L.B. Foster Company (FSTR) Q4 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to L.B. Foster Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference may be recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Stephanie Listwak, Investor Relations Manager. Please go ahead.

Thank you, operator. Good morning, everyone and welcome to L.B. Foster's fourth quarter of 2021 earnings call. My name is Stephanie Listwak, the company's Investor Relations Manager. Our President and CEO, John Kasel; and our Chief Financial Officer, Bill Thalman will be presenting our fourth quarter operating results, market outlook and business development this morning. Sean Reilly, the company's Corporate Controller is also joining us this morning. We'll start the call with John providing his perspective on the company's fourth quarter performance and updating you on significant business matters and market development. Bill will then review the company's fourth quarter financial results. John will then provide his perspective on company outlook and his closing comments. We will then open the session up 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 in the earnings presentation. Some statements we are making are forward-looking and represent our current view of our markets and businesses today, including comments related to COVID 19. 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 read our disclosures and reconciliation tables provided within today's earnings release and within our accompanying earnings presentation carefully as you consider these metrics. For the purpose of helping you understand the underlying performance of the company, we will be referring to adjusted EBITDA, adjusted net income, adjusted diluted EPS, net debt and adjusted net leverage ratio during the presentation today, as reflected in the reconciliation tables included in the appendix to the earnings presentation. Additionally, at September of 2020, we announced the equity sale of our IOS Testing and Inspection Services division. As a result of this divestiture, we have presented the Testing and Inspection Services business as a discontinued operation including within the earnings release and presentation and have recast prior periods to reflect this change. The comments today will be focused on our results from continuing operations. Further in September of 2021, we announced the asset sale of our Piling Products division. Due to the nature of the sale, we have presented the Piling Products within continuing operations in our financial statements but we have adjusted certain metrics, as indicated in our presentation slides to reflect the sale for purposes of an even comparison. So with that let me turn the call over to John.

Thanks Stephanie and hello, everyone. Thank you for joining us today for our yearend earnings call. Before I jump into prepared remarks, I'd like to introduce Sean Reilly, who joined us as our Corporate Controller and Chief Accounting Officer in early January. Sean brings a valuable contribution of corporate and operational finance experience to our organization, has already contributed to our strategic transformation. Welcome, Sean. During today's call, we will recap significant accomplishments we achieved in 2021, establishing a solid platform for transformational growth in the years to come. It should be highlighted these accomplishments are achieved during a period of unprecedented operational and market challenges that our teams continue to navigate as we transition into 2022. We are continuing to manage the day-to-day challenges of running the business in a turbulent environment while also focusing on our strategic execution roadmap. Slide 5 reflects an overview of the key accomplishments at 2021. Of course, the cornerstone accomplished for us was the development and unveiling of a refreshed enterprise corporate strategy. I'll cover this in more detail in the coming slides. In August, we amended the expanded and extended our revolving credit facility to substantially improve our access to market competitive capital to execute our strategy. At September, we completed the sale of our Steel Piling Products business. The sale of Piling, which was a working capital intensive business that has become commoditized over time, generated approximately $23 million in proceeds that we used to pay down our revolving credit facility. These proceeds coupled with the benefits of the amendment to our credit facility provided greater flexibility to fund accretive bolt-on acquisitions aligned with strategic roadmap, as well as investments in organic growth initiatives in our core growth businesses. We should also highlight the passage of the $1.2 trillion Infrastructure Jobs Act in November 2001. This funding initiative along with other spending programs passed over the last few years, provide much needed resources to repair, rebuild and expand U.S. transportation infrastructure, and national parks for years to come. This strategy coupled with the prospects for significant multi-year project and program funding in our core markets should lead to improving shareholder value. On Slide 6, I'll cover some of the key messages from our Investor Day event in December of ‘21. In particular, primary elements of Refresh Strategy. We are aligned on executing our strategy to transform L.B. Foster by focusing on growth platforms in core markets, and transitioning to a technology-focused infrastructure solutions provider. By establishing growth and returns platforms within our portfolio, we created a clear roadmap to drive Shareholder value by focusing investment, on scalable core businesses with market headroom for growth and leveraging our differentiated offerings, specifically rail technology, where we are entering some adjacent markets and in precast concrete. The growth plan for businesses will be funded through existing available resources as well as a strong cash generation from a returns business' platform. On Slide 7 reflects the eight playbook items that make up our strategic transformation roadmap. In alignment with strategy, we are focusing resources on the businesses in our growth platform where we see the greatest market headroom. We're also driving capital efficiency and maintaining our competitive advantage in our returns businesses. We will be systematic and relentless in executing our strategy and plan on providing quarterly updates to all stakeholders on our progress. Slide 8 provides an overview of our new segment reporting structure. Our reporting segments have been established in alignment with our refreshed corporate strategy and the corresponding management organization structure established to execute the related strategic roadmap. We will have three reporting segments going forward. Rail Technologies and Services, Precast Concrete Products, and Steel Products and Measurement. Slide 8 provides an overview of each of the segments financial results for 2021 as well as their primary product offerings. The most significant change in reporting segment is the establishment of our Precast Concrete Products as a reportable segment. This segment was previously included in the Infrastructure Solutions Segment. The Steel Products and Measurements segment represents the balance of the previous Infrastructure Segment. Rail Technology Service is largely unchanged. So, I'll now turn it over to Bill who will spend some additional time on the performance of our segments with his financial review. Bill?

