Earnings Call Transcript - FSTR Q3 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Q3 2024 L.B. Foster Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s session is being recorded. I would now like to turn it over to Lisa Durante. Go ahead, Lisa.

Lisa Durante, Investor Relations Manager

Thank you, operator. Good morning, everyone, and welcome to L.B. Foster’s third quarter of 2024 earnings call. My name is Lisa Durante, the company’s Investor Relations Manager. Our President and CEO, John Kasel; and our Chief Financial Officer, Bill Thalman, will be presenting our third quarter operating results, market outlook, and business developments this morning. We will start the call with John providing his commentary on the company’s third quarter performance. Bill will then review the company’s third quarter financial results. John will provide his perspective on market developments and company outlook in his closing comments. We’ll then open up the session 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. Today’s discussion includes corrections made to the company’s previously reported financial statements as disclosed in the Form 10-K/A for 2023 and Forms 10-Q/A for the first and second quarters of 2024 filed with the Securities and Exchange Commission. 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’ll also discuss non-GAAP financial metrics and encourage you to carefully read our disclosures and reconciliation tables provided within today’s earnings release and presentation as you consider these metrics. So with that, let me turn the call over to John.

John Kasel, President and CEO

Thanks, Lisa, and hello everyone. Thank you for joining today for our third quarter earnings call. I’ll start today’s call by recognizing and welcoming Lisa Durante. Lisa was recently promoted to Manager of Financial Reporting and Investor Relations. I’m also pleased to announce that Stephanie Schmidt has been promoted to an expanded role in our financial reporting team. We’re fortunate to have both Stephanie and Lisa leading our Investor Relations and financial reporting efforts and look forward to their continuing contributions. Congratulations Lisa and Stephanie. Turning to the quarter, we’re very pleased with the progress achieved during the third quarter as reflected in our exceptional profitability and cash generation results. These results clearly indicate our strategy to transform the profitability profile of our business is on track. The 23.8% gross margin reported represents the highest level we’ve seen in over a decade. It was up 490 basis points over last year. The margin achieved was on $137.5 million in sales, which were down 5.4%, highlighting the improved portfolio profitability and efficiency. Net income in the quarter was $35.9 million, which included a $30 million favorable tax valuation reserve adjustment, noting that our improving profitability trends allowed us to release this provision. Adjusted EBITDA was $12.3 million, up 16.4% over last year, despite the lower sales with the improved gross margins and lower SG&A expenses. As expected and in line with our normal seasonal working capital cycle, we also delivered a very strong quarter of cash generation with cash from operations totaling $24.7 million. Cash was deployed primarily to reduce our net debt by $17.7 million to $65.4 million at the quarter end. As a result of our lower debt levels and improving profitability, our gross leverage ratio improved by 0.8 times ending the quarter in an impressive 1.9 times. We also continued funding CapEx initiatives within the Rail Technology and Precast Concrete growth platforms. At the same time, we expanded our stock purchase program buying approximately 127,000 shares for $2.6 million during the quarter. With the third quarter results largely in line with our expectations, we made modest updates to our 2024 financial guidance. We lowered the sales expectations slightly but maintained the midpoint of our adjusted EBITDA outlook in line with the improved earnings efficiency of the portfolio. And with the strong results achieved in the third quarter, we slightly increased our outlook with the second half free cash flow now expected to range between $30 million and $35 million. In summary, we’re very pleased with our third quarter results and look forward to leveraging our continuing momentum to a strong finish to 2024. I’ll turn it over to Bill to cover the financial details for the quarter, and I’ll come back at the end with some closing remarks on our markets and outlook. Over to you, Bill.

William Thalman, Chief Financial Officer

Thanks John, and good morning, everyone. I’ll begin my comments covering the third quarter highlights. As always, the schedules in the appendix provide more information on our results including non-GAAP measures discussed on today’s call. Also, we’ll call out the impact of significant portfolio actions where meaningful. For the third quarter, the only inorganic impact is the bridge grid deck product line exit that was announced last year. Net sales for the quarter were down 5.4%, driven primarily by domestic rail commercial weakness with organic sales down 8.5%. Infrastructure organic sales were down approximately 2%. Despite the lower sales, gross profit grew to $32.8 million, up $5.3 million versus the prior year. Last year’s gross profit included $3.9 million in adverse impacts from the bridge grid deck exit contributing to the year-over-year improvement. The benefits of our strategic execution delivered a gross margin of 23.8% in Q3, the highest level achieved in over 10 years. Gross profit and margin improvement was realized in both Rail and Infrastructure, despite lower sales in both segments. I’ll impact sales and margin drivers by segment further on the slides ahead. Selling, general, and administrative costs in Q3 were $24.3 million, down $0.1 million from the prior year. The current quarter included $0.4 million in costs associated with a resolved legal matter and $0.8 million in costs associated with the previously announced enterprise restructuring program. These increases were offset by $0.8 million in lower employment costs and $0.7 million in lower bad debt expense. As a reminder, last year’s bad debt expense included a $0.9 million charge related to the bankruptcy of a UK customer. Net income for the quarter totaled $35.9 million, including $30 million due to a favorable tax valuation allowance adjustment. This improvement in financial performance is allowing us to continue to build strategic momentum and confidence in our operations. Adjusted EBITDA for the quarter was $12.3 million, up 16.4% versus last year due primarily to the gross profit improvement and lower SG&A. Cash generation for the quarter was strong with $24.7 million in cash from operations, up $6.1 million over last year’s third quarter. I’ll cover the deployment of operating cash flow along with some additional color on orders and backlog by segment later in the presentation.

