L.B. Foster Company
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Greetings, and welcome to the L.B. Foster’s Fourth Quarter 2017 Earnings Teleconference. 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 being recorded. I would now like to turn the conference over to your host, Judy Balog. Thank you. You may begin.

[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 fourth 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 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 fourth quarter presentation on our website under the Investor Relation’s tab for those who have online access. This evening, Jim will review the company’s fourth quarter financial results. Afterwards, Bob will review the Company’s fourth quarter performance and provide an update on significant business issues and market developments. We will then open 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 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. Reconciliations of U.S. GAAP to non-GAAP measures 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 measure. 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 2017 fourth quarter were $141.3 million, compared to $106.6 million in the prior year quarter, an increase of $34.8 million or 32.6%. The 32.6% fourth quarter sales increase was due to improvements across all three segments led by an 88.5% increase in our Tubular and Energy Services segment, our Rail Products and Services segment increasing by 35.2% and the Construction Products segment increasing by 3.6%. The Tubular and Energy Services sales increase of $15.6 million or 88.5% was driven by substantial improvements in both our Upstream Test and Inspection division, as well as our Midstream Precision Measurement Systems and Protective Coating divisions. This growth was partially offset by our threaded product sales, which declined in the quarter. The Rail sales improvement of $17.8 million or 35.2% was led by our North American Rail businesses. Our Rail Products businesses saw a 35.2% increase led by distribution and transit products. Our Concrete Ties division saw a 200% increase in sales, compared to the prior year quarter. The rails technology sales increase of 18.8% included a year-over-year increase at both our North American and to a lesser extent European divisions. Our fourth quarter Construction segment sales improved from the prior year by $1.4 million or 3.6%. Both our Fabricated Bridge and Precast Concrete products divisions drove the year-over-year improvement with Fabricated Bridge sales increasing by 43.2% and Precast Concrete Products sales increasing by 22.3%. This growth was partially offset by our piling sales, which declined in the quarter. As a percentage of fourth quarter 2017 sales, Rail accounted for 48.3%, Construction was 28.2% and Tubular and Energy Services was 23.5%. Now looking at gross profit. Our consolidated fourth quarter 2017 gross profit margin was 19.7%, an increase of 210 basis points from the prior year quarter with improvements in each of our three segments. Tubular gross profit margin improved significantly by 1240 basis points, compared to the fourth quarter 2016. Construction had an improvement of 200 basis points, while Rail gross profit margin increased by 40 basis points. The Tubular and Energy Services gross profit margin experienced a significant increase. 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. This was partially offset by reductions in our gross profit margin in our Midstream Precision Measurement Systems and Threaded Products businesses. Our Construction segment gross profit margins increased by 200 basis points to 18.7%. This was primarily driven by our Precast Concrete business 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 Rail Technologies division. Looking at our expenses. Our consolidated selling and administrative expenses increased by $463,000 or 2.3% to $20.5 million in the fourth quarter due to personnel-related cost increases totaling $1.5 million partially offset by reduced insurance reserves of approximately $1 million. As a percentage of sales, selling and administrative expense decreased by 430 basis points to 14.5% from 18.8% in the 2016 fourth quarter. Amortization expense remained flat as compared to the prior year fourth quarter. Interest expense decreased by $147,000 due principally to reductions in our outstanding debt. The company’s income tax expense for the fourth quarter was $3.2 million on pretax income of $3.5 million. Fourth quarter 2017 income tax expense was impacted by the U.S. Tax Cuts and Jobs Act which was enacted in December 2017. The net effect of this act increased our income tax expense by $1.8 million, as a result of the one-time transition tax and the remeasurement