L.B. Foster Company - Q2 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. Welcome to L.B. Foster's second quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to turn the call over to Stephanie Schmidt of Investor Relations. You may begin.

Stephanie Schmidt (Investor Relations)

Thank you, operator. Good morning, everyone, and welcome to L.B. Foster's second quarter of 2024 earnings call. My name is Stephanie Schmidt, the company's Investor Relations Manager. 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 developments 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 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 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 read our disclosures and reconciliation tables provided within today's earnings release and within our accompanying earnings presentation carefully as you consider these metrics. With that, let me turn the call over to John.

John Kasel (President and CEO)

Thanks, Stephanie, and hello, everyone. Thank you for joining us today for our second quarter earnings call. July 21st, 2024, marked the three-year anniversary of my appointment as President and CEO of L.B. Foster Company. I thought I'd begin today's call by providing a recap of what we accomplished over the last three years. I took over as President and CEO in 2021, which was a year of significant change for the company. Our current chairman, Ray Betler, had joined the board in 2020 and helped us through a strategic reassessment of the business in 2021. With Ray's guidance, leadership, and support, the board and senior management team established a strategic vision and an operating playbook to transform the company into a technology-oriented global infrastructure solutions provider.

The cornerstone of the strategy was a portfolio assessment to establish our growth platforms, namely, Rail Technologies and Precast Concrete. These businesses would receive the investment funding needed to drive profitable growth in the business. The balance of the business became a returns platform. These businesses would be optimized for cash generation and, where appropriate, divested to generate additional proceeds to fund growth initiatives, both organic and inorganic. Over a three-year period, we completed nine strategic transactions. We sold off four non-core businesses and exited a commoditized bridge grid deck product line. These transactions generated cash, improved leverage, and eliminated distractions to our core groups. Proceeds from these divestitures were used to complete four acquisitions over the same time period, two in Rail Technologies in the United Kingdom and two in Precast Concrete in the United States.

In late 2023, we completed a restructuring of our UK business in response to a very challenging business conditions in the local market. More impactful, we just announced an enterprise-wide restructuring that, along with headcount attrition already achieved, should generate annual run rate savings of $4.5 million per year. I will come back with more on this topic in my closing comments. In summary, the impact flow of our transformation journey has been truly remarkable, as you can see in the results compared to 2021. Sales are up 6% due to the net impact of M&A. Adjusted gross margins are up 40-60 basis points, and the trailing twelve months Adjusted EBITDA is up 64%, translating to a 37.9% adjusted EBITDA leverage on the net sales growth achieved. Now, on to today.

As mentioned in our earnings announcement, the second quarter was a bit weaker than we expected, and there's some near-term uncertainty in our end markets, given the broader recessionary concerns in the domestic and global economies. While we believe we will return to profitability expansion in the second half, we thought it would be prudent to be a bit more cautious with our financial guidance for 2024, given some of the larger macro, macro drivers that could have a greater impact on demand rates through the end of the year. Despite the tempered outlook, the midpoint of our 2024 Adjusted EBITDA guidance represents an approximately 12% growth over 2023, a virtually flat organic sales growth.

We're focused on what we control, getting back to profit expansion in the second half and finishing 2024 strong, so we can continue to build momentum towards achieving our aspirational goals. Bill will now cover the detailed financials for Q2, and I'll come back at the end with some closing remarks on our markets and outlook. Over to you, Bill.

Bill Thalman (CFO)

Thanks, John, and good morning, everyone. I'll begin my comments covering the consolidated highlights of the second quarter on Slide seven. As always, the schedules in the appendix provide more detailed information on the financial results for the quarter, including certain non-GAAP measures discussed on today's call. As we've done in the past, we'll call out the impact of portfolio actions where applicable. For the second quarter, these impacts included last year's Ties divestiture and the bridge grid deck product line exit, with a combined impact of 1.5% lower net sales this year. Net sales for the quarter were down 4.9% in total, 3.4% on an organic basis, driven primarily by weakness in the Rail segment. I'll unpack the drivers on the segment slides in a moment.

Gross profit was down $1.7 million, with margins nearly flat with last year at 21.7%. Lower margins in rail were largely offset by improved margins in infrastructure. The improved margins within infrastructure were due primarily to the favorable impact of our portfolio actions, coupled with an $800,000 gain on the sale of an ancillary property in the quarter. Selling general and administrative costs increased $0.4 million over the prior year, due primarily to corporate legal provisions as well as professional service costs incurred as associated with the announced restructuring. Net income for the quarter totaled $2.8 million, unfavorable 19.4% versus the prior year quarter. The net gain realized on the property sale, as well as certain corporate legal costs, were excluded from Adjusted EBITDA.

Each of them were approximately $800,000 in the quarter. Adjusted EBITDA for the quarter was $8.1 million, down 23.8% versus last year, due primarily to lower gross profit, coupled with higher professional service costs associated with the restructuring. In line with our seasonal working capital needs, cash used for operating activities in the quarter was $5 million. These needs were somewhat lower this year due to the commercial weakness in the quarter. I'll provide some additional color on orders and backlog by segment later in the presentation. The bridges on Slide eight reflect the organic and portfolio-driven impacts on sales and adjusted EBITDA for the quarter versus last year.

