Foster L B Co Q1 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to L.B. Foster's First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stephanie Listwak, Investor Relations Manager. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's first quarter of 2023 earnings call. My name is Stephanie Listwak, the company's Investor Relations Manager. Our President and CEO, John Kasel; and our Chief Financial Officer, Bill Thalman, will be presenting our first quarter operating results, market outlook and business development this morning. We'll start the call with John providing his perspective on the company's first quarter performance. Bill will then review the company's first quarter financial results. John will provide perspective on market development and company outlook in his closing comments. We will then open the session up for questions. Today's slide presentation, along with our earnings release and financial disclosures were posted on our website this morning and can be accessed on our Investor Relations page. Our comments this morning will follow the slides in the earnings presentation. Some statements we are making are forward-looking and represent our current view of our markets and business today. These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information, except as required by securities laws. For more detailed risks, uncertainties and assumptions related to our forward-looking statements, please see the disclosures in our earnings release and presentation. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables provided within today's earnings release and within our accompanying earnings presentation carefully as you consider these metrics. So with that, let me turn the call over to John.

Thanks, Stephanie, and hello, everyone. Thanks for joining us today for our first-quarter earnings call. As you can see on Slide 5, we continue the positive momentum we established beginning in the second half of 2022, and we're off to a strong start to 2023. Sales growth was 16.9% in Q1 with organic growth at 11.5% and adjusted EBITDA coming in at $4.5 million or 3.9% of sales, noting that EBITDA results were more than double last year's Q1. I'm pleased to say that the benefits of our strategic transformation actions are clearly visible in our operating results in Q1, with gross margins expanded 360 basis points to 20.2%. Speaking of transformation actions, we continued our portfolio modifications with the divestiture of Chemtech at the end of the quarter. The sale of Chemtech provided $5.3 million in proceeds despite operating at near breakeven levels on a standalone basis. These proceeds, coupled with $6.2 million in free cash flow, allowed us to further deleverage in the quarter with an $11.5 million reduction in net debt and the gross leverage ratio for our Crest facility improving to 2.4x. Order rates continue to grow year-over-year, and the strong book-to-bill ratio of 1.21:1 expanded our backlog by 6.2% despite the sale of Chemtech at the quarter end. In consideration of our Q1 results and the sale of Chemtech, we did reduce our 2023 revenue guidance by $20 million at both ends of the range, but more importantly, maintained our adjusted EBITDA range of $27 million to $31 million. And finally, in February, our board authorized a $15 million share repurchase program, adding a valuable capital allocation tool. In summary, we're pleased with our continuing progress executing our strategic playbook, and we expect the favorable operating trends to continue moving through 2023. Next, Bill will cover the detailed financials for Q1, and I'll come back at the end with some closing remarks. Over to you, Bill.