John Kasel, President and CEO

Thanks, Bill. Please refer to Slide 18 for an overview of our key business market drivers underpinning our outlook. Bill mentioned that our trailing 12-month book-to-bill ratio improved slightly in the third quarter. The improvement was realized in the Rail segment with improving demand in both Rail Products and Global Friction Management. The recovery of market conditions for our UK business remains on track. Here in North America, we started to see some increased quoting and project activity in the rail market, which would translate to solid growth for our Rail Products revenue in future quarters. Quoting activity for Total Track Monitoring solutions also continues on the positive trend. And I’m pleased to say that we’re beginning to be awarded business with new product technologies in this space. With the increased focus on rail safety, operating efficiency, and reliability, we expect this trend to continue to 2025 and beyond. While demand levels in the Rail segment are improving, infrastructure markets are somewhat choppy. The infrastructure book-to-bill ratio declined in the most recent quarter due to continuing weakness in Steel Products. But let me start by highlighting the positive developments of Precast Concrete. Business in this product remains robust with demand in our CXT buildings bolstered by the funding from the Great American Outdoors Act, continuing on record levels. In addition, we are in the process of commissioning a facility in Central Florida to produce the Envirocast wall system. This organic strategic action is to service the booming regional residential and light industrial commercial real estate markets in that area. Our licensed technology offers an attractive solution for builders who are faced with rising costs and construction delays due to a lack of labor and materials for traditional construction methods. We believe that this factory-built modular concrete wall system positioned in the weather-challenged area of Central Florida will lead to substantial precast growth for years to come. In contrast, Precast Concrete business activity and Steel Products remain somewhat soft across the board, particularly for the bridge forms and gas pipeline coating services. We are aware of where we’re seeing solid coating activity in these markets indicating some level of pent-up demand, but project orders have not yet been released. We’re also expecting that the completion of the election cycle here in the U.S. will create some certainty for our customers allowing them to proceed with much-needed work in the bridge and pipeline infrastructure. In summary, overall prospects for long-term sustainable growth should remain strong in light of the infrastructure investment super cycle we expect for years to come. Most importantly, demand levels in our growth platforms of Rail Technologies and Precast Concrete remain robust, which should translate into expanding profitable growth and returns.

Christopher Sakai, Analyst

Hi, John and Bill, good morning.

John Kasel, President and CEO

Hi, Chris.

Christopher Sakai, Analyst

So, just I’m looking at the 2025 revenue goal targets. Can you help kind of shed some color on, I guess, what we’re expected to see, I guess next year that’ll really help boost that revenue number to get to the target?

John Kasel, President and CEO

Yeah, good question. Thanks, Chris. We’re getting kind of line of sight on what’s going on with the balance of the quarter and, right now, activity is strong. If you see what our guidance shows us landing between $530 million and $540 million for the balance of the year on sales, and then uplifting with revenue targets for $580 million to $620 million next year. So I’m sure that’s where your question’s going and that’s where it’s happening. It is coming in our growth platforms and it’s coming through sales. We feel very good about our margins. I think we’re about 22.2% year-to-date with a strong quarter at 23.8%. So we feel very, very good what’s going on in our margins and our portfolio. So it’s all about the organic growth. I mentioned what we’re seeing right now in Florida, which is an extension of our recent acquisition that we made in Tennessee. So we feel very good about what’s going on and continue to grow our concrete business. Bill talked in great depth about what’s happening with Total Track Monitoring and the Friction Management business. Both those two are doing extremely well and we have great opportunities, all organic line of sight that we’re going to continue to build off these growth platforms through the balance of this year and, more importantly, into next year.

John Bair, Analyst

Thank you. It’s Bair. There’s no L in there. No L’s in a couple of months, anyways. Good morning, John and Bill.

