L.B. Foster Company
Q1 2017 Earnings Call Transcript

Published: 2 May 2017

[Operator:]

Greetings, and welcome to L.B. Foster First Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only-mode. A Question-and-Answer Session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is recorded. I would now like to turn the conference over to your host today Judy Balog, Investor Relations. Please go ahead.

[Judy Balog:]

Thank you. Good evening, ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the Company’s first quarter 2017 operating results. My name is Judy Balog, and I’m the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster’s President and Chief Executive Officer. Also on the call is Mr. Christopher Scanlon, L.B. Foster’s Controller and Chief Accounting Officer. We have a first quarter presentation on our website under the Investor Relations tab for those who have online access. This evening, Chris will review the Company’s first quarter financial results. Afterwards, Bob will review the Company’s first quarter performance and provide an update on significant business issues as well as Company and market developments. And then, we will open up the session for questions. During today’s call, our commentary and responses to your questions may contain forward-looking statements including items such as the Company’s outlook for our businesses and markets, cash flows, margins, operating costs, capital expenditures, and other key business metrics, issues and projections. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make 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 law. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year ended December 31, 2016, as updated by subsequent items filed with the Securities and Exchange Commission for additional information regarding risk factors that may affect our results. In addition to the results provided in accordance with United States Generally Accepted Accounting Principles, our commentary includes non-GAAP EBITDA statements. A reconciliation of net loss to non-GAAP EBITDA has been included within the Company’s 8-K filing. Statements referring to EBITDA are considered non-GAAP measures, and while they are not intended to replace the presentation of our financial results in accordance with GAAP, Company believes that the presentation of these measures provides additional meaningful information for investors to facilitate the comparison of past, present, and forecasted operating results. Our accompanying earnings presentation reconciles these non-GAAP measures to the corresponding GAAP measure. With that, we will commence our financial review discussion, and I will turn it over to Chris Scanlon.

[Christopher Scanlon:]