Thanks, John, and good morning, everyone. I'll begin my comments covering the consolidated highlights of our first quarter on Slide 7. Note that the schedules in the appendix provide more detailed information on our financial results, including the non-GAAP measures Stephanie referenced. The Chemtech sale was completed at the end of Q1, so their operating results are included in our Q1 results. Q1 results also include 2022 additions to the portfolio, VanHooseCo and Scratch, but exclude the track components business that was divested in the third quarter last year. First-quarter sales were $115.5 million, up $16.7 million or 16.9% over last year. Higher sales volumes, coupled with improvements in business mix and price realization increased gross profit by 41.6%. As a result of these achievements, together with the accretive benefits of our portfolio actions, gross profit margins expanded 360 basis points to 20.2%. We're very pleased with the margin improvement achieved year-over-year and expect these favorable trends to continue as volumes improve in our seasonally strong second and third quarters. The $2 million transaction loss on the Chemtech divestiture resulted in a $2.2 million net loss in Q1. However, adjusted EBITDA improved $2.8 million year-over-year to $4.5 million, with the EBITDA margin more than doubling to 3.9%. John covered consolidated orders, backlog, and cash performance in his opening remarks, and I'll provide some more additional color on these items later in the presentation. Slide 8 provides a bridge of our Q1 sales and EBITDA year-over-year, highlighting the impacts within our legacy business and the benefits of our portfolio transformation. The chart on the left highlights the strong organic growth realized in Q1, with the $11.4 million sales increase contributing to an 11.5% organic sales growth. The net impact of M&A increased revenue by $5.3 million or 5.4%. As John highlighted in his opening remarks, commercial activity remains robust, and we expect organic and inorganic revenue growth rates to remain favorable as we move through 2023. The chart on the right highlights the progress achieved in improving profitability in our legacy business, with EBITDA improving by $2.8 million year-over-year, representing leverage of 24.1% in the quarter. M&A activities also contributed favorably to EBITDA growth year-over-year, but was somewhat tempered due to the seasonally low volumes in the quarter. We expect this impact to be more pronounced in the coming quarters, similar to what we realized in Q3 and Q4 of last year. Slide 9 provides an important perspective on the progress we've made in our profitability, specifically in our gross margins. Gross margins in Q1 are typically softer due to normal seasonality in the business. However, the result achieved in this year's first quarter, 20.2%, is the highest Q1 result we've seen since 2019, when the energy market was much more robust. This favorable trend highlights the benefits of the portfolio actions and margin recovery efforts in our legacy business. We expect strong revenue growth and improved gross margins to continue moving through 2023 as the structural improvements in our business continue to take hold. Over the next three slides, I'll cover our segment performance, starting with the Rail segment on Slide 10. First-quarter rail segment revenues were up slightly year-over-year at $64.4 million, with 5.8% organic growth, partially offset by the impact of M&A. Strong sales growth in global friction management and rail products were partially offset by softness in the Technology Services & Solutions business in the U.K. and the impact of the track components divestiture. Rail margins expanded 250 basis points to 22.2% on higher volumes and friction management, and improved price realization across the majority of the portfolio. New orders in backlog were down 19.3% and 7.6%, respectively, due primarily to the track components divestiture and order timing in rail distribution. As reflected on Slide 11, the Precast Concrete segment revenue increased by $9.3 million or 61.8% year-over-year. Revenues were up 6.5% organically, and the VanHooseCo acquisition contributed $8.3 million, representing growth of 55.3%. Gross margins were up 640 basis points to 22.7% due to the accretive impact of the VanHusco acquisition, along with improved price realization and strong operating performance in the legacy business. Orders and backlog remain robust in our precast segment, with VanHooseCo contributing $7.7 million and $11.7 million, respectively. The Steel Products & Measurement segment results on Slide 12 reflects a 33.6% increase in revenues, driven largely by coatings and measurement and partially offset by lower sales in the Fabricated Bridge business. Improved gross margins, which were up 570 basis points to 13%, were driven by higher volumes in Protective Coatings but were partially offset by weaker volumes and higher raw material costs for fabricated bridge. Orders in backlog were up 18.9% and 18.7%, respectively, despite the Chemtech divestiture at quarter end, due primarily to improved order intake in fabricated bridge and protective coatings. Turning to our liquidity and cash metrics on Slide 13, we continue to make progress reducing our net debt and gross leverage during the quarter. We reduced net debt by $11.5 million to $77.5 million at quarter end, with $6.2 million in free cash flow and $5.3 million in proceeds from the Chemtech divestiture. We also improved the gross leverage ratio for our revolving credit facility to 2.4x at the end of the quarter, an improvement of 0.4 of a turn during the quarter. I should highlight that we received approximately $3 million in federal income tax refunds in February, and we have approximately $100 million in federal net operating loss carryforwards that are expected to reduce future cash taxes as our profitability continues to improve. Our capital allocation priorities remain unchanged and are well aligned with our strategy. Over the last 2.5 years, we've raised nearly $37 million in capital by divesting three underperforming businesses no longer aligned with our strategy. Those proceeds were redeployed to acquire three businesses: VanHooseCo, Scratch, and Intelligent Video, that fit well within our growth platforms. While we continue to be active in evaluating inorganic investment opportunities, we do not anticipate any significant acquisitions for the foreseeable future. We continue to focus on deleveraging activities while cautiously investing in the organic growth opportunities we see in Rail Technologies and Precast Concrete. Capital spending is expected to run about 2% of sales, slightly higher than our typical spending level due to organic growth investments. Our Union Pacific warranty settlement obligation will be fully fulfilled after $16 million in payments, $8 million in each of 2023 and 2024. Lastly, we will cautiously evaluate opportunities to return cash to shareholders through the $15 million stock repurchase program authorized by our board earlier this year. In summary, we're pleased with the progress we've made reducing our net debt and leverage following the acquisitions completed last year, and further improvement remains a top priority.

