L.B. Foster Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 7 speakers on the call.

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.

Operator

After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stephanie Lisbach, Investor Relations Manager. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to L. B. Foster's Q1 of 2023 Earnings Call. My name is Stephanie Liptwach, the company's Investor Relations Manager.

Speaker 1

Our President and CEO, John Cassell And our Chief Financial Officer, Bill Tallman, will be presenting our Q1 operating results, market outlook and business developments this morning. We'll start the call with John providing his perspective on the company's Q1 performance. Bill will then review the company's Q1 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.

Speaker 1

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 atlbfoster.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.

Speaker 1

We will also discuss non GAAP financial metrics and encourage you to read our disclosures and reconciliation tables provided So with that, let me turn the call over to John.

Speaker 2

Thanks, Stephanie, and hello, everyone. Thanks for joining us today for our Q1 earnings call. As you can see on Slide 5, we continue the positive momentum we established beginning in the second half of twenty twenty two, 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 $4,500,000 or 3.9 percent of sales, noting that EBITDA results were more than double last year's Q1. I'm pleased to say the benefits of our strategic transformation actions are clearly seen in operating results in Q1, with gross margins expanding 360 basis points to 20.2%.

Speaker 2

Speaking of transformation actions, we continued our portfolio modification With the divestiture of ChemTek at the end of the quarter, the sale of ChemTek provided $5,300,000 in proceeds Despite operating at near breakeven levels on a stand alone basis, these proceeds coupled with $6,200,000 free cash flow Allowed us to further delever in the quarter with $11,500,000 reduction in net debt and the gross leverage ratio for our Crest facility improving to 2.4 times. Order rates continue to grow year over year and the strong book to bill ratio of 1.21:one expanded our backlog by 6.2% Despite the sale of ChemTek at the quarter end, in consideration of our Q1 results and the sale of ChemTek, We did reduce our 2023 revenue guidance by $20,000,000 at both ends of the range, but more importantly maintained our adjusted EBITDA And finally, in February, AirBoard authorized a $15,000,000 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 And I'll come back at the end with some closing remarks. Over to you, Bill.

Speaker 3

Thanks, John, and good morning, everyone. I'll begin my comments covering the consolidated highlights of our Q1 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 ChemTek sale was completed at the end of Q1. So their operating results are included in our Q1 results.

Speaker 3

Q1 results also include 2022 additions to the portfolio, Van Husco and Scratch, but exclude the track components business that was divested in the Q3 last year. 1st quarter sales were $115,500,000 up $16,700,000 or 16.9 percent over last year. Higher sales volumes coupled with improvements in business mix and price realization increased gross profit 41 point 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 improvements achieved year over year and expect these favorable trends to continue as volumes improve And our seasonally strong second and third quarters.

Speaker 3

The $2,000,000 transaction loss on the Chemtek divestiture resulted in a $2,200,000 net loss in Q1. However, adjusted EBITDA improved $2,800,000 year over year to $4,500,000 with the EBITDA margin more than doubling To 3.9 percent. 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 $11,400,000 sales increase contributing 11.5 percent organic sales growth.

Speaker 3

The net impact of M and A increased revenue $5,300,000 or 5.4 percent. 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 Progress achieved in improving profitability in our legacy business, with EBITDA improving $2,800,000 year over year, representing leverage of 24.1 percent in the quarter. M and 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.

Speaker 3

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 Q1, 20.2% is the highest Q1 result we've seen since 2019 Portfolio actions and margin recovery efforts in our legacy business. We expect strong revenue growth Over the next three slides, I'll cover our segment performance starting with the Rail segment on Slide 10. 1st quarter Rail segment revenues were up slightly year over year at 64,400,000 with 5.8 percent organic growth partially offset by the impact of M and A.

Speaker 3

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 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 $9,300,000 or 61.8 percent year over year. Revenues were up 6.5 percent organically and the Van Husco acquisition contributed $8,300,000 representing growth of 55.3%.

