L.B. Foster Company Q1 2023 Earnings Call

Good day, and thank you for standing by welcome to L. B Foster's first quarter 'twenty 'twenty 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 to ask a question. During the session you will need to press star one on your telephone you will then hear an automated message and watching your hands raised to remove yourself from the queue. Please press star one again.

Be advised that today's conference is being recorded I would now like to turn the conference over to your speak today definitely Atlas Park Investor Relations manager. Please go ahead.

Thank you operator.

Everyone and welcome to L. B Foster's first quarter of 2023 earnings call. My name is Stephanie.

Companys Investor Relations manager.

Evidence and CEO , John Castle that our Chief Financial Officer Bill Pullman.

Our first quarter operating results market outlook and business developments this morning.

We will start the call with John providing his perspective on the company's first quarter performance.

Alan 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 L. B Foster dotcom.

Our comments this morning will follow the slides and the earnings presentation.

Some statements, we're 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 are.

Under takes 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 todays 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 .

Thank you Stephanie and Hello, everyone. Thanks for joining us today for our first quarter earnings call.

As you can see on slide five 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% Q1 with organic growth of 11, 5% and adjusted.

Adjusted EBITDA coming in at $4 5 million or three 9% of sales.

Noting that EBITDA results were more than double last year's Q1.

Im pleased to say the benefits of our strategic transformation actions are clearly seen in operating results Q1 <unk>.

Gross margins expanded 360 basis points to 22%.

Speaking of transformation actions, we continued our portfolio modifications with the divestiture cap tech at the end of the quarter.

The sale of Chem Tech provided $5 3 million proceeds despite operating at near breakeven levels on a standalone 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 per our credit facility proving to two four times.

Order rates continue to grow year over year, and a strong book to bill ratio of one to one to one expanded our backlog by six 2%. Despite the sale of cap tech at the quarter end.

In consideration of our Q1 results and the sale of Chem Tech, we did reduce our 2023 revenue guidance by $20 million at both ends of the range.

But more importantly, maintain their adjusted EBITDA range of $27 million to $31 million.

And finally 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 then I'll come back at the end with some closing remarks.

Where do you bill.

Thanks, John and good morning, everyone.

I'll begin my comments covering the consolidated highlights of our first quarter on slide seven.

Net of the schedules in the appendix provide more detailed information on our financial results, including the non-GAAP measures Stephanie referenced.

The Chem Tech 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 Vanhoose go 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 22%.

We're very pleased with the margin improvements 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 <unk> divestiture resulted in a $2 2 million net loss in Q1.

However, adjusted EBITDA improved to $8 million year over year to $4 5 million.

The EBITDA margin more than doubling.

Three 9%.

John covered consolidated orders backlog and cash performance in his opening remarks, and I will provide some more additional color on these items later in the presentation.

Slide eight 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 five 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 to $8 million year over year, representing leverage of 24, 1% in the quarter.

Yes.

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 in Q4 of last year.

Slide nine 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, 22% 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.

We expect strong revenue growth and improved gross margins to continue moving through 2023 as the structural improvements in our business continued 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 five 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 and solutions business in the UK and the impact of the track components divestiture.

Rail margins expanded 250 basis points to 22, 2% on higher volumes in friction management and improved price realization across the majority of the portfolio.

New orders and backlog were down 19, 3% and seven 6%, respectively. Due primarily to the track components divestiture and order timing in rail distribution.

As reflected on slide 11, pre cast concrete segment revenue increased $9 3 million or 61, 8% year over year.

Revenues were up six 5% organically and advance <unk> 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 van <unk> acquisition, and both improved price realization and strong operating performance in the legacy business.

Orders and backlog remain robust and our pre tax segment with van <unk>, contributing $7 7 million and $11 7 million respectively.

The steel products and measurement segment results on slide 12 reflects a 33, 6% increase in revenues driven largely by coatings in measurement and partially offset by lower sales and 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 and backlog were up 18, 9% and 18, 7% respectively. Despite the Chem Tech divestiture at quarter end due primarily to improved order intake and 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 <unk> divestiture.

We also improved the gross leverage ratio per our revolving credit facility to two four times at the ended the quarter.

An improvement of four tenths 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 two and a half 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 van Fusco 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 pre cast concrete.

Capital spending is expected to run at about 2%.

Sales slightly higher than our typical spending level due to the organic growth investments.

Our Union Pacific warranty settlement obligation will be fully fulfilled.

<unk> 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 one <unk>.

8% to one.

With orders outpacing sales by approximately $40 million.

However, the consolidated book to Bill ratio in the first quarter was particularly strong at one to one to one with all segments, increasing their order books in the quarter.

