Hello everyone, welcome. Your next presentation is FreightCar America, Inc., traded on NASDAQ, ticker RAIL. Here we have Michael Riordan, CFO.
Good afternoon. I'll give a quick background. FreightCar America is a manufacturer of railcars for the North America industry. A 120-year-old company. It's evolved massively over time. Fastest growing OEM today right now, expanding modern capabilities, the newest built plant in Coahuila, Mexico. We have a unique ability across all of our lines to flex between building new cars, converting railcars from one type of railcar to another, rebodying railcars, and doing now retrofits of tank cars to upgrade them from one spec to a new spec. We have a completely vertically integrated campus. We do manufacturing or assembly of railcars. We have a fabrication center on premise with six plasma tables, numerous punching and pressing machines, so we can in-house instead of outsourcing all the fabrications of components. We have an automated wheel and axle shop that will lathe, grind axles, wheel press, and mount them.
We have a strong margin profile. Right now, we are the leading gross margins in the industry for manufacturing freight cars. We are the third largest in the industry and have been consistently increasing market share quarter by quarter now that we've fully built out our plant, which was a Greenfield site that was completed in Q1 of 2024. Just some quick highlights on the trailing 12 months. Through June 30, 3,600 railcars delivered, $11,000 per railcar of adjusted EBITDA, which was a significant increase year -over -year. We have approximately 5,000 units of capacity. That does vary based on the mix of the cars we build. $21.5 million of adjusted free cash flow and $466 million of revenue. We started this transition in 2020. We were the last of the builders to move to Mexico. We shut down our U.S.
facilities at the end of 2020 and consolidated all the manufacturing down to Mexico, starting with one line in 2021, expanding to two lines in 2021, then three lines in 2022. The fourth line was up in December of 2023, which is why I say it was really running in 2024. Now we're running four lines with a fifth line at the ready to build on, and the fabrication center on site, and the wheel and axle building. We've had a CAGR of 55% on deliveries and 51% on revenue from 2020 to 2024. You'll see the adjusted EBITDA profile dramatically change from consistently losing cash in the U.S. to now generating leading adjusted EBITDA per car in the industry. We're well positioned within our addressable market, which right now is 70% of the total railcars in North America. We're the market leader in open-top hoppers.
We're in a primary position on gondolas and flat cars. Currently, we're a secondary player on covered hoppers as we've branched into that market, which is about 40% of the volume. We've made concerted efforts in 2023, 2024, and now 2025 to grow market share and have been very successful. In boxcars, there's three of us that make it. We all make it, but it is not one of our cores that we go after. For future growth, tank cars is part of what we plan to get into in the next couple of years, and that will round us out to 100% market share or addressable market. Tank cars are significantly meaningful in the industry as they are the highest average selling price. A normal freight car in our mix is about $110,000.
Our margin profile on freight cars is about 13% gross margin, which is the industry leading right now. Tank cars are about $165,000 average selling price and tend to have gross margin profiles between 15% - 18%. Just a quick look at the different car types if you're not familiar with freight cars. We have gondolas, which carry coil gondolas for steel coils, mill gondolas for scrap material, wood chip gondolas, aggregate gondolas for aggregate material. We have hoppers, covered hoppers, which are generally used in the agricultural space, open-top hoppers for aggregate material, boxcars, flat cars, and then we do conversions and modifications. I had mentioned conversions are a big part. We kind of invented that years ago. We were a coal-only company. When coal started going down, we had a lot of people come to us and say, "We just bought a bunch of coal cars.
What do we do?" We came up with the concept to convert a coal car into any one of the other car types. We are now getting into tank car modifications. We have a significant contract we announced last year that we won with a customer to do about 1,300 retrofits to upgrade DOT 111 spec tank cars to DOT 117R that will cover us from 2026 through 2027 for this customer. That is our launching pad into new tank cars as we'll get AAR certification for tank cars and have a showcase for all of our customers to show that we can build tank cars, which, given the recent derailments, etc., have been a concern of many customers as a new entrant making it into tank cars. We pride ourselves on going to market with the unique configurations and customizations we offer to private car owners.
