FreightCar America - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue and EPS came in below Street: revenue $96.3M vs $102.7M consensus; Primary EPS $0.05 vs $0.08 consensus; Adjusted EBITDA $7.3M grew YoY but was below S&P Global’s EBITDA consensus, while gross margin expanded 780 bps YoY to 14.9% on mix and efficiency. Results were affected by planned lower deliveries (710 vs 1,223 YoY) due to dedicating capacity to large custom fabrications. S&P Global consensus figures marked with an asterisk; Values retrieved from S&P Global.*
• Commercial momentum was strong: 1,250 railcars ordered (~$141M), representing ~25% of industry orders and 36% in the addressable market, pushing backlog to 3,337 units/$318M; management reaffirmed FY25 guidance (deliveries 4,500–4,900; revenue $530–$595M; Adjusted EBITDA $43–$49M).
• Cash generation continued: operating cash flow $12.8M; adjusted free cash flow $12.5M; cash on hand $54.1M; fourth consecutive quarter of positive operating cash flow; capex light at $0.3M in Q1; FY25 capex remains $5–$6M with ~$1M for tank car retrofit readiness.
• Stock reaction catalysts: guidance reaffirmation and share-gain narrative vs near‑term misses and second‑half weighted delivery cadence; tariff/USMCA positioning and tank-car retrofit program underpin medium-term optionality.

What Went Well and What Went Wrong

• What Went Well

  • Margin and profitability resilience on lower volumes: gross margin 14.9% (+780 bps YoY) on favorable mix/efficiency; Adjusted EBITDA $7.3M vs $6.1M YoY. CEO: “we achieved robust margins…once again outperforming our industry peers”.
  • Commercial execution and market share: 1,250 orders (~$141M) with the largest quarterly intake market share in 15 years; backlog to 3,337 units/$318M; mgmt cites addressable market share rising to 27% on TTM basis.
  • Cash flow and balance sheet: operating cash flow $12.8M and adjusted FCF $12.5M; cash ended $54.1M; fourth straight quarter of positive operating cash flow; no revolver borrowings.

• What Went Wrong

  • Top-line and EPS miss vs Street: revenue $96.3M vs $102.7M consensus; Primary EPS $0.05 vs $0.08 consensus; EBITDA below S&P’s consensus; planned lower deliveries (710 vs 1,223 YoY) and Q1 allocation to large fabrications weighed on revenue/EBITDA conversion. S&P Global values marked with an asterisk; Values retrieved from S&P Global.*
  • Higher SG&A: SG&A rose to $10.5M vs $7.5M YoY; management flagged timing and expects normalization as % of revenue over the year.
  • Interest expense remained elevated YoY: $4.3M vs $2.4M in Q1 2024; although finance costs improved from 2024 levels overall, interest expense impacted GAAP operating leverage; GAAP diluted EPS of $1.52 was driven by a $52.9M non‑cash warrant liability gain (excluded from adjusted).

Transcript

Operator (participant)

Welcome to FreightCar America's first quarter 2025 earnings conference call. At this time, all participants' lines are in a 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 Odeh with Riveron Investor Relations.

Chris Odeh (Senior Director)

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 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 Form 10-K for a description of certain business risks, some of which may be outside of the control of the company and 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 first quarter of 2025 is posted on the company's website at freightcaramerica.com, along with our 8-K, which was filed pre-market this morning. With that, I'll turn it over to Nick for his few opening remarks.

Nick Randall (President and CEO)

Thank you, Chris. Good morning, everyone, and thank you all for joining us today. I'm very pleased to share another quarter of exceptional performance for FreightCar America, driven by robust railcar orders, continued market share gains as the fastest-growing railcar manufacturer in the industry, and significantly improved profitability with strong margin expansion. As we anticipated, our first quarter results reflect planned lower railcar production as we dedicated a portion of our manufacturing capacity to deliver large custom fabrications. This effort further showcases our operational flexibility and ability to manufacture large-scale, complex fabrications that are tailored to the unique needs of our customers. Despite fewer deliveries during the quarter, we achieved strong profitability and met our expectations. In short, we executed exactly as planned and remained on track to achieve our full-year goals for 2025. We saw significant margin improvements during the quarter.

