L.B. Foster Company
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Greetings, and welcome to the L.B. Foster Third Quarter 2017 Results Conference Call. Due to some technical complications with global newswire, the issuance of our press release was delayed. We ask that you access our third quarter press release on the Investor Relations section of the company's website lbfoster.com. The company has filed its press release with the Securities and Exchange Commission on Form 8-K. This filing can also be accessed at sec.gov. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Judy Balog, Manager of Investor Relations. Thank you, Judy. You may begin.

[Judith 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 third quarter 2017 operating results, and 2017 fourth quarter and full year outlook. My name is Judy Balog, and I am the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. Also on the call is Mr. James Maloney, L.B. Foster's CFO and Treasurer. In addition to our press release, we have a third quarter presentation on our website under the Investor Relations tab, for those who have online access. This evening, Jim will review the company's third quarter financial results. Afterward, Bob will review the company's third quarter performance, provide an update on significant business issues and market developments and discuss fourth quarter and full year outlook. We will then open this 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 securities laws. 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 and adjusted EBITDA, and certain other metrics where we have added back the effect of impairment charges. Reconciliation of U.S. GAAP to non-GAAP measurements have been included within the company's 8-K filing. Statements referring to EBITDA, adjusted EBITDA as well as certain measures, excluding the impairment charges, are considered non-GAAP measures, and while they are not intended to replace the presentation of our financial results in accordance with GAAP, the 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 measures. With that, we will commence our financial review discussion and I will turn it over to Jim.

[James Maloney:]