Those are the large companies that buy the railcars outright and manage their own fleet. We spend the extra time with our engineering team, meeting with their maintenance and mechanical teams to customize cars specifically to what they need and modify from our base designs so they get the exact car they want for the next 50 years. With the leasing community, we play on the fact that we do not offer leasing. The two larger competitors of ours that make up about 70% of the industry are leasing companies first. There are many other leasing companies. 60% of railcars are leased. We target the leasing community and help them understand that we are not their competition. When you come to us to build your railcar and we sit down with you and your customer to work through the designs, you're not introducing your competition to your customer.
It's a direct symbiotic relationship to come up with a solution that helps you win the lease and helps us win as well. Lastly, railroads, the Class 1 railroads are obviously a customer of ours as well. Our pillar is value creation. We have the flexible, vertically integrated manufacturing facility I mentioned. We have a 2,000-person workforce in Mexico. We've had no issues. We have extremely low turnover, have very good benefits for our workforce, and keep them going. We are one of the few that are not laying people off. We're hiring instead of laying people off because we've been growing and growing our market share and growing our backlog. We have consistently achieved industry-leading gross margins over the past two years. At the end of last year, we optimized our capital structure. We had an expensive preferred share. We replaced that with a lower-cost term loan facility.
We then obtained a new working capital facility that allows us, if needed, to borrow against working capital. We've converted ourselves now where we are just consistently generating free cash flow quarter -over -quarter, which is positioning ourselves well to continue to pay down debt and then refinance with a target in 2026 to exit our term loan and move into commercial banking, which will further lower our cost of capital and allow us more flexibility for both organic and inorganic opportunities in the future. I've kind of touched on this a little bit, but the one place I haven't is the optimized backlog and order fulfillment, which is actually really telling for this year. All the uncertainty around tariffs across the whole economy definitely played out in the railcar space as well, not knowing will there be a tariff on railcars.
Given that most of the railcars are covered hoppers used in agricultural and commodity movement, there is no ability for a Cargill or a Louis Dreyfus or a Bunge to absorb a 25% cost increase on a railcar that should cost $110,000 and become $135,000. For them to absorb that, all the price of commodities will go up, and that will appear in the grocery stores, everywhere. There'll be massive inflation. There was a lot of hesitancy. We're exempt from it, as are all of our competitors. Under USMCA, we comply, and railcars are exempt from all tariffs, exempt from all customs paperwork. Where that's created some positive for us is all that uncertainty in the first two quarters led people to delay orders. We believe, based on our customers, we have the industry-leading order-to-fulfillment time, whereas our competition is typically, you know, eight to nine months preferred.
We typically operate in a three to five-month order-to-fulfillment. While our peers on the earnings calls talked about lower deliveries this year, and they're going to push out to next year, and that's where the demand's coming, we've maintained our guidance all year and looked at this as an opportunity to continue to take market share because customers do want their railcars this year. They have capital budgets that they have to spend.
When they come to us in August and September and the other guys say, "I can deliver you in January and February," we're able to say, "I'll take your order and deliver to you in November or December." This is going to be great for us because in a year where we're down from an average of 40,000 cars delivered to 30,000 and our market share is going up each quarter, we'll take those orders, keep the market share, keep the customers happy, provide for them when no one else could, and when the industry comes back because it's a very stable industry. 1.7 million railcars, mandated retirement at 50 years by the government. It's a consistent demand over the long term of 40,000 cars a year. We'll just have even higher volumes than we have this year.
Guidance that we put out at the beginning of the year on our Q4 2024 earnings call, and we've maintained it each quarter, 4,500 - 4,900 cars delivered, $530 million- $595 million of revenue. It's a pretty big variation there because the mix of cars will have a big impact on the revenue as the ASPs differ greatly, and $43 million- $49 million of adjusted EBITDA. Investment highlights, you know, 5,000 units of capacity with an average mix that can definitely change. Our plant will never constrain our capacities to deliver. We run two shifts now, not three. If demand is there, we will always increase for that. We'll add a third shift. We have a fifth line under roof that we're not leasing right now that we can turn on in three months for only $1 million of CapEx to grow further.
