L.B. Foster Company

Good day, and thank you for standing by. Welcome to the L.B. Foster First Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. You will then hear an automatic message advising your hand is raised. To answer your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker for today, Lisa Durante.

Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's first quarter of 2025 earnings call. My name is Lisa Durante, the company's director of financial reporting. Our president and CEO, John Castle, and our chief financial officer, Bill Tallman, 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 up the session for questions. Today's slide presentation, along with our earnings release and financial disclosure, 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 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 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.

Thank you, Lisa, and hello, everyone. Thank you for joining us today. I'll begin my remarks on slide five, covering the key drivers of our first quarter results. As mentioned in our year-end earnings report in March, we started 2025 soft during the last year, with first quarter sales down 21.3%, compared to atypically strong prior year comparison. The client was realizing, Charlie, within our rails segment, with infrastructure sales growing 5% over the last year, driven primarily by strong demand in our precast concrete business. It is important to note that our rail business had an exceptionally strong first quarter last year and also entered 2025 with a lower backlog, primarily due to work timing and rail distribution. Rail distribution demand is lumpy at times, and we have experienced quarterly swings in volume in the past, depending on timing of the large project work. This quarter was also impacted by an apparent slowdown in the release of government funding, impacting project activity levels with our customers. But I feel pleased to report that we're starting to see project funding and bidding levels improve, as evidenced by our 46.9% rail backlog increase during the quarter. Getting back to the results, the lower Q1 sales volume in the rail segment drove a 69.3% decrease in the just-needed-up versus last year. As expected, our net debt increased to 79.9 million quarter, reflecting the increased working capital funding needed to support sales growth, along with annual incentive and insurance premium payments. Net debt was up $4.9 million versus last year, and the gross leverage ratio came in at 2.5 times compared to 2.2 times last year. Order rates began to recover in the first quarter, increasing 39.1% commercially and 12.6% over the last year. This translated to an improved backlog at quarter end of $237.2 million, up $51.3 million during the quarter, and up $15 million over the last year. The backlog growth was higher in our more profitable growth product lines, which should translate into near-term sales growth and profitability expansion year-over-year, as early as the second quarter. After Bill covers the financial details for the quarter, I'll come back at the end with some closing remarks on our backlog trend market outlook and our financial guidance for the year. Over to you, Bill.