Thank you, Judy. Net sales for the first quarter of 2017 were $118.7 million compared to $126.3 million in the prior year, a decrease of $7.6 million or 6%. Gross profit margin was 17.9%, a decrease of 110 basis points from the prior year quarter. We experienced margin compression in our Rail and Construction distribution businesses, as well as unfavorable product sales mix in our Transit division, which also negatively impacted gross profit margin. The 6% first quarter sales decline was due to 17.4% decline in the Tubular and Energy Services segment and 12.2% decrease in the Rail Products and Services segment. This was partially offset by 17.1% increase in Construction segment sales. The Tubular and Energy Services sales decline was driven by decreases in all domestic product categories with the exception of the Test and Inspection Services business. Year-over-year precision measurement system sales declined by $6.2 million. This decline was partially offset by 57.4% increase in our upstream Test and Inspection Services division. The Rail sales decline was due to reductions across all domestic product categories including 7.4% decline in Rail distribution, offsetting these decreases were improved global rail technology sales. Our Construction segment sales improved from prior year by $5.4 million or 17.1%. Both our piling products and fabricated bridge products had increased year-over-year sales with piling sales increasing by $3.2 million and fabricated bridge product sales increasing by $3 million. We did experience a decline in precast concrete sales of $739,000 or 8.4%. As a percentage of first quarter 2017 sales, Rail accounted for 47.6%, Construction was 31.4% and Tubular and Energy Services was 21%. Next, I’ll provide some commentary on gross profit at segment level. Starting with Tubular and Energy. Tubular and Energy Services gross profit margin increased by 170 basis points or 11%, it increased to 16.9% due to market improvement in our test and inspection services business which is favorably impacted by the improving upstream market. This was offset by reductions in midstream businesses. Construction segment gross profit margins decreased by 130 basis points or 7.5% to 16.2%. As noted previously, this was driven by our piling products margins that were narrowed on a larger sales base compared to the prior year. This decline was partially offset by operating efficiencies in our precast concrete businesses. Rail gross profit margin declined by 190 basis points or 8.6% to 19.8% due to decreased transit margins and compressed rail distribution business margins. Offsetting these declines were favorable year-over-year gross profit margins at our international Rail technologies divisions. Moving on to our expenses, our consolidated selling and administrative expenses decreased by $3.6 million or 15.7% to $19.2 million due to our ongoing cost reduction initiatives and strategic spending cuts totaling $3.1 million as well as lower Union Pacific Rail Road litigation costs of $500,000. As a percentage of sales, selling and administrative expense decreased by 187 basis points to 16.2%, driven by personnel related cost reductions. Amortization expense decreased by $1.5 million to $1.8 million in the first quarter, primarily due to asset impairment charges taken in the second and third quarters of 2016. Interest expense increased by $900,000 due principally to increased interest rates related to our outstanding debt. Company’s income tax expense for the first quarter was $400,000 on a pretax loss of $2 million. First quarter income tax expense relates to foreign jurisdiction income taxes. The Company recorded a full valuation allowance against the U.S. deferred tax assets as of December 2016. Therefore, no tax benefit was recorded on our domestic losses. First quarter 2017 net loss was $2.4 million or $0.23 per diluted share compared to a loss of $2.8 million or $0.28 per diluted share last year. EBITDA was $5.1 million in the first quarter compared to $4 million last year. One of our revised credit agreement covenants is an $18.5 million minimum EBITDA covenant on a trailing 12-month basis, which applies to the first two quarters of 2017. EBITDA as defined by the credit agreement are certain non-cash adjustments that a traditional financial EBITDA calculation might not incorporate. As a result, the first quarter EBITDA calculation pursuant to the amended credit agreement for the consecutive 12-month period is approximately $6.5 million higher than the $18.5 million minimum EBITDA covenant. Turning over to the balance sheet. Working capital net of cash and current debt decreased by $7 million compared to the fourth quarter of 2016. Accounts receivable increased by $10 million during the first quarter and consolidated DSO accelerated to 48 days compared to December 2016. Inventory remained relatively flat with the $700,000 decrease compared to the December 2016 while accounts payable and deferred revenue increased by $17.4 million. We do feel good about our accounts receivable and inventory management results, and we will continue to focus on overall working capital management. Total debt declined by $4.3 million from December of 2016 to March of 2017 with our credit facility obligations declining by $4 million. Now, moving over to our cash flow activities. Cash provided by operating activities in the first quarter was $10.7 million compared to a use of $5.1 million in the prior year quarter. First quarter capital expenditures were $3.5 million compared to $3.1 million in the prior year. $2.1 million of our first quarter capital spend related to assets placed into service for a long-term service contract with a Class 1 railroad. We anticipate our 2017 capital expenditures to approximate $6 million. Of this amount, approximately $2.5 million will relate to our Class 1 service contract. We will continue to scrutinize our capital expenditures and focus our capital outlay on programs required to improve both new and existing business opportunities. I’ll provide some commentary on new orders in backlog activity next, as our first quarter 2017 bookings were $162.7 million, an increase of 38% compared to last year’s first quarter due to 59.7% increase in Rail, a 31.1% increase in Tubular and a 12.1% increase in Construction bookings. First quarter orders for the Rail segment were stronger than 2016 due to increased order volumes for Rail distribution and our North American track components businesses, as well as international for community [ph] businesses. Increased North American Rail traffic has had a positive impact on our Rail segment’s new orders and backlog and we are encourage by the current state of the freight rail market as both carloads and intermodal units improved year-over-year. Tubular orders improved by 31.1% over the prior quarter, driven by improved upstream order activity. Our midstream order activity also improved with protective coatings seeing an increase. However, our precision measurement systems in midstream business did experience a decrease in orders in the current quarter. Construction orders increased by 12.1%, driven by increases in both precast concrete and piling products orders. Order backlog stood at $195.3 million at the end of the first quarter, up $41.3 million or 26.8% from the prior year first quarter’s backlog of $154 million. The increase was seen within all three segments with 38.9% increase in Construction, a 22.3% increase in Rail and 10.8% increase in Tubular segment backlog. As mentioned in the earnings release, first quarter bookings and backlog grew sequentially over the fourth quarter of 2016 by 43.6% and 32.4%, respectively. Additionally, both bookings and backlog have also increased for the third consecutive quarter. In closing, our focus remains on increasing sales and profitability, while continuing to focus on working capital management and free cash flow. Our continued primary use of free cash flow will be targeted toward debt reduction. That concludes my comments on the first quarter of 2017. With that, I will now turn it over to Bob.

