FSTR - NASDAQ

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.

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.

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.

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.

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 Coatings, we believe that we are in a favorable recovery trend for this product line. In summary, we believe that demand drivers supporting steady growth through the year-end and beyond remain intact with increasing demand expected for our growth platforms on Rail Technologies and Precast Concrete. Switching topics. I'll provide a brief comment on tariffs. As previously mentioned, our supply chains are primarily sourced from within the U.S. with some minor exceptions for certain electronics and other sourced outside the U.S. Thus far, tariffs have not had a significant impact to our product cost or ability to secure the materials needed to serve our customers. I'll wrap up today's call covering our updated 2025 financial guidance on Slide 18. Second quarter results were largely in line with our expectations delivering strong improvement both sequentially and year-over-year. We're entering the back half of the year with a solid order book, favorable business mix, and lower operating cost structure, which supports our expectations for a strong second half of 2025. Our realized full year guidance is slightly lower due primarily to the Rail segment H1 performance. While strong orders were secured in Q2, the Rail sales uplift was deferred to the back half of the year, reducing our full year outlook for the Rail segment. Having said that, our revised guidance midpoint still assume a 25.1% increase in adjusted EBITDA on relatively modest sales growth of 2.7% for 2025. And the midpoint assume a 42.8% increase in adjusted EBITDA year-over-year on a 14.3% sales growth for the second half of 2025. And finally, the free cash flow outlook for the full year was also reduced slightly due primarily to the timing of working capital needs for Rail at the end of 2025. I'll note that our revised free cash flow midpoint outlook is still an attractive yield at approximately 8%. So as you can see, we are well positioned to deliver solid sales growth, strong profitability expansion and robust cash generation as we strive to maintain momentum through the balance of 2025 and beyond. In summary, we're very pleased with our team's performance and the favorable track we are on. So with that, thank you for your time and continuing interest in the L.B. Foster. I'll turn it back to the operator for the Q&A session.

[Operator Instructions] Our first question comes from Liam Burke with B. Riley Securities.

On the capital allocation front, are you seeing return -- high return opportunities in acquisitions or possibly reinvesting in growth projects? Or would you be leaning more towards repurchases and debt reduction?

Thanks, Liam, for the questions. First of all, we have first organic growth we've seen now in 5 quarters. So we're very pleased about that. So we've been plowing our available capital into our organic programs, and we're starting to see the benefit of that. As I mentioned, the Florida new operations up and running. We feel very good about that, and we're continuing to put more money in our Precast operations, because that growth has really, really taken off. As I mentioned through the Great American Outdoors Act, but we're also seeing a lot of highway and civil type work with that. As you know, we are buying, and we have approval to buy shares in the company, $40 million repurchase program over a 3-year period. So we've been very active in that, and we're very bullish about where we're at today, and we'll continue to make those -- that capital towards that. As far as acquisitions, we've got quite a bit going on organically right now. We're very happy with what's going on with the recent -- most recent acquisition of VanHouseCo. We're really make strides in that area as well. But we're also being mindful of trying to find some tuck-in and other type of acquisitions to support our strategy for the years to come. So our pipeline is active. We've been actively looking at opportunities out there, but we'll also make sure that we're executing on what's in front of us right now. And that's where we're feeling very strong about the second half of the year, supported by that significant backlog growth that we've seen sequentially, and solid year-over-year performance.

Great. And my next question is, if I look at the backlog composition, both Infrastructure and Rail Products and Services, are you seeing follow-through on -- in the Infrastructure side on Precast Concrete and on Rail on the Friction Management side and the backlog for the rest of the year?