Thanks, John. I'll begin my comments on slide seven, covering the consolidated results of the first quarter. As a reminder, the schedules in the appendix provide details on the financial results covered in today's call, including non-GAAP information. As John mentioned in his opening remarks, first quarter results were lower than last year, driven entirely by lower sales volume in the rail segment. Net sales for the quarter were down 21.3%, with rail segment sales down 34.6%, driven primarily by weak rail distribution demand within the rail products business unit. Partially offsetting the decline was an increase in infrastructure sales, which were up 5% over last year due to a 33.7% increase in precast concrete sales. Gross profit was down $6 million, with the gross margin down 50 basis points to 20.6%. The decline was driven by lower rail sales as well as slightly unsavorable mix within the rail segment. SG&A costs decreased $1.9 million from the prior year due to lower personnel and professional service costs. First quarter adjusted EBITDA was $1.8 million, down $4.1 million versus last year due to the lower margins from the rail sales decline. Operating cash flow, which was a use of $26.1 million, followed normal seasonal patterns due to increased working capital needs, coupled with funding for prior year incentives and annual insurance premiums. We saw favorable trends in orders and backlogs across the business, which I'll cover by segment later in the presentation. Slide eight provides a reminder of the typical seasonality of our business. Sales and EBITDA levels are normally stronger in the second and third quarters, as they represent the primary construction season period for our customers. The growth in our backlog during the first quarter gives us confidence that we will see an improvement in sales volumes across the business in the second quarter. Free cash flow trends follow a pattern of consumption in the first half of the year, funding sales growth leading up to the construction season. This trend reverses in the back half of the year as construction season winds down. I'll highlight that despite these large swings, Average free cash flow for 2023 and 2024 was approximately $31 million excluding the $8 million Union Pacific payments which are now behind us. That's a yield of approximately 15% at our current equity valuation. In summary, the softer first quarter is normal for our business and we expect results for the balance of the year to follow our typical seasonal patterns. Over the next couple of slides, I'll cover our segment performance starting with the rail segment on slide nine. First quarter rail segment sales totaling $54 million were down 34.6% due to an exceptionally strong first quarter last year, coupled with the lower order book entering 2025. The sales decline was primarily in the rail products business unit which was down 44.7 percent due to the decline in rail distribution volume. Technology services and solutions sales were also down 41.3 percent in part due to lower UK sales volumes as we continue to scale back initiatives in this market. On a positive note, global friction management sales were up 11 percent versus last year as this growth platform continues to perform well. Rail margins of 22.3% were down approximately 20 basis points, driven by the sales volume decline and unfavorable business mix. Rail orders declined 0.6% versus last year, but increased 51.4% sequentially as we enter the stronger demand period for the business. Backlog levels increased 46.9% during the quarter and 6.6% versus last year. The backlog improvement was realized in both rail products and global friction management, while technology services and solutions backlog declined, driven primarily by the UK. Turning to infrastructure solutions on slide 10, net sales increased $2.1 million or 5% due to the strength in our precast concrete business, which increased 33.7% over the prior year. Steel product sales were down $5 million or 24.4% due primarily to lower protective coatings sales. Gross profit margins were up 40 basis points to 18.6% due to higher volumes within precast and improved margins in steel products due to our portfolio work. Infrastructure orders were very strong at $65.8 million, up $17.2 million, or 35.3% over the prior year quarter. Backlog totaling $145.5 million is up $9.3 million over last year, including a $12.1 million increase or 51.6% from improving protective coding demand. I'll now cover liquidity and leverage metrics on slide 11. Net debt levels increased $4.9 million over the last year to $79.9 million, and the gross leverage ratio increased 0.3 times to 2.5 times at quarter end. These movements were largely in line with our expectations. We're in the heavy working capital investment period of the year, which will continue in the second quarter as we fund expected sales growth. Net debt levels should increase modestly during the second quarter, but we expect gross leverage will remain around 2.5 times before declining in the back half of the year. We remain confident in our ability to manage the choppy working capital needs of the business and believe the key drivers of strong, sustainable free cash flow remain intact. Our capital allocation priorities are outlined on slide 12. On March 3rd of 2025, our board authorized a new three-year $40 million stock buyback program that will expire at the end of February, 2028. During the first quarter, we repurchased approximately 169,000 shares representing approximately 1.5% of the shares that are outstanding. This compares to approximately 303,000 shares repurchased in all of 2024. Share repurchases are an important capital allocation priority for us, especially with the improving prospects for cash generation and the attractive equity valuation. We expect to invest capital in our facilities at a rate of approximately 2% of sales with a focus on organic growth initiatives in our growth platforms. We also continue to evaluate tuck-in acquisitions to add product line breadth and geographic coverage to our growth platforms. And finally, we will remain prudent with our leverage and net debt levels, with the goal of maintaining leverage between one times and two times over the longer term. My closing comments will refer to slides 13 and 14 covering orders, revenues, and backlog by business. The book-to-bill ratio for the trailing 12 months was a favorable 1.04 to 1, with favorable developments realized in both segments. First quarter order rates improved 12.6% over the prior year, driven by a 35.3% increase in infrastructure orders. Order rates improved 39.1 percent sequentially, with increases realized in both segments, highlighting the improved trend and demand levels across the business. And lastly, the consolidated backlog on slide 14 reflects an improving trend for both segments, with backlog growing during the quarter 46.9 percent and 17.8 percent for rail and infrastructure, respectively. Rail backlog included a $22.8 million increase, or 63.4%, for rail products driven primarily by improved demand within rail distribution. Compared to last year, consolidated backlog is up $15 million, or 6.7%, with gains realized in our more profitable product lines. Within rail, rail products and friction management backlog are up 21.2% and 71.4% respectively, while the UK backlog within TSNS is down 52.7%. For infrastructure, precast backlog is up 3.8%, and as I mentioned earlier, protective coding backlog is up $12 million, or 51.6%. We believe these favorable trends will translate into improved results in the second quarter, both in terms of sales volume and margin expansion. Thanks for the time this morning. I'll now hand it back to John for his closing remarks. Back to you, John. Thanks, Bill.