Our gross margin expanded to 14.9%, up 780 basis points year-over-year, nearly doubling from the same period last year. This margin strength clearly demonstrates the disciplined execution of our manufacturing presence. The improved margins translated directly to the bottom line, with adjusted EBITDA at $7.3 million, exceeding last year despite lower revenue and deliveries. These results underscore our team's commitment to profitable growth and operational efficiency. We have consistently emphasized profitable execution, and our Q1 results reflect this commitment. Our commercial pipeline remains robust. We booked 1,250 new railcar orders valued at approximately $141 million in the first quarter, marking a strong start to the year. These orders drove our backlog to 3,337 railcars, totaling $318 million, providing excellent visibility well into 2025.

Importantly, FreightCar America was the fastest-growing railcar manufacturer in North America, according to published ARCI data, expanding our addressable market share from 8% to 27% over the last 12 months. Despite lower industry-wide orders, more customers continue to choose us, validating our product quality, reliability, and value-added solutions. Our strategic advantages underpin this success. Operating from a purpose-built facility, we maintain an agile manufacturing platform that quickly responds to customers' needs. This vertically integrated campus enables rapid adjustments and seamless customization of product. Strategically positioned near the U.S. border, our facility reduces supply chain delays and transit times, effectively minimizing industry bottlenecks. Additionally, our alignment with USMCA guidelines insulates our operations from current tariff uncertainties, all while providing us with a distinct competitive edge through enhanced responsiveness, shorter lead times, and operational adaptability.

This unique blend of a 120-year legacy as a pure-play railcar manufacturer with a startup agility continues to drive our rapid growth and market share gains. Turning to the industry environment, we remain cautiously optimistic about the overall outlook for railcar equipment demand over the next 24 months. Fundamental market drivers, such as consistent rail traffic levels and ongoing railcar replacement cycles, continue to be healthy and supportive, while the timing of any orders might shift due to customer preferences or logistical considerations. Looking ahead, our commercial pipeline remains very active. Customer inquiries continue at a strong pace, and our discussions for additional railcar orders are ongoing. We anticipate industry-wide deliveries will pick up momentum throughout the remainder of the year, and our robust backlog positions us exceptionally well to meet this growing demand. With this context, we reaffirm our full-year 2025 guidance.

Our Q1 performance and positive trends give us confidence in achieving our targets. We continue to expect full-year deliveries of between 4,500-4,900 railcars, generating revenue of $530 million-$595 million. Our adjusted EBITDA remains targeted between $43 million-$49 million. Notably, production deliveries will ramp up significantly in the second half of this year, supported by sequential quarterly growth as we convert backlog into sales. Our Mexico facility can produce over 5,000 railcars annually, and our proven team can process and position as well to deliver these results. With that, I will now turn the call over to Matt to provide further insights on the market dynamics.

Matt Tonn (CCO)

Thank you, Nick. I'm pleased to share that FreightCar America achieved its strongest quarterly market share performance in over 15 years, securing orders for 1,250 railcars valued at approximately $141 million. This represents 25% of all new railcars ordered in the quarter and 36% within our addressable market. These exceptional results clearly demonstrate that our agile manufacturing capabilities and rapid responsiveness to shifting customer needs continue to resonate strongly in the marketplace. We concluded the first quarter with a robust backlog of 3,337 units valued at approximately $318 million, marking a near 20% sequential increase from year-end. Total industry orders over the trailing 12 months came in around 24,000 units, roughly 15,000 units below historical replacement levels.