Thank you, Judy. Net sales for the 2017 third quarter were $131.5 million compared to $114.6 million in the prior quarter, an increase of $16.8 million or 14.7%. The 14.7% third quarter sales increase was due to improvements across all 3 segments, led by a 32.3% increase in our Tubular and Energy Services segment, with the Construction Products segment increasing 12.2% and our Rail Products and Services segment increasing 9.1%. The Tubular and Energy Services sales increase of $7.4 million or 32.3%, was driven by substantial improvement in both our upstream Test and Inspection division as well as our midstream Protective Coatings division. This growth was partially offset by precision measurement system sales, which declined in the quarter. Our third quarter Construction segment sales improved from the prior year by $4.2 million or 12.2%, both our Fabricated Bridge and Precast Concrete Products division drove year-over-year improvement with Fabricated Bridge sales increasing by 106.8% and Precast Concrete Product sales increasing by 8.6%. The Rail sales improvement of $5.2 million or 9.1% was led by our domestic Rail Products and Rail Technology businesses. Our domestic Rail businesses saw a 13.8% increase led by Rail Distribution in Allegheny Rail Products. Rail Technologies sales increased year-over-year at both our European and North American divisions. As a percent of third quarter 2017 sales, Rail accounted for 47.2%, Construction was 29.7% and Tubular and Energy Services was 23.1%. Now looking at gross profit. Our consolidated third quarter 2017 gross profit margin was 20.1%, an increase of 280 basis points from the prior year quarter, with improvements in each of our 3 segments. Tubular gross profit margin improved significantly by over 1,800 basis points. Construction saw an improvement of 290 basis points, while Rail gross profit margin increased 80 basis points. The Tubular and Energy Services gross profit margin experienced increases at each of our divisions within the segment. Our midstream Protective Coatings and our upstream Test and Inspection businesses were the primary contributors, both of which were helped by continued improving market conditions. While to a lesser extent, gross profit margins in our midstream precision measurement systems business also improved. Construction segment gross profit margins increased 290 basis points to 20.6%. This was primarily driven by our Precast Concrete Products division, and to a lesser extent, our Piling Products business. The Rail segment gross profit margin increase was due to increased margins within domestic Rail Products as well as Concrete Rail Products, these increases were partially offset by a reduction within our Transit Products division. Moving on to expenses. Our consolidated selling and administrative expenses increased by $411,000 or 2.1% to $20.2 million in the third quarter due to personnel-related cost increases totaling $821,000, partially offset by lower litigation costs of approximately $468,000. As a percent of sales, selling and administrative expense decreased 190 basis points to 15.4% from 17.3% in 2016 third quarter. Amortization expense remained flat as compared to prior year third quarter. Interest expense increased by $506,000, due principally to higher interest rates on our outstanding debt. The company's income tax benefit for the third quarter was $208,000 on pretax income of $3 million. Third quarter 2017 income tax benefit primarily resulted from changes in our estimated annual effective tax rate. Third quarter 2017 net income was $3.2 million or $0.31 per diluted share compared to a loss of $6 million or $0.58 per diluted share. Our prior year third quarter earnings included impairment charges totaling $6.9 million or $5.9 million net of tax. Excluding the prior year impairment charge, the 2016 adjusted net loss would have totaled less than $100,000 or less than $0.01 per diluted share. Adjusted earnings before interest, taxes, depreciation, amortization and adding back prior year impairment charges, totaled $9.9 million in the third quarter of 2017 compared to $4.1 million in 2016's third quarter. Our credit agreement contains a minimum EBITDA covenant on a trailing 12-month basis, which increased to $23 million during the third quarter of 2017 per the agreement. EBITDA, as defined in the credit agreement, has certain noncash adjustments that are traditional financial EBITDA calculation might not incorporate. As a result, the third quarter 2017 EBITDA calculation pursuant to the credit agreement for the trailing 12-month period is approximately $9.1 million higher than the required $23 million minimum. Turning to the balance sheet. Working capital, net of cash and current debt, increased by $15.1 million compared to the 2017 second quarter. This was primarily driven by a $19.4 million increase in inventory, which is supported by our fourth quarter sales outlook. Accounts receivable increased by $2.3 million and the related DSO increased slightly to 50 days in the third quarter compared to 49 days in the second quarter. Accounts payable and deferred revenue increased $7.9 million as compared to the second quarter. Inventory increased by $19.4 million compared to the 2017 second quarter, as we build inventory due to improved third quarter orders and ending backlog levels. We continue to feel good about our accounts receivable and inventory management results, as DSO performance in inventory turns continue to improve over prior year. Our total outstanding debt increased $300,000 in the quarter. For the first 9 months of 2017, we have reduced our total debt by $21.3 million. Now moving to our cash flow activities. Our cash used by operating activities in the third quarter of 2017 was $2.4 million compared to $5.3 million provided in the prior year quarter. For the first 9 months of 2017, cash flow from operating activities provided $27.5 million compared to $11.9 million in 2016. Third quarter capital expenditures were $738,000 compared to $1.4 million in the prior year. We anticipate our 2017 capital expenditures to range between $6 million and $7 million. Of this amount, approximately $2.7 million relates to a Class 1 railroad customer service contract, which required capital beginning in the first half of 2017, and is intended to build our aftermarket service capabilities for Rail operators. 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 will, next, provide some commentary on our new orders and backlog activity. Our third quarter 2017 new orders were $145.5 million, an increase of 31.3% compared to last year's third quarter. Tubular segment orders improved 97.1% over the prior year quarter by improved upstream order activity in our Test and Inspection division. And our midstream order activity also improved year-over-year with Protective Coatings and precision measurement systems seeing increases as well. Third quarter orders for the Rail segment increased 44.5% compared to the prior year quarter, primarily due to increased volumes at our domestic distribution and friction management businesses as well as new products with our Transit division. We continue to benefit from investment in track infrastructure, as freight rail operators focused on operating performance and the need to maintain resilience in their network. Construction segment new orders were down 11.1%, as Piling division orders declined more than new orders in both our Fabricated Bridge and Precast Concrete Products divisions grew. Fabricated Bridge new orders were strong, despite not having a mega bridge project. Backlog stood at $189.6 million at the end of the third quarter, up $45.8 million or 31.8% from the prior year backlog of $143.8 million. Backlog within our Tubular and Rail business segments increased as of September 30, 2017, compared to 2016, with a 97.5% increase in the Tubular segment and a 60.6% increase in the Rail segment. These were partially offset by 1.1% in Construction segment backlog. In closing, our focus remains on capitalizing on the recovering markets and the organic growth programs intended to increase sales and restore profitability. We will also continue to focus on maximizing free cash flow through the end of the year with our goal toward further debt reduction. That concludes my comments on the third quarter 2017. With that, I will now turn it over to Bob.

[Robert Bauer:]

