L.B. Foster Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 7 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to L. B. Foster's Second Quarter 2024 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 I would now like to turn the call over to Stephanie Schmidt of Investor Relations. You may begin.

Speaker 1

Thank you, operator. Good morning, everyone, and welcome to L. B. Foster's Q2 of 2024 Earnings Call. My name is Stephanie Schmidt, Investor Relations Manager.

Speaker 1

Our President and CEO, John Cassell and our Chief Financial Officer, Bill Thalmann, will be presenting our Q2 operating results, market outlook and business developments this morning. We'll start the call with John providing his perspective on the company's Q2 performance. Bill will then review the company's Q2 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 relating 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 within today's earnings release and within our accompanying earnings presentation carefully as we consider these metrics. So with that, let me turn the call over to John.

Speaker 2

Thanks, Stephanie, and hello, everyone. Thank you for joining us today for our Q2 earnings call. July 21, 2024 marked 3 year anniversary of my appointment as President and CEO of L. B. Foster Company.

Speaker 2

I thought I'd begin today's call by providing a recap of what we accomplished over the last 3 years. I took over as President and CEO in 2021, which was a year of significant change for the company. Our current Chairman, Ray Betler, had joined the Board in 2020 and helped us through a strategic reassessment of the business in 2021. With Ray's guidance, leadership and support, the Board and senior management team established a strategic vision and operating playbook to transform the company into a technology oriented global infrastructure solutions provider. The cornerstone of the strategy was a portfolio assessment that established our growth platforms, namely Rail Technologies and Freecast Concrete.

Speaker 2

These businesses would receive the investment funding needed to drive profitable growth in the business. The balance of the business became a returns platform. These businesses would be optimized for cash generation and were appropriately divested to generate additional proceeds to fund growth initiatives, both organic and inorganic. Over the 3 year period, we completed 9 strategic transactions. We sold off 4 non core businesses and exited commoditized bridge grid decking product line.

Speaker 2

These transactions generated cash, improved leverage and eliminated distractions to our core complete 4 acquisitions over the same time period, 2 in Rail Technologies in the United Kingdom and 2 in precast concrete in the United States. In late 2023, we completed a restructuring of our UK business in response to a very challenging business conditions in the local market. More impactful, we just announced an enterprise wide restructuring that along with headcount attrition already achieved should generate annual run rate savings of $4,500,000 per year. I will come back with more on this topic in my closing comments. In summary, the impact flow of our transformation journey has been truly remarkable as you can see in the results compared to 2021.

Speaker 2

Sales are up 6% due to the net impact to M and A. Adjusted gross margins are up 4 to 60 basis points and the trailing 12 months adjusted EBITDA is up 64%, translating to a 37.9 percent adjusted EBITDA leverage on the net sales growth achieved. Now on to today. As mentioned in our earnings announcement, the 2nd quarter was a bit weaker than we expected and there's some near term uncertainty in our end markets given the broader recessionary concerns in the domestic and global economies. While we believe we will turn to profitability expansion in the second half, we thought it would be prudent to be a bit more cautious with our financial guidance for 2024 given some of the larger macro drivers that could have a greater impact on demand rates through the end of the year.

Speaker 2

Despite the tempered outlook, the midpoint of our 2024 adjusted EBITDA guidance represents approximately 12% growth over 2023, a virtually flat organic sales growth. We're focused on what we control, getting back to profit expansion in the second half and finishing 2024 strong, so we can continue to build momentum towards achieving our aspirational goals. Bill will now cover the detailed financials for Q2, and I'll come back to the Analyst and closing remarks on our markets and outlook. Over to you, Bill.

Speaker 3

Thanks, John, and good morning, everyone. I'll begin my comments covering the consolidated highlights of the Q2 on Slide 7. As always, the schedules in the appendix provide more detailed information on the financial results for the quarter, including certain non GAAP measures discussed on today's call. As we've done in the past, we'll call out the impact of portfolio actions where applicable. Q2, these impacts included last year's ties divestiture and the Bridge grid deck product line exit with a combined impact of 1.5% lower net sales this year.

Speaker 3

Net sales for the quarter were down 4.9% in total, 3.4% on an organic basis, driven primarily by weakness in the Rail segment. I'll unpack the drivers on the segment slides in a moment. Gross profit was down $1,700,000 with margins nearly flat with last year at 21.7%. Lower margins in rail were largely offset by improved margins in infrastructure. The improved margins within were due primarily to the favorable impact of our portfolio actions, coupled with an $800,000 gain on the sale of an ancillary property in the quarter.

Speaker 3

Selling, general and administrative costs increased $400,000 over the prior year due primarily to corporate legal provisions as well as professional service costs incurred as associated with the announced restructuring. Net income for the quarter totaled $2,800,000 unfavorable 19.4 percent versus the prior year quarter. The net gain realized on the property sale as well as certain corporate legal costs were excluded from adjusted EBITDA. Each of them were approximately $800,000 in the quarter. Adjusted EBITDA for the quarter was $8,100,000 down 23.8% versus last year, due primarily to lower gross profit coupled with higher professional service costs associated with the restructuring.