This shortfall in order activity has created pent-up demand, which we anticipate will materialize beginning in the second half of the year, providing a meaningful tailwind as the fundamentals of railcar demand remain strong and steady. Despite the slower industry order environment early in the year, our trailing 12-month market share has expanded to 27% within our addressable market and 16% of the overall market. This clearly illustrates our ability to gain market share even in the challenging conditions, positioning us favorably as order volumes normalize back toward historical replacement rates. Our ability to win is driven by the strength of our broad and differentiated product portfolio and pure-play manufacturing capabilities. The versatility of our products, combined with our flexible manufacturing platform, consistently enables us to meet diverse customer demands.

Our proven ability to convert customer inquiries into firm orders highlights our strategic market position, customer relationships, and growing reputation for responsiveness and reliability. Long-term industry demand remains healthy, supported by steady annual replacement cycles anticipated to range between 35,000 and 40,000 units. Given these positive market fundamentals, we are confident that our versatile operations and our strategic capabilities position us well in the market. I will turn the call over to Mike for comments on our financial performance. Mike.

Mike Riordan (CFO)

Thanks, Matt. Good morning, everyone. I'd like to begin by sharing a few first-quarter highlights. Consolidated revenues for the first quarter of 2025 totaled $96.3 million, with deliveries of 710 railcars, compared to $161.1 million on deliveries of 1,223 railcars in the first quarter of 2024. This was a result of lower deliveries in the quarter that we anticipated due to dedicating a portion of manufacturing capacity to deliver large custom fabrications. Additionally, the prior year period presented a challenging comparison due to a timing benefit associated with railcar deliveries delayed by the U.S.-Mexico border closure in late December 2023, which subsequently shifted revenue recognition into early January 2024. Gross profit in the first quarter of 2025 was $14.4 million, with a gross margin of 14.9%, compared to gross profit of $11.4 million and gross margin of 7.1% in the first quarter of last year.

Higher gross margin performance was driven primarily by a favorable product mix and improved production efficiency. SG&A for the first quarter of 2025 totaled $10.5 million, up from $7.5 million in the first quarter of 2024. Excluding stock-based compensation, SG&A's percentage of revenue increased approximately 47 basis points. In the first quarter of 2025, we achieved adjusted EBITDA of $7.3 million, compared to $6.1 million in the first quarter of 2024, driven primarily by favorable product mix and operational efficiencies. Adjusted net income for the first quarter of 2025 was $1.6 million, or $0.05 per diluted share, compared to adjusted net income of $1.4 million, or a loss of $0.10 per share in the first quarter of last year. During the quarter, we had a $52.9 million non-cash adjustment on our warrant liability.

As a reminder, the warrant liability adjustment accounted for in adjusted net income is a non-cash item with no effect on shares outstanding or earnings per share calculations, reflecting only the valuation change of the warrant holder's investment. This quarter, we generated $12.8 million in operating cash flow, marking our fourth consecutive quarter of positive cash flow from operations. Notably, this is a $38.1 million swing from the first quarter of 2024, when we used $25.3 million of cash for operations. Additionally, our adjusted free cash flow for the first quarter of 2025 was approximately $12.5 million, a $43 million improvement compared to the first quarter of 2024, when we consumed $30.5 million in adjusted free cash. This quarter's robust cash generation was driven by our strong commercial and operational pillars, as well as our improved capital structure.

As a result, we ended the quarter with cash holdings of $54.1 million and no outstanding borrowings on our revolving credit facility. Capital expenditures for the first quarter totaled $0.3 million. For the full year 2025, we continue to expect capital expenditures in the range of $5 million-$6 million, including approximately $1 million for our tank car retrofit program. As we consistently generate positive cash flow, we remain committed to our disciplined capital allocation priorities, which include reducing leverage to our normalized range of 1-2.5x and further strengthening our financial position. Supported by strong momentum and positive cash flow generation, we are well-positioned to invest in future growth opportunities and access lower-cost financing while maintaining confidence in our full-year outlook. With that, we will now open the line for Q&A.

