Foster L B Co Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Q1 2024 L.B. Foster Earnings Conference Call. At this time, all participants on this known 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 for today, Stephanie Schmidt. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's First Quarter of 2024 Earnings Call. My name is Stephanie Schmidt, 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 developments 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 developments 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 at lbfoster.com. 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 relating 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. Thank you for joining us today for our first quarter earnings call. Please turn to materials to highlight the quarter on Slide #5, which reflects continuing progress to this momentum in our strategic transformation. First quarter organic sales improved 16.9% over the prior year, with an exceptionally strong quarter delivered by our Rail segment. In fact, rail segment sales were up 29.4% on an organic basis. The improved sales performance coupled with a 90 basis point gross margin improvement, ending at 21.1%, drove a 32.4% increase in adjusted EBITDA year-over-year. The overall improvement in profitability was driven by real estate, which delivered strong profit, and improvement in the Technology Services and Solutions business, both in North America and the United Kingdom. Infrastructure results were somewhat soft during the quarter with organic sales basically flat year-over-year as the precast business was adversely impacted by challenging winter conditions in observed markets. However, market demand remains robust in our Infrastructure segment, and we expect results to improve as we continue to move through the construction season. As expected, our net debt increased to $74.9 million during the quarter, reflecting the increased funding to our working capital to support sales growth along with annual bonuses and insurance premiums. It's important to note that our net debt was down $3.5 million versus last year and the gross leverage ratio of 2.2x improved year-over-year. As mentioned in the announcement, we sold property associated with our former joint venture for $3.5 million in net proceeds. The associated gain was excluded from our adjusted EBITDA for the quarter. Order rates recovered in the first quarter, increasing 25.5% sequentially and 3% last year on an organic basis. Backlog remains healthy at approximately $222 million, which is down $37.6 million versus last year. Noting that a $12 million increase is due to strategic divestitures completed in 2023. The balance of decline is largely due to our rail distribution business, which has improved to pre-COVID order fulfillment lead times, translating to sales growth at a lower order book level. With the strong start to the year in line with our expectations, we reaffirmed our 2024 financial guidance and believe we are on track to achieve our 2025 financial growth established over two years ago. Bill will now cover the detailed financials for Q1, and I'll come back at the end with some closing remarks on our markets and our outlook. Over to you, Bill.