Speaker 3

In line with our seasonal working capital needs, cash used for operating activities in the quarter was $5,000,000 These needs were somewhat lower this year due to the commercial weakness in the quarter. I'll provide some additional color on orders and backlog by segment later in the presentation. The bridges on Slide 8 reflect the organic and portfolio driven impacts on sales and adjusted EBITDA for the quarter versus last year. The sales bridge on the left breaks out the impact of the business divestitures and isolates the organic sales decline of $5,000,000 which was primarily realized within the Rail segment. The EBITDA bridge highlights the profitability uplift year over year delivered from our portfolio work.

Speaker 3

This is despite the $2,200,000 sales decline from these activities. The legacy business profitability is down due primarily to the rail segment volumes and margins coupled with corporate professional fees associated with the restructuring. Turning to sales and margin trends on Slide number 9. The sales trend on the left reflects the strong organic performance we've delivered in recent quarters. Despite the softer second quarter, the trailing 12 month organic growth rate was still 8.7%.

Speaker 3

Despite the lower second quarter sales, margins have remained resilient at a level above 21% for 5 straight quarters. This achievement highlights the transformation of our business portfolio as well as improved pricing and manufacturing execution across the majority of the business. We're confident in the long term demand prospects for our end markets and believe we will see improvements once the macro uncertainty drivers begin to clear. In the meantime, we're focused on delivering strong profitability growth and margin expansion despite the short term commercial headwinds. Over the next couple of slides, I'll cover our segment and performance in the quarter, starting with the Rail segment on Slide 10.

Speaker 3

2nd quarter rail revenues totaling $85,600,000 were down 6 0.6% from last year, including a 1.5% decline from the ties divestiture. The 5% organic decline was driven primarily by lower volumes and softer market prices in the rail products business unit. Rail margins of 20.9% were down 80 basis points year over year, driven by lower overall sales and margins within Rail Products. And on a positive note, margins in the Global Friction Management and Technology Services and Solutions improved versus last year, including some recovery in our UK business. 2nd quarter rail orders increased $1,000,000 year over year and up $4,400,000 excluding the impact of last year's ties divestiture.

Speaker 3

Backlog of $114,800,000 decreased $17,700,000 from the prior year quarter with the decline primarily within rail products and lower business activity in the UK. 2nd quarter rail orders and backlog increased sequentially 39.7% and 33.4% respectively. Turning to Infrastructure Solutions on Slide 11. Segment revenue decreased $1,200,000 or 2.2%. However, 1.4% of the decline was due to divestiture and product line exit activity.

Speaker 3

Organic sales were relatively flat compared to the prior year. Gross profit margins were up 90 basis points to 22.9%. The improvement was realized within steel products, driven by portfolio changes executed over the last year as well as the $800,000 gain on the sale of an ancillary property. Infrastructure orders were $54,000,000 down $13,800,000 from the prior year quarter due to softer demand across the steel products business unit, primarily in protective coatings. Precast orders were flat year over year.

Speaker 3

Backlog totaling $135,000,000 was down $22,600,000 $6,900,000 due to the bridge product line exit. The balance of the decline was realized across the steel products business unit. Free cash concrete backlog improved $2,000,000 versus last year. I'll next cover our year to date results on Slide number 12. Organic sales increased 5.5%, partially offset by a 4.9% decline from divestiture and exit activities.

Speaker 3

Organic sales growth was driven by the Rail segment as a result of the strong segment performance in the Q1. Gross profit improved $1,200,000 including the $800,000 property sale gain in Q2, while gross profit margins of 21.4 percent improved 30 basis points. The improvement can be attributed to the business portfolio changes in line with the company's strategic transformation, coupled with overall higher sales volumes and favorable business mix realized in the Rail segment in the Q1. Selling, general and administrative costs increased 1 point $7,000,000 over the prior year due primarily to corporate legal provisions as well as professional service costs associated with the announced Net income for the quarter totaled $7,300,000 favorable $5,900,000 over the prior year, including $4,300,000 in gains from ancillary property sales in 2024. The prior year included $3,100,000 in losses on the divestiture of Chemtech and Tyes.

Speaker 3

The net gain realized on asset sales and certain corporate legal costs were excluded from the 2024 year to date adjusted EBITDA, which was $14,000,000 down $1,100,000 due primarily to higher selling and administrative costs. Cash used by operating activities in the first half of twenty twenty four was $26,800,000 driven by seasonal working capital needs and annual incentive and business insurance funding. I'll now cover our liquidity and leverage metrics reflected on Slide 13. 2nd quarter net debt declined $2,500,000 versus the prior year, while the gross leverage ratio increased 2 tenths of a turn to 2.7 times. This level of net debt was largely in line with our expectations and we expect net debt will decline through the balance of the year.