As mentioned, industry-leading profile last year that was 12% gross margin, about $10,000 a rail car. We've been higher than that for the first two quarters of 2025. Generated consistent free cash flow second consecutive year in 2025. We will have, we have a low maintenance level of CapEx at only about 0.5% - 0.75% of revenue. All of this free cash, we are now positioned to spend organically to get into tank cars, which is a CapEx investment over the next two years, as well as inorganically targeting accretive M&A to the core business, which we have two business segments, manufacturing new rail cars and servicing the aftermarket, spare parts, repair services, etc. That's it. That's just a quick overview. Any questions anyone has, I'm more than happy to take, expand on the industry, how we position ourselves, et cetera.
Let's talk about the mandated replacement cycle.
Sure.
What happens to a car at 50 years? Does it truly become scrap metal, or are there countries south of us that ultimately take those cars? Secondarily, over time, over a decade, do we see the number of mandatory retirements increasing because the rail market 40 years ago was bigger than it was 50 years ago?
Sure. The general question was about railcar retirements. The first one was around the 50-year retirement. At 50 years, the Class 1 railroads are required to remove that car when it hits 50 years from interchange. They can't run anymore. If it's on a closed loop, like let's say you're a steel company that has their own rail track between two plants that's not on an interchange, you can run those cars until they fall apart. That's very rare circumstances. At 50 years, yes, they are required to be removed. They'll scrap those cars. If there's any components worth using, they might save those for somebody else and sell them in the aftermarket. They are required to be completely removed. Can you take those cars and move them south? That's a trickier one. In general, you can't because the track is different in South American countries.
In Mexico, it is the same track. Ferromex picks up at our plant and runs all the way up, interchanges with Union Pacific and BNSF. We did build almost every coal car in Colombia as a FreightCar America car. I could tell you that the wheels, the axles, and the gauges and the narrow width of them are all different because their track is a different width. You can't just pick it up and move it. They are kicked out. To the second one, when you look at the replacement, if you actually look back at the data, it should say that there's 50,000 cars that are needed for the next three years each year based on retirements. We all get to 40,000 are needed because a lot of things have changed in the past 50 years.
The AAR in the late 1990s increased the weight load you can have and increased it to 286,000 lbs per car. You could put more in a car now than you could before. The cars built back in the day were much heavier. There's been massive lightweighting. You're able to lightweight a car to allow yourself to put more material in, so you need less cars. The combination of those has us kind of narrow that back from 50,000 - 40,000 cars based on today's designs and engineering of railcars. No problem.
All right, I'll pose one more.
Sure.
Did we hear correctly that the leased railcar market is 70% of the cars?
We currently, with our car designs, cover 70% of the marketplace between open-top hoppers, gondolas, flat cars, covered hoppers, and boxcars. The leasing community owns about 57% of the railcar fleet in North America.
All right, which I think is on the next slide.
Yes, we tend to mirror that with our customer segmentation here.
Okay, if they own 57%, they're buying a lower portion of that pie. That 57% looks like right here. Is that what's more aligned to 40% or 45%?
Yes. We're not exactly mirrored. This is our customer delivery schedule, so we're not exactly mirrored to it. The leasing community has been picking up for us. We still see a lot of private car owners come to us because of that customization we do. Right now with the infrastructure, we're seeing a lot of people need open-top hoppers for aggregate materials to service the infrastructure spend that's going on. That will likely shift, especially as we get into covered hoppers. Most of the end users don't like to own those outright and are lessors. That's where we've also seen, if this pie chart was shown two years ago, it would have looked 1/3 , 1/3 , 1/3 , and it's grown to about 47%. That's astute. It's not 57% on here. We do see that continuing to expand towards the lessor side.