Thanks, John, and good morning, everyone. I'll begin my comments covering consolidated highlights on our first quarter on Slide #7. As a reminder, the schedules in the appendix provide more detailed information on our financial results for the quarter, including certain non-GAAP measures discussed on today's call. As John mentioned in his opening remarks, our first quarter results were strong, driven by both organic growth and the portfolio moves we made in line with our strategic roadmap. Portfolio moves completed last year include the sale of Chemtec at the end of Q1 and the sale of the concrete ties business at the end of Q2. In addition, last year we announced the exit of our Bridge deck product line in Q3, and we also completed the Cougar Mountain Precast acquisition in Q4. Organic results reviewed throughout today's presentation provide insight into the performance of our base business, excluding these portfolio actions. Net sales for the quarter were up 7.6%, 16.9% on an organic basis, with the organic growth driven primarily by the strong results in the Rail segment, while Infrastructure organic sales were essentially flat year-over-year. Gross profit was up $3 million, which drove a margin expansion of 90 basis points, improving consolidated margins to 21.1%. The improvement was driven by the rail sales uplift as well as the benefit of portfolio actions and improved product mix. Selling, general, and administrative costs increased over the prior year due to personnel and professional services costs. However, as a percentage of sales, SG&A was down 20 basis points to 18.3%. Net income for the quarter totaled $4.4 million, which included a $3.5 million net gain on the sale of the Magnolia, Texas property. The net gain realized was equal to the proceeds received as the property carried a book value of zero at the time of the sale. The net gain realized on the property sale was excluded from the adjusted EBITDA for the quarter, which was $5.9 million, up 32.4% versus last year. As expected, cash used for operating activities in the quarter was $21.9 million due to seasonal working capital needs, coupled with funding for prior year incentives and annual insurance premiums. I'll provide some additional color on orders and backlog by segment later in the presentation. The bridges on Slide 8 reflect the organic and portfolio-driven impacts on sales and adjusted EBITDA for the quarter versus last year. The bridge on the left side highlights the strong organic growth realized in Q1 with a $19.5 million sales increase, representing 16.9% organic growth. The net impact of M&A activities decreased revenue by $10.6 million or 9.2%. The bridge on the right side highlights the improved profitability delivered from both organic and M&A drivers. Notably, adjusted EBITDA was up $0.6 million from M&A activities despite the related $10.6 million decline in sales. The EBITDA leverage on strong organic sales growth was tempered due to lower profitability in Infrastructure, coupled with the higher SG&A. We expect our profitability from organic sources will improve as the year progresses. Overall, we're pleased to see the uplift in adjusted EBITDA, resulting in a 90 basis point improvement to 4.8% of sales for the quarter. Slide 9 highlights the progress we've made in sales growth and margin expansion over the last two years. The net impact of our strategic execution resulted in a 7% adjusted sales growth for the trailing four quarters ended March 31, 2024. Of course, this reported result includes the impact of our portfolio work. Organic growth over the same time period averaged approximately 13% per quarter, with a 16.9% realized this quarter being the high point. Over the trailing four quarters, adjusted gross profit increased 17.3%, resulting in a 190 basis point improvement in adjusted gross margin to 21.4%. As a result of our portfolio work and profitability initiatives, adjusted gross margins have exceeded 21% in each of the last four quarters. We're very pleased to see the impact of our transformation in our results and believe the structural improvement in the gross margin profile of our business will continue to deliver improving margins given the demand outlook from our infrastructure end markets. Over the next couple of slides, I'll cover our segment performance in the quarter, starting with the Rail segment on Slide 10. First quarter rail segment revenues totaling $82.6 million were up 28.3% over last year, including a 1.1% decline from the Pie divestiture. Strong organic sales growth was realized in both Rail Products and Technology Services & Solutions business units. We're especially pleased with the results in TS&S, which included an uplift from the domestic rail safety business as well as some modest recovery in the U.K. Rail margins of 22.5% were up 30 basis points year-over-year driven by the strength of the TS&S business. New rail orders increased 13.6% year-over-year and 39.4% sequentially, driven primarily by rail products. While backlog levels decreased 24.3% versus last year, this decline is primarily due to shorter lead times and improved order fulfillment in rail products, resulting in meaningful sales growth with a relatively lower backlog level. Last year's orders and backlogs associated with the divested concrete ties business were $2.7 million and $3.5 million, respectively. Turning to Infrastructure Solutions on Slide 11. Segment revenue decreased $9.4 million or 18.4%. However, 19.5% of the decline was due to divestiture and product line exit activity. Organic sales were relatively flat with a 1% increase over the prior year. Strong growth in steel products was offset by the impact of adverse weather conditions on customer project installations and precast concrete. Gross profit margins were up 80 basis points to 18.4%, due primarily to portfolio changes executed over the last 12 months. New orders were $48.6 million, down $17.1 million from the prior year quarter, with divestiture and product line exit activity contributing a decline of $8.5 million. Backlog totaling $136.2 million reflects a $10.1 million decrease, $8.5 million of which was due to M&A activity. I'll now cover our liquidity and leverage metrics on Slide 12. We were pleased to see the continued improvement in our net debt and gross leverage metrics compared to last year. Net debt levels decreased $2.5 million, and our gross leverage ratio decreased 0.2x. As expected, we saw an uptick in both net debt and gross leverage during the quarter to fund seasonal working capital needs as well as prior year incentive bonuses and annual insurance premiums. We remain confident in our ability to manage our leverage metrics around 2x over the long term given our capital-light business model and improving cash generation outlook. While we had a $21.9 million use of cash from operations during the quarter, we expect operating cash flow to improve along typical seasonal patterns as the year progresses. We remain confident in our free cash flow outlook guidance of $12 million to $18 million in 2024, which includes the final $8 million that's owed under the Union Pacific settlement agreement. Cash generation will be prudently deployed along our capital allocation priorities, including continuing the execution of our share buyback program with $12.3 million of the original $15 million authorization still available through February of 2026. In summary, we believe the key drivers of strong sustainable free cash flow are in place and should continue to improve throughout the balance of 2024 and beyond. I'll next revisit our capital allocation priorities outlined on Slide 13. As I mentioned, we continue to focus on managing leverage levels while opportunistically investing in organic growth opportunities we see in Rail Technologies and precast concrete. We're comfortable with gross leverage around 2x, which is down from the recent 3.3x high point seen after the completion of three acquisitions in the summer of 2022. Capital spending is expected to run around 2% to 2.5% of sales on average, which is slightly higher than our historical levels due to investments in our growth platforms. As mentioned before, we continue to evaluate opportunities to return cash to shareholders through our stock repurchase program, and we've been active since its inception in February of 2023, repurchasing approximately 151,000 shares or 1.4% of the outstanding shares at an average price of $17.89 per share. We continue to evaluate small tuck-in acquisitions that can extend our product portfolio within our growth platforms, such as the recent Cougar Mountain acquisition that was completed at the end of 2023. And finally, we continue to consider a dividend as a capital allocation option as the prospects for stronger free cash flow improved. My closing comments will refer to Slides 14 and 15, covering orders, revenues, and backlog by business. The book-to-bill ratio over the last 12 months was 0.941, which is somewhat softer due to the strong order book fulfillment rates and improved lead times. First quarter order rates did improve sequentially by 25.5% and were up 3% on an organic basis, highlighting an improving trend in the demand levels. And lastly, our consolidated backlog on Slide 15 reflects a healthy level, with the decline year-over-year due both to divestiture and product line exit activity, coupled with improved lead times and order fulfillment execution. As mentioned in the past, our order rates and backlog are susceptible to swings driven primarily by large order timing in our rail distribution product offering. Despite the lower backlog level, we remain optimistic in the longer-term prospects for growth and demand across our portfolio and expect this will translate into improving backlog as the year progresses. In summary, we're pleased with the strong start to 2024 and look forward to continuing this progress throughout the balance of the year. Thanks for your time, and I'll now hand it back over to John for closing remarks. John?