Please turn to slide 16, where I'll begin my closing remarks covering recent market developments and near-term outlook. While first quarter results were down last year, the plan was largely isolated to weakness in rail distribution demand within the rail products business unit. This product line benefits from the well-publicized government infrastructure programs, which we believe slowed earlier in the year due to uncertainty in the amounts and continuation of federal funding, resulting from Washington's cost-cutting initiatives or the like. As Bill mentioned in his comments, it is important to note that demand levels for rail products began to improve throughout Q1, with orders up sequentially 77.8% and backlog up both sequentially and year-over-year at the end of the quarter. We also are seeing increasing quotation rates from some of our largest customers in Q2Q, providing us confidence that demand drivers for rail products are getting back on track. Demand for friction management solutions remains robust, and an ongoing focus on rail safety in North America continues to drive demand for our total track monitoring solutions. Within the infrastructure segment, demand for our precast concrete products continues to grow, with increased orders and backlog year over year. on top of strong sales growth delivered in the first quarter. We continue to see favorable demand building for our EnviroCast precast wall system, now being manufactured in Florida, as well as our ONG protective coating systems, with combined backlogs up 12.1 million, or 51.6% year-over-year. The increased backlog, coupled with improved profitability mix within the backlog, should translate into near-term sales growth and profitability expansion year-over-year, as early as the second quarter. We are closely monitoring the status of the government funding programs, but remain optimistic that they will move forward as announced, given the greater infrastructure need. As mentioned during our last update, our markets are observing the threat of tariffs, which primarily is centered around steel. We continue to take steps in this area to protect our supply chains and build in flexibility where possible, recognizing the volatile operating environment. In summary, we expect our key end markets will improve in the second quarter as we enter the heavier construction season for our customers. And as you would expect, we will monitor demand drivers as the balance of the year unfolds and focus on what we can control maximizing opportunity in front of us. A reminder of our investment thesis can be found on slide 17. In summary, the four key pillars of value creation remain unchanged. We've repositioned our business portfolio, which allows us focus on investment in our highly profitable growth platforms of rail technologies and precast concrete. Our capital-like business model drives free cash flow and economic profit generation with longer-term demand, both expected from domestic and infrastructure investment. We continue to employ a disciplined approach to capital allocation to maintain flexibility while driving shareholder returns. And lastly, we remain confident in our strategic and and into the future. I'll wrap up today's call by covering our 2025 financial guidance on slide 19. First quarter results were down from last year's exceptionally strong start, but the first quarter is normally slow, and we entered the second quarter with a strong backlog, improved profitability mix, and favorable demand drivers in our key end markets. The second quarter results are expected to be substantially better than the first quarter, and we expect to realize near-term sales growth and profitability year over year, as early as the second quarter. As a result, despite the volatile and uncertain macro environment, we are maintaining our 2025 financial guidance as we continue to remain confident in our ability to deliver results within our guidance for the year. As I mentioned earlier, we remain optimistic that previously announced government funding programs for infrastructure investment will remain largely intact, and our 2025 guidance includes knowing that we will revisit our guidance as appropriate as these market demand drivers and broader operating conditions become more clear for the balance of the year. Thank you for your time and continuing interest in Elby Foster. I'll turn it back to the operator now for the Q&A session.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. You'll then hear an automated message advising your hand is raised. We also ask that you please wait for your name and company to be announced before proceeding with your question. One moment while we take the first question. And our first question today is coming from the line of Julio Marrero of Sudoti. Your line is open.

Great, thanks. Hey, good morning, John and Bill. Thanks for taking questions.

Hey, I'm Julio.

Hey, so I wanted to start on the rail technology and services segment. You know, I appreciate the commentary you gave about the lower year-over-year volume and the impact that had on the first quarter and how the rail products business unit was down year-over-year against the strong prior year quarter in the first quarter. It would seem that the second and third quarter would also be tough comparable, so I was hoping you could talk about how you would have us think about rail products volumes sequentially here in the second quarter, and should we expect rail products volumes to also be down in the second quarter on a year-over-year basis?

Yeah, thanks, Julio. Thanks for your question today. And, you know, we're a seasonal construction company, so we're looking for actually a very big Q2 and Q3. And this is where we really feel good about maintaining our guidance for the year because we really picked up some nice orders entering Q2. And the mill and our supply channel partners are ready to perform. So we're, contrary to maybe your thoughts, we're looking at big Q2 and Last year wasn't the best Q2 for us, so we're looking to put a number on the board here and show some good activity here and profitability as well in Q2.

And rail products will be a big piece of that. Great.

Very encouraging there. It was good to see that backlog growth in rail here in the quarter. Can you speak to the mix of that backlog growth?

Yeah. I've mentioned it and Bill did as well. I can have Bill give the exact numbers again. Even though we were down on the real product side, to be clear, it was just the distribution side. A reminder, investors and viewers, that a big part of that real distribution business flows through the government, about 82% of it. That's where we saw a little bit of a pause in the first quarter. We're seeing that break free now because the nice thing about the rail space is They need to replace the rail, right? These things can't just sit there and not be replaced. So that work is beginning to come. But our TTM business, our condition monitoring business, is really, really doing well, including the FM business. And that's where we're seeing even the larger profit margins as well and the opportunity to really get some nice growth, not just on the quarter, but a year-over-year comparison. Bill, maybe you could... you know, highlight what those numbers were again?

