Q3 2023 LB Foster Co Earnings Call
Good day and welcome to L. B Foster's third quarter of 2023 earnings call. Later, we will conduct a question answer session and instructions will be given at that time as a reminder, this call's being recorded.
I'd like to turn the call over to Stephanie Smith, the Companys Investor Relations manager you may begin.
Thank you operator.
Good morning, everyone and welcome to L. B Foster's third quarter of 2023 earnings call My.
My name is Stephanie Smith, the Companys Investor Relations manager, our President and CEO, John Castle at our Chief Financial Officer Bill Pullman.
Our third quarter operating results market outlook and business developments this morning.
We'll start the call with John providing his perspective on the company's third quarter performance.
Bill will then review the company's third quarter financial results.
John will provide perspective on market developments and company outlook in his closing comments.
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 undertake no obligation to revise or publicly release. The result of any revisions to these statements in light of new information, except as required by securities laws.
For more detailed risks uncertainties and assumptions relating to our forward looking statements. Please see the disclosures in our earnings release presentation.
We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables provided in today's earnings release and within our accompanying earnings presentation carefully as you consider these metrics.
So with that let me turn the call over to John.
Thanks, Jeff Lee and Hello, everyone. Thanks for joining us today for our third quarter earnings call.
As you can see on slide five in our presentation materials.
The improved growth and profitability profile of our business driven by strategic transformation continued to gain momentum during the third quarter.
You'll recall that we previously announced the exit of the bridge grid that guideline, which is included within our steel products and measurement segment.
The costs associated with the product line exits in the quarter were $4 1 million, which included an update and the expected value of certain commercial projects being completed as we wind down the product line.
In addition, we recorded a 900000 provision for bad debt expense associated with a customer in the U K file for administrative protection.
Adjusting for these non routine items, we reported a $12 six organic sales growth.
Adjusted EBITDA of $10 6 million, which is up 14, 2% year over year.
Gross margins continue to expand in the quarter with adjusted gross margins of 21, 2%, improving 40 basis points year over year.
On a year to date basis, adjusted gross margins are up 250 basis points versus last year.
Highlighting the significant progress we have made improving the profit profile of our business.
I am pleased to report the cash flow generation was particularly strong third quarter with cash flow from operations of $18 6 million, representing the highest level achieved since third quarter of 2019.
The cash generated was used to reduce borrowings under our revolving credit facility with net debt reduced by $16 9 million.
As a result of our lower borrowings we finished the quarter with a gross leverage ratio per our credit facility at two times. This is down from the two five times, we reported last quarter.
More significantly down from three three times, we reported at the end of last year's third quarter.
After a very strong order intake in the second quarter order rates for third quarter were somewhat soft.
Third quarter orders totaled $103 million with a book to bill ratio standing at approximately <unk> seven to one.
However, it's important to note that the trailing 12 months book to Bill ratio was one point all three to one indicating continuing order book expansion.
Backlog remains healthy at approximately $243 million with the $29 $6 million decline year over year due entirely to the strategic divestiture and exit activities, we completed over the past year.
So with that we are confident in the growth prospects for our key domestic and AD markets are somewhat more cautious in the outlook for our business in the U K given the current conditions in that region.
As a result, we are maintaining the midpoint of our guidance for sales and adjusted EBITDA for 2023, while narrowing the range for both metrics.
I'm very pleased with the progress we have made thus far in 2023.
I look forward to our continued strong finish to the year.
Further progress in 2024 and beyond.
Next Bill will cover the detailed financials for Q3, and I will come back at the end with some closing remarks on our outlook.
Over to you Bill.
Thanks, John Good morning, everyone.
I'll begin my comments covering the consolidated highlights of our third quarter on slide seven.
As always the schedules in the appendix provide more detailed information on our financial results, including non-GAAP measures Stephanie referenced in her opening.
As John mentioned in his opening remarks, there are a couple of items that we called out in our adjusted results for the quarter as compared to last year.
During the third quarter, we announced the exit of the bridge deck product line.
Change in the expected value of certain commercial projects associated with the product line resulted in a $2 million reduction in sales and $3 $1 million reduction in gross margins in the quarter.
This adjustment was in addition to approximately $1 1 million and other cash and noncash expenses associated with exit activities, resulting in a total impact of a product smartly $4 $1 million on profitability in the quarter.