Thanks, Bill. Please turn to Slide 17 for an overview of our key business and market drivers underpinning our outlook. We are optimistic about the longer-term prospects for growth in our end markets through both segments, particularly given the continued emphasis on infrastructure investment. In 2023, we again realized some project-related business from U.S. federal programs approved over the last several years, and we expect that trend to continue going into 2024 and beyond. In addition, emphasis on rail safety programs is another favorable driver for our business. We've seen an uplift in demand for our total track monitoring technology products in 2024 and expect this trend will continue. We are also cautiously optimistic that the U.K. construction markets have stabilized and show modest signs of improvement after a challenging 2023. Finally, record spending on recreational parks and campgrounds funded by the Great American Outdoors initiatives continues to drive strong demand for our CXT Concrete buildings. Coupled with government funding for road and bridge rehab projects, as well as robust regional commercial and residential real estate development, we believe the outlook for our long-term demand is favorable for our Infrastructure segment. In summary, overall prospects for sustainable profitable growth should remain strongly supported by the infrastructure investment super cycle we expect for years to come. On Slide 18, I'd like to emphasize the investment thesis for L.B. Foster, which is supported by four key pillars. First, we've taken the strategic steps necessary to transform our business portfolio, resulting in structural improvements in profitability that were delivered in 2023 and are continuing as evidenced by the first quarter results. Second, we reported strong organic growth in 2023 and also started this year with solid growth. It's our belief and strategy that we will be a pure-play infrastructure company with numerous opportunities for growth through the multiyear investment programs that are clearly needed in our served markets. Third, with the exceptional cash flow in 2023 and our capital-light business model, coupled with improving profitability and the completion of our Union Pacific settlement payments later this year, should all provide even more favorable cash flow in the future. Fourth and finally, we have a disciplined capital allocation process with multiple drivers that have been deployed to create value for our shareholders, as evidenced by our improved equity returns. So in summary, we believe our strategy is sound and our execution along these four pillars should deliver improving results through 2024 and beyond. With these pillars in place, we're confident in our prospects for the future. As I wrap up today's call on Slide 19, I'll remind everybody we are closely monitoring the potential for L.B. Foster to be added back to the Russell 2000 index this year. Our market cap as of last Tuesday, the measurement date, was approximately $255 million, up 106% over last year. The index was up 11.6% over the same time period, and the market cap cutoff last year was approximately $160 million. Given our equity performance relative to the index, we believe we'll be on the list for inclusion once published later this month. Looking back, it's been 2.5 years since our Investor Day. At that time, we rolled out the strategic transformation roadmap and aspirational goals for 2025. We've completed nine transactions that have simplified our business structure, improved our profitability profile, and aligned the business to capture robust demand in our infrastructure markets. We are pleased with the progress and the journey continues. We reaffirmed our guidance for 2024 and have a clear line of sight to our goals for 2025. Our team is energized by the prospects for the future. Yes, indeed, we have momentum. As I started today's call, I will end the call with a recognition of our employees in the rail division on a topic of safety. This group worked the entire first quarter over 365,000 employee production hours without a recordable injury. Congratulations to Greg Lipper, who leads this group, and to all that made this happen. So with that, thank you for your time and interest in L.B. Foster. I'll turn it back to you, operator, for the Q&A session.