Operator (participant)

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, please, while we pull for questions. Our first question comes from the line of Mark Reichman with Noble Capital Markets. Please proceed with your question.

Mark Reichman (Senior Research Analyst)

Thank you. I just had two questions. The first is, would you just elaborate on which segments of your product suite are driving sales growth, and in which products is the company picking up market share?

Nick Randall (President and CEO)

Hey, Mark. It's Nick. I'll answer that one, and then Matt can fill in some additional details. When you think about the segments, our current product portfolio, we're seeing orders in all the segments and the products that we offer. We've got covered hoppers, we've got open-top hoppers, we've got mill gondolas, we've got agones. We're seeing a reasonably nice mix across all product types in those. We don't really spread the segments and the products any further than that outside. I think that's what you're asking is, did we see the orders on any given product type especially, or was it across the broad? It was really a nice, healthy mix, which allows us to utilize multiple VS lines for our product and you think about our planning process. Matt, anything we missed on there?

Matt Tonn (CCO)

No, I think you covered it really well, Nick. Hopefully, that answers your question, Mark.

Mark Reichman (Senior Research Analyst)

Sure. The second question is, what are your considerations for putting a fifth production line into service?

Nick Randall (President and CEO)

What a question. I'll answer that one. We've always talked about intentions to have around about 5,000 unit capacity in our facility. We've always talked about if customer demand increased, then we have a fifth line under roof that we could turn on in under 90 days with probably less than $1 million of CapEx. Pretty quickly, we could turn that on, and that would probably add another 1,000-1,200 unit capacity. Really, we'll be looking for a trigger that we see a sustained customer demand over, let's say, 5,200 a year that would justify us commissioning that fifth line. It's built. The roof is, the building is built. The space is there under roof, but we wouldn't fully commission it until we saw those triggers on market demand.

Mark Reichman (Senior Research Analyst)

Here's the basis for my question. In the past, you've always talked about that you probably would not do it unless the industry moved past replacement cycle and that if you were to enter the tank car market, which you plan to do, that you might squeeze out lower-margin products for that productive capacity. Here we are in the first quarter, and we've seen that you used productive capacity for higher-margin aftermarket parts versus railcars.

It just seems to me that if you're going to get into tank cars, that perhaps watching the replacement cycle is kind of the wrong signal. I might expect a fifth line to be added sooner than later, maybe even ahead of entering the tank car market, so you don't have to push out any other products for that, so you don't have products competing for that productive capacity. Is that the right way to look at it, or are you still kind of pegged to the industry numbers?

Nick Randall (President and CEO)

I think it's aligned with the right way to look at it, but it's incomplete. Let me just add some more color to it. When I answered the first question, it was purely simply on what would the trigger be on pure railcar demand. If we just took that in isolation, then that's where the first answer comes to. It would be a sustained demand for us over, let's say, 5,200 units a year would allow us to commission that fifth line for additional railcar capacity, etc., etc. As we go into tank cars in future years, that tipping point is with additional product portfolio, additional products in our product portfolio. That tipping point becomes arguably more ways of reaching that tipping point, which tank cars could trigger that fifth line. The last bit you talked about is non-railcar or new car products.

That could be conversion work, which does not typically get reported through as a new railcar product in orders, but it does in deliveries. It could be conversion work. It could be adjacent manufacturing, like these large sub-assemblies and large fabrications that we shipped in Q1 if they were sustainable. Typically, the nature of those is they are highly commissioned for a given product, so predictability is a little bit off. Any of those could trigger that fifth line, and that fifth line may be used as space for manufacturing that is not particularly pure railcars. That would be an option as well. We keep all those as an option, but my answer to the question was really about the pure railcar trigger would be about 5,200 new units. Of course, if customers would like a large number of conversions, that is an option.

