L B Foster Co

NASDAQ:FSTR

Earnings Call Transcript 2023-Q1

[Operator]

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. [Operator Instructions] 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.

[Stephanie Listwak, IR Manager]

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 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 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.

[John Kasel, President and CEO]

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 in double last year's Q1. I'm pleased to say that the benefits of our strategic transformation actions are clearly seeing 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 stand-alone basis. These proceeds, coupled with $6.2 million free cash flow allowed us to further delever in the quarter with $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, Airport 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 of some closing remarks. Over to you, Bill

[William Thalman, CFO]

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 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 11.5% organic sales growth.

The net impact of M&A increased revenue, $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, moving through 2023. The chart on the right highlights the progress achieved in improving profitability in our legacy business with EBITDA improving $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 a 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 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, Precast Concrete segment revenue increased $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, and both 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 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 $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 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 the 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.

And 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 reflects 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. And 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 increase, up 21% over last year is attributed to the VanHooseCo acquisition and continuing strength in the legacy business. 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.

And while 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. John?

[John Kasel, President and CEO]

Thanks, Bill.

Please turn to Slide 17. We'll all 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 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 uptake in demand.

The heightened focus on rail safety in the United States represents an opportunity for improving demand for our Rail Technologies offering. And with that, 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 reduce our exposure to the volatile energy market we have in the U.S.

The move was in line with our strategic road map, 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. And 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 multiple 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 of revenue and approximately $50 million in EBITDA by 2025. And with that, 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.

[Operator]

[Operator Instructions] One moment for our first question. Question comes from the line of Alex Rygiel with B. Riley Securities. Your line is now open.

[Alex Rygiel, B. Riley Securities]

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

[John Kasel, President and CEO]

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.

So we anticipate that as well as additional leverage coming to our facilities that we should be able to continue to grow on those margins. Now end to next quarter and third quarter, especially Alex.

[Alex Rygiel, B. Riley Securities]

Super helpful. And then relative to your long-term 2025 vision, do you feel like you're ahead of this plan kind of right 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%?

[John Kasel, President and CEO]

Well, I think the 20.2 coming out with 20.2% in the first quarter is a pretty clear signal that we're on the right path here. These portfolio moves that we made and Bill highlighted in his remarks, were very important to us. We're going to really focus on organic growth now and really focus on our core competencies in the next couple of years of leveraging what we have done well in the past.

So I guess 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 labor workforce, we feel very good the aspirational goals that we put in place back in a couple of years ago, we are absolutely where we would like to be.

[Alex Rygiel, B. Riley Securities]

Very nice. Nice quarter. Thank you.

[John Kasel, President and CEO]

Thanks, Alex.

[Operator]

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.

[Chris Sakai, Singular Research]

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

[John Kasel, President and CEO]

Well, first of all, thanks for joining us today, Chris, and we appreciate your question because there's a couple of pieces that make up that segment, and we're very pleased with what's going on as respect to the coatings business, right, that we have the work in our Willis facility as well as Birmingham, which has been a nice uplift and somewhat of a return to modest levels related to that pipeline industry. We are seeing some headwinds, though, really some of the bridge products. We mentioned that today, specifically on one of the products that we build a grid decking product. By and large, we are pleased with what's going on with that segment. And of course, Chemtech was part of that segment as well, Chris.

So what you're going to see is continuing improvement in gross profit with the divestiture of Chemtech. So we feel very good about that segment on a year-over-year basis, more poorly where it's going to be heading over the next 1.5 years to two years.

[Chris Sakai, Singular Research]

Okay. Thanks for that. Now as far as any more divestitures are concerned, are there plans for more? Can you shed some light there?

[John Kasel, President and CEO]

Yes. I think you asked that every quarter, and we appreciate that. But you know 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 we put our playbook together is we have expectations in the company and when we want to drive this aspirational goals, not just in 2025 and beyond, we have things that we'd like to get done.

So if the borrower is not met or we don't see the growth coming, both top line and returns, we always look at those businesses. But we've done a lot over going back to what Alex was just talking about. We've done a lot of work here in a very short period of time. So we're going to kind of sit back here a little bit, digest what we have and really work on our organic opportunities that we have and really creating some leverage and scale in the markets that we serve.

[Chris Sakai, Singular Research]

Okay. Great. And last question for me. Do you have a target gross leverage ratio? I know it's declined. How should we see this for the rest of the year?

[John Kasel, President and CEO]

Let me flip that over to Bill. I think he would like to weigh in on that because we're also looking at with that February of the stock buyback program. So some of the things we're balancing between the $15 million stock buyback program as well as our revenue. Bill, you got some comments on that?

[William Thalman, CFO]

Yes. Good morning, Chris, yes, 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 because of the revenue ramp that occurs from Q1 to Q2, but we had a great collections quarter on AR. We obviously got the proceeds from the Chemtech sales. So that helped us to pay down the facility got us to about 2.4 turns on the gross leverage ratio.

We -- the longer-term goal that we've stated is right around 2. We feel comfortable with a stable to growing EBITDA that we would be comfortable with that 2x leverage level. In the second quarter, we would expect to see maybe just a little bit of a reversal of that $2.4 million in the quarter because of working capital investment needed to support an expectation of strong revenue in Q2 and Q3.

