L.B. Foster Company (NASDAQ:FSTR) Q1 2024 Earnings Call Transcript May 7, 2024
L.B. Foster Company beats earnings expectations. Reported EPS is $0.4038, expectations were $-0.16. FSTR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to Q1 2024 L.B. Foster Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to turn the conference over to your speaker for today, Stephanie Schmidt. Please go ahead.
Stephanie Schmidt: Thank you, Operator. Good morning everyone and welcome to L.B. Foster’s first quarter of 2024 earnings call. My name is Stephanie Schmidt, the company’s Investor Relations Manager. Our President and CEO, John Kasel; and our Chief Financial Officer, Bill Thalman, will be presenting our first quarter operating results, market outlook, and business developments this morning. We’ll start the call with John providing his perspective on the company’s first quarter performance. Bill will then review the company’s first quarter financial results. John will provide perspective on market developments and company outlook in his closing comments. We will then open the session up for questions. Today’s slide presentation, along with our earnings release and financial disclosures were posted on our website this morning and can be accessed on our Investor Relations’ page at lbfoster.com.
Our comments this morning 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. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and reconciliation tables provided within today’s earnings release and within our accompanying earnings presentation carefully as you consider these metrics.
So, with that, let me turn the call over to John.
John Kasel: Thanks Stephanie, and hello everyone. Thank you for joining us today. For our first quarter earnings call. Please turn to materials to highlight the quarter on Slide 5, which reflect continuing progress in building momentum to our strategic transformation. First quarter organic sales improved to 16.9% over the prior year with exceptionally strong quarter delivery by Rail segment. In fact, Rail segment sales were up 29.4% on organic basis. The improved sales performance, coupled with a 90 basis point gross margin, margin improvement ending at 21.1% drove a 32.4% increase in adjusted EBITDA year-over-year. The overall improvement in profitability was driven by Rail segment, which delivers strong profit improvement in Technology Services and Solutions business both in North America and the United Kingdom.
Infrastructure results were somewhat softer in the quarter with organic sales basically flat year-over-year as the free cash business was adversely impacted by challenging weather conditions in observed markets. Favorable [ph] market demand remains robust in our Infrastructure segment and we expect results to improve as we continue to move through the construction season. As expected, our net debt increased to $74.9 million during the quarter, reflecting the increased funding to our working capital to support sales growth along with annual bonuses and insurance premiums. It’s important to note that our net debt was down $2.5 million versus last year and the gross leverage ratio of 2.2 times improved two times [ph] year-over-year. As mentioned in announcement, we sold an adjacent property associated with our former joint venture in Magnolia, Texas for $3.5 million in net proceeds.
The associated gain was excluded from our adjusted EBITDA for the quarter. Order rates recovered in the first quarter, increasing 25.5% sequentially and 3% last year on an organic basis. Backlog remains healthy at approximately $222 million, which is down $37.6 million versus last year, noting that $12 million of increase is due to strategic divestitures completed in 2023. The balance of decline is largely due to our Rail Distribution business, which has improved to pre-COVID order fulfillment lead times translating to sales growth at a lower order book level. With a strong start to the year in line with our expectations, we reaffirmed our 2024 financial guidance and believe we’re on track to achieve our 2025 financial goals established over two years ago.
Bill will now cover the detailed financials for Q1 and I’ll come back at the end with some closing remarks on our markets and our outlook. Over to you Bill.
Bill Thalman: Thanks, John, and good morning everyone. I’ll begin my comments covering consolidated highlights on our first quarter on Slide 7. As a reminder, the schedules in the appendix provide more detailed information on our financial results for the quarter, including certain non-GAAP measures discussed on today’s call. As John mentioned in his opening remarks, our first quarter results were strong, driven by both organic growth and the portfolio moves we made in line with our strategic road map. Portfolio moves completed last year include the sale of Chemtec at the end of Q1 and the sale of the Concrete Ties business at the end of Q1. In addition, last year we announced the exit of our bridge grid deck product line in Q3 and we also completed the Cougar Mountain Precast acquisition in Q4.
Organic results reviewed throughout today’s presentation provide insight into the performance of our base business excluding these portfolio actions. Net sales for the quarter were up 7.6%, 16.9% on an organic basis, with the organic growth driven primarily by the strong results in the Rail segment. While Infrastructure organic sales were essentially flat year-over-year. Gross profit was up $3 million, which drove a margin expansion of 90 basis points, improving consolidated margins to 21.1%. The improvement was driven by the Rail sales uplift as well as the benefit of portfolio actions and improved product mix. Selling, general and administrative costs increased over the prior year due to personnel and professional services costs. However, as a percentage of sales, SG&A was down 20 basis points to 18.3%.