Thank you. As a reminder, our first question today will be coming from Alex Rygiel of B. Riley Securities. Your line is open.

Thank you, and good morning, gentlemen. A couple of quick questions here. First off, a very nice quarter. Congratulations on that. But there was no change to our full-year guidance, and understanding it's early. The first quarter was strong. Did you see any kind of pull forward? Or are you really just kind of staying conservative given where the new order activity is in the first quarter?

Yes. Actually, we're feeling pretty good about the order activity. We did have a little bit of activity that we thought might be a Q2 that moved into Q1. But most of it is, like you said earlier, from Q1. And there are a lot of headwinds in the markets today. We're experiencing some nice results and a nice start, but we're being cautious in our guidance that we're giving in the market.

Fair enough. And then as it relates to your comment about shorter lead times, can you go into a little bit more detail on that?

Yes. I appreciate that. Yes, rail distribution, I mentioned that and kind of back to pre-COVID levels. It's a good thing. It did impact what we built in the backlog because in the past, customers were coming to us with the extended lead times and provided us orders and greater visibility. We had to build out that capacity in the mill, specifically a steel provider. In the last six months or so, we've seen that get back to normal conditions. The order rate and bidding rate is still good, but they just don't need to place the orders as often as they did in the past, resulting in a little less order book. But that's a good thing for us; we're feeling much better about where we're at today.

And then lastly, as it relates to capital allocation, clearly, you expect decent cash flow this year. CapEx is sort of being managed and maintained. So I suspect that's going to free up some capital here to allocate towards M&A. Could you discuss that and how you think about using debt and stock in future M&A transactions?

I'll start, and I'll let Bill join in as well. First of all, Bill mentioned we're at 2% to 2.5% of sales in capital allocation, so we're pretty light on the capital side. We like to do what we can, think things through, really work on the process itself, and then bring capital only when it's needed. This has been very beneficial for us, especially considering our improved margins. Cash is critical. Free cash flow is something we really measure and monitor. We're excited about getting to the settlement payments with Union Pacific. That's $8 million that comes off and changes in the balance of this year, and we'll have some dry powder as we move forward. Regarding your M&A question, we did quite a few deals recently; we mentioned completing nine deals in the last 2.5 years. We feel very good about our portfolio after going from three segments to two. We're focused on execution right now, ensuring we hit the guidance and building our platform while keeping in mind the numbers we set out two and a half years ago for 2025. So we won't get too aggressive with M&A work. We’ve built credibility in the marketplace, and we're committed to enhancing profitability and shareholder interests. That said, we will continue to track our cash situation.

Yes, I guess I would say, after John's point, we had a great cash flow year last year, right around $32 million to $33 million of free cash flow, and the guidance is $12 million to $18 million this year. The CapEx that we're executing this year is actually running higher than our long-term expectations due to some of the organic opportunities we're investing in, which will help us leap from where we expect to be in '24 to '25 guidance. The stock repurchase programs will continue, and with the Union Pacific obligation waning and stronger cash flows in 2025, the prospects for a dividend will receive greater attention. This is something we continuously discuss with our Board today. We feel good about our direction and look forward to continuing progress this year.

The next question is coming from Chris Bake of Singular Research. Your line is open.

I had a question on backlog trends. You mentioned you see it improving throughout the year. Can you provide a sense of what levels you see it going to?