The sales bridge on the left breaks out the impact of the business divestitures and isolates the organic sales decline of $5 million, which was primarily realized within the Rail segment. The EBITDA bridge highlights the profitability uplift year-over-year delivered from our portfolio work. This is despite the $2.2 million sales decline from these activities. The legacy business profitability is down due primarily to the Rail segment volumes and margins, coupled with corporate professional fees associated with the restructuring. Turning to sales and margin trends on slide number 9, the sales trend on the left reflects the strong organic performance we've delivered in recent quarters. Despite the softer second quarter, the trailing twelve-month organic growth rate was still 8.7%. Despite the lower second quarter sales, margins have remained resilient at a level above 21% for five straight quarters.

This achievement highlights the transformation of our business portfolio, as well as improved pricing and manufacturing execution across the majority of the business. We're confident in the long-term demand prospects for our end markets and believe we will see improvements once the macro uncertainty drivers begin to clear. In the meantime, we're focused on delivering strong profitability growth and margin expansion despite the short-term commercial headwinds. Over the next couple of slides, I'll cover our segment and performance in the quarter, starting with the Rail segment on Slide 10. Second quarter rail revenues totaling $85.6 million were down 6.6% from last year, including a 1.5% decline from the Ties divestiture. The 5% organic decline was driven primarily by lower volumes and softer market prices in the Rail Products business unit.

Rail margins of 20.9% were down 80 basis points year-over-year, driven by lower overall sales and margins within Rail Products. On a positive note, margins in the Global Friction Management and Technology Services and Solutions improved versus last year, including some recovery in our U.K. business. Second quarter rail orders increased $1 million year-over-year and up $4.4 million, excluding the impact of last year's Ties divestiture. Backlog of $114.8 million decreased $17.7 million from the prior year quarter, with the decline primarily within Rail Products and lower business activity in the U.K. Second quarter rail orders and backlog increased sequentially 39.7% and 33.4%, respectively. Turning to Infrastructure Solutions on slide 11, segment revenue decreased $1.2 million, or 2.2%.

However, 1.4% of the decline was due to divestiture and product line exit activity. Organic sales were relatively flat compared to the prior year. Gross profit margins were up 90 basis points to 22.9%. The improvement was realized within Steel Products, driven by portfolio changes executed over the last year, as well as the $800,000 gain on the sale of an ancillary property. Infrastructure orders were $54 million, down $13.8 million from the prior year quarter due to softer demand across the Steel Products business unit, primarily in Protective Coatings. Precast orders were flat year over year. Backlog totaling $135 million was down $22.6 million, $6.9 million due to the bridge product line exit. The balance of the decline was realized across the Steel Products business unit.

Precast Concrete backlog improved $2 million versus last year. I'll next cover our year-to-date results on slide number 12. Organic sales increased 5.5%, partially offset by a 4.9% decline from divestiture and exit activities. Organic sales growth was driven by the Rail segment as a result of the strong segment performance in the first quarter. Gross profit improved $1.2 million, including the $800,000 property sale gain in Q2, while gross profit margins of 21.4% improved 30 basis points. The improvement can be attributed to the business portfolio changes in line with the company's strategic transformation, coupled with overall higher sales volumes and favorable business mix realized in the Rail segment in the first quarter.

Selling general and administrative costs increased $1.7 million over the prior year due primarily to corporate legal provisions as well as professional service costs associated with the announced restructuring. Net income for the quarter totaled $7.3 million, favorable $5.9 million over the prior year, including $4.3 million in gains from ancillary property sales in 2024. The prior year included $3.1 million in losses on the divestiture of Chemtec and Ties. The net gain realized on asset sales and certain corporate legal costs were excluded from the 2024 year-to-date Adjusted EBITDA, which was $14 million, down $1.1 million, due primarily to higher selling and administrative costs.

Cash used by operating activities in the first half of 2024 was $26.8 million, driven by seasonal working capital needs and annual incentive and business insurance funding. I'll now cover our liquidity and leverage metrics reflected on slide 13. Second quarter net debt declined $2.5 million versus the prior year, while the gross leverage ratio increased 0.2 of a turn to 2.7x. This level of net debt was largely in line with our expectations, and we expect net debt will decline through the balance of the year. We also expect the gross leverage ratio to improve by year-end. Our normal working capital cycle typically results in strong cash generation in the second half of the year.

We expect free cash flow to range between $25 million-$30 million in the second half of 2024, with a gross leverage ratio closer to our longer-term target of 2x by year-end. While our updated free cash flow guidance reflects a more cautious outlook for cash generation in 2024, we remain confident in our ability to manage our leverage metrics at around 2x over the long term, given our capital-light business model. We plan to continue to prudently deploy operating cash along our capital allocation priorities, including continuing the execution of our stock repurchase program. Since the program's inception in February of 2023, we've repurchased about 204,000 shares of stock, representing approximately 1.9% of the common stock outstanding at an average price of approximately $19.50 per share.