Net income for the quarter, totaling $4.4 million included a $3.5 million net gain on the sale of the Magnolia, Texas property. The net gain realized was equal to the proceeds received as the property carried zero book value at the time of the sale. The net gain realized on the property sale was excluded from the adjusted EBITDA for the quarter, which was $5.9 million, up 32.4% versus last year. As expected, cash used for operating activities in the quarter was $21.9 million due to seasonal working capital needs coupled with funding for prior year incentives and annual insurance premiums. I’ll provide some additional color on orders and backlog by segment later in the presentation. The Bridge is on Slide 8 reflect the organic and portfolio driven impacts on sales and adjusted EBITDA for the quarter versus last year.
The Bridge on the left side highlights the strong organic growth realized in Q1 with the $19.5 million sales increase representing 16.9% organic growth. The net impact of M&A activities decreased revenue $10.6 million or 9.2%. The Bridge on the right side highlights the improved profitability delivered from both organic and M&A drivers. Notably, adjusted EBITDA was up $0.6 million from M&A activities despite the related $10.6 million decline in sales. The EBITDA leverage on the strong organic sales growth was tempered due to lower profitability and infrastructure coupled with the higher SG&A. We expect our profitability from organic sources will improve as the year progresses. Overall, we’re pleased to see the uplift in adjusted EBITDA resulting in a 90 basis point improvement to 4.8% of sales for the quarter.
Slide 9 highlights the progress we’ve made in sales growth and margin expansion over the last two years. The net impact of our strategic execution resulted in a 7% adjusted sales growth for the trailing four quarters ended March 31, 2024. Of course, this reported result includes the impact of our portfolio work. Organic growth over the same time period averaged approximately 13% per quarter, with the 16.9% realized this quarter being the high point. Over the trailing four quarters adjusted gross profit increased 17.3%, resulting in a 190 basis point improvement in adjusted gross margin to 21.4%. As a result of our portfolio work and profitability initiatives, adjusted gross margins have exceeded 21% in each of the last four quarters. We’re very pleased to see the impact of our transformation in our results and believe the structural improvement in the gross margin profile of our business will continue to deliver improving margins given the demand outlook from our infrastructure end markets.
Over the next couple slides, I’ll cover our segment performance in the quarter starting with the Rail segment on Slide 10. First quarter Rail segment revenues totaling $82.6 million were up 28.3% over the last year, including a 1.1% decline from the Ties divestiture. Strong organic sales growth was realized in both Rail products and Technology Services and Solutions business units. We’re especially pleased with the results in TS&S, which included an uplift from the domestic rail safety business as well as some modest recovery in the UK. Rail margins of 22.5% were up 30 basis points year-over-year, driven by the strength of the TS&S business. New rail orders increased 13.6% year-over-year and 39.4% sequentially, driven primarily by Rail Products, while backlog levels decreased 24.3% versus last year this decline is primarily due to shorter lead times and an improved order fulfillment in Rail Products, resulting in meaningful sales growth with a relatively lower backlog level.
Last year’s orders and backlogs associated with the divested Concrete Ties business were $2.7 million and $3.5 million, respectively. Turning to Infrastructure Solutions on Slide 11. Segment revenue decreased $9.4 million, or 18.4%. However, 19.5% of the decline was due to divestiture and product line exit activity. Organic sales were relatively flat with a 1% increase over the prior year. Strong growth in Steel Products was offset by the impact of adverse weather conditions on customer project installations and Precast Concrete. Gross profit margins were up 80 basis points to 18.4%, due primarily to portfolio changes executed over the last 12 months. New orders were $48.6 million, down $17.1 million from the prior year quarter, with divestiture and product line exit activity contributing a decline of $8.5 million.
Backlog totaling $136.2 million reflects a $10.1 million decrease, $8.5 million of which was due to M&A activity. I’ll now cover our liquidity and leverage metrics on Slide 12. We were pleased to see the continued improvement in our net debt and gross leverage metrics compared to last year. Net debt levels decreased $2.5 million and our gross leverage ratio decreased 0.2 times. As expected, we saw an uptick in both net debt and gross leverage during the quarter to fund seasonal working capital needs as well as prior year incentive bonuses and annual insurance premiums. We remain confident in our ability to manage our leverage metrics around two times over the long term, given our capital-light business model and improving cash generation outlook.
While we had a $21.9 million use of cash from operations during the quarter, we expect operating cash flow to improve along typical seasonal patterns as the year progresses. We remain confident in our free cash flow outlook guidance of $12 million to $18 million in 2024, which includes the final $8 million that’s owed under the Union Pacific settlement agreement. Cash generation will be prudently deployed along our capital allocation priorities, including continuing the execution of our share buyback program with $12.3 million of the original $15 million authorization still available through February of 2026. In summary, we believe the key drivers of strong, sustainable free cash flow are in place and should continue to improve throughout the balance of 2024 and beyond.
