FreightCar America expects railcar orders to grow as the year moves into 2022 amid pent-up demand pressures to purchase new railcars, executives said during the company’s third-quarter 2021 earnings call on Monday. This demand release follows a third quarter in which customers seemed to halt their orders temporarily in order to avoid inflationary costs and higher steel prices, executives said.
There is some hesitation from would-be buyers to commit to purchasing railcars amid significantly higher prices for steel, including the steel to make a railcar, according to FreightCar America (NASDAQ: RAIL) President and CEO Jim Meyer. But customers may also get to a point in the fourth quarter when they feel they have to buy the railcars to ensure that they have the cars that they need, Meyer told investors during Monday’s earnings call.
“I would … describe the market as a little bit conflicted right now. The demand is there. The need is there. The inquiries are there. Orders are being placed. They are just not being placed at the rate that’s commensurate with the inquiries,” Meyer said.
“I’m not sure it’s really just kind of a static idea that if steel comes down to X, suddenly orders get placed. Because the longer a potential customer is evaluating placing those orders, the need to place those orders also increases. So it’s coming. And the longer there is a level of pause on the part of placing orders, it just further adds to the demand side of the equation,” Meyer continued.
The market is “just feeling a little bit conflicted to us right now, but the main emphasis is the inquiries are strong. They are high-quality inquiries. And so we’re quite confident at this point that the inquiries and order activity that is out there is still commensurate with our plans as we look to next year and bringing two more production lines on stream,” he said.
The return of freight rail volumes to pre-pandemic levels, declining railcars in storage numbers and the continued scrapping of older railcars are trends that FreightCar America sees as supporting the company into 2022.
As a result, FreightCar America is planning to add two more production lines at its Castaños facility in Mexico.
“We are building the two additional production lines … because we are forecasting demand and being able to fill those lines. So each quarter since we brought Castaños online has been a quarter of increasing volumes. We are now, you can say, plateaued with two production lines. And then the next step-up will be when we get lines three and four on again later next year, assuming the demand is there,” Meyer said.
Third-quarter 2021 financial results
FreightCar America sustained a third-quarter 2021 net profit of $731,000, or 3 cents per diluted share, compared with a loss of $41.3 million, or $3.03 per diluted share, in the third quarter of 2020.
Third-quarter revenue jumped 131% to $58.3 million, on deliveries of 505 railcars. In comparison, FreightCar America delivered 313 railcars in the second quarter of 2021 and 163 railcars in the third quarter of 2020.
“These results come in while our team continues to build out the new facility in Castaños, Mexico, refine all aspects of our manufacturing operations, heavily focus on material cost reduction and deal with the ongoing challenges of the pandemic and global supply chain,” Meyer said during Monday’s earnings call.
Manufacturing operating income was $163,000, which FreightCar America said was a second positive result. Manufacturing operating loss in the third quarter of 2020 of $36.8 million.
The company had a backlog of 1,895 railcars at the end of the third quarter, worth approximately $198 million.
It has a delivery outlook of between 1,750 and 1,580 railcars for 2021.
“Overall, we are pleased with FreightCar America’s continuing momentum, including our fourth consecutive quarter of positive gross margin,” Meyer said in a release. “However, our results for the quarter were impacted by the difficult launch of a new railcar model. That event aside, which is now well behind us, we wholeheartedly believe in the business transformation we’ve completed and remain focused on returning to long-term growth and profitability.”
Meyer noted on the earnings call that higher steel prices appear to be having a temporary impact on FreightCar America’s ability to close orders. In the last 12 months, steel prices have appreciated by roughly 225%, Meyer said.
“In response to this, our team is doing everything they can to protect margins, mainly through a renewed focus on material cost reduction across the board, passing through cost increases where possible and being more selective on the business we accept,” Meyer said during the earnings call.