Yes, absolutely. Friction Management, thanks for mentioning, it has been absolutely tremendous year that we put together in Q2. And we had the best month we've ever had in Q2 related to Friction Management. And that growth just keeps going. We feel very good about that. And our TTM work, which was a little soft in the beginning of the year, a lot of that is a flow-through from the larger Class 1s or also comes from the government type funding and spending. And we've seen that those appropriations change and the need for that activity in the second half of the year. So we feel very good about that. It's coming into backlog. As I mentioned, we were concerned in the first half of the year, whether or not we're going to have the backlog support our guidance and we do. It came through the Rail side in a big way. And then Precast has just been humming along very, very well. And of course, we mentioned in the broadcast about what's going on with Coatings. That's been a good year-over-year improvement as well. So all in all, we feel very good where we're at right now related to the work we have in hand. We just need to perform in the second half of the year.

Our next question comes from Julio Romero with Sidoti & Company.

I wanted to start off with a clarification question. With the AMH exit of the U.K. business, do you have any remaining U.K. exposure within Rail? And then what's remaining within TS&S would be purely the U.S. portion?

Yes. So thanks for your question. The U.K. as we mentioned, is the headwinds are there. We've been working on rightsizing that business for a period of time. We didn't just take action in Q2. We're just announcing that action. So AMH was a significant piece of that. And then related to our telecommunications work, we're just getting it in line with the activity and the type of work that we would like to produce in the market. So that will be an ongoing focus area for us for the balance of the year, but we've got the right team working on it right now in the U.K., and with the oversight here in the U.S. So we feel good we're going to be in a good -- pretty good position here by year's end. As far as a greater TS&S, is that your question related to back in North America?

I was asking if the remaining business within TS&S would be purely U.S., but it sounds like there's a little bit left of U.K. in there.

Yes, a little bit U.K., but the greater work in the U.S. has been very, very strong, very buoyant.

Okay. That's very helpful. And on the guidance, I think the updated sales range implies second half sales growth of 10% to 18% at the low and high ends of the guidance. Can you maybe discuss how you envision that growth across the two segments. And then also from a cadence perspective with regards to the third and the fourth quarter.

Yes. Well, third and fourth quarter, first of all, from a seasonality point of view, it's very, very strong, Q3 is typically the best quarter that we see in the year. We expect that to continue this year. And in Q4, we just got so much work to do that Q4 should be in good order and good standing for that. What we really are happy about is our gross profit. We ended the quarter at 30.9% gross profit in dollars and 21.5% in profit margin. That's going to continue. We expect that to continue to grow through the balance of the year. And our work that we did a year ago on SG&A has really positioned ourselves well to lever up the cost side of the business in the second half of the year. Backlog is supportive of what we need to get done in the second half of the year. So the numbers that we put out there, the $535 million to $555 million of sales is an area that we feel strongly that we will finish. And then, of course, the adjusted EBITDA numbers will flow accordingly.

Yes. Very fair. And that's even -- the gross profit dollars you're hitting is without even the Rail business really working on all cylinders. So...

That's exactly right. We really performed very, very well in the first half of the year and Q2 with what we had to work on. We feel very good about how we have the work really performing.

Very good. Last one, if I may, is just on the Envirocast business. Congratulations on manufacturing and installing your first Envirocast precast wall system. Can you just talk about progress in that business and how much contribution if any, is expected in the second half?

Yes, we're not -- this is about getting it right. So we're entering a new market, new space with the product line that we know and we performed in other parts of the U.S. So we're starting slow, but it's meeting our expectations. We're working very closely with contractors and homebuilders, and our first job as well as bringing the best workforce we can focus on our quality, focus on our productivity and most of all focus on safety. So we're very pleased we're to date where we're at. I'll be down in the next month to see it firsthand, again, as we start moving product out to sites and talking directly with customers. But as far as the balance of the year, we're not expecting that much this is really a growth -- organic growth opportunity that we're putting in place for years to come. And we're focused on just making sure we're doing right this year.

[Operator Instructions] Our next question comes from John Bair with Ascend Wealth Advisors.

A couple of questions. How much of the U.K. business has sort of been cleaned up. You took a pretty significant hit there with the tax situation. Can we expect that to be lesser impact going forward?

