L.B. Foster Company (FSTR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the L.B. Foster August 2022 Investor Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Stephanie Listwak, L.B. Foster's Investor Relations Manager. Please go ahead.

Thank you, Carmen. Good morning, everyone, and welcome to L.B. Foster's August 2022 Investor Update Call. My name is Stephanie Listwak, the company's Investor Relations Manager. Our host for today's call, presenting on L.B. Foster's most recent acquisition transaction, are the company's President and CEO, John Kasel; and the company's Chief Financial Officer, Bill Thalman. Slides to accompany today's presentation have been posted on the L.B. Foster Investor Relations website, and today's comments will follow the slides posted. After the conclusion of the presentation, we will be opening up the session for questions. Before we get started today, I wanted to remind all of those listening to please refer to our safe harbor disclosure included in today's slide deck for detailed risks, uncertainties and assumptions related to any forward-looking statements made today. Additionally, we will discuss some non-GAAP financial metrics today and encourage you to review the reconciliation tables within the slide presentation carefully as you consider these metrics. So with that, I'd like to turn the call over to John.

Thanks, Stephanie, and thanks for joining us today. It's an exciting day in the company and a lot of work has been done, and I'm -- Bill and myself are anxious to share it with you. So first, I am on Slide 4 of the presentation materials for those that are following along. So on Friday, we announced the acquisition of the operating assets of VanHooseCo company Precast LLC with a purchase price of $50.5 million and EBITDA multiple ranging between 7x and 7.5x. More importantly though, this just lines up very well with our existing CXT business, our precast business. And as you move over to Slide #5, you'll see that why that's the case. Back in last year, if you recall, we put together a strategy, and Bill and I announced to you on the Investor Day in December of last year. Under that portfolio, we had 2 growth -- 2 areas for -- 2 categories: one through growth and one through returns. The return size is maximizing cash and generation of the remainder of our businesses. And I'll talk a little bit about that today. But we also knew we needed to take on some inorganic growth opportunities, which was our playbook item 1, 2, 3 and 4, and double billing of precast is why we're here talking today. On Slide 6, the team has been really focused and energized of making things happen and really driving shareholder return. And over the last 2 months, we've done 4 transactions in line with our strategy. As you recall, last week, I talked to you about the Skratch acquisition, which Skratch Enterprises in the U.K. plus the acquisition of Intelligent Video. Both of them are bolstering our capabilities in visual communication and condition monitoring in our rail space in Western Europe. Second, we did a divestiture of the track components business in Canada providing about $7.8 million to fund our growth programs as well as do the things that we're talking about today with the VanHooseCo transaction. On Slide 7, you'll see that the operating assets and look at the VanHooseCo properties itself. VanHooseCo was started by Jeff VanHoose in 1998. They're headquarters right outside of Knoxville in a town called Lebanon. They -- today, they're up and running in that facility, as I said, since '98, but we're commissioning a second facility right outside of Nashville, a small town called Lebanon. We say there's about 100 employees that's gaining by the day since we're commissioning into new facility. But this business serves the commercial, industrial and residential infrastructure markets very, very well. And the -- what's really attractive to us is these both locations, one online, one coming online this week is that we're right in the hot spot. We got fast-growing margins to us in the Southeast United States. Unlike CXT, a good portion up to 95% of VanHooseCo customer base is nongovernment. So that -- we really like the fact that it has balance to our existing CXT business. And it gets a heavily weighted balance off the government and more balance towards private investment projects as well. On Slide 8, the uniqueness of the VanHooseCo and with a really excited opportunities, we have really realized -- it underpins with their IP, their intellectual properties. What we have depicted here is a product called Envirocast. We have a 3-year license agreement to manufacture and market this product in the -- with the terms of the deal. What is unique about this and unlike what we can do today, if you look on the right-hand side, for those who are looking at the presentation, today, we make concrete walls in our existing precast facilities with rebar and concrete. This gives us the opportunity to make a wall and put the insulation to metal studs actually in the wall itself coming right out of a factory going to the job site. That is a huge significance because if we did what we do today in CXT, if we want to add insulation, we got to stick frame it inside either with wood or with metal and then add insulation after we actually build the wall. So this is one unit, one package and protected with intellectual properties, significant advantage for us. And you can see these walls come together on this illustration we've put together, as put in by crane and operators and something of this size could be put together in a couple of hours versus site built with brick or stone today would literally take days to weeks. So significant opportunities that we're very excited about. On Slide 9 is this another part of their intellectual properties that we're excited about, and that's the Envirokeeper. So as you know, stormwater retention, detention itself is the market that's absolutely on the rise, and it's a real growth sector that we're seeing a bright future in, in that part of the country as well as in the West Coast. We're going to take these intellectual properties and bring them to all our sites these products. We see that opportunities that exist in Washington and Idaho as well as Texas. It gives us a real line of sight to developing these and taking these products to other businesses and other markets as well as right out of the Tennessee market. So in addition to -- with [indiscernible] today, the VanHooseCo folks also make a large line of precast products. And if you put those with our products, it really makes for a strong precast business with operation -- we see opportunities to integrate some of the these product lines to existing facilities, as I said earlier. But these portfolios coming together are expected to bind a force in the business with a growing precast infrastructure market that really speaks well to the government actions that Bill said in the past -- last November last year. So we see with the coming opportunities good funding, both by the private as well as the government sector, to really give us some opportunities to expand our portfolio that we have today. On Slide 10, when we put together the strategy we shared with you last year, we also came up with some -- a really disciplined process for us to -- if we go after organic, we want to make sure that we're really focused on something that's going to add value to our shareholders, first and foremost. So we've broken up in economics participation, geographic footprint and capabilities. When we came across the VanHooseCo operation, it was very clear to us that this operation between the 2 facilities, really checked all the boxes. So we're very excited about the economics, participation, expansion of our global footprint and increased capabilities that this acquisition provides to us. So with that, I would like to turn it over to Bill Thalman, and Bill is going to share with you some of the financial considerations, and I'll come back with some closing remarks after Bill's presentation. Bill?