[Robert Bauer:]

Thank you, Chris. Hello, everyone. Thank you for joining us today. As I make my remarks, there are two recurring messages that will help you think about our year-over-year performance, as well as set expectations for upcoming quarters. The first message centers around the changing business environment, of which our bookings performance and increasing backlog in the quarter, which were broad based, are the best indicator. I’ll comment on the freight rail and transit rail markets where our orders have outpaced the capital spending projections from end users. And I’ll cover the energy market where an upstream recovery appears well underway and midstream improvement is expected in the coming quarters. The second message is centered around our profit performance where first quarter EBITDA of $5.1 million was $2.1 million above the fourth quarter of 2016 and better than first quarter of last year by $1.1 million on lower sales in 2017. This helps highlight how the changes in our cost structure, which has dominated prior discussions are positioning us to leverage from added volume as market conditions improve. Now for some of the specifics on Q1 results, first quarter demand almost always reflects lower transportation and construction project starts, which tend to ramp up in March or later. Sales volume in the quarter ended slightly better than we were forecasting. However, the upside surprise was the way the shipments rose throughout the quarter as order entry got stronger and ended in March with some real strength. Among the highlights in our sales results is the rebound in our new rail and piling distribution businesses. Together, they were 36% of sales in the quarter as we won some sizable orders and regained share, particularly in the lower margin commodity piling products. As a point of reference, the two product lines averaged approximately 32% of total revenue last year. This mix coupled with the lower than usual volume in Q1 contributed to some pressure on overall gross margins that finished about 140 basis points lower than we were anticipating. Our efforts to restore volume in commodity piling products have put pressure on gross margins. And while the new rail volume is dilutive to overall gross margins, it has contributed to the profit increase in the Rail segment and is an area we want to see grow. Last quarter I mentioned that our full year average price per ton on new rail sales was down 20% year-over-year. Pricing appears to have bottomed in Q4 of 2016 as the average price per ton sold in Q1 improved slightly from the fourth quarter average. And there are examples of current projects being bid at even higher price levels. As the year progresses, we believe that rising raw material costs and improving factory utilization rates in the steel industry will put further upward pressure on prices, which in turn should help boost our sales growth. Turning to cost reductions and EBITDA performance. The cost reduction actions we took late last year helped us get SG&A expenses well below prior year levels. We beat the targets we had set in our plan and certain expenses such as legal expense are running below planned levels. SG&A was clearly a contributor to first quarter EBITDA results. Now, we look forward to seeing the contribution as volume increases in future quarters. I was encouraged with the $5.1 million in EBITDA in Q1, particularly following the prior fourth quarter where EBITDA was $3 million. The Q1 year-over-year pretax improvement of $2.2 million on lower sales volume was another reflection of the operating leverage resolving from these cost reductions. Helping drive this improvement is one of our top priorities, margins in the Tubular and Energy services segment where improvement in upstream services and recent order strength and protective coatings provided some uplift. Gross profit in this segment was 170 basis points better than prior year and 770 basis points better than Q4 2016. This was driven by good cost control and in the case of the Q4 2016 comparison, there is some added volume which certainly helped. Now, turning to working capital and cash flow. Our attention on working capital performance was evident, we held inventory flat versus start of the year and completely offset our growth and receivables. Working capital typically grows during the first quarter as we prepare for increased volume in Q2 and beyond. So, we’re off to a good start. I expect some added pressure on working capital. If order volume stays at the first quarter level, I’ll be pleased that working capital can finish the second quarter flat with Q1. Our efforts to curtail capital spending have been working as well. CapEx totaled $3.5 million in the quarter versus prior year quarter of $3.1 million, the majority of our capital spending in the current quarter related to equipment placed in service under a new multi-year service contract for Class 1 Rail carrier. Excluding the service contract, we’ve been able to operate at very low levels of capital spending, as we’ve turned our attention toward maximizing free cash flow. The balance of our spending this year is mostly aimed at improvements we’re making to expand product offering for concrete