On August 5th, 2024, our board of directors approved a modification to the program, which shortens its tenure from 3 to 2 years and allows the remaining $11 million authorization to be used through February 2025 without restriction. As a reminder, we're now down to $4 million owed to Union Pacific, with $2 million paid on August 1st and the remaining $4 million due in December. The U.S. federal NOLs should continue to minimize our cash tax burden for the foreseeable future. In summary, despite the softer outlook for cash generation for the full year, we believe the key drivers of strong, sustainable free cash flow are in place and should continue to improve through the balance of 2024 and moving into 2025. I'll next revisit our capital allocation priorities outlined on slide 14.

We continue to focus on managing leverage levels while opportunistically investing in organic growth opportunities we see in Rail Technologies and Precast Concrete. Our announced restructuring program should further enable investment in growth platforms, given the expected cost savings over the coming quarters. We're comfortable with gross leverage around 2x and believe we will be back near that level by year-end. Capital spending is expected to run at approximately 2.5% of sales on average, which is slightly higher than our historical levels due to investments in our growth platforms. As mentioned before, we continue to evaluate opportunities to return cash to shareholders through our stock repurchase program, and we plan to use this important capital allocation lever prudently, given the approved changes to the program.

We continue to consider small tuck-in acquisitions that can extend our product portfolio within our growth, growth platforms, and this is expected to become an increasingly important driver of our growth as we establish goals beyond 2025. And finally, we continue to consider a dividend as a capital allocation option as the prospects for stronger free cash flow improve, particularly in 2025 and beyond. My closing comments will refer to slides 15 and 16, covering orders, revenues, and backlog by business. The book-to-bill ratio over the trailing twelve months was 0.93:1, which reflects the lower order rates in both segments, coupled with strong order book execution and improved lead times. Q2 order rates improved in rail year-over-year, while the weaker demand across the Steel Products business drove the infrastructure decline.

Consolidated second quarter order rates did improve sequentially, 29.2%. Lastly, the consolidated backlog on slide 16 was down $40 million from the record-high levels last year, with both segments experiencing declines. The Rail segment backlog is down $17.7 million, or 13.3%. As mentioned in the past, order rates and backlog are susceptible to large swings, driven primarily by project order timing and the rail distribution business. In addition, backlog in our U.K. business is down $9.2 million, as we purposely scaled back our investment in this market until a clearer recovery path develops. On a positive note, the rail backlog is up approximately 30% versus the previous three-quarter average, indicating some favorable development. Infrastructure backlog is down $22.6 million, or 14.3%, with the entire decline due to Steel Products.

Precast Concrete backlog improved $2 million or 2.2%. The $24.6 million decline in Steel Products backlog was due to lower demand levels across the business unit, as well as a $6.9 million decline from product line exit activities. Despite the lower backlog level, we remain optimistic in the longer-term prospects for growth and demand across our portfolio, and expect this will translate into an improving backlog in the future once near-term macroeconomic conditions improve. In summary, we continue to remain optimistic about our 2024 outlook, despite some temporary headwinds experienced in the second quarter. Our revised financial guidance implies an expected Adjusted EBITDA growth rate of approximately 12% for 2024, with strong profitability, expansion, and cash generation in the second half.

We remain focused on finishing the year on a positive note and look forward to reporting on our progress next quarter. Thanks for the time, and I'll now hand it back to John for his closing remarks. John?

John Kasel (President and CEO)

Thanks, Bill. Please refer to slide 18 for an overview of our key business and market drivers underpinning our outlook. We continue to be optimistic of longer-term prospects for growth in our end markets, both for both segments, particularly given the continued emphasis on infrastructure investment. In 2023, we began to realize some project-related business from U.S. federal programs approved over the last several years, years, and we expect that trend to continue moving through the balance of 2024 and beyond. Transit ridership levels in the U.S. are back to pre-pandemic levels, and repair work on transit lines is relatively strong at this time. On the other hand, freight car loads within the domestic rail market are somewhat softer versus a year ago, which we believe is resulting in deferrals on project work for Class I, short line, and regional railroads.

The developing macroeconomic uncertainty may also be impacting demand in our served markets somewhat. The recent findings regarding the East Palestine train derailment highlight the opportunity for our Total Track Monitoring solutions... and we're seeing a nice increase in demand for those solutions year-over-year. As noted earlier, our U.K. business has shown some signs of recovery versus last year, and we believe market conditions have stabilized, and we're improving modestly, and are improving modestly in the in-country economic development center. Turning to our infrastructure markets, the CXT Buildings product line continues to benefit from record spending on recreational parks and campgrounds. This is funded by the Great American Outdoors Act. We expect this demand to remain robust through the balance of this year and into 2025.

