L.B. Foster Company Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Key Drivers: The company achieved modest sales growth for the second consecutive quarter, with Infrastructure sales up 4.4% led by a 12.7% increase in steel products. Rail revenues were soft due to U.K. downsizing and timing of rail distribution sales. Exceptional cash generation of $29.2 million from operations reduced net debt to $55.3 million, and the company repurchased approximately 184,000 shares. Elevated backlog positions the company for a strong Q4 with an expected 25% sales growth.
• Segment Details: Rail orders increased by 63.9%, with TS&S orders up $25 million due to a large multiyear order in the U.K. Infrastructure net sales rose 4.4%, but gross profit declined due to unfavorable mix and higher costs. Year-to-date net sales were down 5.7%, but adjusted EBITDA was $25.4 million, a 3.5% decrease from the prior year.
• Market Developments: Tariffs had minimal impact on costs, and the federal government shutdown did not severely affect business immediately. Improved rail demand with federal funding, Rail friction management sales up 12.3%, Infrastructure precast backlog solid, and Steel Products sales up 13% (with pipeline coatings up 77%) were noted as key developments.

Segment Performance

• Rail Segment: Third quarter revenues were $77.8 million, down 2.2% due to order delivery timing and lower demand in the U.K. Rail product sales decreased 5.9%, while Technology Services & Solutions sales fell 5.3%. However, total track monitoring sales surged 135.1% and global Friction Management sales rose 9%. Rail orders increased 63.9%, and backlog grew by $51.6 million, with Rail Products contributing 59.9% of the increase.
• Infrastructure Solutions Segment: Net sales increased by $2.5 million or 4.4% due to growth in steel products. Despite this, gross profit declined by $1 million as margins dropped 260 basis points due to unfavorable sales mix and higher production costs. Net orders decreased by $14.9 million, but infrastructure backlog stood at $107.2 million, with shippable backlog up approximately $6 million compared to the prior year.

Guidance

• Q4 Expectations: The elevated backlog is expected to translate to approximately 25% sales growth in Q4, with both segments anticipated to grow. The midpoint of adjusted EBITDA for Q4 is expected to be up 115% on the back of 25% sales growth.
• Outlook: The company anticipates a strong finish to 2025, with backlog and orders positioning for growth. Strategic growth platforms such as total track monitoring, friction management, and precast are performing well, supporting the growth outlook.

Risks

• Federal Government Shutdown: Potential delays in project and delivery timelines if the shutdown continues into Q4 or beyond could impact Q4 results.
• Order Cancellations: Infrastructure net orders declined due to the cancellation of a $19 million Summit Protective coating order, affecting backlog levels.

Question and Answer

• Q: Talk about guidance and hitting sales and EBITDA guide, assumptions on government shutdown. A: John Kasel stated there is no significant immediate impact from the government shutdown, funding is flowing, and with a book-to-bill ratio of 1.8:1, the company is confident in hitting the guidance.
• Q: Drivers of total track monitoring sales growth and sustainability. A: John Kasel mentioned total track monitoring is part of strategic growth platforms, with good customer acceptance, and friction management and precast are also performing well, supporting sustainability.
• Q: Free cash flow guidance and rail deferrals impact. A: John Kasel noted rail deferrals may shift working capital to 2026, but the company focuses on cash generation and has strong cash flow from operations.
• Q: Multiyear order in U.K. contrast with deemphasized business. A: John Kasel explained the U.K. business is being right-sized, but the multiyear order provides stability and technology transfer to North America, contributing to long-term growth.
• Q: Summit order cancellation circumstances. A: John Kasel said the customer canceled the order, AIPCO notified L.B. Foster, and while the order may be resurrected, the company has ample work to sustain operations.