My closing comments will refer to Slides 14 and 15, covering orders, revenues and backlog by business. The book-to-bill ratios on Slide 14 reflect the continuing strength we've seen across the business, particularly in the first quarter. The book-to-bill ratio over the trailing 12 months was 1.08:1, with orders outpacing sales by approximately $40 million. However, the consolidated book-to-bill ratio in the first quarter was particularly strong at 1.21:1, with all segments increasing their order books in the quarter. Lastly, our consolidated backlog on Slide 15 reflects the robustness of the commercial activity across the majority of the business and net benefits of the M&A actions completed over the last 12 months. The Precast backlog increased, up 21% over last year, attributed to the VanHooseCo acquisition and continuing strength in the legacy business. The backlog in the Steel Products & Measurement segment was up 19% versus last year, despite the impact of the Chemtech divestiture, highlighting the improved demand in our Protective Coatings business. While the Rail segment backlog was down 8% versus last year, primarily due to order timing and the divestiture of the track components business, the rail backlog grew 8% from the start of the quarter. In summary, our first quarter results reinforce our confidence in our strategic playbook, and we look forward to reporting continuing progress through the balance of 2023 and beyond. Thank you for your time, and I'll now hand it back over to John for his closing remarks. Thanks, Bill. Please turn to Slide 17. We'll start my closing remarks with a brief overview of how we see our key end markets developing in the coming quarters. As previously mentioned during update calls, our business has benefited from significant government funding for infrastructure projects in the past, and the funding levels approved over the past several years are greater than we've ever seen before. We're also seeing an increase in quoting activities for major projects, and the order rates in the coming quarters should reflect this uptick in demand. The heightened focus on rail safety in the United States represents an opportunity for improving demand for our Rail Technologies offering. We are taking steps with our rail customers to capture this opportunity and support safety initiatives with advanced offerings of our technology-based products, solutions and services. One area of softness we're monitoring is in the U.K., with pronounced inflationary impacts currently dampening demand in our key markets. Our sales in the U.K. were down 28% year-over-year in the first quarter. However, order rates improved somewhat in the quarter, and we are quoting a significant amount of work that should continue to benefit in the coming quarters. The Chemtech divestiture further reduces our exposure to the volatile energy market we have in the U.S. The move was in line with our strategic roadmap, and we're pleased to see the modest recovery of our Protective Coatings business, which is benefiting from renewed investment in pipeline infrastructure for traditional and adjacent market applications. While recessionary conditions are prevalent in many industrial markets, we remain cautiously optimistic that our key end markets will remain resilient in part due to the support of the government-funded infrastructure programs. In closing, on Slide 18, quotation and order rates will remain robust across the majority of our business. Our Rail Technologies and Precast Concrete growth platforms continue to benefit from previously announced multi-year infrastructure investment programs. As a result, we remain confident in our organic growth and margin expansion potential underpinning our aspirational goals of approximately $600 million in revenue and approximately $50 million in EBITDA by 2025. On behalf of all the employees of L.B. Foster, we look forward to reporting on our continuing progress in the coming quarters. Thanks again for your interest in L.B. Foster, and I'll now turn it back to the moderator for the Q&A session.