Speaker 3

We also expect the gross leverage ratio to improve by year end. Our normal working capital cycle typically results in strong cash generation in the second half of the year. We expect free cash flow to range between $25,000,000 to $30,000,000 in the second half of 2024 with a gross leverage ratio closer to our longer term target of 2 times by year end. While our updated free cash flow guidance reflects a more cautious outlook for cash generation in 2024, we remain confident in our ability to manage our leverage metrics at around 2 times over the long term given our capital light business model. We plan to continue to prudently deploy operating cash along our capital allocation priorities, including continuing the execution of our stock repurchase program.

Speaker 3

Since the program's inception in February of 2023, we repurchased about 204,000 shares of stock representing approximately 1.9% of the common stock outstanding at an average price of approximately $19.50 per share. On August 5, 2024, our Board of Directors approved a modification to the program, which shortens its tenure from 3 to 2 years and allows the remaining $11,000,000 authorization to be used through February of 2025 without restriction. As a reminder, we're now down to $4,000,000 owed to Union Pacific with $2,000,000 paid on August 1st and the remaining $4,000,000 due in December. And the U. S.

Speaker 3

Federal NOLs should continue to minimize our cash tax burden for the foreseeable future. In summary, despite the softer outlook for cash generation for the full year, we believe the key drivers of strong sustainable free cash flow are in place and should continue to improve through the balance of 2024 and moving into 2025. I'll next revisit our capital allocation priorities outlined on Slide 14. We continue to focus on managing leverage levels while opportunistically investing in organic growth opportunities we see in Rail Technologies and Precast Concrete. Our announced restructuring program should further enable investment in growth platforms given the expected cost savings over the coming quarters.

Speaker 3

We're comfortable with gross leverage around 2 times and believe we will be back near that level by year end. Capital spending is expected to run at approximately 2.5% of sales on average, which is slightly higher than our historical levels due to investments in our growth platforms. As mentioned before, we continue to evaluate opportunities to return cash to shareholders through our stock repurchase program and we plan to use this important capital allocation lever prudently given the approved changes to the program. We continue to consider small tuck in acquisitions that extend our product portfolio within our growth platforms and this is expected to become an increasingly important driver of our growth as we establish goals beyond 2025. And finally, we continue to consider a dividend as a capital allocation option as the prospects for stronger free cash flow improve, particularly in 2025 beyond.

Speaker 3

My closing comments will refer to Slides 1516 covering orders, revenues and backlog by business. The book to bill ratio over the trailing 12 months was 0.93:one, which reflects the lower order rates in both segments coupled with strong order book execution and improved lead times. Q2 order rates improved in rail year over year, while weaker demand across the steel products business drove the infrastructure decline. Consolidated second quarter order rates did improve sequentially 29.2%. And lastly, the consolidated backlog on Slide 16 was down $40,000,000 from the record high levels last year with both segments experiencing declines.

Speaker 3

The Rail segment backlog is down $17,700,000 or 13.3%. As mentioned in the past, order rates and backlog are susceptible to large swings driven primarily by project order timing and the rail distribution business. In addition, backlog in our UK business is down $9,200,000 as we purposely scaled back our investment in this market until a clear recovery path develops. On a positive note, the rail backlog is up approximately 30% versus the previous 3 quarter average ending indicating some favorable development. Infrastructure backlog is down $22,600,000 or 14.3 percent with the entire decline due to steel products.

Speaker 3

Free cash concrete backlog improved $2,000,000 or 2.2%. The $24,600,000 decline in steel products backlog was due to lower demand levels across the business unit as well as a $6,900,000 decline from product line exit activities. Despite the lower backlog level, we remain optimistic in the longer term prospects for growth and demand across our portfolio and expect this will translate into an improving backlog in the future once near term macroeconomic conditions improve. In summary, we continue to remain optimistic about our 2024 outlook despite some temporary headwinds experienced in the Q2. Our revised financial guidance implies an expected adjusted EBITDA growth rate of We remain focused on finishing the year on a positive note and look forward to reporting on our progress next quarter.

Speaker 3

Thanks for the time and I'll now hand it back to John for his closing remarks.

Speaker 4

John?

Speaker 2

Thanks, Bill. Please refer to Slide 18 for an overview of our key business and market drivers underpinning our outlook. We continue to be optimistic of longer term prospects for growth in our end markets for both segments, particularly given the continued emphasis on the infrastructure investment. In 2023, we began to realize some project related business from U. S.

Speaker 2

Federal programs approved over the last several years, and we expect that trend to continue moving through the balance of 2024 and beyond. Transit ridership levels in U. S. Are back to pre pandemic levels and repair work on transit lines is relatively strong at this time. On the other hand, freight carloads within the domestic rail market are somewhat softer versus a year ago, which we believe is resulting in deferrals and project work for Class 1, short line and regional railroads.