Okay, taking that one step further, given that your two larger competitors are also leased, why would a railcar company that has a leasing model buy any cars from them?
That is a very good question. No. One thing we've not done, we've reinvented ourselves over the past decade. We have not had that full portfolio offering. When you looked at, I'm a leasing company and I'm servicing everything, I need to be able to offer everything. You'll see, you know, GATX, it's public, has done for the past 15, 20 years these giant $500 million - $1 billion deals that set for the next five years, I'll buy 3,000 cars from you. Don't know what, but I need the optionality that I need to be able to buy any one of these cars. We've never been able to offer that yet. That deal comes up in 2027.
All of a sudden, it's going to be really interesting when you see a GATX and say, do you want to keep doing that deal with your competitor or do you want to go to the person who's not a competitor? Their breadth of portfolio offering, especially with the tank cars, has been huge because covered hoppers and tank cars make up close to 60% of the market, 60%, 70% of the market. Covered hoppers are 40%, tank cars are 30%. A lot of times, the same buyer needs both because if you think about somebody who's going to do vegetable oil, their raw material is going to come in in a covered hopper, and their finished product is coming out in a tank car.
Right now, we can only say, hey, we'll give you covered hoppers, and somebody like a Union Tank Car who only makes tank cars can say, I can offer you tank cars, but you're getting it from two different builders, and you don't have flexibility to say, yeah, my team got it wrong. I actually, I don't need 200 hoppers and 150 tank cars. I need 150 hoppers and 200 tank cars. Now you have two different builders to go back to, whereas with a Greenbrier or Trinity right now, what they're able to offer is, I'll do the whole package, and you can just flex within six months, tell me exactly how many you need. That is one area they're still winning from us right now, which is why lessors will still go to them because they might not know the end demand. As soon as we crack into the tank cars, which that retrofit program is our commercial showcasing of that, we'll be able to offer the complete picture.
I was going to say, what about the tank cars? What do you do? When you do get into tank cars, how will that?
Sure. On hoppers, we don't break out specific margins, but I will say that we don't set the price. We are smaller in there. We'll probably do 1,500 - 2,000 covered hoppers on a market that's about 16,000. They are the large volumes, so they do have a lower margin profile. We do well, and overall, you'll see as we've, I'll answer it this way, covered hoppers we've gotten into really big in 2025, and our margin profile hasn't gone down. We find ways to win, and we always challenge ourselves for cost reduction, whether that's value-added or value-engineered work in there to take cost out or to improve productivity. We always challenge the conventional thinking of how many cars can you make, and it's a very manual process. We're finding ways to increase the margin, even if we're constrained on price by competitors.
For tank cars, that will be accretive to the overall bottom line, higher selling price, higher margin profile, even if the entry point needs to be underprice the competition by a little bit to enter. Given that they're mid-teens to high teens in margin, you could cut a couple percentage points off to enter the market. Where we're at now at 13% on gross margin for the manufacturing segment, it's still an uplift, especially when you take that on instead of $110,000 - $165,000 a unit. You're welcome.
I wasn't aware about your goals for the benefit. I'm Stephen Poe. You did a really nice job bringing out the.
Thank you. We had that preferred share, and the timing we went out to refinance coincided with the election, so there was a little bit of trepidation. We did a secured term loan. We cleaned that up. Is that the end state that I want? No. We have almost $60 million of cash at the end of Q2 and $110 million of debt that I can't use to offset because you can't prepay a term loan. We will look in 2026. We'll then have two years of consistent, last year was $43 million. The guidance this year is $46 million on adjusted EBITDA. We'll have seven consecutive quarters of operating cash flow, two years of solid $20 million+ of adjusted free cash flow. Commercial banking should be well within our sight.
If I looked at what I think is ideal, it would be a revolving credit facility that I could borrow up and down on and have flexibility to pay down debt. When the growth opportunities we talk about, getting into tank cars with CapEx or targeted M&A come about, I can use the debt very quickly to execute on deals. That is likely an early 2026 endeavor. You're welcome.