Speaker 3

Gross margins were up 6.40 basis points to 22.7 percent due to the accretive impact of the Van Husco acquisition and both improved price realization And strong operating performance in the legacy business. Orders and backlog remain robust in our precast segment, With Van Husco contributing $7,700,000 $11,700,000 respectively. The Steel Products and Measurement segment results on Slide 12 reflect 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 5.70 basis points to 13% Were driven by higher volumes in protective coatings, but partially offset by weaker volumes and higher raw material costs Orders and backlog were up 18.9% and 18.7%, respectively, Despite the ChemTek 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.

Speaker 3

We continue to make progress reducing our net debt and gross leverage during the quarter. We reduced net debt $11,500,000 to $77,500,000 at quarter end, with $6,200,000 in free cash flow and $5,300,000 in proceeds From the ChemTek 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 4 tenths of a turn during the quarter. I should highlight that we received approximately $3,000,000 in federal income tax refunds in February, and we have approximately $100,000,000 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.

Speaker 3

Over the last two and a half years, we've raised nearly $37,000,000 in capital by divesting 3 underperforming businesses No longer aligned with our strategy. Those proceeds were redeployed to acquire 3 businesses, Van Huzco, 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 And Rail Technologies and Precast Concrete. Capital spending is expected to run at about 2% of sales, Slightly higher than our typical spending level due to the organic growth investments.

Speaker 3

Our Union Pacific warranty settlement obligation We will be fully fulfilled at $16,000,000 after $16,000,000 in payments, dollars 8,000,000 in each of 2023 2024. And lastly, we will cautiously evaluate opportunities to return cash to shareholders through the $15,000,000 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 1415 covering orders, revenues and backlog by business. The book to bill ratios on Slide 14 reflect the continuing strength we've seen across the business, particularly in the Q1.

Speaker 3

The book to bill ratio over the trailing 12 months was 1.08:one, With orders outpacing sales by approximately $40,000,000 However, the consolidated book to bill ratio in the Q1 was particularly Strong at 1.21:one 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 and A actions completed over the last 12 months. The free cash backlog increase, up 21% over last year, is attributed to the Van Husco 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 ChemTek divestiture, Sure. Highlighting the improved demand in our Protective Coatings business.

Speaker 3

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 In our strategic playbook, and we look forward to reporting continuing progress through the balance of 2023 beyond. Thank you for your time. And I'll now hand it back over to John for his closing remarks.

Speaker 3

John? Thanks, Bill.

Speaker 2

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 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 quarter should reflect this uptick in demand. The heightened focus on rail safety in the United This 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.

Speaker 2

One area of softness we're monitoring is in the U. K. With pronounced deflationary impacts currently dampening demand in our key markets. Our sales in U. K.

Speaker 2

Were down 28% year over year in the Q1. 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 Chemotec divestiture further reduced 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.

Speaker 2

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's funded infrastructure programs. In closing, on Slide 18, quotation and order rates remain robust across the majority of our 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 We're approximately $600,000,000 of revenue and approximately $50,000,000 EBITDA by 2025. And with that, on behalf of all the employees of L. B.

Speaker 2

Foster, we look forward to reporting on our continuing progress in the coming quarters.

Operator

Please wait for your name to be announced. Please stand by while we compile the Q and A roster. One moment for our first question. Question comes from the line of Alex Rygiel with B. Riley Securities.

Operator

Your line is now open.

Speaker 4

Thank you. Good morning, gentlemen. Very nice quarter. Couple of quick questions here. Couple of quick questions.

Speaker 4

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?

Speaker 2

Yes. We think so. In fact, we're planning on it. I will tell you that our 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.

Speaker 2

So we anticipate that as well as Leverage coming to our facilities that we should be able to continue to grow on those margins now and to next quarter and Q3 especially Alex.

Speaker 4

Super helpful. And then relative to your long term 2025 vision, do 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%?

Speaker 2

Well, I think the 20.2 coming out with 20.2 in the Q1 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 be really focused 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.

Speaker 2

The aspirational goals that we put in place back in a couple of years ago, we are absolutely where we'd like to be.

Speaker 4

Very nice. Nice quarter. Thank you.

Speaker 2

Thanks, Alex.