John Kasel, President and CEO

Good morning, John.

John Bair, Analyst

Yeah, a couple of questions here for you. On your Slide 18, you are showing commissioning a facility in Central Florida, and I apologize if I missed a comment on this, but how long do you believe it’ll take to get that up and running and what kind of CapEx is required to build that facility?

John Kasel, President and CEO

We’ve been working on this for a while. It’s a brownfield installation, so that means we’re partnering with a very large precaster, one of the largest precasters in Central Florida. We felt that was the best way to come to the market, enter the market with the infrastructure already there is related to making the product. And then, of course, we bring in the commercial side and the technical side, the engineering side. So it’s a wonderful partnership that we forged. It’s been now 3 years. We started a relationship with that company. So we feel very, very good about it. Ground has been broken. We are expecting to be making our first product by the end of this year. So capital based upon the way we set it up, we were targeting between $3.5 million to $4 million in capital. So, again, if you go back to investment thesis, we talk about being capital light. This is another great example where we really go in and we do it the right way. We spend enough money, but it’s not a heavy capital call. It’s about taking our products to the market but doing it with channel partners. They really know what they’re doing and, more importantly, we’re very excited about these opportunities in the Central Florida market.

John Bair, Analyst

Okay. And then are your projections for 2025 on as far as revenue build in a run rate kind of for this particular facility in that market?

John Kasel, President and CEO

That’s right. Yeah, so if you go back to what Chris Sakai’s question was, because we got to increase the sales that’s going year-over-year. So, keep in mind our strategy’s been about managing our portfolio. So we’ve been really taking that top-line down over the last couple of years, right, in 2021. That’s behind us now. So our portfolio’s in place and now we’re going to continue to grow and much of that revenue is coming through all, in fact all of us coming through organics, and this is a great example of it.

John Bair, Analyst

And so that $3 million to $4 million at CapEx towards this project is basically behind you as well, right?

John Kasel, President and CEO

Yeah, of course, we’re spending a little bit, yeah. The major tranche of it is behind us. Yes.

John Bair, Analyst

Yeah. So adding the last $4 million of the Union Pacific deal, get that behind you, that’s a pretty nice swing.

John Kasel, President and CEO

Yeah, thanks for bringing that up. Yeah, that’s for sure.

John Bair, Analyst

Putting both of those together. That’s pretty significant. So, yeah, my other question for you, you mentioned about bolt-ons, would targeted bolt-ons be focused on U.S. operations as opposed to Europe or elsewhere?

John Kasel, President and CEO

Yes. Today about 95% of our sales is North America. We are not going to stray away from that. We feel very bullish about what’s going on. We do believe there’s an investment super cycle. We do believe there’s a lot of pent-up demand right now, and I think we’re in a good place here in the U.S. specifically to take advantage of that for years to come.

John Bair, Analyst

Right. Very good. Thanks very much for taking the questions and hope to see you soon. Take care.

John Kasel, President and CEO

Yeah. Take care, John.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn it back over to John Kasel for closing remarks. Go ahead, John.

John Kasel, President and CEO

I really appreciate it, Mark. And more importantly, I want to appreciate the team that’s sitting in the room with me today. We have a group that has done just a tremendous amount of heavy lifting here and the work that we put out to the market, I think second to none as far as the information, the transparency, the level of detail. This group here has worked night and day getting ourselves ready for today’s call, as well as other things that we need to get done and conducting board meetings. So I’d like to start with Bill Thalman, who heads up the group. I look at Bill as a partner that – we run the business with, and his guidance and leadership has been tremendous; his input that he brings to the party is second to none. Recently coming in was Sean Riley, who Bill brought over and has done just a tremendous job of bringing a team together that’s a world-class team. So, which starts with Joe Kisucky. Joe’s done a tremendous job. Again, these are the people behind the scenes really making things happen. I mentioned two of them right off the start, Lisa Durante just moved up from a nice role with a promotion. And then, Stephanie Schmidt who’s been really carrying up the load and now again recently promoted to a larger role within the company. So I really want to thank this team for what they’ve done and more importantly really putting us in a favorable position for how we go up to market. To me, it’s all about restoring credibility, and that’s first and foremost within the company and the second is with the shareholders. I think the package information and our transparency in information about how we do it, more importantly, how we present ourselves is second to none. So I’d like to again thank this team and all that they’ve done and will continue to do so. So with that, thank you for joining us for the third quarter. Bill and I and this team look very much forward to finishing up a very strong fourth quarter as we talked about and, more importantly, really getting into 2025 and continuing to put this company on the map. Thanks for your interest in L.B. Foster and have a great holiday season. We look forward to talking to you in March of next year. Take care.

Operator, Operator

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.