L.B. Foster Company Q2 FY2025 earnings call

Key drivers include return to sales growth in Q2 with revenues up 2% y-o-y, led by Infrastructure segment sales up 22.4% (Precast Concrete up 36%). Adjusted EBITDA increased 51.4% despite modest sales growth. Net debt decreased to $77.4 million, gross leverage 2.2x. Financials showed net sales grew 2% y-o-y, gross profit up $0.4 million but margin down 20 basis points. SG&A costs decreased $2.4 million. Cash provided by operating activities was $10.4 million. Segment details: Rail revenues down 11.2%, margins 19.9% (down 100 basis points); Infrastructure net sales up 22.4%, margins 23.3% (up 40 basis points).

Rail: Second quarter revenues were $76 million, down 11.2% due to delayed order development and reduced activities in the U.K. Global Friction Management sales were up 17.2%. Rail margins were 19.9%, down 100 basis points, but excluding the AMH exit charge, margins were up 40 basis points. Rail orders decreased 2.3% vs last year but increased 37.3% sequentially, and backlog increased 42.5% during the quarter. Infrastructure Solutions: Net sales increased $12.4 million or 22.4% due to Precast Concrete up 36%. Gross profit margins improved 40 basis points to 23.3% due to higher sales volumes in Precast and improved margins in Steel Products.

Revised full year guidance is slightly lower due to Rail segment H1 performance. Midpoint assumes 25.1% increase in adjusted EBITDA on 2.7% sales growth for 2025. Second half of 2025 assumes 42.8% increase in adjusted EBITDA on 14.3% sales growth. Free cash flow midpoint outlook reduced slightly due to Rail working capital timing.

U.K. business challenges including rightsizing and impact on TS&S backlog; tariffs could potentially impact supply chains though not significant thus far.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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?

Q: 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.

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

Q: On the guidance, 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.

A: 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.

Q: 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?

A: 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.

Q: 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.

Q: 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?

A: 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.