Thanks, John. And good morning, everyone. I'll begin my comments by covering the consolidated highlights of our fourth quarter on Slide number 10. Note that the schedules in the appendix provide more detailed information on our financial results. And the comments on this slide are intended to hit the key takeaways for the quarter. Also, our Steel Piling business was divested in September of last year and is not being treated as a discontinued operation. Accordingly, the amounts presented today include the piling business within the Steel Products and Measurement segment unless otherwise noted as adjusted for compatibility purposes. Fourth quarter sales were $113 million, down $2.6 million or 2.3% from Q4 of last year. However, adjusting for the piling divestiture, sales were up 8.8% year-over-year. Despite the sales growth, gross profit and gross profit margins were both down in Q4 due to the Piling divestiture coupled with unfavorable sales mix, raw material and labor inflation, and labor supply chain and lingering COVID-related disruptions. Gross profit margins were down 190 basis points on a reported basis and down 240 basis points excluding piling. Fourth quarter adjusted EBITDA declined $3.7 million to $3.2 million, with $1.3 million of the decline due to the Piling divestiture, and the balance due to the lower gross profit in the remaining business coupled with higher SG&A cost primarily related to increased incentive expense, including $700,000 in greater long term stock incentive credits last year. We finished 2021 with a solid quarter of cash generation with $6 million of operating cash flow translating into a $5.2 million reduction in our net debt during Q4, which stood at $21 million as of year-end. Fourth quarter orders totaling approximately $95 million were a bit softer than our more recent quarterly run rates, but we finished the year with a healthy backlog of approximately $210 million and we began to see orders rebound in early 2022. I'll cover orders and backlog trends by segment in a few minutes. I'll now review the quarter results by segment starting with Rail Technologies and Services on Slide 11. Fourth quarter rail segment revenue increased $3.5 million year-over-year, largely driven by increased volumes within global friction management and technology services and solutions, as customer demand improved and COVID-related disruptions continued to ease. Rail Product revenue was up to a lesser degree with supply chain and labor disruptions impacting order book fulfillment. Despite the improved sales gross profit margins were down 240 basis points due to raw material and labor cost inflation, coupled with supply chain disruptions and unfavorable business mix, primarily in the Rail Products business. New orders and backlog levels reflect softer order intake in Rail Products largely due to timing. We expect Rail Product orders to improve in early 2022. As reflected on Slide 12, Precast Concrete Products segment revenue was essentially unchanged year-over-year at $20 million. However, gross margins were down 390 basis points due primarily to higher input costs as well as labor and engineering disruptions impacting production and absorption. Orders and backlog remain robust in our Precast segment. And we expect this favorable trend to continue with the announced government funding programs. The Steel Products and Measurement information on Slide 13 has been adjusted to remove the impact of the Piling divestiture for comparability purposes. Overall revenues and gross margins were up in Q4 primarily due to improved volumes in bridge products, threaded water well pipe and fluid measurement systems although, margins in bridge products were somewhat weaker due to higher steel costs. Order rates and backlog are relatively stable, albeit at the press amounts compared to pre pandemic levels. I'll now cover our full year results reflected on Slide number 14. 2021 revenues were $513.6 million compared to $497.4 million last year, a $16.2 million increase or 3.3%. The increase was also 3.3% adjusting for the effect of the piling divestiture. Gross profit decreased $8.7 million from the prior year comparable period and the 16.8% gross profit margin for the year was a 230 basis point decrease from last year. The decline in gross profit margin was similar adjusting for the effect of the Piling divestiture. While sales growth improved in the second half of the year, gross profit margins declined due to the challenging operational and inflationary environment. Adjusted EBITDA totaled $18.7 million down $13.3 million, due primarily to an $11.8 million decline in coatings and measurement, coupled with inflationary and disruptive operating conditions in other parts of the business. SG&A costs were also higher year-over-year primarily related to personnel-related incentive costs, including $1.1 million in higher credits from long term incentive and profit sharing plans last year, coupled with the consulting fees associated with our strategic assessments. Operating use of cash was $800,000 for the full year, reflecting the overall lower profitability of the business primarily in coatings and measurement, coupled with increasing working capital needs as project completion timelines and order fulfillment cycles extended. Capital expenditures for the year were $4.6 million, resulting in free operating cash flow of negative $5.4 million for the full year. The $23 million in proceeds from the Piling divestiture were used to reduce borrowings under our revolving credit facility, and during 2021 net debt was reduced by $17 million. Favorable order trends in Technology Services and Solutions, Precast Concrete and threaded products were matched by softness in rail products, bridge and coatings and measurement. I believe it's important to reflect on where we are as an overall business given the significant challenges, we faced over the past two years. We highlighted in our releases throughout 2021 that the downturn in the midstream energy markets since the start of the pandemic has had a significant adverse impact on our energy related businesses. Slide 15 highlights that our challenges have been primarily isolated in this portion of our business. In fact, our remaining business has been fairly resilient during this challenging time when the impact of coatings and measurement is excluded, the sales and profitability of the non-energy related business is nearly back to levels seen in 2019 immediately before the pandemic. Despite these challenges, we continue to pay down our debt, improve our credit metrics and expand our liquidity over this two-year time period. This has given us the financial flexibility to execute our strategy as the pandemic impacts continue to abate and growth opportunities are identified. The improvements we've made in our liquidity and credit metrics are reflected on Slide number 16. Over the past four years, we've systematically reduced our debt and improved our credit metrics, with the adjusted net leverage ratio down to 1.1 times as of the end of 2021. As a result, we have nearly $109 million in available funding to execute our strategic plan, which includes both organic and inorganic growth opportunities. We are still anticipating $8.5 million in federal income tax refunds. And we have approximately $90 million in federal net operating loss carry forwards that will help to reduce our federal tax burden for the foreseeable future. I'm not going to speculate or comment on when the outstanding tax refunds will be received, other than to say that they are delayed and should have been received by now. As a reminder, we continue to leverage our capital light business model, with capital spending and working capital needs around 1% and 20% of sales respectively. My closing comments will be on Slides 17 and 18 covering the orders, revenues, and backlog by business. The book-to-bill ratio is on Slide 17 reflects the strength we've seen in the Precast Concrete business segment, partially offset by a somewhat weaker trend in Steel Products and Measurement, and Rail Technologies and Services. As previously mentioned, the lower order rates in Rail Technologies and Services in Q4 were attributable to the rail products business. And this is expected to return to the run rates achieved in the first half of 2021. And lastly, our consolidated backlog on Slide 18 reflects the robustness of the Precast Concrete business over the last several years, which has more than offset the decline experienced in Steel Products and Measurement. Our yearend backlog remains above pre-pandemic levels as adjusted for the Piling divestiture, despite the temporary softness in rail products orders in Q4. We remain focused on addressing the operational and supply chain challenges impacting our order fulfillment, which should help us build momentum as we move throughout 2022. Thank you for your time today. And I'll turn it back over to John for his closing remarks.