One moment for our first question. The question comes from Alex Rygiel with B. Riley Securities. Your line is now open.

Thank you. Good morning, gentlemen. Very nice quarter. A couple of quick questions here. First, gross margin in the precast segment was very strong. Is this a new sort of level that can kind of be maintained in that low 20% range, at least through 2023?

Yes. We think so. In fact, we're planning on it. I will tell you that pricing dollars right now are exceeding the inflationary dollars. So we've done a good job getting out in front of this, working with our customers. We anticipate that, along with additional leverage coming to our facilities, should allow us to continue to grow those margins, especially in the next quarter and the third quarter, particularly.

Super helpful. And then relative to your long-term 2025 vision, do you feel like you're ahead of this plan, on target with this plan? And what are some of the bigger catalysts or things that you need to do in order to achieve EBITDA margins of that 8%?

Well, I think the 20.2% coming out with the first quarter is a clear signal that we're on the right path. The portfolio moves that we made, which Bill highlighted in his remarks, were very important to us. We're focusing on organic growth now and our core competencies in the next couple of years, leveraging what we have done well in the past. So the short answer is yes, we feel very good. Considering everything that's been going on related to COVID, inflation, all the impact related to the labor workforce, we feel positive about the aspirational goals that we put in place a couple of years ago. We are absolutely where we would like to be.

Very nice. Nice quarter. Thank you.

Thanks, Alex.

Thank you. One moment for our next question please. Our next question comes from the line of Chris Sakai with Singular Research. Your line is now open.

Yes, hi, good morning, John and Bill. I just had a question on the gross profit for steel products and measurement, which looks like it's improved significantly this quarter. I wanted to see how we should be thinking about the gross profit in that segment in the next quarter or in the year?

Well, first of all, thanks for joining us today, Chris, and we appreciate your question. There are a couple of pieces that make up that segment, and we're very pleased with what's going on with the coatings business. We have work in our Willis and Birmingham facilities, which has seen a nice uplift and a return to modest levels related to the pipeline industry. We are seeing some headwinds, particularly with some of the bridge products. We mentioned that today, specifically one of the products that we build, a grid decking product. But by and large, we are pleased with what’s going on in that segment. Of course, Chemtech was part of that segment as well, Chris. We feel you will see continued improvement in gross profit with the divestiture of Chemtech, so we feel good about that segment on a year-over-year basis.

Okay. Thanks for that. Now, regarding any plans for more divestitures, can you shed some light on that?

Yes. I think you ask that every quarter, and we appreciate it. We're not going to mention or comment on that. But that is part of everything we do in the portfolio. It was a big part of our strategic transformation plan. We have expectations in the company when we want to drive our aspirational goals. If the bar is not met or we don't see the growth coming, both at the top line and in returns, we always evaluate those businesses. We've done a lot over this period of time. So we're going to kind of sit back for a bit, digest what we have, and really work on our organic opportunities and create some leverage in the markets that we serve.

Okay, great. Last question from me. Do you have a target gross leverage ratio? I know it has declined. How should we see this for the rest of the year?

Let me flip that over to Bill. I think he would like to weigh in on that because we're also balancing the $15 million stock buyback program.

Yes. Good morning, Chris. We were pleased with the activity that we achieved in the quarter. We had a really strong cash generation quarter. Both free operating cash flow was favorable in a quarter we typically would see working capital investment. However, we had great collections on accounts receivable. We got the proceeds from the Chemtech sales, which enabled us to pay down the facility and got us to about 2.4 turns on the gross leverage ratio. The longer-term goal that we’ve stated is around 2. We feel comfortable with stable to growing EBITDA that would support that leverage level. In the second quarter, we would expect to see a little bit of a reversal from 2.4 turns because of working capital investment needed for expected strong revenue in Q2 and Q3. But then as the year progresses, we should head back down closer to two by the end of the year.

Okay. Great. Thanks for the answers.

