L B Foster Co (FSTR) 2024 Q1 法說會逐字稿

Good day and thank you for standing by. Welcome to the Q1 2024 L.B. Foster earnings conference call. (Operator Instructions). 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, who 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 law.

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 we consider these metrics.

So with that, let me turn the call over to John.

Thanks, Stephanie. Hello, everyone, thank you for joining us today for our first quarter earnings call. Please turn to materials to highlight for the quarter on slide number 5, which reflect continued progress in building momentum through our strategic transformation.

First quarter organic sales improved 16.9% over the prior year, but they are certainly 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 Rail segment, which delivered strong profit improvement in technology services and solutions business both in North America and the United Kingdom. Infrastructure results were somewhat softer in the quarter, with organic sales basically flat year-over-year.

As the Precast business was adversely impacted by challenging weather conditions in certain markets. While the 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 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 $2.5 million versus last year and the gross leverage ratio of 2.2 times improved [2 times] year over year.

As mentioned in our announcement, we sold ancillary properties associated with our former joint venture in Magnolia, TX 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 $12 million decrease is due to strategic divestitures completed in 2023.

The balance of the 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 overdue book level. With a 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 goals 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 then 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 number 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 the Q1 and the sale of Concrete Ties business at the end of Q2.

In addition, last year, we announced the exit of our bridge grid 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 totaling $4.4 million included a $3.5 million net gain on the sale of the Magnolia, TX property.

The net gain realized was equal to the proceeds received as the property carried zero book value 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 incentives and annual insurance premiums. I'll provide some additional color on orders and back acquired 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 the $19.5 million sales increase, representing 16.9% organic growth. The net impact of M&A activities decreased revenue $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 the strong organic sales growth was tempered due to lower profitability and 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 the 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 Ties 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 UK.

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 was primarily due to shorter lead times and an improved order fulfillment in Rail products resulting in meaningful sales growth with a relatively lower backlog level. Last year's orders and backlog 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 the adverse weather conditions on cross 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 0.2 times.

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 2 times 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 just 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 [2 times], which is down from the recent 3.3 times 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 [0.94:1], which is somewhat softer due to the strong order book fulfillment rates and improved lead times. Q1 order rates did improve sequentially 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 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 offerings. Despite the lower backlog level, we remain optimistic in the longer-term prospects for growth in 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 his 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 in longer-term prospects for growth in our end markets through both segments, particularly given extreme emphasis on infrastructure investment.

In 2023, we then realized some project related business from US federal programs approved over the last several years, and we expect that trend to continue into 2024 and beyond. And additional 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 I suspect this trend will continue. We're also cautiously optimistic that the UK construction markets have stabilized and showing modest signs of improvement after a challenging 2023.

And finally, record spending on recreational parks and campgrounds funded by the Great American Outdoors Act 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 strong where 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 and profitability that we delivered in 2023 and are continuing as evidenced by our first quarter results.

Second, we reported strong organic growth in 2023 and also started this year, again with healthy growth. As our belief and strategy that we represent an infrastructure pure play. But (technical difficulty) we have for growth to the multiyear investment programs. They're clearly needed in our served markets.

Third, with exceptional cash flow in 2023 and our capital-light business model, coupled with the 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 for us.

And finally, we have disciplined capital allocation process with multiple drivers that have been deployed and creating value for our shareholders as evidenced in 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've been 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 a market cap cut off 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 will publish strategic transformation roadmap and aspirational goals for 2025.

Since then, we've completed nine transactions. We've simplified our business structure, improved our profitability profile and aligned the business to capture robust demand in our served infrastructure markets. Very pleased with the progress, but the journey continues. We reaffirmed our guidance for 2024 and 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 recognition to our employees in the Rails segment. This time on the topic of safety. This group for the entire first quarter on 365,000 employee production hours without a recorded injury. Congratulations to Greg Lippard who leads this group and all that made this happen.

So with that, thank you for your time and continued interest in L.B. Foster, and I'll turn it back to the operator for the Q&A session.

(Operator Instructions) Alex Rygiel, B. Riley Securities.

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

Yeah, actually, the order activity, we're feeling pretty good about. We did a little bit of activity that we thought maybe a Q2 that moved in Q1. But most of it was, like you said earlier is Q1 and there's lot of headwinds out in the markets today. We're experiencing some nice results and 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?