In addition, we recorded a $900000 provision for a potentially uncollectible amounts due from a customer.
Filed for administrative protection in the UK during the quarter.
As a reminder, net sales and gross profit in last year's third quarter included a $4 million adverse impact from the settlement of certain long term commercial contracts related to the multiyear Crossrail project in the UK.
Noting the impact of our portfolio moves.
The current quarter includes a full quarter of results for the van <unk> acquisition, which was completed on August 12 last year.
Offsetting this higher inorganic revenue was the impact of track components Chem Tech and ties businesses that were divested over the last 12 months.
On a GAAP basis third quarter sales were $145 3 million up $15 3 million or 11, 8% over last year.
Adjusting net sales for the items above resulted in an organic sales increase of 12, 6% cut.
Coupled with a two 2% increase from acquisitions, and then partially offset by four 8% decline from divestitures all segments had organic sales increases during the quarter.
High sales volumes, coupled with improvements in business mix and price realization increase the reported gross profit by 22, 2% to $28 2 million with reported gross profit margins, increasing 160 basis points to 19, 4%.
The increase in gross profit adjusted for non routine items in both periods was 12, 1% year over year and.
And adjusted gross profit margins of 21, 2% increased 40 basis points for the quarter.
As expected a favorable trend in margin performance has continued throughout 2023 with year to date adjusted margins coming in at 21, 1% up 250 basis points year over year.
We're happy to see the adjusted gross profit consistently above 20% in 2023, and we remain optimistic for continued favorable trends in Q4 and moving into 2024.
The $4 $1 million bridge grid deck exit impact and $900000 UK bad debt provision reduced net income to $500000 in Q3.
However, adjusted EBITDA improved $1 $3 million year over year to $10 $6 million with the adjusted EBITDA margin, improving 30 basis points to seven 2% of adjusted sales.
This is the second consecutive quarter, where we reported adjusted EBITDA margins above, 7%, which is attributable to our business portfolio transformation profitability improvement initiatives and organic growth.
John covered consolidated orders backlog and net debt performance in his opening remarks, and I will provide some additional color on these items later in the presentation.
We've been showing the adjusted sales and adjusted EBITDA bridges on slide eight over the last several quarters. The highlight the performance within our legacy business and the benefits of our portfolio transformation.
The chart on the left highlights the strong organic growth realized in the third quarter.
The $16 $9 million adjusted sales increase representing 12, 6% organic sales growth.
The net impact of M&A decreased revenue $3 $5 million or two 6%.
As John highlighted in his opening remarks, we continue to have a healthy backlog and we expect organic growth rates to remain favorable in Q4.
As we stated in our second quarter call. The net impact of M&A presents a tougher comparison in the second half of 2023 due to the Chem Tech and ties divestitures, coupled with the lapping of the scratch and van <unk> acquisitions.
Our business portfolio work is largely complete and we are focused on executing the organic growth opportunities, we see across the business in line with our strategy to invest in rail technologies and precast concrete growth programs.
The chart on the right highlights the continuing progress we've achieved in improving profitability through our portfolio work.
M&A activity resulted in a decline in sales, but the impact on adjusted EBITDA was an improvement of $1 $5 million.
Despite the strong organic sales growth in our legacy business.
Profitability was down slightly year over year due to the higher SG&A expenses, largely tied to wages and incentive costs.
In summary, we're pleased with the combined results achieved through our strategic transformation and we look forward to continued progress as we wrap up 2023.
Slide nine provides an important perspective on the progress we've made in sales growth and profitability over the last two years.
The net impact of our strategy execution resulted in a 15% adjusted sales growth for the trailing four quarters ended September 32023, with double digit sales growth achieved in every quarter.
Over the same time period adjusted gross profit increased 31, 1%, resulting in a 250 basis point improvement in adjusted gross profit margins to 27%.
In summary, we believe our portfolio transformation organic growth and focus profitability initiatives have resulted in a structural improvement in the gross margin profile of our business that should be sustainable with the longer term demand prospects from our infrastructure end markets.
Over the next three slides I'll cover our segment performance starting with the rail segment on slide 10.
Third quarter rail segment revenues of $86 $9 million were up 12, 3% year over year.
