L.B. Foster (FSTR) Q2 2025 Earnings Transcript

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DATE

Aug. 11, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

- President and Chief Executive Officer — John F. Kasel

- Chief Financial Officer — William M. Thalman

- Director of Financial Reporting and Investor Relations — Lisa Durante

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the L.B. Foster Second Quarter 2025 Earnings Call. [Operator Instructions] Please be advised today's conference being recorded. I would now like to turn the call over to your speaker today, Lisa Durante. Please go ahead.

Lisa Durante: Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's Second Quarter of 2025 Earnings Call. My name is Lisa Durante, the company's Director of Financial Reporting and Investor Relations. Our President and CEO, John Kasel; and our Chief Financial Officer, Bill Thalman, will be presenting our second quarter operating results, market outlook and business development this morning. We'll start the call with John providing his perspective on the company's second quarter performance. Bill will then review the company's second quarter financial results. John will provide perspective on market developments and company outlook in his closing comments. We will then open up the session 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 will follow the slides and 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 carefully read our disclosures and reconciliation tables provided within today's earnings release and presentation as you consider these metrics. So with that, let me turn the call over to John.

John F. Kasel: Thanks, Lisa, and hello, everyone. Thanks for joining us today for our second quarter review. I'll begin with Slide 5, covering the key drivers of our results for the quarter. We're very pleased with our performance in the quarter with improvements delivered broadly across the business. First of all, we returned to sales growth in the second quarter with revenues up 2% over last year. The growth was achieved in the Infrastructure segment, with sales up 22.4% led by a 36% increase in our Precast Concrete business. Rail revenues, on the other hand, remained soft in the quarter, declining 11.2% from last year. However, the Rail sales included a 17.2% increase in Friction Management sales over last year.

In addition, demand rates for our Rail offering increased significantly in the quarter as evidenced by a 42.5% increase in our backlog from the start of the quarter. This sets a solid foundation for our growth outlook in the back half of the year. Highlighting the benefits of our strategic execution, we delivered a 51.4% increase in adjusted EBITDA over last year despite the modest sales growth in the quarter. The improvement was driven by favorable margins in the Infrastructure segment and strong SG&A leverage capacity enterprise. Our net debt decreased to $77.4 million at quarter end, with gross leverage improving to 2.2x, compared to 2.7x last year.

And finally, the order rates for the quarter drove a solid increase in our backlog for both segments with an improved business mix versus last year. I'll turn it over to Bill now to cover the financials for the quarter, and I'll come back at the end with some color on our market outlook and financial guidance for the year. Over to you, Bill.

William M. Thalman: Thanks, John, and good morning, everyone. I'll begin my comments on Slide 7, covering the consolidated results for the second quarter. As always, the schedules in the appendix provide details on the financial results covered in today's call, including reconciliations for non-GAAP information. As John mentioned in his opening remarks, we returned to organic sales growth in the quarter for the first time since Q1 of 2024. Net sales grew 2% year-over-year, driven by strong growth in Precast Concrete within Infrastructure. Reported gross profit was up $0.4 million with the gross margin down 20 basis points to 21.5%.

The reported Q2 gross profit includes a $1.1 million charge related to the exit of an Automation and Material Handling product line in the U.K. Also, last year's gross profit included a $0.8 million property sale gain. Adjusting for these 2 items, gross margins were up 120 basis points versus last year, on improved business mix, primarily within the Infrastructure segment. SG&A costs decreased $2.4 million due to lower personnel, insurance and professional services costs in the quarter. The current quarter includes a $0.3 million charge for the AMH exit. With the higher revenues and lower spending levels, the SG&A percentage of sales improved 200 basis points to 15.6%.

Adjusted EBITDA was $12.2 million, up 51.4% versus last year driven by improved margins in Infrastructure and lower SG&A spending across the business. Cash provided by operating activities was $10.4 million, favorable $15.4 million versus last year due to improved profitability and lower working capital needs. I'll cover the favorable developments in orders and backlog later in the presentation. Slide 8 provides a reminder of our typical business seasonality and the related financial profile. Sales and EBITDA levels are normally higher in the second and third quarters as they represent the primary construction season for our customers.

As a result, our free cash flow normally follows the pattern of consumption in the first half of the year with a reversal in the back half of the year as the construction season winds down. Since the first half of 2025 was weaker for our Rail business, the working capital needs this year are somewhat deferred to the back half. This is supported by the higher order book exiting Q2 as well as the sales growth implied by our guidance in the back half of 2025. I'll highlight that the assumed free cash flow at the midpoint of our guidance is approximately $41 million for the second half of 2025.

Over the next couple of slides, I'll cover our segment performance in the quarter, starting with Rail on Slide 9. Second quarter Rail revenues were $76 million, down 11.2% due to delayed order development, primarily in Rail Distribution, coupled with reduced activities in the U.K. Rail Products sales were down 15.5% due to the softer Rail Distribution demand in the quarter. And Technology Services and Solutions sales were also down 32.6% and including the decline in the U.K. business. I'll mention here that the U.K. Automation and Material Handling product line were exiting had $3.1 million in sales and $0.6 million of an operating loss for the trailing 12-month period.

As John mentioned, Global Friction Management sales were up 17.2% versus last year as this growth platform continues to perform well. Rail margins of 19.9% were down 100 basis points, driven primarily by the $1.1 million AMH exit charge. Excluding this impact, Rail margins were up 40 basis points. Rail orders decreased 2.3% versus last year but increased 37.3% sequentially, reflecting the strong order book development we expected for Rail distribution. Backlog levels increased 42.5% during the quarter and 13.9% versus last year. The backlog improvement was realized in both Rail Products and Global Friction Management, while TS&S backlog declined driven primarily by the U.K. Turning to Infrastructure Solutions on Slide 10.