Thanks, Bill. Please turn to Slide 20 where I’ll start my closing remarks with a brief overview how we see the key end markets developing in the coming quarters. As previously disclosed, our business benefited from significant government funding of infrastructure projects in the past. And the funding levels approved over the last two years are greater than we've ever seen before. While it's difficult to predict the magnitude of the impact this funding will have on our markets and demand for our products, we're optimistic we will see improving demand. One of the early favorable signs of level activity we're seeing in our Precast Concrete Products where the order book has increased over 50% during 2021. And while pursuing alternative markets and applications for our Coatings and Measurement Businesses, we do not anticipate any meaningful recovery for the foreseeable future. Bill highlighted the key inflationary and operational issues we faced in the latter part of 2021. Like many of the industrial companies, we had been adversely impacted by labor and raw material inflation, as well as supply chain service partner and lingering COVID-19 related disruptions during the latter part of the year. These factors adversely impacted our ability to execute on our order book and reduce operating margins. We continue to focus on actions to mitigate higher product input and delivery cost, including increasing prices where possible. This will continue to be our focus moving into 2022 as many of our commercial contracts are renewed. We're also taking steps to shore up our resources needed to stabilize manufacturing in order to fulfill. We expect margins to improve in 2022 as mitigation actions take hold, although current operating environment remains challenging. In closing, 2021 has been both a challenging yet exciting year for L.B. Foster team, but we started 2022 by building momentum. Our team is energized by a powerful combination of renewed strategy, and a process for significant multiyear funding of projects and programs in our core rail and infrastructure markets that should translate to improving shareholder value in the coming years. Lastly, our employees around the world are key to our future. I would like to thank all of them for their dedication, support, as we continue to keep our world moving. Thank you again for your interest in L.B. Foster. I will now turn it over to the operator for the question-and-answer session.