And lastly, our consolidated backlog on slide 15 reflects the robustness 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 free cash backlog increase up 21% over last year is attributed to the van <unk> acquisition and continuing strength in the legacy business.

Backlog in the steel products and measurement segment was up 19% versus last year. Despite the impact of the Chem Tech 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 order timing and the divestiture of the track components business.

The rail backlog grew 8% from the start of the quarter.

Yes.

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 .

Thanks, Bill Please turn to slide 17, where I'll start my closing remarks with a brief overview of how we see our key end markets developing in the coming quarters.

As previously mentioned during our update calls our business has benefited from significant funding infrastructure projects in the past and the funding levels of proved the past several years are greater than we've ever seen before.

We're also seeing an increase in quoting activity for major projects and the order rates in the coming quarter should reflect this uptick in demand.

The heightened focus on rail safety in the United States represents an opportunity for improving demand for our rail technologies offerings.

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 product solutions and services.

One area of softness we're monitoring is in the UK with pronounced deflationary impact currently dampening demand in our key markets.

Our sales in the UK were down 28% year over year in the first quarter, our order rates improve somewhat in the quarter and we are recording a significant amount of work that should continue to benefit in the coming quarters.

They can protect divestiture further reduce our exposure to the volatile energy market, we have in the U S. The.

The move was in line with our strategic roadmap and we're pleased to see the modest recovery of our predictive coatings business, which is benefiting from renewed investment in pipeline infrastructure for traditional and adjacent market applications and.

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 remained robust across the majority of our business. Our rail technologies, a pre cast concrete growth platforms continued 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.

Approximately $600 million of revenue and approximately $50 million 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 L. B Foster and I will now turn it back to the moderator for the Q&A session.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone. Please join your question. Please press Star one again, please wait for your name to be announced please standby, while we compile the Q&A roster.

One moment for your first question.

Okay.

Question comes from the line of Al <unk> with B Riley Securities. Your line is now open.

Thank you good morning, gentlemen, very nice quarter.

Quick questions here.

Couple of quick questions first.

Gross margin in the precast segment was very strong.

So do you sort of level that can kind of be maintained sort of in that low 20% range.

At least through 2023.

Yes, we think so in fact, we're planning on it I will tell you there are pricing dollars right now are exceeding the inflationary dollars. So we've done a good job getting out in front of us working with our customers. So we anticipate that as well as the additional leverage coming to our facilities that we should be able to continue to grow grow on those margins.

Now into next quarter and third quarter, especially Alex.

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 what are some of the bigger catalyst or things that you need to do in order to achieve.

EBITDA margins of about 8%.

Well I think the 22 coming out with 22 in the first quarter was 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 they ask.

Operational goals that we put in place.

Back in a couple of years ago.

We are absolutely where we'd like to be.

Very nice nice quarter. Thank you.

Thanks Al.

Thank you.

One follow up for our next question. Please.

Our next question comes from the line of Chris Sakai with singular research. Your line is now open.

All right.

Yes, hi, good morning.

Ron and Bill just I had a question on I guess on the.

Gross profit for steel products and measurement.

It looks like its improved it improved significantly this quarter wanted to see as well.

How should how should we be thinking about this the gross profit in this section segment.

And the next quarter and the year.

Sure.

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 what's going on as a respect to the.

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.

Pipeline industry.

We are expecting we are seeing some headwinds, though related some of the bridge products. We mentioned that today, specifically on one of the products that we build a grid decking product.

But by and large we are pleased with what's going on with that segment and of course Chem Tech was part of that segment as well, Chris So what youre going to see is continuing improvement in gross profit.

With the divestiture of <unk> so.

We feel very good about that segment year over year basis, more poorly where it's going to be heading over the next year and half to two years.

Okay. Thanks for that.

Now as far as any more diverse just divestitures are concerned.

Are there plans for more can you can you shed some light there.

Yes, I think you asked me that every year.

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 is a big part of our strategic transformation, we put our playbook together as we have expectations and the company of.

We want to drive this aspirational goals not just in 2025 and beyond.

We have things that we'd like to get done so.

The borrower is not met or we don't see the growth coming both topline and returns will 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 <unk>.

<unk> that we serve.

Okay, Great and last.

Question for me.

Do you have a target gross leverage ratio declined.

How do you should we see this for the rest of the year.

Let me flip that over to Bill I think youll see wed like to weigh in on that because we're also looking at.

At February .

The stock buyback program. So some of the things we're balancing between the $15 million stock buyback program as well as our leverage so bill you've got some comments one yes, 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 went up quarter, we typically would see working capital investment because of the revenue ramp that occurs from Q1 to Q2, but.

<unk> had a great collections quarter on on a R.

Obviously, you've got the proceeds from the <unk> sales, so that helped us to pay down the facility got us to about two four <unk>.