Thanks, John. Good morning, everyone, and thanks for joining us today. My comments will be on Slide #12 of the presentation. We'll start there. And the information that's presented there for VanHooseCo is as of their most recently completed fiscal year and the end of 2021. When you look at the asset base that was acquired about $28.5 million, you can see a significant asset base relative to the revenue that's being generated in that time frame, which was just over $28 million. But there has been significant investment that was made in the Lebanon facility, and as John mentioned that earlier, it's coming online this week, and we expect to see revenues growing from that site as a result of the investment in the quarters to come. Their working capital percentage of sales is pretty similar to L.B. Foster's, right around 20%. And the revenue growth for the last couple of fiscal years end of 2021 was right around 5%. And we've been seeing that their performance after the end of fiscal '21 has been above that level, and so we're optimistic and excited to see that the momentum of the business is growing. One of the things to highlight about VanHooseCo is that their profitability is -- stands out. Gross margin is right around 28% and then their EBITDA margins are at approximately 25%. And when you look at what they do, they have a very narrow focus on value-added product lines. A significant amount of their business, as John mentioned earlier, is in the commercial industrial space and very little government work. And one of the things that they really perform well at is customer service, making sure product of a high quality is available on time when needed, and customers are willing to pay a premium price for those materials to be available for their most demanding projects. So that's something that VanHooseCo has been able to leverage in their operations and in their financials and something that we expect to continue and grow with and hopefully learn a little bit on our side of the business as well. So very strong financials. The one mentioned about capital spending, you can see at the bottom of the schedule, we were about $6.2 million of capital spending in 2021, which brought their free operating cash flow to negative $1.6 million. Obviously, a big piece of that was related to the Lebanon investment that was made, which in total was about $8 million over the multiyear investment period. And we would say that their ongoing CapEx needs from a maintenance point of view are closer to $1 million per year, right around 3% of sales. So I feel good about the purchase price and the business that we acquired, and we're looking forward to seeing as part of the L.B. Foster portfolio going forward. On the next slide, I did want to highlight the fact that we did have an amendment required to our credit facility to accommodate the acquisition. The amendment was approved unanimously by our bank group. And basically, they had to approve the VanHooseCo acquisition as a permitted acquisition under the revolving credit facility due to its size. The key terms of the amendment with the permitted acquisition reference there. Also, the maximum gross leverage ratio was increased from 3.25x to 4x at the acquisition closing date and as of the end of our third quarter. And then there's a step-down in that leverage ratio by 25 basis points as of the end of December and then on down through to the end of the June quarter in 2023 when we get back to 3.25x, which is the pre-amendment level and then going forward. The additional pricing tier was added because the previous cap on the facility was 3.25. Once it's up to 4, there was an additional pricing tier that was added. And then lastly, many of the facilities that are being renewed at the moment are going through the conversion from LIBOR-based pricing to SOFR-based pricing. So that's something that we accomplished with this amendment as well. And our bank group has been very supportive as we're transitioning towards the accelerated growth component of our playbook and really thank them for their continuing support as we transform L.B. Foster. So with that, I'll turn it back over to John for his closing remarks. John?