Yes. Definitely. We've taken a large hit that we were expecting to do, and we'll talk about the tax. And of course, there's a cash part of the tax that is probably the most important. But maybe Bill can add a little color on some of those details that we can share.

Yes. So in the quarter, we reported a 55% effective rate. And it's basically a mathematical impact because we didn't have a tax benefit that we would record on the loss that we incurred in the U.K. on a pretax basis because of the cumulative losses that we had there as well as the restructuring charge that we took in the quarter. What we would expect going forward is the profitability will improve in the U.K. and our overall profitability will also improve. So the impact of that situation in the U.K. will become lesser as the year progresses, and we're expecting an effective rate for the quarters between 30% to 35%. And then a blended effective rate for the full year between 35% and 40%. But those are, again, just P&L drivers for the effective tax rate and EPS. The important thing for us, first of all, was obviously turning the U.K. business around, and we think we're getting to that pivot point there. But then also on a consolidated basis, we're paying somewhere around $2 million per year in global cash taxes, and that will be the case for the foreseeable future.

Okay. And then -- so then going forward in, say, '26, were those tax rates in the 30%, 35% range come down? So...

Yes. And we would expect that to be within the [indiscernible] rate closer to the upper 20s, which is what we've expected it to be from an overall jurisdiction and mix of taxes point of view.

Okay. Okay. And then switching over to Precast, with the Envirocast. What is the emphasis on residential versus commercial? What do you see as the more positive uptake of that? Or is it too early in the game yet?

Well, I don't think it's too early. The initial thinking was residential, and we could do light commercial or light industrial type work as well. But the real market that we're serving and the area we went to is very heavy focused on residential. And so that's the contractors and the homebuilders that we're working directly with today.

Is there any legislation or anything like that, that would drive potential sales and adoption of this technology?

Yes. The hurricanes and the effect of the weather had a dramatic impact on homebuilders, on regulatory requirements. And so we are seeing -- and of course, the ability to pay -- be able to afford to pay for insurance. So in the event that you cannot afford insurance or it's very expensive, there is a big significant draw towards building a home out of concrete today. The thing that we really did not anticipate going into this, we knew that we had an impact related to labor. But with everything else going on across the country right now related to building, construction and labor market, that's where we're really seeing an uptick in the need for our product. The availability of labor is just shrinking in that part of the country. And what our product is able to do is we build in a factory. So the labor is in the factory environment and the erection of a home is literally in days versus weeks or potentially months. So that's been a real significant draw is being able to manage expectations with our customer because of the inability for them to bring labor and secure labor in the market down there.

Okay. Well, that raises another interesting question then, how are you focused or not focused, but how are you -- what is your situation with your own labor force at, say, VanHouseCo and elsewhere?

Elsewhere? Yes, very good. We've been working on that. First of all, the beauty of L.B. Foster fosters is our people. That's really what drives our company and the profits come from our people. So we spend a lot of time supporting and nurturing our culture. So we've become the place to work in the markets we serve. And we've been working on that talent pool and that workforce of Florida long before we made any product, bringing them on board, bringing them into the culture, understanding how we do things. And for them to really have that ownership related to building a factory and now building a product. That's a significant part of how we do things. So we have a very, very good workforce. And we feel very fortunate, but also we work on it each and every day to make it the way it is today.

And I'm not showing any further questions at this time. I'd like to turn the call back to John for any further remarks.

Thank you, everybody. Thanks for joining us today. And we've, again, wrap up, we feel very good about the quarter, where we're at, the build of the backlog, supporting our margin, the SG&A that we're now dealing with, where now we're able to really leverage that in the second half of the year. It's really the tariffs I mentioned in the call, really have little to no impact, and the freeing up of government funding, specifically on the Rail side is really giving us opportunity to feel very excited about what's in front of us for the second half of the year. So thanks for your ongoing support of the company. And we look forward to talking to you after we post next quarter results. Take care.