Thank you. [Operator Instructions]. And our first question comes from the line of Alex Rygiel with B. Riley. Your line is open. Please go ahead. Alex, your phone might be on mute.

It was. I apologize for that. Good morning, John and Bill and welcome, Sean.

Good morning.

Good morning, Alex.

Couple of questions here. First, new orders in rail were weak. You mentioned timing. Can you expand upon that just a little bit?

Sure, Alex. A lot of these are significant projects that we're seeing. So they're a little lumpy as they come through our pipeline. And so, we did see a little bit of a tail off here in the balance of the year, but nothing to be alarmed about.

And is it safe to assume that the large project sort of bid opportunity is growing in 2022 versus 2021?

I think that's a fair statement. The activity, our quoting activity has been very, very robust. So we are I wouldn't say we're seeing the infrastructure stimulus yet. But there's a lot of good works that are they're looking to get done here in the first quarter into the half year mark on the rail side, specifically, both here and abroad for that matter.

And from a competitive standpoint, is there any reason to believe market share gains could be had or losses could occur?

It’s a little early to call on that one. We would hope, I think we've done a really good job of solidifying our -- especially between Q3 and Q4 really stabilizing our factories, really shoring up our supply chain, and really putting ourselves in extension of our customer. So, I hope that gives us an advantage going forward. But time will tell.

Sure. And then any guidance as it relates to sort of first quarter indoor sort of full year 2022 that we can kind of think about and model for net sales or EBITDA?

Well, we don't give guidance. And so we're going to fall short of probably your expectations of what you're looking for. But I will tell you, again, the work that we put together between Q3 and Q4, and the bidding activity we had and the strong order book we ended the year, I think gives us as I completed the presentation really gives us the momentum heading into 2022 that we're looking for.

That's great. Thank you very much, John and good luck.

Thanks, Alex.

Thank you. [Operator Instructions]. And our next question comes from the line of Chris Sakai with Singular Research. Your line is open. Please go ahead.

Hi, good morning. Just wanted to get an idea -- I wanted to get an idea about what are the main growth drivers for the Precast Concrete business and the growth in the backlog?

Yeah, so again I mentioned the 50% growth last year right in the order book. That's really exciting. So, a lot of that is our new operation in Boise that’s really came online very strong with the LarKen acquisition that we made that brought us into a little more industrial type products between manholes and risers. So, we're seeing some really nice order entry and activity there, as well as the great American Outdoors Act that we seek the funding appropriations that have been now in place for probably 18 months. So, we're seeing quite a bit of work that's coming through that legislation. So, it's been very good for us, very robust.

Okay, great. And just one question on coatings and measurement. Is it fair to say, as the price of oil keeps climbing, would we start to see more orders in coatings and measurement?

Well, I would love to see that correlation. We haven't seen that to-date. So, a lot of that is really what's going on in the dynamics of the midstream energy market right now. So, I will tell you, our coating activity has picked up in our coatings business. But we're still way off where we've been and we shared that with you today. So we don't see much of that changing in the near future.

Okay, all right. Well, great. Thanks.

Thank you. [Operator Instructions]. I'm showing no further questions. And I would like to turn the conference back over to John Kasel for any further remarks.

Thank you, Michelle, and thanks for everybody participating today. And I'd like to call out a shout out to Mr. Bill Thalman who is, today's the one-year anniversary of him joining the company, and I really appreciate everything he's done. We mentioned earlier how much work we got done in 2021. And how excited and poised we are for shareholder return in the future. And Bill has been instrumental in putting the pieces together to make that happen. And the results that we hope to see in the future as well. So thanks Bill, for all you're doing and we have much work to do. But we're off to a good start and your accomplishments have been fantastic.

Thanks, John. Appreciate it.

All right. Thank you everybody for joining us today and we look forward to catching up with you after the Q2. Take care and be safe.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.