Yeah, I appreciate that. Rail distribution, I mentioned that and back to pre-COVID levels is a good thing. It did impact to what we built in the backlog because in the past, we had -- the customers were coming to us with extended lead times and gave us orders and greater visibility. Could you let us know build out that capacity in the bill, specifically a [circle], which is a steel provider.

In the last six months or so, we've seen that get back to basically normal conditions. So the order rate and bidding rates 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 were being pretty stressed, if you will from a supply chain in the past. So we feel much better about where we're at today is much more back to normal.

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

Well, sir, As Bill -- I mean, first of all, Bill mentioned we're at 2% to 2.5% of sales as our capital play. So we're pretty light on the capital side. We like to do all we can think through things really work on the process itself and then bring capital only was needed, which has been very beneficial for us, especially with the -- as you see, our improved margins.

And a lot of that is the heavy lifting and by our men and women that are just making things and doing things better, including the safety results that I mentioned. Cash is critical, free cash flow is something we really measured, we monitor. We're excited about getting to the settlement agreements with the Union Pacific, that $8 million that comes off and it changes the balance of this year, and we'll have some dry powder as we move forward.

But get it back to your M&A question. Right now, we did have quite a few, as we mentioned, nine deals in the last 2.5 years. And we feel very good about where we're at with respect to our portfolio. We went from three segments to two segments, and we're really focused on execution right now, make sure we hit the guidance and then go from there building a platform with the mind that is 2025.

The numbers that we put out there, we put 2.5 years ago in building that platform, building that growth top and bottom line lined up to that. So we're not going to get too crazy as far as M&A work. I think we rebuilt a lot of credibility back in the marketplace today in shoring up what it is that we are building our core competencies and really focus on things that really make profitability and investors' interest in the company.

That said, we will continue to look at the cash situation. And Bill, I'll let you maybe chime in with your thoughts including a dividend perhaps in the future.

Yeah. I guess I would say to John's point, we had a great cash flow year last year, right around [$32 million, $33 million] of free cash flow last year and the guidance is $12 million to $18 million this year. And the CapEx that we're doing this year is actually a little higher run rate than what we would expect over the longer term because of some of the organic opportunities we're investing in, that will help us make the jump from where we are expecting to be in '24 to '25 guidance.

And then with the stock repurchase programs, those will be continuing. And with the UP obligation going away and stronger cash flows in 2025, I think that's when the prospects of a dividend will get greater attention, that's something that's continuously a discussion with our Board today. So feeling good about the direction we're going and look forward to continuing to make progress this year.

Very helpful. Thank you. Nice quarter.

Thanks, Alex.

Chris Sakai, Singular Research.

Hi, good morning. I had a question on the backlog trends. You mentioned that you see it improving throughout the year. Can you help us understand or give a sense as to what level do you see it going to?

Well, first of all, the bidding activity is very, very strong right now across the entire company for the Infrastructure and Rail side. I mean, sequentially, we feel very good about our uptick in activity from quarter to quarter and even when you look at Q1 versus Q1 year over year.

I don't know necessarily. We don't give guidance what the backlog is. All I know is we have enough activity in that bidding activity to be able to reconfirm our guidance for this year.

Okay, great. Thanks. And it looks like Rail had a good quarter for revenue growth. Can you comment on what were the main drivers there?

I mentioned in my remarks, a very strong performance on Rail and actually very good performance out of the entire Rail segment, including the UK. I would say that in quite a while, I say year might have been even longer. So UK year-over-year is really stabilized and something that we feel much better about conditions going forward.

The team over there has done a great job of just rightsizing as to what the market's going on and what we saw that come through in the first quarter. Our acquisition we made over there is scratch. It has been also had a very, very good quarter with nice profitability. So that came through.

And the other piece that really jumped off the page is our condition monitoring here in North America related to our salient business, specifically with [Walmart] for introduction of that product in the market, specifically helping our customers, to free customers as well as the transit customers with safety and safety measures that are going on keeping the trains on the track as well as really looking at their operational efficiencies and effectiveness of how they run and manage their train operations. They've had a very, very strong start to the year. And they're going to continue to have a fantastic year as far as we can see.

So we're very excited about the technology, the innovation, the things that the company has really been working on the last couple of years of moving this -- migrating this technology from UK and Western Europe in North America. And we're really seeing the fruits of our labor right now in the rail space.

So that's really exciting us as much as anything else. It may not become too -- per se, order backlog in dollars and dollars was coming to a profitable backlog with gross margin and giving opportunities to really grow this business and do something significant. So from that point of view, where we expected to be at this time and we're looking to put together a strong Q2 and beyond.