Speaker 2

The developing macroeconomic uncertainty may also be impacting demand in our served markets somewhat. The recent findings regarding the East Palestine train derailment highlight the opportunity for our total track monitoring solutions, and we're seeing a nice increase in demand for those solutions year over year. As noted earlier, our UK business has shown some signs of recovery versus last year and we believe market conditions have stabilized and we're improving modestly and are improving modestly in the in country economic development center. Turning to our infrastructure markets, the CXC buildings product line continues to benefit from record spending on recreational parks and campgrounds. This is funded by the Great American Outdoors Act.

Speaker 2

We expect this demand to remain robust through the balance of this year and into 2025. Notwithstanding the short term weather related headwinds we saw in H1, the government funding for road and bridge rehab projects as well as robust regional commercial and residential real estate development should bode well for our infrastructure segment over the longer term. In summary, overall prospects for long term sustainable profitable growth should remain strong in light of the infrastructure investment super cycle we expect for years to come. On Slide 19, I'd like to emphasize the investment thesis for Obi Foster, which is supported by 4 key pillars. First, we've taken the strategic steps necessary to transform our business portfolio, resulting in structural improvements to profitability that we delivered in 2023 and the execution of our restructuring program that we just talked about in 2024 is expected to also provide profitability improvement through the balance of the year.

Speaker 2

2nd, we believe we represent infrastructure pure play with multiple avenues for growth through multiple year investment programs that are clearly needed in our served markets. We're also investing in key organic growth initiatives designed to take advantage of the macro trends that are driving the need for infrastructure investment in our served regions. 3rd, our capital light business model coupled with steady profitability improvements and the completion of our Uniti Pacific settlement payments Bill just mentioned later this year should provide a more favorable free cash flow outlook for the second half of twenty twenty four and beyond. And finally, we have disciplined capital allocation approach with multiple drivers that have been deployed and are creating value for our shareholders as evidenced by our prudent equity returns. The recent amendment to our stock repurchase authorization provides us greater flexibility to deploy more capital to buy back stock should valuations remain attractive.

Speaker 2

Of course, Bill and I will remain prudent in our approach with leverage goals in mind. So in summary, we believe our strategy is sound and our execution along these four pillars should deliver results, improving results through 2024 and beyond. I'd like to close our updates with a reminder on our aspirational goals for 2025. You'll find this on Slide number 20. I begin today's call with a recap of our progress since 2021.

Speaker 2

We clearly have made tremendous improvements in our business and are very proud of what we accomplished as a team in a very short period of time and more importantly in a very challenging environment. We made some tough decisions along the way, including business divestitures and restructurings that resulted in some good people leaving our organization. As I mentioned in my opening comments, we began restructuring in the U. K. In the Q4 of last year, and we're seeing the positive benefits from those actions in this year's results.

Speaker 2

With the new human capital program in line with our strategic roadmap, we're taking the necessary steps to enable investment in our growth platforms and drive resource deployment efficiency across the entire business. Of course, we are far from finished with what we set off to do in 2021. There's significant work for us to do to fully take advantage of the opportunities in front of us. As you can see on this chart, we established our 2025 aspirational goals at the end of 2021 and we are focused on managing through the short term uncertainty and getting back to growth in our profitability in the second half of the year. Delivering a strong H2 will help us build required momentum needed to deliver an exceptional 2025 and set the stage for continuing growth beyond.

Speaker 2

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

Operator

Thank you. Our first question comes from the line of Chris Sakaiya with Singular Research. Your line is open.

Speaker 4

Hi, good morning, John and Bill.

Speaker 2

Good morning, Chris.

Speaker 4

I guess just kind of a top level question. You've seen some softness in demand from in rail and coatings and steel. How are we supposed to think about this going into the 3rd and 4th quarters? Do you see a rebound there?

Speaker 2

Yes. Thanks, Chris, for joining us today. Absolutely, we do. We also got impacted by weather in the H1-two. So some of these delays and some of these things, we're starting to get the volumes through our factories.

Speaker 2

But as Bill and I talked about today and you look at the year over year as well as sequential growth, we're looking at 29% H2 delivery versus last year in our EBITDA. So we're expecting quite a bit of volume moving through our facilities in the second half of the year.

Speaker 4

Okay. Thanks. And then I'm looking at the 2024 guidance for free cash flow. What were the main drivers now for breakeven guidance as previously $12,000,000 to 18,000,000

Speaker 2

dollars So I'll turn that over to Bill. But we got some again, we got some movements going on a little bit as we expected a stronger Q2 and we were deferring some of that work into Q3. So we've got some working capital and some other things that are moving around. But in general, we still feel very, very good about our position and where we're going to end up the years first as far as leverage and really our balance sheet in general. Bill, do you want to add a little more context to that?