A large number of ancillary products, that's an option. Typically, because that fifth building is already under roof and that it's a relatively low volume of CapEx to commission it and relatively low proportion of time, as in less than 90 days, that's always something that's available to us should the customer demand on any of that product or portfolio or adjacencies trigger it, and we would do that accordingly.

Mark Reichman (Senior Research Analyst)

No, that's great. Thank you very much.

Nick Randall (President and CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Brendan McCarthy with Sidoti. Please proceed with your question.

Brendan McCarthy (Equity Analyst)

Great. Good morning, everyone. Thanks for taking my questions here. Wanted to start off on industry order flow. It looked like you had a very strong first quarter at about 25% share. We've seen commentary from other railcar manufacturers kind of highlighting the hesitancy from customers that's kind of flowing through to order conversions. Just kind of wondering if you can differentiate what you're seeing in your order flow versus maybe the industry more broadly.

Nick Randall (President and CEO)

Yeah, I'll take that, Brendan. And then if Matt has anything to add, he can add anything. I'll step back to begin with. The drivers that drive the overall rail industry are still pretty consistent. The railroads' utilizations, the railroads' consumptions, etc. Those high-level macro drivers are still pretty resilient, which then gets down to the replacement cycle that we talk about, typically 40,000 units a year. I think we've been experiencing that there's some transitional timing of which quarter those orders get placed in as opposed to we're not really seeing a significant overall drop from that 40,000. Timing from quarter to quarter, one year may be 38,000, the following year may be 42,000. We still believe that if you took the next 24 months, the replacement rates will still be about 40,000 ±5%, which is pretty consistent with where they've been.

When you drill that down to the product portfolio we have, on different products, we're seeing some pretty resilience. On our open-top hoppers, we believe we're number one in that product portfolio category with our VersaFlood product. That's a consistent customer demand for that, which is great for us. We've recently, last year, talked about putting a line on covered hoppers, which has seen great results. They are typically 40% of the market, so there's a large demand for those. They are probably not quite 40%, more like 25% of the overall market. We're seeing large demand for those. It is a bit product-type, but our overall experience is the pipeline is strong. Customers are still wanting to talk to us about orders in the pipeline.

We've got a great value proposition, I believe, and that's what's creating our ability to grow our market share regardless of whether the broader market softens quarter on quarter or not. We've got good outlook for the rest of the year, which is why we are reaffirming our guidance. We've got a healthy, what I would consider a healthy pipeline. Hopefully, that answers your question, Brendan. If not, just feel free to refine it.

Brendan McCarthy (Equity Analyst)

No, that's great. Thanks, Nick. I appreciate the color. So just to clarify, have you seen order conversion rates slow or, I guess, how are your conversations with customers ultimately going throughout the first five months of the year?

Nick Randall (President and CEO)

Q1 order intake was our highest proportion of intake for 15 years, I think, Matt was. I think that answers that question. It was a strong order intake quarter for us. We've always talked about the process of working with customers on orders is anything from 18 months to three-year process from first concept of there's some sort of need, whether we have mining operation or agricultural operation or you name it. They get from a, "I've got a need of replacement of product to, I've got a design." That whole gestation period is usually a year or more. Once you get into the final designs and the sort of trying to win the bids, that's the bit that we record as our orders won in Q1. We have good visibility on all of those steps in our pipeline.

There has been some nervousness of converting the pipeline into order placement, which was nervousness behind us, but I think we've crossed that bridge so much in Q1. Hopefully, that gives you some insight. We report orders as in orders booked, but there's a lot of pre-work that goes behind that. That is that gestation of the project from concept through to winning an order. We're still seeing a healthy pipeline there.

Brendan McCarthy (Equity Analyst)

That makes sense. At the industry level, is it fair to say you still expect industry deliveries to total somewhere between 35,000 and 40,000 for full year 2025?