Notwithstanding the short-term weather-related headwinds we saw in H1, the government's funding for road and bridge rehab projects, as well as robust regional, commercial, and residential real estate development, should bode well for our infrastructure segment over the longer term. In summary, overall prospects for long-term sustainable, profitable growth should remain strong in light of the infrastructure investment super cycle we expect for years to come. On slide 19, I'd like to emphasize the investment thesis for L.B. Foster, which is supported by four key pillars. First, we've taken the strategic steps necessary to transform our business portfolio, resulting in structural improvements in profitability that we delivered in 2023, and the execution of our restructuring program that we just talked about in 2024, is expected to also provide profitability improvement through the balance of the year.

Second, we believe we represent an infrastructure pure play, with multiple avenues for growth through multiple year investment programs that are clearly needed in our served markets. We're also investing in key organic growth initiatives designed to take advantage of the macro trends that are driving the need for infrastructure investment in our served regions. Third, our capital-light business model, coupled with steady profitability improvements and the completion of our Union Pacific settlement payments, Bill just mentioned, later this year, should provide a more favorable free cash flow outlook for the second half of 2024 and beyond. And finally, we have a disciplined capital allocation approach with multiple drivers that have been deployed and are creating value for our shareholders, as evidenced by our improved equity returns.

The recent amendment to our stock repurchase authorization provides us greater flexibility to deploy more capital to buy back stock should valuations remain attractive. Of course, Bill and I will remain prudent in our approach with leverage goals in mind. So in summary, we believe our strategy is sound, and our execution along these four pillars should deliver results, improving results through 2024 and beyond. I'd like to close our updates with a reminder on our aspirational goals for 2025. You'll find this on slide number 20. I began today's call with a recap of our progress since 2021. We clearly have made tremendous improvements in our business and are very proud of what we accomplished as a team in a very short period of time, and more importantly, in a very challenging environment.

We made some tough decisions along the way, including business divestitures and restructurings, that resulted in some good people leaving our organization. As I mentioned in my opening comments, we began restructuring the U.K. in the fourth quarter of last year, and we're seeing the positive benefits from those actions in this year's results. With the new human capital program, in line with their strategic roadmap, we're taking the necessary steps to enable investment in our growth platforms and drive resource deployment efficiency across the entire business. Of course, we are far from finished with what we set off to do in 2021. There's significant work for us to do to fully take advantage of the opportunities in front of us.

As you can see on this chart, we established our 2025 aspirational goals at the end of 2021, and we are focused on managing through the short-term uncertainty and getting back to growth in our profitability in the second half of the year. Delivering a strong H2 will help us build required momentum needed to deliver an exceptional 2025 and set the stage for continuing growth beyond. So with that, thank you for your time and continuing interest in L.B. Foster Company. I'll turn it back to the operator for the Q&A session.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Sakai with Singular Research. Your line is open.

Chris Sakai (Senior Equity Analyst)

Hi, good morning, John and Bill.

John Kasel (President and CEO)

Morning, Chris.

Bill Thalman (CFO)

Good morning.

Chris Sakai (Senior Equity Analyst)

I guess just a kind of a top-level question. You know, we've seen, you've seen some softness in demand in rail and coatings and steel. How are we supposed to think about this going into the third and fourth quarters? Do you see a rebound there?

John Kasel (President and CEO)

Yes. Thanks, Chris, for joining us today. Absolutely, we do. You know, we also got impacted by weather in the H1 too. So some of these delays and some of these things, you know, we're starting to get the volume through our factories. But, you know, as Bill and I talked about today, and you look at the year-over-year as well as sequential growth, we're looking at 29% H2 delivery versus last year in our EBITDA. So we're expecting quite a bit of volume moving through our facilities in the second half of the year.

Chris Sakai (Senior Equity Analyst)

Okay, thanks. And then I'm looking at the 2024 guidance for free cash flow. What were the main drivers now for break-even guidance as previously $12 million-$18 million?

John Kasel (President and CEO)

... So, I'll turn that over to Bill. But, you know, we got some—again, we got some movements going on a little bit. As we expected, a stronger Q2, and we're deferring some of that work into Q3, so we've got some working capital and some other things that are moving around. But in general, we still feel very, very good about our position and where we're going to end up the year as far as leverage, and really, and our balance sheet in general. Bill, you want to add a little more context to that?

Bill Thalman (CFO)

Yeah, yeah. Hi, Chris. The range previously was $12 million-$18 million, with a $15 million midpoint. You know, we obviously announced our restructuring. That will consume some cash. We'll get some savings from that as well, as outlined in the release. But the primary thing we're looking at is the timing of business in the rail business that is likely to push volume off to the latter part of the year. And as a result of that, we'll end up having a higher working capital requirement in the second half of the year that is likely to end up with a more tempered cash flow overall. Now, that's a full year cash flow.

So we had $31 million of negative free cash flow consumption in the first half of the year. We expect the second half to be $25 million-$30 million positive free cash flow in the second half of the year.

John Kasel (President and CEO)

Yeah.