But then as the year progresses, we'll see that turn, and we should be able to see progress heading back down closer to two by the end of the year. So that was kind of the perspective that we have, our short-term goals. And then once we get there, we'll look at other capital deployment opportunities that we have in line with our strategy.

[Chris Sakai, Singular Research]

Okay. Great. Thanks for the answers.

[William Thalman, CFO]

Thank you. Appreciate it, Chris.

[Operator]

Thank you. One moment for our next question. [Operator Instructions] One moment for our next question. Our next question comes from the line of Brett Kearney with Gabelli ETFs Trust. Your line is now open.

[Brett Kearney, Gabelli ETFs Trust]

Hi, guys. Good morning. Thanks for taking my question. John, I want to pick up with one of the last comments you made in your prepared remarks on some of the LB 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 the 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 pretty critical need.

[John Kasel, President and CEO]

Yes. So thanks, really appreciate the question. It's top of mind for our company and more importantly, top of mind for the industry right now. And we want to make sure that we're doing everything we can to get our technology and let's just maybe take a step back and understand what our technology is. So first of all, we got a wild, which will impact load detector.

And we just released a new revision and new technologies to the market from Mark 3 to Mark 4, which has significant capabilities of really understanding what's going over the rails, looking at impacts, looking at cars that are hunting or moving back and forth are looking at in balanced loads.

So this device has been in place for over 20 years, and we have a large installed base across North America. And it's a significant device that's used for measuring what's going on over the track and the train and the relationship between the two. The other piece that we have a significant play in as far as safety and managing the relationship between the wheel to rail. That's that contact patch between the steel on steel.

So as you go into curve or you go down to tangent track and making sure that the train is operating and performing one, from an environmental point of view or from a fuel efficiency point of view, but also making sure the life of the assets are going well and it able to keep that well on the track.

So that's a significant thing that we have offering. And we've been using and selling across the world. With that, Congress is in the middle of this, obviously, working with our customers. We're also at least answering questions wherever we can.

And they're looking at these devices where they're installed, how they're being used. And then of course, we're working with our customers at the same time frame. So I think it is early on, as you mentioned. I do think there will be regulations coming out. I think the railroads by and large, both freight as well as transit are focusing on what could do to bring safety to the forefront of that history as well.

So I don't have a time line in mind, but I will tell you the materials and the applications and solutions and services that I just mentioned, there's a lot of interest in our company and our business right now related to that. So I guess we'll probably talk more about that in the coming quarters and give you some updates on how that's going.

[Brett Kearney, Gabelli ETFs Trust]

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

[John Kasel, President and CEO]

Yes. Well, first of all, they didn't have a great year last year. So let's just call it the way it is. And that team got energized to get out and make things happen. We had a large backlog and some of that backlog was constrained because of the work that we do primarily with the state and federal and local governments.

So we were able to get into some new arrangements really get after what I mentioned earlier as far as pricing dollars exceeding inflation dollars. Our supply chain group did a fantastic job of bringing the components that we're struggling to get in the past and our operations really, really did a fantastic job on the legacy side.

And honestly, I think the acquisition of VanHooseCo got everybody fired up in the organization or bringing down two new facilities brought in new management, new skill sets, and that group is really hitting on all strides right now. We feel very good about where they're at more employing where they're going to be heading. And the reality is we said, listen, we have growth platforms of precast and rail technologies, and you guys need to do your part.

So we've really, Bill and myself, the leadership team really made it clear to them is here the opportunity to step up. And I would say they're taking full advantage it. Bill, do you want to add any more color to that?

[William Thalman, CFO]

Yes. No. Just to highlight John had mentioned the backlog was a bit constrained last year, and we had some challenging operating environments without escalating raw material costs. If you recall, we talked about the fact that we had trouble getting engineering work to sign off on drawings to get production lined up to be able to get product through the manufacturing facility. And 12 months later, we're in much better shape, and we got a nice order book.

And we did have a little bit of weather in Q1, but it wasn't a constraint to getting revenue growth in the business, and we're looking for a stronger performance coming in Q2 and Q3 as well.

[Brett Kearney, Gabelli ETFs Trust]

Congratulations on the continued momentum.

[John Kasel, President and CEO]

Well, we appreciate it. Thanks for using that word, too, because that's how we look at it internally. We've got a ways to go, but we definitely built that.

[Operator]

[Operator Instructions] 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.

[John Kasel, President and CEO]

Thanks, Noman. I really appreciate it. Thanks for everybody joining us today. I'd like to end the meeting with just a comment on safety and internal to L.B Foster. We really are striving to be the best world-class facilities that we have.

And our safety really represents what we are and how we do things, it's really core value of our company. And I'm pleased to announce that we only had one injury in the entire first quarter of the year. Now one injury is too many, but I'm very pleased with the focus, the energy and the excitement and more importantly, attention to our employees and the safety of all employees in the company. So well done to our group. And it really kind of ties in line with the performance.

When safety is there, the quality follows, the productivity comes in the profitability and such. So our team is really stepping up the strategies in play. We feel very excited about more importantly where we're going than where we've been. We've learned from the past, and we really feel shored up that their aspirational goals are going to be something that we're going to be reaching here in 2025 and then continue to grow beyond.

So thanks again for your interest in L.B. Foster. And I'll turn it back to Noman, and we'll close the meeting.

[Operator]

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