of deferred tax assets and liabilities. Fourth quarter 2017 net income was $289,000 or $0.03 per diluted share, compared to a loss of $40.9 million or $3.97 per diluted share last year. Our prior year fourth quarter earnings included income tax expense from the valuation allowance, as well as deferred taxes related to unremitted foreign earnings. Earnings before interest, taxes, depreciation and amortization totaled $10.4 million in the fourth quarter 2017, compared to $3 million in the last year’s fourth quarter. Our revised credit agreement contains a minimum EBITDA covenant on a trailing 12 month basis, which increased to $25 million to fourth quarter 2017 per the agreement. EBITDA as defined in the credit agreement has certain non-cash adjustments that a traditional financial EBITDA calculation might not incorporate. As a result, the fourth quarter 2017 EBITDA calculation pursuant to the amended credit agreement for the trailing 12 month period is approximately $12.3 million higher than the $25 million minimum EBITDA covenant calculation. Onto the balance sheet side. Working capital, net of cash and current debt was reduced by $4.6 million compared to the 2017 third quarter. This was primarily driven by a $6.5 million decrease in inventory in the fourth quarter, as higher levels of inventory were on hand at September 30, 2017 to support our fourth quarter sales increase. Accounts receivable decreased by approximately $2.7 million and our related DSO remains flat at 50 days in the fourth quarter, compared to the third quarter. Accounts payable and deferred revenue decreased $8.3 million, as compared to the third quarter. We will continue to focus on working capital management activities throughout 2018. Our outstanding debt decreased by $8.3 million in the current quarter. We additionally paid off our term loan during the fourth quarter. For 2017, we have reduced our total outstanding debt by $29.6 million. Now moving on to our cash flow activities. Our cash provided by operating activities in the fourth quarter 2017 was $11.9 million, compared to $6.5 million provided in the prior year quarter. For the year, 2017, cash flow from operating activities provided $39.4 million, compared to $18.4 million in 2016. Fourth quarter capital expenditures were $814,000, compared to $1.2 million in the prior year. We anticipate our 2018 capital expenditures to range between $6 million and $8 million. Our capital expenditures will continue to focus on programs that are targeted at improving both new and existing business. Let’s look at our new orders and backlog activity next. Our fourth quarter 2017 new orders were $115.5 million, an increase of $1.9%, compared to last year’s fourth quarter. For the full year, new orders increased 14.5%. During the fourth quarter, Tubular orders improved by 75.8% over the prior year quarter driven by significant orders in our Midstream Protective Coatings and Precision Measurement businesses. We also continue to see favorable order activity in our Upstream Test and Inspection Services business. During the full year 2017, the Tubular segment’s new orders increased 53.4% compared to the prior year. Fourth quarter orders for our Rail segment decreased 15%, compared to the prior year quarter, primarily due to reduction in our North American Rail businesses. These reductions were partially offset by strong quarter from our European businesses. We are pleased with our current North American rail traffic and we continue to be encouraged by the state of the freight rail markets as both commodity carloads and intermodal units improved year-over-year. For the full year 2017, the Rail segment new orders increased 17% compared to the prior year. Construction segment new orders were down 5.6% as our Piling division orders declined 11.8% and Fabricated Bridge orders decreased 5.8%, partially offsetting this decline was an increase in new orders in our Precast Concrete products division, which increased 4.3%, compared to the prior year. During the full year 2017, the Construction segment new orders decreased 8% compared to the prior year. Backlog stood at $166.9 million at the end of the fourth quarter, up $19.4 million or 13.2% from the prior year backlog of $147.5 million. Backlog within our Tubular and Rail business segment increased as of December 31, 2017, compared to 2016 with nearly a 110% increase in the Tubular segment and a 9.7% increase in the Rail segment. These were partially offset by a reduction of 1% in the Construction segment backlog. Our continued focus remains on increasing sales and profitability, as well as maximizing working capital and free cash flow. That concludes my comments on the fourth quarter of 2017. With that, I will now turn it over to Bob.