Bill Thalman (CFO)

It's right around breakeven for the full year, but really strong expectations for the second half of the year.

John Kasel (President and CEO)

And of course, Chris, we, you know, we close out the year with our, our last installment of $4 million with Union Pacific payments. So, you know, we feel very good how we're going to end the year, more importantly, how we're going into 2025.

Bill Thalman (CFO)

And Chris, just one last item. I just want to highlight that, you know, obviously, the leverage metric was a little elevated here at the end of the quarter, 2.7x. The cash generation in the second half of the year, plus the expected improvement in profitability year-over-year in the second half of the year, we'll see our leverage drop from 2.7x back closer to that 2x target that we talk about.

Chris Sakai (Senior Equity Analyst)

Okay, sounds good. And then, with this restructuring program, how much will it take from, or reduce SG&A, or what are the... Do you have any sort of quantifiable numbers there?

John Kasel (President and CEO)

Well, let me kind of walk through the process, first of all. So, you know, how we got here is, you know, I wanted to walk through the three years for a reason, because transformation takes time, and we needed to change our portfolio, right? Which we've done over the last three years. But in doing so, those four divestitures that we spoke to today, we had stranded costs in the business that we continued just to absorb in the business. And so we knew over a period of time that we needed to make a change. More importantly, not just to get cost out, which, by the way, is $4.5 million on the annual run rate. It was about taking monies and bringing back to the company to make sure we're focusing on our growth.

See, as we're transforming this company to a technology innovation type company from a, you know, a distribution-type steel company, we weren't very strong at the front of the house. So much of the work we've been doing is taking from the back office administration and putting it out in front of the customer, putting it in front of, you know, technology, innovation. And this is where we're really shoring up what we're doing and where we get excited about where we're, how we're going to finish the second half of the year, more importantly, what we're going to do in 25 and beyond. So what Bill and I were talking about today is really, yeah, we had a little bit of headwinds here in the quarter, but, you know, that just makes you stronger and makes you more focused.

So in the last couple, you know, months, we've been talking about this, working on this, and we did it last week, which was a very tough time in our company with a reduction in force. But this is something we did with a knee-jerk reaction related to what was going on in the quarter. This is something that was planned, so it happened last year. So we're start seeing the benefits, you know, through the balance of this year, more importantly, into 2025 and beyond.

Chris Sakai (Senior Equity Analyst)

Okay, great. Thanks for the answers.

John Kasel (President and CEO)

Yeah. Thanks, Chris.

Operator (participant)

Please stand by for our next question. Our next question comes from the line of Justin Bergner with Gabelli Funds. Your line is open.

Justin Bergner (Portfolio Manager)

Good morning, John. Good morning, Bill.

John Kasel (President and CEO)

Hi, Justin.

Bill Thalman (CFO)

Hi, Justin.

Justin Bergner (Portfolio Manager)

Hey, a few questions here. To start, just on the revised Free Cash Flow guide, the timing of rail deliveries, so does that mean that you expect to end the year with a higher accounts receivable-

John Kasel (President and CEO)

Yes.

Bill Thalman (CFO)

Yes.

Justin Bergner (Portfolio Manager)

Balance, and expect. Are there other parts within-

John Kasel (President and CEO)

No

Justin Bergner (Portfolio Manager)

that rail timing dynamic?

John Kasel (President and CEO)

Definitely accounts receivable. We're gonna have a strong Q4, so which is gonna pump up that AR.

Bill Thalman (CFO)

Strong revenue for Q4-

John Kasel (President and CEO)

Correct

Bill Thalman (CFO)

... which will drive AR up. Exactly.

Justin Bergner (Portfolio Manager)

Okay. Got it. So maybe a second question would relate to the, you know, mix of business in Rail. I mean, could you comment on whether the Rail Technologies business continues to mix up margin? Because it wasn't as evident in the decrementals this quarter.

John Kasel (President and CEO)

Yeah. You know what? You know, you know, we sit and you put together all this work and all this paperwork. You know, what we feel really good about is our strategy. This is how we're pivoting the company into TTM and condition monitoring. We had a fantastic H1 related to those businesses, and then what we're doing in the UK as well. So the headwinds we're seeing right now are really specific to our former, you know, the returns business related to rail distribution and our ARP-type work. This is where the company continues to pivoting. But, you know, we saw quite a few headwinds, and that carries a lot of volume and a lot of leverage.

But we, we have a very strong backlog, we have very strong activity, and we feel very good the second half of the year that will continue to grow, really demonstrating our ability to drive profitability in rail and doing it through technology innovation.

Justin Bergner (Portfolio Manager)

Okay. So just to maybe clarify that statement, so I guess the Rail Products business, even though it may not carry a high average margin, there's still fairly meaningful incrementals and decrementals there?

John Kasel (President and CEO)

That's correct.