Thank you, Jim. Welcome to everyone on the phone. We appreciate you joining us today. There are a number of highlights to our third quarter results that I'm going to go through. Orders through 3/4 of the year and the September ending backlog currently stand out among them, as does operating cash flow through 9 months. While we didn't generate cash in Q3, as a result of inventory needed to service the backlog, our operating cash flow after 3 quarters is very strong and we've made meaningful progress toward debt reduction this year. The order entry strength in the third quarter was driven by solid demand in the Rail and Tubular and Energy segments, the 31% increase in orders year-over-year for the quarter helped boost the year-to-date bookings growth rate to over 18%. We are seeing continued strengthening in a number of our end markets compared to the prior year, and in the case of the North American freight rail market, there is a shift in spending toward the Products and Services we provide, that's driving some of our growth. In the Tubular and Energy Services segment, where bookings increased 97% in the quarter, we continued to see rising demand from the energy markets we serve. Test and Inspection Services for upstream applications have increased every quarter in 2017, where bookings and sales have more than doubled in the third quarter and year-to-date. And the midstream market recovery, which tends to lag the upstream recovery, has strengthened considerably as orders for Protective Coating of line pipe and measurement solutions for oil and gas pipeline applications were both more than double the third quarter of last year. In our Rail segment, new orders were up 45% in Q3. New Rail, transit projects and Rail Technologies, all drove a good portion of the growth. We had a very good quarter for booking transit projects across the U.S. and Europe, which drove increases in new Rail, transit fastening systems and automation solutions, helping bring year-to-date bookings for the Rail segment to 29% over prior year. Construction orders, which were down 11% year-over-year in the quarter, and down almost 9% year-to-date, do not reflect a weak market. Our Bridge division accounts for most of the year-to-date decline, as we have not booked a large bridge project like the Peace Bridge project that we booked in the second quarter of last year, which is still working its way through our backlog and will continue to do so through the rest of the year. Our Precast Concrete business is once again up year-over-year, and the Piling division is slightly off of last year's pace. In addition to the overall strengthening of our business in line with market trends, we're having success with our organic growth programs, our more recently acquired businesses made a more significant contribution to orders growth in Q3, and programs to expand geographic and market coverage have clearly contributed to our bookings strength. So, our September ending backlog increased another $13.5 million sequentially from June, and it's up $46 million or 32% over prior year. Tubular and Energy backlog is up 98%, Rail segment is a very strong 60% and the Construction segment backlog stands at $75 million, roughly what it was last quarter in June and last year in September, despite the fact that we haven't had a major Bridge project booked this year. Although, we don't carry a lot of backlog in some businesses, our backlog usually declines in Q3, as we head into the seasonal slowdown for Construction in North America. So, let me comment now on each of these 3 reporting segments in terms of the market outlook. I'll begin with Rail. Transit projects are looking better in North America. We have succeeded with numerous opportunities as transit agencies expand to serve more geographic area and passenger traffic. European and more specifically, U.K. investment continues as passenger networks are extended, especially in the most congested areas. We continue to win substantial business as investment in London and inter-city networks remained solid. Freight Rail in North America is much better than prior year as coal carloads are up 12% in the U.S. and 6% in Canada for the year. It appears that the recovery in coal shipments is beginning to moderate and domestic coal shipments are not expected to continue to show much growth from this point forward. Capital spending in the freight rail market has been reported at lower levels than prior year by several of the Class 1 carriers, continuing to reinforce our belief that operations and network infrastructure are getting more share of the spending this year than rolling stock and locomotives and of course, that's good for us. Looking at Energy now. The upstream market activity continues to increase, even as a rig count additions have moderated. The U.S. rig count has more than doubled since the bottom in 2016. We are seeing the impact of productivity that is driving well count per rig at a higher rate along with increased depths and lateral lengths, which are driving the need for more Tubulars per rig that's deployed. We are now more than a full year past the May 2016 bottom in the rig count. And U.S. operators continue to forecast production rate increases. As they reach 9.3 million barrels per day in September, the EIA is now forecasting this number to be 9.9 million barrels per day in 2018, which should continue to drive demand for our Tubular services. Midstream projects are following the increase in production volume, as we have received new orders for coated pipe and measurement systems well above prior year levels. Our backlog is now stretching into 2018 in both of these businesses, our efforts to attract new customers for gas measurement systems has also provided some strength in orders. With regard to the Construction segment, although we haven't booked a large project in our Bridge division this year, it doesn't signal any weakness in our capabilities or ability to secure grid decking business. We remain a leader in the market for grid decking solutions, and projects requiring this unique solution can vary from year-to-year. The dynamics in the market have not changed. The number of structurally deficient, obsolete bridges has not declined in any meaningful way either. Highway, Bridge and port work remain steady. Our buildings business is growing, as we reach new markets and customers in the Northeast. And investments we made in our facility capacity earlier this year in our West Virginia concrete plant, are bringing in added revenue from further market penetrations throughout the Northeast U.S. market. So overall, our markets are