Nick Randall (President and CEO)

Yeah. I mean, I think last year the most forecast was sitting around 36, and the industry ended up 42. That's what 2024 ordered at. I don't think 2025 will be as high as 2024 at the 42,000 units shipped. I think somewhere between that range of probably 34-40 is probably accurate. I would expect any softening of deliveries in 2025 would probably roll over into 2026. The average will probably be still around that 38,000-40,000 units shipped, delivered.

Brendan McCarthy (Equity Analyst)

Got it. That's helpful. Can you provide any insight on what you're looking for for quarterly delivery cadence for the rest of this year?

Mike Riordan (CFO)

Hey, Brendan. It's Mike. Yeah. Q2, we'll see a step up from Q1, albeit it won't be, I'd say, a significant step up as we changed from the large custom fabrications and have a number of changeovers happening in Q2. When you get to Q3 and the back half, which we've kind of talked about before, will be much more back half heavy. Q3 and Q4 will really step up to get you to the guidance. Q1 to Q2, you will see an uptick in Q2, but not dramatic uptick, just given the number of changeovers we have for the orders on the books. Hopefully, that helps a bit.

Brendan McCarthy (Equity Analyst)

Yep, that's helpful. Thanks, Mike. And Nick, I know you mentioned there was a nice mix across all product types driving revenue growth this quarter. When you look at gross margins, was there a specific railcar type that really—I know you mentioned there was a favorable product mix that kind of drove the gross margin increase. Are you able to provide color on what specific railcar types you're referring to?

Nick Randall (President and CEO)

I'll ask Mike to break that down for us if he can.

Mike Riordan (CFO)

Yeah. So Brendan, when you look sequentially, our gross margins went down just slightly from Q4 to Q1. When you look year-over-year, it is a pretty dramatic difference. That is largely driven by the product mix from last year. I can say from when we talked on the Q4 call last year and the Q1, one product we were making back then were box cars, which is notoriously in the industry a pretty low-margin car falling out of our backlog. That is really what is driving that Q1 2024 margin rate to look low.

Brendan McCarthy (Equity Analyst)

Understood. One more question from me just on SG&A. Looks like a nice or large increase there. I think you mentioned there was a legal expense in that number. Can you provide additional color on that legal expense?

Mike Riordan (CFO)

Not recalling that piece. SG&A was just a little high in Q1 as we ramped up some of our spending in Q1. It is really just timing for the full year. We expect SG&A to be pretty much in line with what you have seen last year, especially as SG&A is a percentage of revenue. Just heavier in Q1 from a timing perspective, but you will see that number fall off in Q2 and then be at a normal rate Q2, Q3, Q4.

Brendan McCarthy (Equity Analyst)

Great. Thanks, everybody. Congrats on the quarter. That's all for me.

Mike Riordan (CFO)

Thanks, Brendan.

Nick Randall (President and CEO)

Thanks, Brendan.

Operator (participant)

Thank you. Our next question comes from the line of Aaron Reed with Northcoast Research. Please proceed with your question.

Aaron Reed (Research Analyst)

Hi, Mike. Hi, Nick. Thanks for taking the call here. Just wanted to follow up on and figure out in terms of the new orders that you're able to pick up, can you give me a little more color around what types of cars that might be or the margin profile on it just so we can get an idea of what next year is starting to look like as well too since we're knocking on the door being halfway through this year?

Nick Randall (President and CEO)

Yeah. I'll do the product types that we're seeing. And then if any questions on margin that we haven't already answered, we'll try and square those ways. The product types, we've typically talked about how we like to keep we have the ability to build any product on any line. But from a productivity perspective, we want to try and keep like products on the same line, if that makes sense, to avoid unnecessary changeovers. As I mentioned on our Q1 order intake, we've seen product that falls on all of our lines. That is different products across that spectrum in a nice mix that we've got significant lumps of orders that go on each of our production lines. If you think about our product portfolio, it's everything in the railcar business.