Thanks, Bill. Really appreciate it. And I'd first like to thank the entire L.B. Foster team really making these things happen. If you look at these number of 4 specific strategic actions we have taken over the last 2 months on top of a really nice sequential improvement in our revenue and gross profit. The team is really, really focused and it's easy to do, I guess, when you have a strategy, but more importantly, we're executing on that strategy. Making the actual VanHooseCo situation come to light and making it happen, really, it falls in the hands of 3 of our individuals. And I'd like to call them out especially today, Bill Treacy, Mark Muratore and Sean Reilly. For the most part, these gentlemen given up their personal lives and really been living in Tennessee for the better part of 6 months. And I'd like to personally thank them for what they've done and the ability for this transaction would not have been possible without their hard work and efforts. So thank you to 3 of them to making it happen. But also important is the Jeff VanHoose and Don Akins. From the days -- first days we met back in December of last year, it was clear that they want to leave a legacy in their business. They're staying out with their business for a period of time, but they want to leave a legacy and it became very clear that L.B. Foster and CXT operation was going to make that happen. So it's about 2 businesses coming together but more importantly, 2 cultures come together. And that was clear from my point of view and their point of view that this is where literally magic can happen. So my thanks to them and their leadership hanging in there. Moving from a private company to a public company is not an easy situation. And keeping their team engaged and focused has been nothing short of outstanding. So my thanks to both Jeff and Don for making this happen. So simply said, if you look at Slide 15 and 16, we laid out a strategic playbook last December, and the team here is extremely focused on bringing the value to our shareholders with 4 significant plays over the last 60 days. The team remains committed to transform the company into a high-growth technology-focused infrastructure solutions provider. And I and the team are very pleased with our progress we've made to date. This does take time to pivot the company, but we're well trenched to make that happen. And I'm very excited that the company's coming together and doing something very special in the marketplace. So thank you for your time today and continued interest in L.B. Foster. And I'll now turn it back to the operator for the Q&A session. Thank you.

[Operator Instructions] Our first question comes from the line of Alex Rygiel with B. Riley Securities.

Very nice acquisition here.

Thanks, Alex.

With the new facility coming online this week, what's the capacity? And how should we think about what the annual revenue of that facility could generate sort of in a go-forward 12-month period?

Well, it's going to be a different ramp up starting with 10 employees as of this week, and we'll ramp up. But let's just put it this way. This -- the business itself actually plays in a different market, even though they're a couple of hundred miles away. So that's good. And the actual facility was sized with the equipment and automation in place to do something very similar to what's happening today in the base business.

That is helpful. And then as it relates to sort of this product, what is the theoretical shipping distance of most of these products?

That's a good question. On the ones with the IP specifically Envirocast and Envirokeeper, we can go about 250 to 300 miles to be very competitive. Now that's changing also. With the competitive landscape today, the tightness of labor, I think we can even hopefully be able to reach into further distance as well.

That's helpful. And then as it relates to the margin profile of this business, obviously, the margins are fantastic. Can you talk to that point a little bit so we can gain a little bit more confidence that the margin profile here is sustainable longer term?

Yes. Well, we spent a lot of time there. So we really understand what underpins that from a market point of view and from a product and process point of view. And this team has done a great job of holding their gains as well as an inflationary market. And perhaps looking at a recession, they did a good job of getting price. So we feel very good about their ability to continue to improve upon their margin position.