Okay, great. Thanks for the answers.

Justin Bergner, Gabelli Funds.

Good morning and nice quarter. Just a couple of questions. On the infrastructure side, any estimated quantification of the impact of tough weather and sales and EBITDA in the quarter?

We really didn't put a pencil to paper on that. I was out there myself in that geography this spring between the rain and it actually has Snow and talking to customers, it was just a lousy quarter related to a -- we built quite a bit of product. We are ready to go. And as the construction areas dry out, things will improve. I really couldn't put a number to it. Maybe, Bill?

Just to give you 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 say the lion's share of that was due to the weather impact.

We've got a good order book position for the business. We feel like we're going to get back on track in the second quarter, but that was the year-over-year decline attributable to the Precast business within infrastructure.

Okay. And are you seeing any macro impacts on precast positive or negative, I guess a negative side might be higher interest rates? Or is that still very manageable?

No, they're manageable. And the supply chain, as I mentioned, the rail side, getting back to normal. The supply chain related to concrete and availability of cement is getting back to normal. So that's very, very good for us.

The allocations that were there in the past kind of limit our ability to perform, that situation is improved dramatically. Our markets are booming, doing very, very well down in Texas in the southeast related to the need for concrete. So we don't see any pushback on concrete or the type of products that we're providing in the marketplace. To the contrary, the opposite to run -- we'll be running at full capacity long as we can see.

Okay. That's great. On the Rail side, help me understand there wasn't much gross margin. I guess further modest gross margin improvement on sales been very strong. Is that just a function of some mix or would you expect your margins to be flat with this type of sales growth normally?

Yeah, that's right. I'll let Bill get into details -- actual numbers so that he can share, but it's definitely a mix play. We see came through this year, which is typical in the Rail with the project type work that we do. If we get a big rail products type work that's moving around by components -- rail components, it will bring down, the revenue will be up and in respect to margin will be a little bit dilutive on the bigger picture.

But nice thing is actually supply that you got the other price coming right behind it, but the friction management and the condition monitoring and things like that that really help boost up the profitability. And that's the nice thing of our company is we give them the whole package now.

It's not just selling the components anymore. It's about providing chemicals and the treatments and now the monitoring devices for them to run effectively. So that mix will come in and out. But as we get into more of the actual rail season, which is Q2 and Q3 where the most of the work is done. That's where we'll see the really uplift from leveraging of the business up even more. It will be more impactful.

Bill, any color you want to add to that?

Yeah. Thanks, John. I guess what I would highlight is the growth that we saw within the Rail segment was highlighted by Rail products where they were up in terms of dollars, the $13 million on a year-over-year basis, about 33%.

And across the portfolio that's the business that's going to have the lowest gross profit profile, which would have tempered the margin growth that we saw on a year-over-year basis. On the other hand, steel product -- sorry, TS&S which is the technology element of the portfolio had really strong growth on a year-over-year basis, about 100%.

Now from a dollars point of view, they're a much smaller component of the business and their margins are stronger as well. So that contributed to the lift that we saw that from a percentage point of view, the strength in the Rail products portion of the business is really what tempered the margin performance on a year over year basis.

Okay, got it. And then just one last question on rail. So it seems like what you're seeing 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 returns normal, but amidst still a good --

Yeah, that's right.

Okay.

Thank you, Jeff.

(Operator Instructions) 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's part in today's call. As I said in my opening remarks, we had exceptionally strong start to 2024 and we have momentum. So we really feel good about where we're at today. We have quite a bit of work to do ahead of us to hit our aspirational goals that we've set off to do. But we're off to a great start of the year.

And I really appreciate everybody, the company, the employees as well as the Board of Directors, everybody coming together to make this happen. I mentioned earlier with the group, the safety performance, and that's really testament to when we put our efforts together of really focusing on making something important and safety is a core value of our company that this company makes results happen.

And that was a great example of us coming together. Last couple of years have been a tough time for the company. It's been exciting to see everybody moving together, kind of rowing the boat together and really focus on things that are really driving the profitability as well as serve returned to our shareholders.

And honestly, it's a fun place to work today. So thanks to everybody, thanks to the company as well as investor staying with us. And we feel good about where we're at today and understand we're going to keep working on your behalf into the future. So thanks again, have a wonderful day and we look forward to talk to you after Q2.

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