Adjusting for the 2020 to Crossrail settlement adjust.
Adjusted net sales increased six 8%.
With adjusted organic growth of nine 3%, partially offset by divestitures of two 5%.
Strong organic sales growth realized in both rail products and global friction management was partially offset by continuing softness in the technology services and solutions business in the U K.
And the impact of the track components divestiture.
Reported rail margins of 19, 8% were up 250 basis points year over year.
Adjusting for the Crossrail settlement last year gross profit declined $100000 with gross profit margin down 150 basis points.
The decline in adjusted gross profit was driven primarily by continuing weakness in the UK commercial markets.
Rail orders and backlog were both down year over year, due primarily to divestitures and timing of orders within rail products.
As reflected on slide 11, pre cast concrete segment revenue increased $9 8 million or 33, 9% year over year.
Revenues were up 24, 2% organically and the <unk> acquisition contributed $2 8 million representing growth of nine 7%.
Yes.
Gross profit margins adjusted for purchase accounting impacts associated with the <unk> acquisition last year, we're up 150 basis points to 24% due to improved volumes price realization and strong operating performance in the legacy business, coupled with the accretive benefit of <unk>.
And whose grow gross margins.
Order and backlog levels decrease in our pre cast segment by $3 3 million and $6 $2 million respectively.
The backlog remains healthy at $84 million.
The steel products and measurement segment results on slide 12 reflect a 16, 7% decrease in revenues because of the <unk> divestiture.
Bridge grid deck exit impacts I covered in my opening comments.
Adjusted organic growth of nine 6% was realized because of an increase in protective coatings sales.
Yes.
Reported gross margins were down 840 basis points to eight 7% due to the bridge grid deck exit impact, resulting in a $3 $1 million reduction to gross profit.
Adjusting for the bridge grid deck impact on sales and gross profit gross profit margin increased 480 basis points due to the favorable impact of portfolio changes and margin gains in both protective coatings and fabricated steel products.
Orders and backlog were down 53, 9% and 10, 5%, respectively, driven by divestitures and the bridge grid deck product line exit offsetting strength in the legacy businesses.
Last year's orders included the $18 $7 million summit pipeline coding order within protective coatings.
The year to date results on slide 13 highlight the structural profitability improvements we've established in our business.
Sales are up 13, 5% year over year and gross profit margins have expanded 310 basis points to 25% thus far in 2023.
Adjusted EBITDA is up nearly 54% with the EBITDA margin of six 3% up 170 basis points versus last year.
Year to date cash flow provided by operations was $15 3 million favorable to last year by $34 1 million.
And orders are up two 3% year to date with improved organic order rates more than offsetting the net impact from M&A activities.
Our liquidity and leverage metrics are on slide 14.
As expected net debt decreased $16 9 million in the quarter with strong profitability and lower working capital investment driving $18 6 million in cash flow from operations.
As a result, our gross leverage ratio per our credit agreement decreased from two five times at the start of the quarter to two times at the end of the quarter.
We've made significant progress improving our leverage metrics over the last 12 months with gross leverage down from three three times at the end of last year's third quarter.
While free cash flow provided $12 $5 million year to date.
We've actually reduced our net debt by $23 million. So far this year as a result of divestiture proceeds.
These divestitures improves our gross leverage ratio as they were essentially breakeven businesses on an EBITDA basis that were dilutive to the ratio.
We expect to generate positive free cash flow in the fourth quarter, which should allow us to further reduce our net debt.
As a reminder, our union Pacific warranty settlement obligation will be fully satisfied in 2024 with $4 million due through the remainder of this year and $8 million due in 2024.
We also have approximately $100 million in federal net operating loss carryforwards that should minimize our federal tax obligations for the foreseeable future.
With our capital light business model, improving profitability and beneficial free cash flow drivers in place we.
We believe a favorable free cash flow inflection point is imminent and we're starting to see the early signs of the potential with this quarter's results.
In summary, we're pleased with the progress we've made reducing our net debt and leverage following the acquisitions completed last year.
And diligent capital allocation, along with prudent leverage management remain top priorities.
Our capital allocation priorities are outlined on slide 15.
As I just mentioned, we continue to focus on managing leverage levels, while cautiously investing in organic growth opportunities, we see in rail technologies and pre cast concrete.