I'd like to get a little bit of a Trinity, Greenbrier, part of the more make of the effective materials and explainers. I'm just curious if you could expand a little bit more on how you have an advantage over that right now as getting short team time both ways.
Sure. Right now we're sitting at the end of August. The normal industry eight to nine months would be a great backlog, but when you look at the industry, we're all sitting at six months from an industry-wide perspective, and that includes the fact that Trinity has two more years on a multi-year agreement sitting in that backlog for the industry. You only have four months, and when you think about the lead time to buy steel or to tell a steel mill you need steel, they have to put it on a melting schedule, yada, yada, yada. It's very narrow. Right now you have to be able to execute very quickly or have great steel partners that can get you steel that you need for these car types quickly.
I go back to the past couple of years when we were building out the facility and challenging ourselves to say we just finished building line three in April. Can we go sell it out for the balance of the year? Can we go take customer orders and start building as quick as possible? We always found ways to do it in three or four months. That's not been the historical norm. Historically, in this industry, you had nine, twelve months ahead of time or longer that I'm going to place an order. We've forced ourselves to have to be that nimble and agile, whereas anyone who hasn't done what we've done and reinvented ourselves has been able to operate under that longer lead time scenario. They haven't potentially developed that quick responsiveness to get material in, get it on your floor, and get your production team ready.
Not even if you can get the material, but get your whole line set up and your production team ready to completely flip and build a new car. We've been happy to do that for two years, which allows us to be nimble. In this time of August, September, we can say yes when others have to say no. Or they can say yes, but not within the calendar year, which is actually critical for some people, given that they still work under the constraint of if I don't use it, I lose it on my capital budget.
That may answer this next question. It's probably a little bit unfair, particularly the way I framed it.
Sure.
We are offering on a 50-year life cycle.
Yeah.
Why does five months matter versus a year in terms of a new car?
Sure. Because people don't like to make decisions timely, as simply as it can be. When you think about the people buying them, even if they're leasing the cars, there's an annual budget cycle. When you look at the companies that do budgeting, you're going to go to your CEO, CFO in December, get them to bless it. Many companies then have to go to their board to bless it. Now they have the budget on what they can spend the next year. Now they have that whole line. The negotiation and the intricacies start in January, February, March. All of a sudden, orders placed in April for a car to be delivered that year. Sometimes it takes a little longer, but everything's based on a one-year cycle. No one needs to buy out anymore.
One thing COVID did was it made everyone become massively more resilient in supply chain and shrink things. That in the past, we just said, deal with it. It's 12 months. Now everyone knows you can respond quickly. The one-year budget cycle for all these buys and how significant they are that they almost always involve a board of directors approving it puts that pinch point. They get the budget approved in December, January, and then they start negotiating, fine-tuning, going through all the details that go into this $20 million, $30 million, $40 million purchase, which then forces it. Now I got to still use it within this year. You're constrained within that 12 months. It would be ideal if somebody placed an order and said, "I'll take it in 12 months." That would allow a lot more sourcing opportunities as well. We're in a constraint.
Let me put one more twist on the question.
Sure.
Is there any precedent within the industry that buyers will wait till even December? They'll write you a check, and then the deliveries will come when they come. They've spent their budget, and they have to get prepaid up here and down. Is that even a phenomenon?
It's a good question. I would say the fact that everyone's in Mexico producing cars, there's a lot of hesitancy to give you somebody $20 million ahead of time before they've seen the car be built and before it's been certified. What's more likely to happen is you're going to build the cars. You'll get a certificate of acceptance because every car is reviewed independently, not by us, but by the customer or representative signed off on. They might pay you the cash in that period, but I've rarely seen anyone pay for a car before it's been built when it's not just a down payment. Small down payments aren't normal either in this industry, but it's a small piece. Those cars end up shipping in January. That's more likely to happen.
Because of the scrutiny and the risk of loss doesn't transfer till it crosses into the U.S., many people don't like to pay ahead. It's a good question. I know I'm the last one of the day.