Thank you. Appreciate it, Chris.

One moment for our next question. Our next question comes from Brett Kearney with Gabelli ETFs Trust. Your line is now open.

Hi, guys. Good morning. Thanks for taking my question. John, I want to pick up with one of the last comments you made about L.B. Foster's rail technology offerings that help with condition monitoring solutions. Just anything you can share at this point in terms of what you've heard from industry customers coming out of some of these high-profile train derailments we've seen. I know it's early days in some of your latest product rollouts, but just how you're seeing or anticipate receptivity to some of the solutions you have in the marketplace to address this critical need.

Yes. So thanks; I really appreciate the question. It's top of mind for our company and more importantly, top of mind for the industry right now. We want to ensure that we're doing everything we can to get our technology out. So let's just step back and understand what our technology offers. First of all, we have a wide load impact load detector. We just released a new revision and new technologies from Mark 3 to Mark 4, which has significant capabilities for understanding what's going over the rails, looking at impacts, and evaluating cars that are hunting or moving back and forth. This device has been in place for over 20 years, and we have a large installed base across North America. It's significant for measuring the relationship between the train and the track. Additionally, we have a significant offer in safety and managing the relationship between wheel to rail contact. As you go to curve or down tangent track, we ensure that the train is operating efficiently, from both environmental and fuel efficiency perspectives, while also ensuring asset longevity. This is crucial, and we have been selling this across the world. Congress is currently involved with this, working with our customers who are interested in these devices, their installations, and how they're being used. I believe there will be regulations coming out. Railroads, by and large, both freight and transit, focus on bringing safety to the forefront. I don't have a timeline in mind; however, I will tell you that the materials and services that we've mentioned are generating a lot of interest right now.

Excellent. That's very helpful. I noticed the legacy precast concrete products business had very strong sales and orders in the quarter, even aside from the momentum with VanHooseCo. Just curious what's driving that? Is it still kind of residual from the Great American Outdoors or the IIIA, or what product lines are seeing the most robust activity there?

Yes. They didn't have a great year last year. Let's call it how it is. That team got energized to make things happen. We had a large backlog, and some of that backlog was constrained because of our work with state, federal, and local governments. We were able to enter into new arrangements and really enhance our pricing, which now exceeds inflation. Our supply chain group did an exceptional job in bringing components we were struggling to source before and our operations performed outstandingly in the legacy side. Honestly, I think the acquisition of VanHooseCo got everybody inspired; bringing in new facilities and management with new skill sets has energized that group. We feel very good about their current status and future direction.

And just to add on, the backlog was a bit constrained last year, so we had a challenging operating environment due to escalating raw material costs. If you recall, we discussed that we had trouble getting engineering work to sign off on drawings required for production lineup. Twelve months later, we're in much better shape, and we have a nice order book. We experienced some weather challenges in Q1, but it didn't hinder our revenue growth, and we're looking for stronger performance in Q2 and Q3 as well.

Congratulations on the continued momentum.

We appreciate it. Thanks for using that word because that's how we see it internally. We have a long way to go, but we've definitely built that.

Showing no further questions at this time. I'd like to hand the conference back to Mr. John Kasel, Chief Executive Officer, for closing remarks.

Thanks, Noman. I appreciate it. Thanks for joining us today. I'd like to end the meeting with a comment on safety and internal matters at L.B. Foster. We strive to be the best in world-class facilities. Our safety represents who we are and how we do things, and it is a core value of our company. I'm pleased to announce that we only had one injury in the entire first quarter of the year. One injury is too many, but I'm very pleased with the focus, energy, excitement, and attention towards our employees and their safety. Well done to our group, which ties into performance; when safety is prioritized, quality follows, which leads to productivity and profitability. Our team is stepping up. We feel excited about where we're going and the lessons we've learned. We believe that our aspirational goals will be met by 2025 and beyond. Thank you for your interest in L.B. Foster. I'll turn it back to Noman, and we’ll close the meeting.

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.