Bill Thalman (CFO)

Yeah, it's a very large percentage of our overall rail business. So to the extent that it's having a short-term challenge here, given the commodity prices and some of the weakness in the freight volumes that John had mentioned, it has an impact on the year-over-year decrementals. But, as we also mentioned in the call script, the year-over-year profitability improvements in TTM, our technologies-oriented monitoring business, as well as a recovery in our UK business, both were favorable components to the year-over-year improvement in rail, or those pieces were favorable within rail. It's just the Rail Products portion overcame that, from a consolidated point of view.

Justin Bergner (Portfolio Manager)

Got it. Okay. And then just the restructuring program, is this mainly to remove stranded costs? Is it to get ready for potentially a lower level of demand? Is it something else? Just how should I think about what's really happening from a business point of view on the restructuring side?

John Kasel (President and CEO)

Yeah. Obviously, part of it is stranded costs, but it's about getting better. It's about taking all the work we did, all the investment we've done in SAP, all the back office type of work we've done with our technology innovation, and really putting our best foot forward to streamline the organization. As we move from three segments to two segments we did at the beginning of this year, it's about simplifying the company, simplifying it to you, the investor, is really what this is all about. But in doing so, we had to put our money where our mouth is. And these aspirational goals is all about continuing to drive this innovation technology, specifically through our precast business and what we're doing in rail. So taking money out wasn't the end game. That was a result.

It was also about taking those monies and redeploying them, and redeploying them to the front of the house, out in front of the customer, and really, really redefining ourselves to the market, what we're doing and how we're changing, our portfolio over, over time.

Justin Bergner (Portfolio Manager)

Okay, no, that's very helpful. And then with the 2025 aspirational goals, I mean, is it safe to say that maybe there was some restructuring program envisioned as you approached those goals? Or would you say this is incremental?

No, there was always a vision that if you look at our SG&A, as we kind of laid that out, as or at least implied, you could see we were running up, we were running high to that number, to the percentages. So we, we've been talking about this working internally. We wanted to wait for the right time, not when we had a little bit of headwinds. We wanted to stabilize the company, get through these portfolio moves, which we did through 2023. And in 2024, we wanted to take, you know, these incremental changes, if you will. We weren't ready, honestly. In the last couple of years, we didn't have the people in the position, as well as the skills in the company and the technology in place to make some of these things happen. We're ready now.

So we kind of ripped the Band-Aid off last week and said, "Here we go. Let's get after this.

Okay, got it. So it doesn't seem like there's any change that will affect your ability to serve higher demand or meet growth?

John Kasel (President and CEO)

Let me tell you, let me put it this way, if we didn't do what we did, I'd be—I would not be as bullish on the aspirational goals. We needed to do this to invest in the future and continue to bring the profitability of the company.

Justin Bergner (Portfolio Manager)

Okay, thanks for all the questions.

John Kasel (President and CEO)

Thanks, Justin. Have a great day.

Justin Bergner (Portfolio Manager)

You, too.

Operator (participant)

As a reminder, ladies and gentlemen, that's star 1 1 to ask the question. Please stand by for our next question. Our next question comes from the line of John Bair with Ascend Wealth Advisors. Your line is open.

John Bair (President)

Thank you. Good morning, John and Bill.

John Kasel (President and CEO)

Hi, John.

Bill Thalman (CFO)

Hi, John.

John Bair (President)

First quick question. It looks like... Let's see, you had a legal expense in this quarter that didn't see anything in the first quarter. Is that a one-time issue, or what can you expand on what that relates to?

John Kasel (President and CEO)

Yeah, sure. Bill, you want to maybe give a little with the clients-

Bill Thalman (CFO)

Yeah, yeah. We're, we're not going to expand what it relates to. We've got an ongoing matter that we're working through. I think as we mentioned, it was about an $800,000 expense within the quarter. You know, there could be some additional amount in the future. We can't, can't predict or what that'll be. We don't think it'll be to the same level that we've had in the past. But it's ongoing, and it's something that we're just going to manage here to a conclusion as fast as we can.

John Bair (President)

Do you have any sense of when this issue will be resolved?

Bill Thalman (CFO)

Unfortunately not. Yeah, it's just an active matter, and we hope to resolve it as soon as possible.

John Bair (President)

Okay. So no, not on the edge of being finalized. It could drag out six months or longer, or?

John Kasel (President and CEO)

It's hard to say. We'd love to settle it as soon as we possibly can, but it takes a counterparty to achieve that, of course.

John Bair (President)

Okay. All right. I've got a question with regards to you, you indicated some encouragement with regards to the U.K. Do you think from what you're seeing, is that something that's perhaps sustainable, or-

John Kasel (President and CEO)

Yeah. Yeah. So I think they've had four prime ministers in five years. I mean, they've had quite a turmoil in that organization. The charges and the actions we did in the fourth quarter were very important to get aligned to, to get aligned to what we thought the activity would be. And then we did take some additional actions, some fine-tuning, if you will, part of the enterprise, a reduction of force that we did last week. The new team over there, under the leadership of Neil Sheffield, is doing just a tremendous job of really reinventing themselves and really focus on what we can do and, and more importantly, how we do it to make sure we're driving shareholder value. So, we're very pleased with what's going on there.