[Robert Bauer:]

Thank you, Jim and thank you to everyone on the phone for joining us today. When the year started, our team was determined to make significant progress toward restoring profitability and capitalizing on the opportunities in front of us after taking numerous actions in the prior year to get our costs in line with lower volume. We were very pleased that our fourth quarter and year ended strong. We provided some targets last quarter on full year EBITDA and debt reduction that we were determined to meet close the year and were pleased to report that we met or exceeded those targets. I’ll cover some of the highlights of the results that Jim spoke about and I’ll provide some background as well on full year results and current business conditions. The fourth quarter results reflect a significant improvement over the prior year quarter. Solid order growth throughout the year help drive an increase in backlog that peaked at $190 million at the beginning of the fourth quarter helping lead us to a sequential increase in sales from the third quarter and the 33% increase in sales compared to the prior year quarter. It felt like we had the wind at our back this year, the market recovery, combined with success from organic growth initiatives led to a very nice turnaround. Having sales increase in each of our three reporting segments with solid double-digit sales growth in Rail and Tubular was a sign of market strength and solid execution on our growth initiatives, which capped off a solid year of recovery in the two segments that really suffered in 2016. We maintained our discipline around cost control for the year helping us deliver the operating leverage needed to keep us on a path to improve profitability. The increase in sales volumes certainly played an important part in the 49% increase in gross profit. However, the 250% increase in EBITDA would not have happened without the disciplined cost control following the actions we took in 2016. The fourth quarter is typically a very important one for us in generating cash, usually outpacing all other quarters in comparison. We generated nearly $12 million in operating cash flow. Inventory declined by $6.7 million in the quarter and trade working capital management overall contributed approximately $2 million to cash flow. The focus on working capital allowed for added sales with minimal working capital to deal with the growth. Turning to orders for the quarter, I am not particularly concerned with the 2% year-over-year orders growth in the fourth quarter throughout 2017 new orders growth in each quarter compared to prior year had wide ranging differences from being up 38% to down 8%. And the typical decline in Q4 due to seasonal downturns in our Transportation and Construction-related businesses can vary based on year-end capital plans. What’s more relevant is our ending backlog in Q4, which is up 13% over prior year following a year in which orders were up 14.5% for the full year. This is more representative of our current business climate, which has been accompanied by positive market indicators for most markets that we serve. I’ll cover a few highlights of the order activity and backlog by each of the reporting segments and I’ll comment on both the fourth quarter and the full year. Tubular and Energy services certainly reported the strongest order growth all year as this segment recovered with solid momentum throughout 2017. We finished strong with fourth quarter orders as you heard up 76%, full year orders increased 53%, and ending backlog finished at more than double at the end of last year. The strengthening took place across all divisions in the segment, although it wasn’t until late in the year for some businesses. The backlog increase was driven by projects serving Midstream Pipeline customers, particularly since the Upstream Services business, which grew considerably doesn’t carry much backlog. In our Rail segment, new orders were down 15% in Q4, but they were up 17% for the year and year ending backlog grew almost 10%. The decline in fourth quarter orders was attributed to new Rail and Concrete Ties. However, both of these were up double-digit for the year. Every division contributed to the full year-over -year orders growth, transit projects with several of our products including new rail drove a good portion of the new orders in 2017. Construction orders, which were down 5.6% in the fourth quarter and down 8% full year, ended the year with backlog that was nearly flat with prior year at $71 million. All year, we talked about the lack of a mega project order in our Bridge division. We have had nice success with smaller projects that has helped to keep our backlog healthy. The Precast Buildings business continues to grow as we develop new products and expand into underserved market areas. Our added reach into the Northeast U.S. market continues to drive some of the growth, as does a number of new products launched from our other facilities. So I’ll turn to the P&L part of my comments. As I’ve mentioned throughout the year, our top priority in 2017 was restoring profitability. I believe we made considerable progress given the strength of the market recovery and the slow rate at which pricing is improving in some sectors. Full year gross margins are 50 basis points better than prior