products. So, I was delighted to see that we generated $10.7 million of operating cash flow in the quarter and paid down debt. But once again, there may be some pressure on working capital in Q2 and we’re not forecasting similar cash flow in the second quarter. Now, while I’m really pleased with how our team tackled the need of reduce costs following the market softness, I’ve been looking forward to talking about their recent success in bookings and backlog improvement, and how our team has a much better outlook on the current business environment. So, let’s turn to bookings and backlog. Bookings in Q1 reflect a significant strengthening of our markets, but also our ability to regain share in certain product lines. It’s worth a few of the headlines. A 38% year-over-year increase in consolidated bookings, bookings increased 44% sequentially from Q4. Tubular and Energy Services bookings up 31% as the upstream segment continued to get stronger and protective coatings orders or much better. The Rail business up 60% as all division serving freight rail had solid bookings and our European business remained strong including automation projects. The distribution businesses, which had been struggling with market weakness in lower prices had 41% increase in bookings. The added volume driven by several nice project wins in transit and industrial rail and share gain in piling projects. This was a really good way to see the year get started. I’ll comment on some highlights for each reporting segment beginning with the Rail business. The 60% year-over-year bookings improvement was a bit above our expectations coupled with the backlog increase of $29 million in Q1 since the start of the year. Several product lines in rail had sizeable double-digit gains in orders, the strength was wide spread. As the year began, we’ve pointed out capital spending forecast from North America freight rail operators were projected to be down in 2017. And we often use this as a proxy for setting market expectations, but we also point out that it’s anything but an exact indicator for maintenance or way products we sell. Orders from these customers were strong in the quarter as were orders from industrial and transit customers. Europe remained strong as we work on the cross-rail project, service work for railway automation solutions are facing good demand as our automation solutions for other transportation applications. And finally, our friction management business globally is benefiting from demand as a result of savings and efficiency gains hit the levers. Our ability to provide onsite services along with the industry’s best platform of friction modifier products is helping us remain a leader in this market. So, turning to Tubular and Energy Services. Orders for Tubular and Energy Services up 31%. The upstream market recovery was behind a 95% increase in year-over-year bookings in the test and inspection services business. Rig counts continue to rise; the number of wells drilled continues to rise; and the tons of tubulars used for each well is expected to rise as lateral lengths grow, in some cases upto 20,000 feet. We will start paying more attention to wells drilled than rig count as rigs become more efficient and the number of wells they can drill in a given time period coupled with the increasing length of horizontal drilling. We are still somewhat cautious on the midstream market recovery which traditionally lags the upstream recovery. Protective coatings and measurement systems were forecast to have lower bookings in the quarter as midstream projects were projected to move forward at a slow pace. But orders for protective coatings of midstream pipes were well above forecast, more than doubling over prior year. So, I’ll wrap up with Construction. Construction results were solid in Q1 with 17% sales growth and improving segment profit margins. Bookings were up 12% over prior year and the backlog is 39% above this period last year, which was helped by booking the Peace Bridge project last year in Q2. We’ll be working on this bridge project throughout 2017. Precast concrete products and buildings had another double-digit year-over-year bookings quarter; our expanded product line is helping. We’ve introduced a few metal building products recently and the innovation that this team continues to build on has kept their sales growing. So, we expect to see buildings business have consistent demand for its products, provided government spending is not reduced. So, I will wrap up there with my comments. And turn the call back over to the operator. And we’ll be happy to entertain any questions you might have.

[Robert Bauer:]

Well, thank you, operator. Well, I’m going to take that as a sign that we had a pretty clear discussion about how the quarter wrapped up. There were certainly a number of highlights there, I know as we were looking to those folks that joined us today that we did have quite a few people on the call. So, we do appreciate your attention over the course for the last half hour or so. So, thanks for joining us. And we’ll look forward to talking with you next quarter. Thank you very much.

[Operator:]

This concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.