Yeah, for the rail segment, just looking at the year-over-year growth and backlog, we saw about 22% growth in rail products. Friction management was up about 71% on a year-over-year basis. So that, again, speaks to the improving mix within the backlog. And then, importantly, we saw a pretty large decline in the U.K., portion of the backlog, which was down about 53% on a year-over-year basis. And as you know, that market's been challenged for quite a while, and we've been scaling back our initiatives there. So all of those moves give us confidence that we're going to see improving profitability mix on the rail portfolio. And as long as we expect those government programs remain intact, the volume should be there that would follow that next improvement as well.

Very helpful there. And then dovetails into the last question for me, which is just on the friction management piece, the growth and the backlog and the up sales in the quarter here. Just speak to what's working well on that friction management piece and if you're seeing any share gains.

Yeah, we're picking up new work and new customers and new geographies. And our service team is performing extremely well. So we feel very good about our installed base as it relates to the lubricators and then the amount of consumables that's now entering North America as well as outside of North America is something we have never seen before. So we're feeling very good about that business. Our guy leading the business, Jason Bolin, is doing just a fantastic job. He's also done a great job, you know, we're also in Canada. Great job of managing the relationships in the business. We talk about tariffs, and this guy in that group is working very well managing what's in front of us related to the ongoing tariff threats. And I'm very proud of what that group is doing, and our customers are getting the benefit of a very good product and service.

Very good. I'll pass it on, and best of luck in the second quarter.

Thanks, William.

Thank you. One moment for the next question. And the next question will be coming from the line of Liam Burke.

Good morning, John. Good morning, Bill. John, typically if there's a potential economic or national economic slowdown, the rails tend to see lower traffic volumes, but That's when they take advantage of slower volumes and step up capex. Are you getting any kind of feel for increased capital expenditures on rail projects?

You know, they don't come out and actually say that, but that's exactly what we're seeing. That's where this backlog and new orders that we're seeing is coming from. This is maintenance and additional capital work that they maybe would not have done. They're not necessarily adding capacity, but they're showing up and hardening their So it's exactly right.

Great. Thank you. And on pipe coating, orders were up. The sales were – were the sales numbers seasonally – affected seasonally, or is that just project-based and just general lumpiness?

Yeah. You know, I kind of shared with the – I think earlier in the year we talked about with the new administration that we're probably going to see this thing break free, and we have. And we're very pleased with the order intake. We've hired a lot of people, somewhere around 50 people for this business. We're running close to capacity right now. We will be at full capacity in the second quarter. So we're seeing a very strong year. In fact, I think we're looking at multiple years of restoring that profitability of that business. Now, remember, we have two businesses. We're in line quarter, and we have special coding as well. Both businesses have very large opportunities in front of us, similar to what we've seen maybe six, seven years ago. So we're feeling very, very good about the outlook of those businesses. Bill, you want to add anything to that?

Yeah. The only thing I'd highlight is the quarter itself in terms of reported results, the coatings business was down a tick. We had a pretty large order that we had received at the end of the previous fiscal year That burned out in Q1 of last year. So the first quarter was a little soft in terms of volume, but as John mentioned, we ended up having a 51% increase in the backlog based on the order intake level that we saw in Q1, and we see that continuing on for the rest of the year.

Thank you, John. Thank you, Bill.

Thanks, Leah.

Thank you. One moment for the next question. The next question is coming from the line of Christopher Sake of Singular Research. Your line is open.

Morning, Chris.

New orders and infrastructure. What are you seeing there? What's leading to the improvement?

Yeah, so we mentioned it. Q1 order rates of 35%. Precast is just doing extremely well. You know, our strategy was continue to double up, double down on what we're doing in precast and with our, you know, our expansion and growth and new product lines as well as our new acquisition. Well, that's not so new anymore. It's about, it's approaching three years old, but the penetration we're seeing in the East Coast and down in Carolinas and now with our new operations starting up in Florida, we're just really pleased with what's going on in our precast business and we're looking for that really to It really shored up what we had in the first quarter, honestly, with the distribution being down. We're looking for them to have sequentially a couple of really nice quarters put together here. The nice thing about the business is the Great American Outdoors Act, which is really funding for our original legacy business, the building side. We haven't seen any pullback in that as well. Our order rate coming in related to the legacy of precast buildings is is as good if not better than it was even last year. So we're looking at a fantastic year in that business, in all of infrastructure, which is really being led by pre-cats.