Speaker 3

Yes. Hi, Chris. The range previously was $12,000,000 to $18,000,000 with a $15,000,000 midpoint. We obviously announced our restructuring that will consume some cash. We'll get some savings from that as well as outlined in the release.

Speaker 3

But the primary thing we're looking at is the timing of business in the rail business that is likely to push volume off to the latter part of the year. And as a result of that, we'll end up having a higher working capital requirement in the second half of the year that is likely to end up with a more tempered cash flow overall. Now that's a full year cash flow. So we had $31,000,000 of negative cash free cash flow consumption in the first half of the year. We expect the second half to be $25,000,000 to $30,000,000 positive free cash flow in the second half of the year.

Speaker 3

So it's right around breakeven for the full year, but really strong expectations for the second half of the year.

Speaker 2

And of course, Chris, we closed out the year with our last installment of $4,000,000 with Union Pacific payments. So we feel very good how we're going into the year, more importantly how we're going into 2025.

Speaker 3

Chris, just one last item. I just want to highlight that obviously the leverage metric was a little elevated here at the end of the quarter, 2.7 times. The cash generation in the second half of the year plus the expected improvement in profitability year over year in the second half of the year, we'll see our leverage drop from 2.7 times back closer to that 2 times target that we talk about.

Speaker 4

Okay. Sounds good. And then with this restructuring program, how much will it take from or reduced SG and A or what are the do you have any sort of quantifiable numbers there?

Speaker 2

Well, let me kind of walk through the process first of all. So how we got here is, I wanted to walk through the 3 years for a reason because transformation takes time and we needed to change our portfolio, right, which we've done over the last 3 years. But in doing so, those 4 divestitures that we spoke to today, we had stranded costs in the business that we continue just to absorb in the business. And so we knew over a period of time that we needed to make a change, More importantly, not just to get cost out, which by the way is $4,500,000 on the annual run rate, it was about taking monies and bringing back to the company to make sure we're focusing on our growth. So as we're transforming this company into a technology innovation type company from a distribution type steel company, We weren't really strong at the front of the house.

Speaker 2

So much of the work we've been doing is taking from the back office administration and putting out in front of the customer, putting in front of technology innovation. And this is where we're really shoring up what we're doing and where we get excited about how we're going to finish second half of the year, more importantly what we're going to do in 'twenty five and beyond. So what Bill and I were talking about today is really, yes, we had a little bit of headwinds here in the quarter. But that just makes you stronger and makes you more focused. So the last couple of months, we've been talking about this, working on this.

Speaker 2

And we did it last week, which was a very tough time in our company with a reduction in force. But this is something we did with a knee jerk reaction related to what was going on the quarter. This is something that was planned. So it happened last year. So we start seeing the benefits through the balance of this year, more importantly, into 2025 and beyond.

Speaker 4

Okay, great. Thanks for the answers.

Speaker 5

Yes. Thanks, Chris.

Operator

Please standby for our next question. Our next question comes from the line of Justin Bergner with Gabelli Funds. Your line is open.

Speaker 3

Good morning, John. Good morning, Bill.

Speaker 2

Hi, Justin.

Speaker 6

Hey. Few questions here. So to start, just on the revised free cash flow guide, the timing of rail deliveries, so does that mean that you expect to end the year with a higher accounts receivable balance than expected? Or are there other parts within that rail timing? Dynamic?

Speaker 2

Definitely, it's not receivable. We're going to have a strong Q4, which is going to pump up that AR.

Speaker 3

Strong revenue for Q4, which will drive AR up. Exactly.

Speaker 6

Okay. Got it. So maybe a second question would relate to the mix of business in rail. I mean, could you comment on whether the Rail Technologies business continues to mix up margin because it wasn't as evident in the decrementals this quarter?

Speaker 2

Yes. You know what, we said and you put together all this work and all this paperwork, what we feel really good about is our strategy. This is how we're pivoting the company to TTM and condition monitoring. We had a fantastic H1 related to those businesses And then what we're doing in the UK as well. So the headwinds we're seeing right now are really specific to our former the returns business related to rail distribution and our ERP type work.

Speaker 2

This is where the company continues to be pivoting, but we saw quite a few headwinds and that carries a lot of volume and a lot of leverage. But we have very strong backlog, we have very strong activity and we feel very good the second half of the year that will continue to grow, really demonstrating our ability to drive profitability in rail and doing it through technology innovation.

Speaker 6

Okay. So just to maybe clarify that statement. So I guess the rail products business even though it may not carry a high average margin, there's still fairly meaningful incrementals and decrementals there?

Speaker 3

That's correct. Yes. It's a very large percentage of our overall rail business to the extent that it's having a short term challenge here, given the commodity prices and some of the weakness in the freight volumes that John had mentioned, it has an impact on the year over year decrementals. But as we also mentioned in the call script, the year over year profitability improvements in TTM, our technologies oriented monitoring business as well as a recovery in our UK business, both were favorable components to the year over year improvement in rail or those pieces were favorable within rail. It's just the rail products portion overcame that from a consolidated point of view.