showing more positive signs of continued investment. I'm going to turn to the P&L now. Jim covered a lot of detail on the P&L. But I was pleased to get the third quarter gross profit margins above 20%, as I indicated last quarter, and to see continued signs of our ability to improve gross profit margins. The 280 basis point improvement over prior year third quarter, reflects our progress in attacking this measure, including a few extraordinary charges and expenses that unfavorably affected gross margins. Our adjusted EBITDA for the quarter is continuing to reflect our progress on restoring profitability as well. The 390 basis point increase in adjusted EBITDA or almost $6 million, was driven by a substantial increase in Tubular and Energy Services, which has been an area of focus, but each reporting segment had solid improvement. Within the Tubular and Energy segment, there was improvement in all business areas and a substantial improvement in the upstream Test and Inspection Services area, where the market recovery was most pronounced. On a 9-month year-to-date basis, Tubular and Energy Services has achieved an 830 basis point improvement and therefore, is a significant driver behind restoring profitability in the entire company, where consolidated EBITDA had a 240 basis point improvement after 9 months. But solid performance also came from the Rail business, where EBITDA margins are 90 basis points better year-to-date and Construction is up as well, on a year-to-date basis. With three quarters of the year behind us, we can clearly see that the actions we have taken last year, and up to the first quarter of this year are having widespread impact and are contributing to the operating leverage we were looking for as well. SG&A is very much in line with expectations. In Q3, SG&A was 190 basis points of the margin improvement and year-to-date, it's accounting for 230 basis points of the improvement. I feel good about SG&A spending being $6 million below prior year spending on a 9-month basis. So, I feel like we've got our costs well in control. Turning now to cash flow and the balance sheet discussion. I'll comment first on the inventory increase, which was largely driven by four areas, First, measurement solutions, which has the highest backlog in over 2 years for systems headed to upstream and midstream applications. This was one of our most concerning markets when we started the year, and now are showing signs of a real strength. Second, new Rail and Concrete Ties, which are associated with several transit projects we secured in North America. Third area, our European Rail business, which also includes growth in transit-related projects as well as other automation solutions. And fourth and finally, the buildings division, where growth in Precast buildings orders, and therefore backlog is up considerably. So, our performance on inventory turns still remains better than prior year so far, in 2017. And I expect we'll finish the year better than prior year on terms. The balance of our working capital remains in line with expectations. Receivables have risen with volume as we would expect, but the payables increase has outpaced the growth in receivables. So, after using $19 million in cash in the quarter to fund the inventory, our operating cash flow is still $27.5 million year-to-date, and with capital spending at only $5.3 million this year, we've made some significant progress in reducing debt. So, by year-end, our working capital is expected to decline, as backlog typically decreases during our fourth quarter, and we expect to generate cash in Q4. We are forecasting full year cash flow that will bring net debt to between $90 million and $100 million at year-end, which would drive the company's net debt-to-EBITDA ratio below 3x. I'm going to wrap up with comments on a couple of other items and then go through the fourth quarter outlook. We had a number of other actions we took in Q3 intended to monetize nonstrategic assets. Among the actions are the sale of equipment for services that we're no longer providing the customers for field applied coating of line pipe. This service was an extension of our specialty coating business, and was very small in revenue and not profitable, and as part of our focus on fixing or exiting underperforming businesses, our outlook for acceptable profitability was not there. So, we decided to sell the equipment and exit that business. In a more significant move, we are planning to exit our joint venture business that was formed to make couplings for our threaded products division. We no longer consider the joint venture business to be strategic and actions have been taken that will lead to us selling our 45% interest. In 2015 and in 2016, our reported losses were $410,000 and $1.3 million respectively. And in 2017, our income after 3 quarters is only $386,000. By exiting the business, we will generate cash that we intend to use to pay down debt. So, turning now to the fourth quarter and full year outlook. Typically, our fourth quarter sales are below third quarter as certain segments of the Rail and Construction markets typically complete seasonal projects. However, with the starting backlog of $190 million, we are forecasting fourth quarter sales to be above third quarter, and in the range of $135 million to $142 million, and we anticipate another quarter with gross profit margins in excess of 20%. This is expected to result in full year 2017 sales in the range of $530 million to $537 million. And this volume is expected to bring our full year EBITDA to approximately $35 million to $37 million, up 95% from the prior year adjusted EBITDA of $18.5 million. We are projecting SG&A spending to finish the year below prior year levels despite the sales growth and EBITDA margin should improve by approximately 300 basis points. So, I'm going to conclude my comments there and return the call back to the operator.

[Operator:]

[Operator Instructions]. There are no questions at this time. I'd like to turn the call back to management for closing comments.

[Robert Bauer:]

Okay, well good. Well, thank you, operator. We appreciate everyone listening in today. Hopefully, you found our press release on our website distributed through the 8-K, apparently, the global wire service had a bit of trouble getting these out. But I'm sure you'll be able to find it through a number of means that we distributed it, it delayed our call for a few minutes. But with that, again, we'll thank you for listening in today. And we look forward to talking with you next quarter. So, long.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.