Net sales increased $12.4 million or 22.4% due to the strength in our Precast Concrete business, which increased 36% over last year. Steel Products sales were up $0.2 million, with improved Protective Coatings and threaded volumes offsetting lower bridge volumes. Gross profit margins improved 40 basis points to 23.3% due to higher sales volumes in Precast and improved margins in Steel Products due to our portfolio work. Excluding the $0.8 million favorable impact from the Bedford property sale last year, Infrastructure margins were up 190 basis points year-over-year. Infrastructure orders remained robust at $61.4 million, up 13.7% over the prior year with solid gains in Precast Concrete.

Backlog totaling $139.2 million is up $4.2 million over last year, including $7.9 million or 36.8% from improved Protective Coating demand. I'll next cover some of the key takeaways from our year-to-date results on Slide 11. Net sales in the first half of the year were down 9% due to weaker demand in the Rail segment, primarily in Rail Distribution, coupled with reductions in the U.K. Partially offsetting were sales gains in our growth platforms of Precast Concrete up 35.1% and Friction Management up 14.4%. Year-to-date gross profit reflects the lower Rail sales volumes with margins of 21.2%, down 20 basis points.

SG&A costs decreased $4.4 million from the prior year with lower personnel and professional service costs as the primary drivers. Adjusted EBITDA was $14.1 million, essentially flat with the prior year despite the 9% decline in sales. I'll mention here that the higher effective tax rate for both the quarter and year-to-date period was due to our not recognizing a tax benefit on U.K. pretax losses. I'll emphasize that the higher rate is not reflective of our cash tax requirements, which remain extremely low at approximately $2 million per annum. We expect a lesser impact on our effective tax rate in future quarters, given our improvement efforts in the U.K. as well as our overall improving profitability outlook.

Operating cash flow was a $15.7 million use, favorable $10.7 million compared to last year on lower working capital needs. And orders were up 7.1% due to strong Infrastructure demand. I'll now cover liquidity and leverage on Slide 12. Net debt levels of $77.4 million decreased $6.6 million compared to last year, with the gross leverage ratio improving to 2.2x at quarter end. As mentioned earlier, we expect approximately $41 million in free cash flow in the back half of 2025. We expect to deploy these funds to lower debt levels while also improving leverage both sequentially and year-over-year.

We also plan to continue our stock buyback program, with $36.7 million remaining authorized and approximately 6.5% of outstanding shares repurchased over the last 2.5 years. A highlight of the quarter was the successful negotiation of an amendment to our revolving credit facility. We increased the borrowing capacity and extended the facility tenure to June of 2030, while also reducing borrowing costs and relaxing restrictions. This achievement highlights the confidence our banking partners have in our strategic execution and prospects for the future, and we thank them for their continuing support. I'll briefly touch on our capital allocation priorities outlined on Slide 13. Maintaining our financial flexibility with reasonable debt and leverage levels remains a top priority.

We also continue to invest CapEx in our growth platforms and return capital to our shareholders through our share repurchase program. In summary, we have multiple levers available to drive shareholder value, and we remain prudent in our approach. My closing comments will refer to Slides 14 and 15, covering orders, revenues and backlog by segment. The book-to-bill ratio for the trailing 12 months was a favorable 1.04:1, with positive developments realized in both segments. The Rail segment ratio improved to 1.06:1, with increasing order rates realized for 3 straight quarters. The Infrastructure ratio also remained positive at 1.02:1 with solid year-over-year growth in both orders and revenue in the second quarter.

And finally, on Slide 15, it's clear that the greatest improvement in our backlog was achieved in our Rail segment with a 13.9% increase year-over-year. I'll again highlight that the gains were realized in Rail Products, up 28.4% and Friction Management, up 22.1%. Partially offsetting was the lower backlog for TS&S due primarily to the U.K. This should improve our overall profitability mix for Rail in the coming quarters. And the Infrastructure backlog remains healthy at $139.2 million, with increased Protective Coatings demand driving the improved business mix. Thanks for your time this morning. I'll now hand it back to John for his closing remarks. Back to you, John.

John F. Kasel: Thanks, Bill. I'll begin my closing remarks, covering the recent market developments and outlook on Slide 17. Starting with Rail, the federal project funding that was previously curtailed at the start of the year began to release in the second quarter, which helped drive the backlog increase. We're cautiously optimistic that real customer demand will remain steady through the balance of 2025 with expectations that federal funding will continue as it is. We built a solid backlog in our Friction Management solutions, and we're also making further advances in our total track monitoring product lines. Our customers see the value in these solutions supporting the most challenging and operating safety requirements.

And lastly, the U.K. market demand remains challenged as we are taking the steps necessary to rightsize this business to a smaller technology-based offering with improved demand economic return profiles. Turning to the Infrastructure segment. Our Precast backlog remains solid at nearly $95 million. Precast has also benefited from the government funding programs, particularly the Great American Outdoors Act and highway and civil construction projects are also driving our demand levels. We've previously mentioned the commissioning of our purpose-built Precast facility in Central Florida. We're pleased to report that we have successfully manufactured and installed our first Envirocast insulated wall system during the second quarter.

And as expected, interest in our solution is growing with labor shortages prevalent in the local market. Overall, we remain bullish for a robust demand to continue for our Precast Concrete growth platform. Turning to Steel Products. Second quarter results were flat overall and the business mix improved substantially with the recovery of our pipeline Coatings business, which was up 47% year-over-year. With the renewed interest in energy investment in the U.S. as evidenced in the second quarter sales growth of 37% higher backlog for