They've had a very tough stretch into COVID, through COVID, and we're looking for... You know, it may not be the area of huge growth for us in the future, but that's okay. We like what they're doing. It's a large technology innovation center for us. We're taking much of what they do across the globe as it relates to rail. So we're very happy where they're at today.

John Bair (President)

Okay. And then with regards to domestic rail, I touched on this a little bit in previous questions, but it sounds as if, you know, you highlighted that there was some softness in the prepared remarks and so forth. So is this more of a timing issue from your customers? Because you do reference expected timing of larger orders, that lumpiness in, in-

John Kasel (President and CEO)

Right

John Bair (President)

commitments. Is that-

John Kasel (President and CEO)

Yeah.

John Bair (President)

Is that a fair way to look at it?

John Kasel (President and CEO)

It's a fair way. So first of all, the good news, when you look at rail, you have to look at both aspects of rail, right? Transit, first of all, ridership is back to pre-pandemic levels. We feel very good about that. You know, we have a nice play. Over half of what we do in rail is the transit space, so this is very good news for us. So we'll see more and more of that activity in the second half. Again, why we feel very good about the second half. On the freight side, you got to look up to Canada, first of all. They're doing okay. Canadian Pacific and Canadian National, what's going on, respectively, to intermodal and moving commodities. Here in the U.S., though, you know, it's a little softer.

And so they have delayed and deferred some of their spending. And this is back to the Rail Products conversation that we've had. So the work is coming. We're gonna be very busy in the second half of the year, related to that. So they just deferred some of the work that we typically was on H2, or excuse me, in the second quarter, we're now seeing it in H2. So, you know, just look for a stronger year and probably a stronger fourth quarter than we've seen in the past. So we had a great first quarter, as you know, John. We fell off a little bit, you know, related demand, but, we're gonna see that pick up again. Railroads need to continue to invest in the type of stuff that we provide they need.

So we feel very good about they'll keep showing up, the railroads, doing the maintenance work. And more excitingly, they're really bullish on our condition monitoring, our TTM, our, you know, devices that help them run a safe and secure network. That's where we're seeing a lot of activity and a lot of excitement that gives us really, really excitement going into the second half of the year and more importantly in 2025 and beyond.

John Bair (President)

Great. Okay, last question. Inclement weather impacted your domestic sales on infrastructure. So basically, you're just pushing this stuff out from the second quarter into the third quarter. Is that kind of way to look at it?

John Kasel (President and CEO)

Yeah.

John Bair (President)

Aside from your comments about Protective Coatings were down, is there any indication that that's gonna turn around, or what will it take for that to pick up and become more-

John Kasel (President and CEO)

Yeah

John Bair (President)

-uh, meaningful?

John Kasel (President and CEO)

Let's talk about infrastructure related to what's going on in precast, specifically in those product lines. We got hit hard with weather. Our locations that are located in Tennessee, they had the wettest record, you know, first half year, the wettest year on record, year to date, as well as what's happening through Texas and the other regions. Very, very wet. Not only just affecting our employees to get to work, some of our facilities were shut down for days or, you know, in one case, over a week, related to weather, and power outages. And the third case is, more importantly, what's going on in the construction areas. You know, if it's wet, they can't use our products, they can't put the product underground, and they can't build the infrastructure that's needed. That's pent-up demand.

That does not go away, and we are obviously, you know, short of the hurricane this week. You know, we're seeing things that are drying out, and the need is there. So the spike is just gonna be open much wider in the second half of the year. They need to get these products in the ground. They need to get these products in these areas built. So we feel very good. We're ready. We have products sitting in our yards, products sitting in our plants. We're ready to deliver. So again, why we, we feel very good about what we're looking at for H2. Coming back to, you know, we have two types of coating business. We got an in-line coater, and then we have a specialized coater.

Specialized coater business that we have is doing very well, and they're gonna have a strong second half year. The in-line coater working directly with the IPSCO, those projects are as expected. You know, we're not doing too many pipelines, you know, moving between states right now... and we don't see much of that activity going on in the second half of the year. That may change with a different election or a different cycle, but right now, we're not counting on that business providing much, and it's not really, it's not part of our guidance at all. So if, as that comes back in a big way, that'll be, you know, that'll be on top of what we're, we're, we're looking at today.

John Bair (President)

What about Steel Products? What will it take to turn that around?

John Kasel (President and CEO)

So, you know, when you say turn around, our threading business is actually doing very well. They got hit with the weather like everybody else. We do our threading in Houston, and of course, when it's wet, you know, this is for irrigation pipe, so the demand for irrigation pipe is not as needed. But we're starting to see that change around as it dries out in the West. And we have a nice new market entry taking our pipe, our threaded pipe in the West Coast right now, so we feel good about what we're doing there. On the steel side, you know, we made a nice pivot from our grid decking business, right?