Speaker 6

Got it. Okay. And then just the restructuring program. Is this mainly to remove stranded costs? Is it to get ready for potentially a lower level of demand?

Speaker 6

Is it something else? Just how should I think about what's really happening from a business point of view on the restructuring side?

Speaker 2

Yes. Obviously, part of it is stranded costs, but it's about getting better. It's about taking all the work we did, all the investment we've done in SAP, all the back office type of work we've done with our technology innovation and really putting our best foot forward to streamline the organization. As we move from 3 segments to 2 segments we did beginning this year, it's about simplifying the company, simplifying it to you, the investor, is really what this is all about. But in doing so, we had to put our money where our mouth is.

Speaker 2

And these aspirational goals is all about continuing to drive this innovation technology specifically through our precast business and what we're doing in rail. So taking money out wasn't the end game. That was a result. It was also about taking those monies and redeploying them and redeploying to the front of the house and from the customer and really, really redefining ourselves to the market what we're doing and how we're changing our portfolio over time.

Speaker 6

Okay. That's very helpful. And then with the 2025 aspirational goals, I mean, is it safe to say that maybe there was some restructuring program envisioned as you approach those goals? Or would you say this is incremental?

Speaker 2

No. There was always a vision in that. If you look at our SG and A as kind of laid that out as we're at least implied, you could see we were running high to that number 2, the percentages. So we've been talking about this working internally. We wanted to wait for the right time, not when we had a little bit of headwinds.

Speaker 2

We wanted to stabilize the company, get through these portfolio moves, which we did through 2023. 2024, we wanted to take these incremental changes, if you will. We weren't ready, honestly. In the last couple of years, we didn't have the people in the position as well as the skills in the company and the technology in place to make some of these things happen. We're ready now.

Speaker 2

So we kind of ripped the band aid off last week and said, here we go, let's get after this.

Speaker 6

Okay, got it. So it doesn't seem like there's any change that will affect your ability to serve higher demand or meet growth?

Speaker 2

Let me tell you let me put it this way. If we didn't do what we did, I would not be as bullish on the aspirational goals. We needed to invest in the future and continue to bring the profitability of the company.

Speaker 6

Okay. Thanks for all the questions.

Speaker 2

Thanks, Justin. Have a great day.

Speaker 6

You too.

Operator

Our next question comes from the line of John Bair with Ascend Wealth Advisors. Your line is open.

Speaker 5

Thank you. Good morning, John and Bill. Hi, John. First quick question, it looks like, let's see, you had a legal expense in this quarter that didn't see anything in the Q1. Is that a one time issue or what can you expand on what that relates to?

Speaker 2

Yes, sure. Bill, you want to maybe get a little with the

Speaker 3

Yes, yes. We're not going to expand what it relates to. We've got an ongoing matter that we're working through. I think as we mentioned, it was about an $800,000 expense within the quarter. There could be some additional amount in the future.

Speaker 3

We can't predict what that will be. We don't think it will be to the same level that we've had in the past, but it's ongoing and it's something that we're just going to manage here to a conclusion as fast as we can.

Speaker 5

Do you have any sense of when this issue will be resolved?

Speaker 3

Unfortunately not. It's just it's an active matter and we hope to resolve it as soon as possible.

Speaker 5

Okay. So no not on the edge of being finalized, it could drag out 6 months or longer?

Speaker 3

It's hard to say. We'd love to settle it as soon as we possibly can, but it takes a counterparty to achieve that, of course.

Speaker 5

Okay. All right. I've got a question with regards to you indicated some encouragement with regards to the UK. Do you think from what you're seeing, is that something that's perhaps sustainable or?

Speaker 2

Yes. So I think they've had 4 prime ministers in 5 years. I mean they've had quite a turmoil in that organization. The charges and the actions we did in the Q4 were very important to get aligned to what we thought the activity would be. And then we did take some additional actions, some fine tuning, if you will, part of the enterprise reduction of force that we did last week.

Speaker 2

The new team over there under the leadership of Neil Sheffield is doing just a tremendous job, really reinventing themselves and really focus on what we can do and more importantly, how we do it to make sure we're driving shareholder value. So we're very pleased with what's going on there. They've had a very tough stretch into COVID, through COVID And we're looking for it may not be the area of huge growth for us in the future, but that's okay. We like what they're doing. It's a large technology innovation center for us.

Speaker 2

We're taking much what they do across the globe as it relates to rail. So we're very happy with where they're at today.

Speaker 5

Okay. And then with regards to domestic rail, we touched on this a little bit in previous questions, but it sounds as if you highlighted that there was some softness in the prepared remarks and so forth. So is this more of a timing issue from your customers, because you do reference expected timing of larger orders that lumpiness in commitments. Is that a fair way to look at it?

