that perspective the the most sensitive area if there was going to be an area would be in border crossing but a lot of that is now automated um not fully automated but highly automated so we haven't seen any disruption in that uh in cars transferring to and from uh mexico into the usa but that's probably where if there was to be some disruption, that's where we would see it, but we haven't seen it in any recent term or time frame.

Okay. Thank you guys so much.

Thank you. Thank you.

And we'll go next to Brendan McCarthy with Sudoti.

Great. Good morning, guys. Thanks for taking my questions here. I just wanted to circle back to the 2025 guidance, and sorry if I missed this, but just looking at the midpoint of revenue in adjusted EBITDA for 2025. It looks like just based on my rough math that Q4 is implied to come in at around $11.7 million for adjusted EBITDA on about $140 million in revenue, which would be a margin of about 8%. Just curious if you can expand on the step down there from the third quarter and what might be driving that.

Sure. Yeah. So as mentioned, we had some favorable product mix in Q3 and Q2 where we were doing a number of specialty new cars. We won't see that work really in Q4. And Q4 for us traditionally is a lower margin quarter as we do always try to take off the last week of December to do annual planned maintenance for the facility. So you lose a little margin there with a weak shut off and the proportion of what I call more the commoditized cars as some of the other builders have noted and covered hoppers is just larger in Q4 than it has been in the earlier quarters as well and that product is a lower margin card compared to the rest of our product portfolio yeah brother I mentioned in my script that we've taken some work in addition to that annual shutdown, taking some work to repurpose some of our operational lines to make that margin sustainable going forward.

So there's an annual normal maintenance shutdown that takes place towards that back end of December into the new year period. And then we've got some lines that we are retooling and repositioning to enhance that flow, enhance future margins on those as well. So I don't see anything that is a long-term negative trend, but Q4 often has that sort of additional cost that sits there for a couple of weeks and then obviously you get the revenue diluted with its offset just for those one-off upgrades.

That makes sense that's very helpful I appreciate it and then just more of a broad question on your tank car retrofit program as we start to see you hopefully see the deliveries you know flow through in 2026 and 2027 related to the 1,000-car order in your backlog. Just taking a step back and looking at that addressable market, I guess, are you able to really quantify what that addressable market looks like? How many tank cars are up for possible retrofit as it relates to the 2029 deadline? I know some of those cars may be scrapped, but how do you estimate or ballpark what that addressable market might look like?

I'll start that, and then Matt may have some color to add into that, Brandon. So I think I would step it back a bit. There's a bigger question to ask really for us at Freight Car America is our pathway into new tank car builds. So the retrofit program that we have is significant in its own right. It's a very nice program that we're privileged to work for, work through. But there's a piece of that that, for us, what it also provides to us is the AAR approvals, the process to get the plant prepared and ready, a whole bunch of things that puts us in a position that as soon as that retrofit program is coming towards completion, we switch modes into new car, new tank car production. And that new tank car production, just, you know, on a normal run rate of 40,000 units a year. Approximately 10,000 are tank cars, and that's an area in the market that we've historically not been able to address. So I think what I look and I talk more about internally is the purpose and one of the benefits of doing this retrofit program is we get a short-term benefit, which is great in 26 and 27, but really the exit of that is not to try and clearly we'll take more retrofits if there are there, but the main goal for us is to leave that program and position ourselves into the new tank car programs directly after that but answer to your specific question how big is that market i you know there's a um majority of tank cars are either owned by people who can produce tank cars or look after the tank cars already so maybe um it may be smaller for us but i think there's probably you know there's a couple of maybe a couple of hundred more um that

we could look to add over that program but i really and the reason why it's uh i'm more interested in we would want to switch to new tank cars as soon as possible after that program which is really the sort of the main the main objective for us if that makes sense got it that makes sense I appreciate the color there I know that's a big catalyst for you guys looking ahead one more question for me just on industry dynamics yeah I know you mentioned in the prepared comments you know roughly 30,000 orders for the year continues to run below you know the industry replacement level we've seen you know the industry fleet contract a bit. Are you still pretty confident that you might see an uptick, maybe a retracement towards that replacement level demand in 2026? Or is that still pretty uncertain at this point?