year despite an 80 basis point decline in the Rail segment. The lower gross margins in the Rail segment were impacted by three factors. First, growth in sales from lower gross margin businesses; second, our transit businesses in both the U.S. and Europe had lower margin than prior years due to specific projects, and the services and costs associated with those projects; and third, funding of startup programs for our on-track field services of friction management that support multiyear service agreements had a drag on gross margins. These are attractive service contracts where we are responsible for maintaining friction management and lubrication systems for freight railroads. We do expect gross margins on these service segments to improve as start-up costs are behind us and new field crews become more productive. EBITDA for the Rail segment had a 140 basis point improvement for the year. So while the gross margin had some deterioration, the cost controls and other actions I spoke of earlier were at work in the Rail segment, which had a nice bottom-line improvement. Tubular and Energy Services gross profit in the quarter reflected continued strengthening in the energy markets, as volume drove operating leverage. Full year gross profit was driven by a combination of operating leverage and cost control that resulted in an 870 basis point improvement. The turnaround in our Upstream Service business made significant progress during 2017. Gross profit improvement in this division was substantial. The year-over-year EBITDA growth in Upstream Services accounted for nearly half of the EBITDA growth in the Tubular and Energy Services segment in 2017. There is still room for improvement in the Upstream Test and Inspection Services division. Although the magnitude of the improvement it will drive in future segment profitability is expected to moderate. So, summarizing, overall for the consolidated company, our EBITDA for the year doubled to $36 million. All three reporting segments contributed to the increase with Tubular and Energy Services contributing the most and all three reporting segments had EBITDA margin improvements. So looking at cash and our debt, among the most significant highlights of the year for me, is the combination of EBITDA improvement and cash flow generation that resulted in the full year net debt-to-EBITDA leverage ratio of 2.6. We only needed $7.3 million of working capital increase to fund $53 million of full year sales growth thereby allowing us to generate operating cash flow of $39 million. By holding capital spending to just over $6 million, we created the basis for a reduction in debt of $29.6 million, ending the year with net debt of $92 million and well within our $90 million to $100 million target range. There are too many people to mention across our business that contributed to our ability to reach these targets and deliver results substantially better than the prior year. A leverage ratio of 2.6 looks like a long stretch at the end of 2016 and I am very proud of our team for what we have accomplished. We will continue to focus on strengthening our balance sheet and anticipate reducing debt further in 2018. The new tax laws provide incentive for repatriation of cash held in foreign operations, which we intend to use for further debt reduction. So I’ll wrap up with some comments on the first quarter outlook. We are expecting typical seasonality in the first quarter of 2018 where sales typically declined sequentially from the fourth quarter. 2018 could be a year in which we return to more seasonal patterns in our business. Project activity looks very favorable in Transit Rail, Construction and the energy markets that we serve. The outlook for the Upstream and Midstream Energy sectors has been very favorable as the price of oil continues to remain in the $50 to $60 per barrel range. We have seen several U.S. operators forecast increases in new wells as they intend to push production capacity upward and this should call for additional service work on energy tubulars. We are seeing several midstream pipeline projects move forward as our backlog for Protective Coatings and Measurement Systems projects increased considerably in Q4. Our outlook for 2018 is positive for this market. So in summary, we have a favorable outlook for the year, provided there is no disruption or adverse effect from import restrictions on steel products. We are anticipating the announcement connected with the Section 232 on steel imports that could pose some risk that leads to either price inflation or restrictions on supply to our facilities or with our partners, but it could also bring some opportunity if the actions favor us and/or favor our partners. So, I will end there with my comments before I conclude though once again, I want to thank our team around the world that really helped deliver not only a great quarter, but a great year that’s made such a big impact on the company. So with that, I will turn it back to the operator whom will open it up for questions.

[Robert Bauer:]

All right. Well, we won’t have any long closing comments, but thank you for joining us today. We appreciate your interest and we’ll look forward to catching up with you next quarter. Thank you and good night.

[Operator:]

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