First of all, the bidding activity is very, very strong right now across the entire company, both in the infrastructure and rail side. I mean, sequentially, we feel very good about our uptick in activity from quarter to quarter. I don't know necessarily what the backlog levels will be; we don't provide guidance on that. All I know is we have enough activity and pending activity to reconfirm our guidance for this year.

Great. It looks like rail had a good quarter for revenue growth. Can you comment on what were the main drivers there?

We had a very strong performance in rail and very good performance across the entire rail segment, including the U.K. The U.K. has really stabilized, a market I haven't said in a while. The team over there has done a great job of rightsizing for what the market is experiencing. Our acquisition over there has also had a fantastic quarter with nice profitability. The other significant contributor is our condition monitoring in North America, particularly with our salient business and the introduction of the Wild Mark 4 product in the market, which helps our customers with operational efficiencies in their train operations. They've had a strong start to the year, and we expect a fantastic year moving forward. We are streaming our technology from the U.K. and Western Europe to North America, and we're seeing the fruits of our labor in the rail space.

One moment for the next question. Our next question comes from Justin Bergner from Gabelli Funds.

Nice quarter. Just a couple of questions. On the infrastructure side, any sort of estimated quantification of the impact of tough weather on sales and EBITDA in the quarter?

Yes. We really didn't put a number to that. I was often in the geography this spring, facing rain and even snow and talking to customers. It was just a difficult quarter overall. We built quite a bit of product ready to go. As the construction areas dry out, things will improve. I can’t provide a quantifiable estimate.

Just an order of magnitude, the precast business unit was down about 13% on a year-over-year basis, which is just about $3 million, and we would attribute the lion's share of that to weather impact. We've got a good order book position for the business and feel we'll get back on track in the second quarter, but that was the year-over-year decline attributable to the precast business within Infrastructure.

Are you seeing any macro impacts on precast, positive or negative? The negative side might be higher interest rates? Is that still manageable?

No, it's very manageable. The supply chain, as I mentioned on the rail side, is getting back to normal. The supply chain related to concrete and availability of cement is getting back to normal. The allocations that limited our ability to perform are now dramatically improved. Our markets are booming, particularly down in Texas and the Southeast, related to the need for concrete. So we don't see any pushback on concrete or the types of products we provide. Quite the opposite; we expect to be running at full capacity.

On the rail side, help me understand why there was modest gross margin improvement when sales were very strong. Is that just a function of some mix, or would you expect margins to be flat with this type of sales growth?

Yes, that’s right. I'll let Bill share the details, but it’s definitely a mix play. We see that coming through this year, which is typical in rail with the project type work we do. If we get significant rail product type work, it might temper the revenue; we have other products coming up behind it to help profitability, including the new monitoring devices for safety. So, the mix will fluctuate, but as we progress into the rail season, which is Q2 and Q3, we'll likely see a more impactful uplift.

The growth in the Rail segment was highlighted by rail products, which were up about $13 million on a year-over-year basis, roughly 33%. That’s the part of the business with the lowest gross profit profile, which flattened the margin growth we saw. Conversely, TS&S, the technology arm of our portfolio, achieved strong growth to about 100% year-over-year. Although their margins are robust, they are a smaller portion of the overall business. Thus, the growth in rail products tempered the margin performance from a retrospective view.

Got it. And just one last question on rail. It seems like what you're saying is there's very good growth in rail, but some of the revenue increase in the first quarter was a function of working down backlog as lead times return to normal.

Yes, that's right.

Thank you. At this time, there are no more questions in the queue, and I would like to turn the call back over to John for closing remarks. Please go ahead.

Thank you, Lisa. We appreciate everybody for being a part of today's call. As I said in my opening remarks, we had an exceptionally strong start to 2024, and we have momentum. We feel good about where we're at today. We have quite a bit of work ahead of us to achieve the aspirational goals we've set, but we're off to a great start this year. I appreciate the efforts from our team, the employees, and the Board of Directors for making this happen. I mentioned earlier the safety performance, which is a testament to how we come together to prioritize what's important. Safety is a core value of our company, and we've achieved significant results; a great example of collaboration leading to profitability and returns for our shareholders. We look forward to continuing this positive momentum. Thank you again, and have a wonderful day. We look forward to talking after Q2.

This does conclude today's conference call. Thank you all for joining. You may now disconnect.