We're comfortable with the gross leverage around two times I'm pleased we've achieved this level one year. After the completion of two strategic acquisitions in 2022.
Capital spending is expected to run at approximately one 5% to 2% of sales on average, which is slightly higher than our historical levels due to the organic growth investments with high returns and quick paybacks.
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, with a 0.6% reduction to the outstanding shares thus far consuming approximately $900000 of the.
$15 million authorization.
We continue to pursue small tuck in acquisitions that could extend our product portfolio within our growth platforms and while distributing value to shareholders through a dividend is not a current priority. We will continue to evaluate this capital allocation option as the prospects for stronger free cash flow.
Improve in 2024 and beyond.
My closing comments will refer to slides 16, and 17 covering orders revenues and backlog by business.
The book to Bill ratio over the last 12 months was one <unk> to one with order rates outpacing sales by approximately $15 million.
The consolidated book to Bill ratio in the third quarter was somewhat softer at six 9% to one after a very strong order intake level in the second quarter.
The decline in order rates were most notable in rail and precast concrete segments, where order levels can be somewhat seasonal and lumpy.
We expect overall order rates to improve in the coming quarters building our backlog for fulfillment in 2024.
And lastly, our consolidated backlog on slide 17 reflects the healthy backlog level with the decline year over year due entirely to divestiture and product line exit activities, which totaled $32 $7 million.
We remain optimistic in the longer term prospects for growth in demand across our portfolio and expect this will translate into an improving backlog in the coming quarters.
In closing, our third quarter and year to date results highlight the momentum we're seeing in the business and benefits from our strategic transformation.
We're pleased with our progress, thus far which reinforces our confidence in our strategic playbook.
We look forward to finishing 2023 on a strong note and continued progress in 2024 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 refer to slide 19 for an overview of our key business the market drivers underpinning our outlook.
Main optimistic longer term prospects for growth in rail technologies and rail infrastructure markets, particularly given the increasing emphasis on rail safety fuel savings operating efficiency.
On time deliveries here in the U S and Canada.
It's important to highlight that our UK business is experiencing a particularly challenging market with weaker demand levels and ongoing liquidity disruptions with some customers.
As you would expect we are working with our local team with focus on immediate mitigation actions to reduce costs and limited investment, which will help us provide and maintain some flexibility as market conditions improve.
Here back in the U S. They exited the bridge grid deck product line should allow for more focused effort to grow our bridge forest product line, which is seeing a boost in demand from the broad infrastructure spending programs.
Also the protective coatings business continues to see increased demand from the traditional pipeline investment projects. In addition to the developing alternative applications in place.
And finally, the precast concrete opportunities remains robust across our portfolio.
We continue to expand our market reach enabled by the addition of Andrew ESCO company of which we are just beginning to realize the potential growth of our combined organizations.
In summary, despite the near term challenges we faced in the U K, we believe our overall prospects for profitable growth remains strong in light of the infrastructure investment Super cycle, we expect for years to come.
During the second quarter update unveiled a rebranded company tagline is innovating to solve global infrastructure challenges along with the refinement to our near term goals in 2025, you'll find us on slide number 20.
Despite short term challenges that I previously mentioned the U K, we remain confident in our outlook for growth and profitability in line with our near term goals.
I'll also said, we expect our progress to begin to accelerate due to keep three key factors.
First we anticipate above average growth in rail technologies in precast concrete.
Continued focus and execution by our management team on our profitability initiatives across the portfolio.
And third we will begin to see expense leverage of SG&A against the anticipated organic revenue and margin increases.
In closing our team has made substantial progress transforming L. B foster over the past two years and we are definitely energized by the results we're achieving.
I believe we are well prepared to execute our next phase of transformation and look forward to sharing our accomplishments as we wrap up 2023 and continued momentum into next year.
Thank you for your time, we could during interest in L. B Foster I'll turn it back to the operator for the Q&A session.
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Our first question comes from Alex Rygiel with B Riley Securities. Your line is open.
Okay.
Hi, Alex.
Good morning, gentlemen, how are you doing.
Really good.
Calling in today.
Absolutely. So nice quarter. There are you starting to see any benefits from federal spending and bidding opportunities.