We currently do not have auto racks or tank cars that are shipping this year, but tank cars in future years for sure. This year, we are seeing products being ordered for, we are receiving orders for all the products we have in our product portfolio across those four lines. It is a nice mix from a supply chain operational perspective that keeps all those lines fully utilized. From a margin perspective, I think Mike answered it well when you look at some of the margins from prior years. Notoriously, industry box cars are not the highest particular margins. We do not expect to have any box cars in this year so far. We do not have any in our pipeline at the moment. I think that answers really what we have communicated consistently on our margin. The increase is, I guess, the not inclusion of box cars.

It's just a healthy benefit in our pipeline. Hopefully, that answers your question, Aaron.

Aaron Reed (Research Analyst)

Yeah. No, that's perfect. Another question was around you're going to be spending money to bring that additional line online here, so then you're going to be able to start working on the tank car. Do you have an idea of when that first tank car might roll off the line? Just even a ballpark idea.

Nick Randall (President and CEO)

Let me just break that into some clarifying points. We have a couple of things we've mentioned. We've mentioned that we have a fifth VS line. That's a fifth manufacturing line. That's independent of whether we do tanks. It may be used for tank cars, but it's independent. It doesn't need to be for tanks. That's the conversation I had with Mark earlier. That fifth line would be triggered by any demand. That's one thing. The second one is we have a tank car conversion program, which we booked last year, which shipment starts sometime through the first half of 2026 on that. This year, we'll be spending CapEx to have all that up and ready and running into revenue in late first half, second half of 2026. That's the tank car retrofit program we've talked about.

We have also talked historically about our intention to move into new tank cars. That would be a separate conversation, as there is some CapEx and some preparations to do for that. That will not be in 2025. We are working to land orders probably for deliveries in the out years, future years after 2026. Those are three separate themes. A fifth manufacturing line is not necessarily related to tank cars. That could be any trigger on demand. We would put that in place. That would take less than $1 million and less than 90 days to configure and be production ready. That is one item. The second one is the tank car retrofit program, which we have won. It is a contract. We are going full steam ahead on that. That will start shipping, call it roughly this time next year, 12 months from now, sometime in 2026.

Runs for about 18 months. The third theme is new tank cars. We have tank car approved designs by the AAR, and we will use the tank car retrofit program to launch us into that new tank car space as a new car provider. Hopefully, that clarifies those three things for you, Aaron.

Aaron Reed (Research Analyst)

Yeah, absolutely. One last follow-up question to that, and I think part of it is I phrased it wrong or misunderstood it. That fifth line that you're going to be bringing operational, is that because you have a specific need based on the orders that are coming in, or is that preemptive in anticipation of orders down the road, I guess, is really what I meant to ask.

Nick Randall (President and CEO)

Currently, we do not have a community-based or committed plan to turn that fifth line on. Mark's question earlier was, what would be the trigger points to turn it on or to commission it? With the guidance we have put for 2025, in that guidance, the assumption is we will deliver that guidance without utilizing that fifth line. I think Mark's question was, what would be the trigger points or trigger points that would drive the turning on of that fifth line? Currently, in our guidance for this year, we do not have it. If customer demand rapidly changes and catches us in a positive surprise, we can revisit that and redress that, but it is not in our current guidance for 2025.

Aaron Reed (Research Analyst)

Okay. I apologize. Thank you much. Makes sense.

Nick Randall (President and CEO)

No problem.

Operator (participant)

Thank you. Our next question comes again from the line of Mark Reichman with Noble Capital Markets. Please proceed with your question.

Mark Reichman (Senior Research Analyst)

Thank you. Just a couple of follow-ups. You may have answered this, and I may have just missed it. In terms of that fifth line, you mentioned properly that that can be used for more than just tank cars and that the cost would be about, what did you say, a little over $1 million. What would the cost be to make that line ready for the production of tank cars?