Speaker 2

Yes, fair way. So first of all, the good news. When you look at rail, you have to look at both aspects of rail, right? Transit, 1st of all, ridership is back to pre pandemic levels. We feel very good about that.

Speaker 2

We have a nice play or half of what we do in rail is in transit space. So this is very good news for us. So we'll see more and more of that activity in the second half. Again, while we feel very good about the second half. On the freight side, you got to look up Canada, first of all, they're doing okay.

Speaker 2

Canadian Pacific and Canadian National was going on respectively to intermodal and moving commodities. Here in the U. S, though, it's a little softer. And so they have delayed and deferred some of their spending. And this is back to the rail products conversation that we've had.

Speaker 2

So the work is coming. We're going to be very busy in the second half of the year related. So they just deferred some of the work that we typically was on H2 or excuse me, in the Q2, we're now seeing it in H2. So just look for a stronger year and probably a stronger Q4 than we've seen in the past. We had a great Q1, as you know, John.

Speaker 2

We fell off a little bit related to demand, but we're going to see that pick up again. But we're always need to continue to invest in the type of stuff that we provide, they need. So we feel very good about they'll keep shoring up their rearwards doing the maintenance work. And more excitingly, they're really they're bullish on our condition monitoring, our TTM, our devices that help them run a safe and secure network. That's where we're seeing a lot of activity and a lot of excitement that gives us really, really excitement going into the second half of the year and more fully in 'twenty five and beyond.

Speaker 5

Right. Okay. Last question. Indicated weather impacted your domestic sales on infrastructure. So basically you're just pushing this stuff out from the Q2 into the Q3.

Speaker 5

Is that kind of way to look at it? Aside from your comments about protective coatings were down. Is there any indication that that's going to turn around or what would it take for that to pick up and become more meaningful? Yes.

Speaker 2

Let's talk about infrastructure related to what's going on in precast specifically and those product lines. We got hit hard with weather. Our locations that are located in Tennessee, they had the wettest record first half year, the wettest year on record year to date as well as what's happening through Texas and the other regions. Very, very wet. Not only just affecting our employees to get to work, some of our facilities were shut down for days or in one case over a week related to weather and power outage.

Speaker 2

And the 3rd case is, and more importantly, is what's going on in the construction areas. If it's wet, they can't use our products, they can't put product underground and they can't build the infrastructures needed. That's pent up demand. That does not go away. And we are obviously short of the hurricane this week.

Speaker 2

We're seeing things that are drying out and the need is there. So the SPIC is just going to be open much wider in the second half of the year. They need to get these products in ground, they need to get these products in these areas built. So we feel very good. We're ready.

Speaker 2

We have products sitting in our yards, products sitting in our plants. We're ready to deliver. So again, why we feel very good about what we're looking at for H2. Coming back to we have 2 types of coating business. We have an in line coater and then we have a specialized coater.

Speaker 2

Specialized coater business that we have is doing very well and they're going to have a strong second half year. The inline coater working directly with the CIPCO, those projects are as expected. We're not doing too many pipelines moving between states right now. And we don't see much of that activity going on in the second half of the year. That may change with the different election or a different cycle.

Speaker 2

But right now, we're not going on that business providing much. And it's not really it's not part of our guidance at all. So if that comes back in a big way, that'll be on top of what we're looking at today.

Speaker 5

And what about steel products? What will it take to turn that around?

Speaker 2

So when you say turnaround, our threading business is actually doing very well. They got hit with the weather like everybody else. We do our threading in Houston. And of course, when it's wet, this is for irrigation pipe. So the demand for irrigation pipe is not as needed, but we're starting to see that change around as it dries out in the West.

Speaker 2

And we have a nice new market entry taking our pipe, our threaded pipe in the West Coast right now. So we feel good about what we're doing there. On the steel side, we made a nice pivot from our grid decking business, right? And we closed the book on that last month and moved that business to another party, which left us a bridge forms business. In fact, we just had the board out there and we've facility.

Speaker 2

It's a world class facility. They're operating at very high level. We're finishing up the largest job we ever did, which is down at Tampa, Florida and the IFOR Bridge. We feel very good about that. And we've got quite a few bidding activities and opportunities in front of us.

Speaker 2

To continue to use that, we talked about an investment super cycle. So we're looking for quite a bit of work coming through that plant in that business in the second half of the year.

Speaker 5

Great. Thank you very much for taking the questions.

Speaker 2

Thanks, John. Take care. Thank you.

Operator

Please stand by for our next question. We have a follow-up question from the line of Justin Bergner with Gabelli. Your line is open.

Speaker 6

Thanks for the follow-up. I'm just looking at the sales guide. I mean, you didn't really take the high end down much, but you're talking to some headwinds in rail and maybe that all gets caught up in the Q4, I'm not sure, and talking about protective coatings being weak. So is there some positive offset that's only allowing the sales guide to be taken down by $10,000,000 at the high end? I'm just trying to put together the pieces.