Turns on the gross leverage ratio.

And where is the longer term goal that we've stated is right around two.

We feel comfortable with it.

Stable to grow the growing EBITDA that we would be comfortable with that two times leverage range our level.

In the second quarter.

We would expect to see maybe just a little bit of a reversal of that two four in the quarter because of working capital investment needed to support it.

Our 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.

Okay, great. Thanks for the answers.

Thank you I appreciate it Chris.

Thank you one moment for our next question and as a reminder to ask a question Thats Star one.

One moment for our next question.

Yeah.

Our next question comes from the line of Brett Kearney with Gabelli funds. Your line is now open.

Hi, guys. Good morning, Thanks for taking my question.

Thanks, Brett good morning.

John I wanted to pick up with one of the last comments you made in your prepared remarks on some of that will be fosters 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 derailment, we've seen I know it's early days in some of your.

Latest.

<unk> rollouts, but just how youre seeing or anticipate.

Receptivity to some of the solutions you have in the marketplace to address this pretty critical need.

Yes. So thanks really appreciate the question is top of mind for our company and more poorly top of mind for the industry right now.

We want to make sure that we're doing everything we can to get the.

Our technology and let's just maybe take a step back and understand where their technology is so first of all we got a wild which is will impact low detector and we just released a new revision of new technologies the market from our Mark III, Mark for which has significant capabilities of really understanding what whats going over the rails looking at <unk>.

<unk> looking at cars that are hunting are moving back and forth or looking at imbalanced 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 whether the contract the track has.

And the trained at the relationship between the two.

The other piece of it.

Have a significant play in as far as safety and managing the relationship between the world of rail that contact patch between the steel on steel. So as you go into the curve or as you go down tangent track and make sure that the train is operating performing one from an environmental point of view or from a fuel fuel efficiency point of view, but also.

So making sure the life of the assets are going well.

And as stable as keep that will on the track. So that's a significant thing that we have.

And we've been using.

Selling across the world.

With that Congress is.

<unk> 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 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 book trade as well as traffic that really are focusing on what to do to bring safety to the forefront of that history as well so.

I don't have a timeline in mind, but I do I will tell you that.

<unk> 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.

Excellent that's very helpful. And then just I noticed the legacy pre cast concrete products business very strong sales and orders in the quarter, even aside from the momentum you have with Dan Who's co. Just curious what's driving that is it still kind of residual from the great American outdoors.

Or just kind of what product lines youre seeing the most robust activity there.

Well first of all they didn't have a great year last year. So, let's just call. It the way it isn't that team got energized to get out and make things happen, we have a large backlog and some of that backlog was constrained.

Because of the work that we do primarily with the state 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, bringing a components that were that were struggling to get in the past in our in our operations.

Really really did a fantastic job on legacy side I honestly I think the acquisition event <unk> got everybody fired up and the organization are bringing two new facilities brought in new management, new skill sets and that group is really hitting on all strides right now so I feel we feel very good about where they are at more employee where theyre going to be heading.

And it and the rally as we said listen we have growth platforms of free cash in rail technologies and you guys need to do your product. So we've really bill myself. The leadership team really made it clear to them is the opportunity to step up.

I would say there has taken full advantage of it bill you want to add any more color to that yes no.

Just to highlight that 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 <unk>.

Manufacturing facility and 12 months later, we're in much better shape and we've got a nice order book and.

<unk>.

We did have a little bit of weather in Q1, but it wasn't.

Constraint to getting revenue growth in the business and we're looking for stronger performance coming into Q2 and Q3 as well.

Hello, and congratulations on the continued momentum.

But we appreciate it thanks for using that were too because thats, how we look at internally, we've got a ways to go but we definitely built that.

Correct.

Thank you.

As a reminder, ladies and gentlemen, Thats star one to ask a question.

I'm just showing no further questions at this time I would like to hand, the conference back to Mr. John Castle, Chief Executive Officer for closing remarks.

Thanks, Tom I really appreciate it thanks for everybody joining us today I'd like to hand, the meeting with just a comment on safety and internals L. B Foster.

We really are striving to be the best World class facility facilities that we have.

Our safety really represents where we are and how we do things as really a 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.

No one injury is too many but I am very pleased with the focus the energy and excitement that in more poorly 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 safety is there the quality follows a productivity comes in our profits.

Billy.

Such so.

Our team is really stepping up the strategies in place we feel very excited about more importantly, where we're going where we then we've learned from the past and we.

We really feel shored up that they are aspirational goals are going to be something that we're going to be reaching year. In 2025, and then continued growth beyond so thanks again for your interest L. B Foster.

I'll turn it back to normal will close we'll close the meeting thank you.

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

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