You know, there's a couple of ways of looking at that. First of all, my headline answer is yes, I'm confident we'll trend towards that in the calendar year 2026. I think it'll be more back half-loaded in 2026 but it'll certainly get us in a position where order placement would get order placement first obviously at 40,000 and then you'll see deliveries follow through probably in the deliveries will probably be late 2026 into 2027 I think we look at the underlying fundamentals which is still very solid difficult the class one railroads look at the railroad communities they're still posting good results and good throughput and good utilization rates and all those uh metrics which is very good for us um you know you look at we we see it more that there's pent-up demand coming through because um you know as you think about the main commodities the agricultural commodity commodities the aggregates the oil and gas industry their their desire and their need uh for rail cars uh isn't isn't fundamentally changing down. Scrap rates have continued to happen this year as anticipated or as expected. So what you see is that the underlying demand is still coming through, still pretty predictable. And it's more about, as Matt referenced, it's just the gestation period between inquiry through to order placement just gets extended slightly. You know, we put a forecast out at the beginning of this year for how many units we would get out this year and how much adjusted EBITDA. And, you know, contrary to what the order placement would suggest, we're holding it. And I know we've been able to get through and been able to push that through. So I do see there's an opportunity towards the sort of, as you go to Q2, Q3, Q4 next year, that order placement would certainly trend back to that normalized 40,000 units a year. Matt, and it's not I missed.

No, I think your comments are accurate. The bottom line is you've got two back-to-back years of sub-25,000 per year orders booked. And when we look at our history of 40,000 rail cars delivered or roughly 38,000 ordered over a 10-year span, we can't continue on this pace for long. Add into that the number of cars that are scrapped annually. we are headed towards some sort of a bubble, and we look at that happening sometime in the second half of the year.

Just bubbling as in more orders.

That's great. That makes sense. And just as a follow-up, I know you mentioned 20% market share of the new rail car orders for this quarter. That's really solid to see, and I know that's really trended above your historical market share. What do you really attribute that to?

I'll start with that and then Matt can talk about some of the, you know, I think there's a couple of things is, you know, we've got three things that really work for us. One is scale and experience. You know, we've got a lot of good rail cars out there. Customers know that. Customers like our rail cars. Whether it's new cars or conversions, customers really like the experience. Our breadth of product and configuration we can provide on the markets we address. You know, our customers really like the ability to tailor some of their products and customize it in a way that meets their needs. And then on our execution, you know, we talked about an initiative called TrueTrack, where we have this digital method of traceability and trackability. But our execution of delivering on time, in full, and good quality, reliable rail cars is, you know, those three things fundamentally put in the position where we're able to win, you know, So solve customers' problems in a way that adds value for them and us. And I think, you know, underpinning all that is Matt and his team. They do a good job of being able to get in front of customers, build great relationships, and solve customers' problems as well.

That makes sense. Thanks, Nick. Thanks, everybody. That's all for me. And congrats on a strong quarter.

Thank you. Thanks for having me.

Not much.

Oh, I was going to say, just a summary before we close.

Sorry. So Q3 2025 was another strong quarter for Freight Car America with revenue up over 42%, gross margins expanding to 51.1% and record adjusted EBITDA of $17 million, our most profitable quarter since relocated to Mexico. Operationally, our team in Castanos continues to do gains in safety, quality, throughput and cost. Plant footprint enhancements underway will further improve flow, productivity and margins, reinforcing our leadership in that key segment. Strategically, we're advancing our TrueTrack digital integration, vertical integration and automation, while advancing our operational readiness for tank car conversions, all positioners for future growth and margin expansion. With a healthy backlog of 2,750 units by approximately 222 million, strong inquiry momentum supporting a recovery and replacement cycle demand remain on track to achieve our EBITDA guidance, closing the year with solid profitability and positive cash flow. And with that, thank you very much.

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