Speaker 2

Yes. We don't get into the color of all this, but our precast business, especially on the legacy side, is having a tremendous year, best year ever. This great American Outdoors Act that we referenced in our comments today, we're basically sold out for the balance of the year. So that's where upside is going to come. And then the new acquisition of Van Huzco, which is bringing these products, of course, we got hit with the weather and other things going on in Tennessee and other markets we serve there.

Speaker 2

But that's an area for upside in the second half of the year as well.

Speaker 6

Okay.

Speaker 3

And Justin, I might just add to that as well. That's something that helps the overall business mix in the second half of the year. So we're really while we have an overall top line, somewhat flat to down slightly overall in the second half of the year for the guidance, the profitability is up nicely on a year over year basis. So we'll see an improved business mix in the second half that will drive profit expansion despite the top line softness overall.

Speaker 4

Great. That was it for me.

Speaker 2

Thanks, Justin.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

Speaker 2

Thanks, Wanda, and thanks everybody for joining us today and thanks for the questions. We really appreciate it. I want to close with a couple of remarks related to first core value of our company's safety. Back in last quarter, I mentioned that we're real focused on safety as each and every year. And when you look at a company, you look at their safety results, really speaks to how you treat your employees and really the culture of the company and really how profitable you could be because safety is a result of a lot of good things coming together.

Speaker 2

In the last 3 years, we have struggled in our rail specifically. We've gone the wrong way, still way better than industry, but of course, our goals here at Foster are much we want to be much better industry standards. But year over year in the last 3 years from 2020, 2021, 2023 excuse me, 2021, 2022 and 2023, our safety performance in the rail business just continued to get worse year over year. So last year, we sat down. We said we need to change this.

Speaker 2

So compliments to the rail group, leadership, real focus on making safety a part of our fabric each and every day and getting better. We made a number of changes to staff, including adding operations guide named Dennis Sculli has done a fantastic job. And congratulations to Greg Ledford and his team making safety a core value of our company. They have completed, in fact, the first half of the year with 0 recordable injuries. That's just tremendous results, in fact, perfect results if you want to look at it from that point.

Speaker 2

When you look back, what that means, that 115,699 hours work hours, man hours that we did with no recordable entry across the entire rail business, which represents over 51% of the hours we have worked as a company. So tremendous, very focused on that. So yes, we've had some headwinds, but from operational, from efficiency point of view, the business is coming back, Coatings look good. Our backlog at over $248,000,000 is something that we feel good about. So we're ready to deliver on the second half of the year and we will deliver.

Speaker 2

So as a reminder, my second point is, we had a very strong Q1. And the Q2, of course, is not exactly where we expected to be or wanted to be. We're going to we're continuing to manage to do those macro situations. But we were off 7% when you look H1 over H1 year over year. When you look at H2, what we're putting and you look at a midpoint of our guidance, we're showing a 29% improvement year over year on EBITDA.

Speaker 2

So that's what we have in front of us. And this group, my team and everybody across the company, we're up to the challenge, making and bringing this product to the market and drive the shareholder return, which will give us a 12% year over year improvement in our EBITDA when you look at midpoint to midpoint, how we finished it, what we're forecasting to do. So we will make it happen. We're all in to do this and we have the opportunities in front of us and we will make it happen for the balance of the year. So thanks for your ongoing support.

Speaker 2

Thanks for your interest in Elvie Foster Company. And I know speaking on behalf of Bill and myself, we're very much looking forward to talk to you in early November. Take care for now. Bye bye.

Operator

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.

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Key Takeaways

  • The company highlighted its ongoing strategic transformation over the past three years, completing nine portfolio actions—including four divestitures and four acquisitions—to shift toward a technology-oriented infrastructure solutions provider and announced an enterprise-wide restructuring to save $4.5 million annually.
  • In Q2 2024, net sales fell 4.9% (3.4% on an organic basis) mainly due to softer rail volumes, while gross margin held at 21.7% and adjusted EBITDA declined 23.8% to $8.1 million.
  • The company issued a cautious full-year outlook but still expects roughly 12% growth in adjusted EBITDA over 2023 with flat organic sales and forecasts $25–30 million of free cash flow in H2, driving full-year cash flow close to breakeven.
  • Order and backlog levels were down year-over-year in both segments (rail backlog down 13.3% and infrastructure down 14.3%) but improved sequentially by ~30%, supported by long-term infrastructure funding and rising demand for rail monitoring technologies.
  • Balance sheet metrics remain a priority, with net debt down year-over-year, gross leverage at 2.7x expected to fall toward the 2x target by year-end, and $11 million of share buyback capacity remaining through February 2025, plus consideration of a future dividend.
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Earnings Conference Call
L.B. Foster Q2 2024
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