Okay, great. Can you talk about potential acquisitions? What are you seeing out there? Is it more of a challenging market now with the talks of the tariffs?

You know, it is, but we really are mindful of our strategy. We've got a bunch of organic opportunities and growth that we're trying to manage. So we're busy hiring people, we're busy looking at adding shifts, and we're busy bringing in technical and sales people to make things happen, including service operations and organizations. So we're not out really actively looking for acquisitions because we don't need them. what we have in front of us for the year and the guidance that's within our ability to perform. We just need to execute. Now, if it makes sense to do some smaller tuck-in type things, we're, of course, always looking at those things, but it's really not front of center or front of mind for us right now, Chris.

Okay, great. Thanks for the answer. Yes, thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment for the next question. And our next question is coming from the line of Justin Bergner of Gambelli Funds. Your line is open. Good morning, Justin.

Good morning, Jack. Good morning, Bill. A few questions here. You mentioned that weaker mix was a driver of slightly lower gross margins in your rail segment. But I guess I didn't necessarily follow that, given the pieces you broke out and the strength and the friction side versus the rail product side.

Okay.

Go ahead, Bill, please.

Yeah. So the volume impact on rail products was a part of it, just given the cost structure within the overall business. But then we also had our TTM business, which is the total track monitoring component of the business, had a pretty strong start to the year last year as well. So their volume decline was also a contributing factor. But if you look across the entire rail segment, the largest impact overall was by far the rail distribution volume. And, you know, the TTM piece, again, You know, we're seeing nice bidding activity there. So that was more of a temporary factor than anything.

Okay, that makes sense. Are you seeing any benefit or impact from higher steel prices in your rail products business as it relates to, you know, dollar or percentage margin?

Yeah, good question. So, you know, back in the first Trump administration, right, with the tariffs in 232 and steel, we benefited from that because as the steel input costs rose, we passed out of the marketplace today back then. And we're going to see the same thing. We're seeing the same thing actually this year. As things continue to move forward and prices go, we'll be able to pass those on. You know, coming out of COVID, we got really nimble and really agile where we're able to start driving market price. So I think we're set up very well as a, the tariffs continue to, you know, how real they are, we'll be ready to make sure that we pass those out and get paid for them.

Okay. That makes sense as well. In terms of the funding being released, is that comment mainly relevant to the rail products business as you look at the rest of the year, or are there other businesses?

Yeah. Well, specifically rail distribution. So, you know, behind rail distribution is the transit business, and behind the transit is government authorities. That's how it all flows. To put this in perspective for you, we wouldn't be talking about a down quarter if we just shipped two or three more trains. That's how close it is, and that's how lumpy it is, and that's what kind of construction work we do. So instead of those two or three trains being in Q1, this is, again, providing rail to the transit authorities. They'll now go on Q2. So we'll see that pick up. And it is all about the government programs, it's all about government funding, and it's about, you know, just being a little slower to the start of the year with all the things going on in Washington. But we're seeing that change here pretty quickly.

Okay, thank you. Lastly, could you comment at all on what you're seeing in April in terms of sales and orders, you know, versus the first quarter qualitatively or quantitatively?

I always love questions like that because it's, you know, we don't typically talk about that, but I'm not discouraged, let's put it that way, for where we're at sitting here in April. And when we talked and I closed up today's speech about, you know, giving confidence that we're going to get our year in guidance, that's mindful of what's going on in April.

Okay, do you still think the upper half of the guidance is possible based on where we stand today?

Yeah, Justin, we're lining up to our guidance. So we'll see where all the chips fall. I will tell you our operations are ready to perform. So as the work continues and things get freed up here, we're ready to perform and ready to deliver.

Okay, thanks so much.

Thank you. Thank you. And this does conclude today's Q&A session. I would like to turn the call back over to John Kessel, CEO, for closing remarks. Please go ahead, sir.

Thank you very much. Thank you for joining us today. You know, it's one of these things that you get through the quarter and you get to the next quarter. And that's how myself and the management team are looking, you know, put that behind us and really focus on what's in front of us right now because we have much to do. to really be driving the volumes that we see in front of us and do it the right way to take care of our customers, to make sure that we run a safe and good quality organization and drive shareholder return. And we're looking to continue that through Q2 and the balance of the year. So thanks for your time today, and we look forward to talking to you after the close of the second quarter. Take care.

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