And we closed the book on that, last month, and moved that business to another party, which left us a, a bridge forms business. In fact, we just had the board out there, and we toured the facility. It's a world-class facility. They're operating at a very high level. We're finishing up the largest job we ever did, which is down in Tampa, Florida, on the I-4 Bridge. We feel very good about that, and we got quite a few bidding activities and opportunities in front of us to continue to use that. You know, we talk about an investment super cycle, so we're looking for quite a bit of work, coming through that plant and that business in the second half of the year.

John Bair (President)

Great. Thank you very much for taking the questions.

John Kasel (President and CEO)

Thanks, John. Take care.

John Bair (President)

Yep.

Operator (participant)

Thank you. Please stand by for our next question. We have a follow-up question from the line of Justin Bergner with Gabelli Funds. Your line is open.

Justin Bergner (Portfolio Manager)

Thanks for the follow-up.

John Kasel (President and CEO)

Yeah.

Justin Bergner (Portfolio Manager)

I'm just looking at, you know, the sales guide. I mean, you didn't really take the high end down much, but you're, you know, talking to some headwinds in rail.

John Kasel (President and CEO)

Right.

Justin Bergner (Portfolio Manager)

and maybe that all gets caught up in the fourth quarter, I'm not sure. And you're talking about, you know, Protective Coatings being weak. So is there some positive offset that's only allowing the sales guide to be taken down by $10 million at the high end?

John Kasel (President and CEO)

Yeah.

Justin Bergner (Portfolio Manager)

I'm just trying to put together the pieces.

John Kasel (President and CEO)

Yeah, we don't get into the color of all this, but our precast business, especially on the legacy side, is having a tremendous year. Best year ever. This Great American Outdoors Act that we referenced in our comments today, we're basically sold out for the balance of the year, so that's where upside is going to come. And then the new acquisition of VanHooseCo, which is bringing these products. Of course, we got hit with the weather and other things going on in Tennessee and other markets we serve there. But that's an area for upside in the second half of the year as well.

Justin Bergner (Portfolio Manager)

Okay.

Bill Thalman (CFO)

And, Justin, I might just add to that as well, that's something that helps the overall business mix in the second half of the year. So we're really, while we have a overall top line, somewhat flat to down slightly overall in the second half of the year, per the guidance, the profitability is up nicely on a year-over-year basis. So we'll see an improved business mix in the second half, that will drive profit expansion despite the top-line softness overall.

Justin Bergner (Portfolio Manager)

Great. That was it for me.

John Kasel (President and CEO)

Thanks, Justin.

Operator (participant)

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks.

John Kasel (President and CEO)

Thanks, Twanda, and thanks, everybody, for joining us today, and thanks for the questions. We really appreciate it. I want to close with a couple of remarks related to, first, you know, so core value of our company, safety. Back in last quarter, I mentioned that we're real focused on safety, as in each and every year. When you look at a company, you look at their safety results, really speaks to how you treat your employees, and really the culture of the company, and really how profitable you could be, because safety is a result of a lot of good things coming together. In the last three years, we have struggled in our rail specifically, we've gone the wrong way.

Still way better than industry, but of course, our goals here at Foster are much... We want to be much better industry standards. But year-over-year, in the last three years, from 2021, 2022, and 2023, our safety performance in the rail business just continued to get worse year-over-year. So last year we sat down, we said: We need to change this. So, compliments to the rail group leadership, real focus on making safety a part of our fabric each and every day and getting better. We made a number of changes to staff, including adding an operations guy named Dennis Scully who has done a fantastic job. And congratulations to Greg Lippard and his team, making safety a core value of our company.

They have completed, in fact, the first half of the year with 0 recordable injuries. That's just tremendous results. In fact, perfect results, if you want to look at it from that point. When you look back, what that means, that 715,699 hours work hours, man hours, that we did with no recordable injury across the entire rail business, which represents over 51% of the hours we have worked as a company. So tremendous, very focused on that. So yes, we've had some headwinds, but from an operational, from efficiency point of view, the business is coming back. Quotings look good. A backlog at over $200 or $248 million is something we feel good about.

So we're ready to deliver in the second half of the year, and we will deliver. So as a reminder, my second point is, you know, we, we had a very strong first quarter, and the second quarter, of course, is not exactly where we expected to be or wanted to be. We're gonna we're continuing to manage through those macro situations, but we were off 7% when you look H1 over H1, year-over-year. When you look at H2, what we're putting in, you look at the midpoint of our guidance, we're showing a 29% improvement year-over-year on EBITDA.

So that's what we have in front of us, and this group, my team and everybody across the company, we're up to the challenge of making and bringing this product to the market and, and driving shareholder return, which will give us a 12% year-over-year improvement in our EBITDA, when you look at midpoint to midpoint, and how we finished it, what we're forecasting to do. So we will make it happen. We're all in to do this, and we have the opportunities in front of us, and we will make it happen for the balance of the year. So thanks for your ongoing support. Thanks for your interest in Foster Company. And I know speaking on behalf of Bill and myself, we're very much looking forward to talking to you in early November. Take care for now. Bye-bye.

Operator (participant)

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.