Operator

Thank you. One moment for our next question, please. Question comes from the line of Chris Sakai with Singular Research. Your line is now open.

Speaker 5

Yes. Hi, good morning, John and Bill. 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 this the gross profit in this section segment In the next quarter or in the year.

Speaker 2

Sure. Well, first of all, thanks for joining us today, Chris, and we appreciate your questions because There's a couple of pieces that make up that segment and we're very pleased with what's going on as a respect to the coatings business, right, That we have the work in our Willows 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 expecting we are seeing some headwinds though related to 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.

Speaker 2

And of course, Chemtek 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 ChemTek. 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 year and a half to 2 years.

Speaker 5

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

Speaker 2

Yes. I think you ask for 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.

Speaker 2

We put our playbook together as We have expectations in the company of 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 bar is not met or we don't see the growth coming, both top line and returns, we always look at those businesses. Well, we've done a lot over going back to what Alice 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.

Speaker 5

Okay, great. And last question for me. Do you have a target gross leverage ratio? I know it's Declined, how do you should we see this in for the

Speaker 3

rest of the year?

Speaker 2

Let me flip that over to Bill. I think Phil 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 $15,000,000 stock buyback program as well as our leverage. So Bill, you got some comments on?

Speaker 5

Yes. Yes.

Speaker 3

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 ChemTek sales.

Speaker 3

So that helped us to pay down the facility, got us to about 2.4 Turns on the gross leverage ratio. 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 2 times leverage level. In the Q2, we would expect to see maybe just a little bit of a reversal of that 2.4 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 2 by the end of the year.

Speaker 3

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.

Speaker 5

Okay, great. Thanks for the answers.

Speaker 2

Thank you. Thank you. Appreciate it, Chris.

Operator

Thank you. One moment for our next question. One moment for our next question. Our next Question comes from the line of Brett Kearney with Gabelli Funds. Your line is now open.

Speaker 6

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

Speaker 2

Thanks, Brett. Good morning.

Speaker 6

John, I want to pick up with one of the last comments you made in your prepared remarks on some of L. B. 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 Our receptivity to some of the solutions you have in the marketplace to address this pretty critical need.

Speaker 2

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 Yes.

Speaker 2

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 what our technology is. So first of all, we got Wild, which is Will Impact Mode Detector. And we just released a new revision and new technologies to the market from Mark III to Mark IV, 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 We're 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 and whether the contract the track has And the train, the relationship between the 2.

Speaker 2

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 as you go down tangent track, we're making sure that the train is operating and performing, 1 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's able to keep that wheel 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.

Speaker 2

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 timeframe. 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 really, are focusing on what To do to bring safety to the forefront of that industry as well. So, I don't have a timeline in mind, but I do I will tell you that 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.

Speaker 2

So, I guess, we'll probably talk more about that in the coming quarters and give you some updates on how that's going.

Speaker 6

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 Van Huzco, just curious what's driving that? Is it still kind of residual from the Great American Outdoors or the IIJA or just kind of what product lines you're seeing the most robust activity there?

Speaker 2

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, federal and local governments.

Speaker 2

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 in our operations really, really did a fantastic job on the legacy side. And I honestly, I think The acquisition of Van Husco got everybody fired up in the organization, bringing down 2 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're at more importantly, where they're going to be heading. And the reality is, we said, listen, we have growth platforms of free cash and rail technologies, and you guys need to do your part.

Speaker 2

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

Speaker 3

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

Speaker 6

Congratulations on the continued momentum.

Speaker 2

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

Speaker 5

Terrific.

Operator

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

Speaker 2

Thanks, Norma. 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.

Speaker 2

Foster. We really are striving to be the best world class facility 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 Q1 of the year.

Speaker 2

Now one injury is too many, but I'm very pleased with the Focus the energy and excitement that 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 the safety is there, The quality follows, the productivity comes and the profitability and such. So our team is really stepping up The strategy is in play. We feel very excited about more importantly where we're going than where we've been.

Speaker 2

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 normal and we'll close the meeting. Thank you.

Operator

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

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