Yes, we don't necessarily we didnt see it in the $100 million, we talked about in the bookings for the quarter. However, we were very pleased with the October results that we saw in bookings, which is in line with what we're saying how we're going to finish the year activities.
Bidding activity is very strong right now so.
It's been years, Alex since we talked about this money is being out there and we're starting to see it now flow through the state and government.
For sure and then sort of kind of on that topic book to bill in the quarter was a bit soft.
Obviously referenced some seasonality there.
We had some divestitures.
Anything kind of more broadly than that that might have affected the third quarter appreciating that.
October was strong heading into the fourth quarter.
Yes, well first of all Q2 was fantastic for US and of course, we're looking over the period of time, which was favorable over the last 12 months and as I mentioned October was strong two heading into the fourth quarter I went back and looked at it over the last couple of years and we're flat basically in year over year basis.
If you look over a two year period were six 7% up.
Our backlog of 17% over a three year period so.
It's choppy, where construction, but we're really starting to see a lot of activity starting to come through so we're feeling very good about.
Prospects in 'twenty four and beyond.
Other thing I might highlight Alex is the backlog.
Margin profitability is much better than what the higher balance would have been in the past because of the divestiture work in the.
The accretion that the.
The acquisitions bring to the portfolio that's right.
Yes.
And then I know, it's a little early to kind of think about 2024 and guidance and all of that but.
Any sort of maybe broader kind of comments as it relates to organic growth expectations for 2024 are you thinking low single digit high single digit low double digit.
Especially given the strength this year.
Well, let's put it this way first of all we put our guidance or your aspirational goals in 2025, we're not backing off of those so 24 is really a stepping stone to make that happen.
And.
If you look at our two times leverage right now we've got a lot of opportunities now to take some of that cash that we generated specifically in this quarter and plowed into some really specific programs. We have organic programs that were very very pleased with so youll see more of that coming in the rail technologies and precast side.
Next year will be a transition to our aspirational goals in 2025 will leave with that.
Yes.
Sounds good nice quarter. Thank you.
Thanks, Alex pick here.
Thank you. Our next question comes from Chris <unk> with singular research your line is open.
Hey, Chris.
Yes, hi, good morning.
Can you talk about.
New orders for the quarter it seems.
This was this seasonality that it was they were down.
And how are things looking for the next quarter.
Yeah, well thanks for the question thanks for joining us again today.
Yes. It was choppy we do a lot of have large bids as you know Chris so sometimes they hit the magical quarter, sometimes they extend into the next quarter and that's kind of what we're seeing right now so we're off to a strong start in Q4 October came in.
And a very nice shape to really lines up well to finish the year. So.
We don't get too worked up about what happens in a specific quarter, we're more looking at the activity we're seeing.
And make sure that we're getting those jobs that we think we should get and as Bill just mentioned.
We're really focused on profitability of the company that portfolio changes that we made were significant.
So the fact that we took some backlog out $29 $6 million of backlog now those are very low margin type work and really consumed a lot of management time as well as working capital.
So the work we're getting now much more in line with our strategy our technology innovation changes, we're making and becoming a global company. So we feel.
Pretty good about our situation, where we're at today and more important where we are heading into 'twenty four and beyond.
Thank you as a reminder, if you'd like to ask a question. Please press star one one.
Our next question comes from John Blair with ascend wealth Advisors. Your line is open.
Hi, John.
Yes.
Yes.
Hello, John you there.
John if your telephone is muted please on mute.
If you are still unable to be heard please.
When using the common feature.
Again, if you would like to ask a question. Please press star one one.
I am not showing any further questions I'd like to turn the call over to Jon Kessler for any further remarks, thanks, Michelle really appreciate and thanks for joining us today for our third quarter earnings.
I guess, how we leave this meeting today is we're really excited about cash generation for the quarter.
This is something the company has been working on now we hit a number that we havent seen since 2019, and I think it really gives the shareholders as well as investors.
Feeling a chase to where we were at once before our focus is continuing to do that focus our gross leverage ratio down to two X right now.
We're feeling very good about that and as well as the opportunities we see here in the short term as well as heading into next year. So thanks for your time again and more importantly, thanks for your interest in L. B Foster and take care everybody, we'll talk to you.
After the close of the year Bye bye.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
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