I’ll next revisit our capital allocation priorities outlined on Slide 13. As I just mentioned, we continue to focus on managing leverage levels while opportunistically investing in organic growth opportunities we see in Rail Technologies and Precast Concrete. We’re comfortable with gross leverage around two times, which is down from the recent 3.3 times high points seen after the completion of three acquisitions in the summer of 2022. Capital spending is expected to run around 2% to 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’ve been active since its inception in February of 2023, repurchasing approximately 151,000 shares, or 1.4% of the outstanding shares, at an average price of $17.89 per share.
We continue to evaluate small tuck-in acquisitions that can extend our product portfolio within our growth platforms, such as the recent Cougar Mountain acquisition that was completed at the end of 2023. And finally, we continue to consider a dividend as a capital allocation option as the prospects for stronger free cash flow improve. My closing comments will refer to Slides 14 and 15 covering orders, revenues and backlog by business. The book-to-bill ratio over the last 12 months was 0.94:1, which is somewhat softer due to the strong order book fulfillment rates and improved lead times. First quarter order rates did improve sequentially 25.5% and were up 3% on an organic basis, highlighting an improving trend in demand levels. And lastly, our consolidated backlogs on Slide 15 reflects a healthy level with the decline year-over-year due both to divestiture and product line exit activity coupled with improved lead times and order fulfillment execution.
As mentioned in the past, our order rates and backlog are susceptible to swings driven primarily by large order timing in our Rail Distribution product offering. 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 improving backlog as the year progresses. In summary, we’re pleased with the strong start to 2024 and look forward to continuing this progress throughout the balance of the year. Thanks for your time and I’ll now hand it back over to John for his closing remarks. John?
John Kasel: Thanks, Bill. Please turn Slide 17 for an overview of our key business and market drivers underpinning our outlook. We are optimistic in longer term prospects for growth in our end markets through both segments, particularly given the continued emphasis on infrastructure investment. In 2023, we began to realize some project related business from U.S. federal programs approved over the last several years, and we expect that to trend to continue moving to 2024 and beyond. In addition, emphasis on rail safety programs is another favorable driver for our business. We’ve seen an uplift in demand for a total track monitoring technology products in 2024 anticipate this trend will continue. We’re also cautiously optimistic that the UK construction markets have stabilized and showing modest signs of improvement after a challenge in 2023.
And finally, record spending on recreational parks and campgrounds funded by the Great American Outdoors Act continues to drive strong demand for our CXT concrete buildings. Coupled with government funding for road and bridge, rehab projects, as well as robust regional commercial and residential real estate development. We believe the outlook for our long term demand is favorable for our Infrastructure segment. In summary, overall prospects for sustainable, profitable growth should remain strong in the way of the infrastructure investment super cycle, we expect for years to come. On Slide 18, I’d like to emphasize the investment thesis for L.B. Foster, which is supported by four key pillars. First, we’ve taken the strategic steps necessary to transform our business portfolio, resulting in structural improvements in profitability that were delivered in 2023 and are continuing as evidenced by our first quarter results.
Second, we reported strong organic growth in 2023 and also started this year again with healthy growth. It’s our belief and strategy that we represent an infrastructure pure-play with multiple avenues [ph] for growth through the multiyear investment programs that are clearly needed in our served markets. Third, with the exceptional cash flow in 2023 and our capital-light business model, coupled with the improving profitability and the completion of our Union Pacific settlement payments later this year, should all provide even more favorable cash flow in the future. Fourth, and finally, we have disciplined capital allocation process with multiple drivers that have been deployed and are creating value for our shareholders, as evidenced in our improved equity returns.
So, in summary, we believe our strategy is sound and our execution along these four pillars should deliver improving results through 2024 and beyond. With these pillars in place, we’re confident in our prospects for the future. As I wrap up today’s call on Slide 19, I’ll remind everybody we’ve been closely monitoring the potential for L.B. Foster to be added back to the Russell 2000 Index this year. Our market cap as of last Tuesday, the measurement date was approximately $255 million, up 106% over last year. The Index was up 11.6% over the same time period and the market cap cutoff last year was approximately $160 million. Given our equity performance relative to the Index, we believe we’ll be on the list for inclusion ones published later this month.
Looking back, it’s been two and a half years since our Investor Day. At that time, we rolled up a strategic transformation roadmap and aspirational goals for 2025. Since then, we’ve completed nine transactions, we have simplified our business structure, improved our profitability profile and aligned the business to capture robust demand in our served infrastructure markets. We are pleased with the progress, but the journey continues. We reaffirmed our guidance for 2024 and have a clear line of sight to our goals for 2025. Our team is energized by the prospects for the future. Yes, indeed, we have momentum. As I started today’s call, I will end the call with recognition to our employees in the Rail segment, this time on our topic of safety.
This group worked the entire first quarter over 365,000 employee production hours without a recordable injury. Congratulations to Greg Lippard, who leads this group and all that made this happen. So with that, thank you for your time and continuing interest in L.B. Foster. And I’ll turn it back to the operator for the Q&A session.
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