Nick Randall (President and CEO)

I'm going to break that into two separate things if I can, Mark. The fifth line to make it exactly the same as any of our existing four lines is less than $1 million and less than 90 days. That is one thing. That would replicate any one of the four lines we've got now. There is a separate step that if you wanted to add tank car manufacturing to our facility, you would not have to do it on that new line. You could choose any line you want. There is a series of jigs, fixtures, and additional capital equipment to procure, install, etc. We would trigger that with a tank car order. Those two things are not connected.

The fifth line for general railcar manufacturing, or as we demonstrated in Q1, applications, etc., can be done for less than 90 days, less than $1 million. Separate to that, for our tank car manufacturing program, there would be some additional investments to support that. It does not happen on the fifth line. It can be on any line, but they will be independent of each other.

Mark Reichman (Senior Research Analyst)

How much would it be, and how much time does it take?

Mike Riordan (CFO)

Hi, Mark. This is Mike. At this point, we're not going to comment specifically on that CapEx spend and timeline. As we move closer to entering the tank car market, I will definitely provide the detail on the CapEx growth that would be needed for that, as well as the timeline. Right now, we're not prepared to provide that guidance.

Mark Reichman (Senior Research Analyst)

Okay. Okay. Understandable. And then just the last question is, when I'm just looking at our model and I'm looking at gross margin as a percentage of revenue, back in 2022, I think it was 7.1%, 2023, 11.7%, 2024, 12%. And you saw gross margin expand from the first through the fourth quarter of 2024. And here we are at 14.9% in the first quarter. So I guess what I'm just kind of wondering, have we kind of hit a new band or range for gross margin? I mean, would you continue? I guess maybe first quarter might be a little high. But in terms of kind of a normalized gross margin, what are your thoughts on that, and how much does product mix figure into that?

Have you kind of settled into kind of a normalized product mix, or will we see continued kind of fluctuations quarter to quarter, year to year in product mix? Kind of a long question, but hopefully, it makes sense.

Mike Riordan (CFO)

Hey, Mark. This is Mike. Yeah, I'll take that one. You're right. We've seen gross margin expansion annually each year the past several years. I'd say if you look at our guidance and kind of work back, you'll see we are anticipating gross margin expansion again in 2025. In 2024, we closed around 12%, so we'd expect that to go up in 2025. Product mix definitely plays in from a quarter-to-quarter perspective. When you look over 12 months, it will tend to normalize itself. We had a pretty healthy mix across product types in 2024. I will say, as I mentioned earlier, one of the answers, box cars was in Q1, which was a weight down, hence you'd expect naturally a step up. This is going to be the first full year of running all four lines at full capacity.

We're going to be continuing to look for operational efficiencies and ways to gain margin expansion as we move forward. We'll always have that focus on that. Product mix-wise, again, I will caution, quarter to quarter, you can see fluctuations, but over a 12-month stretch, it tends to normalize. The 12-month stretch last year, absent Q1, is a pretty good indication of where we can be if product mix stays at that 9-10 month average from 2024 and 2025.

Mark Reichman (Senior Research Analyst)

Okay. Great. That's very helpful. Thank you very much.

Nick Randall (President and CEO)

You're welcome.

Mike Riordan (CFO)

You're welcome.

Operator (participant)

Thank you. 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.

Nick Randall (President and CEO)

Thank you. I'd just like to finish in summary with some comments. Q1 2025 marked another quarter of disciplined execution and continued momentum reflected in robust railcar orders, significant market share gains, and substantial margin expansion. Strong financial performance highlighted by gross margin expansion to 14.9%. Adjusted EBITDA growth, despite lower revenue, underscores our commitment to profitable growth. Enhanced operational advantages, including agile manufacturing and commercial execution, position FreightCar America uniquely within the industry. With our current backlog of $318 million and our robust inquiry pipeline, 2025 is set to deliver sequential growth and significant cash flow generation, marking another strong financial year. My thanks to everyone.

Operator (participant)

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