L.B. Foster Company
Q1 2018 Earnings Call Transcript

Published: 2 May 2018

[Operator:]

Greetings, and welcome to the L.B. Foster’s First Quarter 2018 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 being recorded. I would now like to turn the conference over to your host, Judy Balog.

[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 2018 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 first quarter financial results. Afterwards, Bob will review the company’s first 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, 2017, as updated by subsequent items filed with the Securities and Exchange Commission or 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 filings 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, 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 the 2018 first quarter were $122.5 million compared to $118.7 million in the prior year quarter, an increase of $3.8 million or 3.2%. The 3.2% first quarter sales increase was due to improvements within our tubular and energy services segment of 26% and our rail products and services segment increasing by 10.1%. These increases were partially offset by a reduction in the construction product segment of 22.6%. The tubular and energy services sales increase of $6.5 million or 26% was driven by substantial improvement in each of our business units within the segment compared to the prior year period. The rail sales improvement of $5.7 million or 10.1% was led by our European rail technologies businesses as well as domestic rail products. Our European rail technology businesses saw sales increases of 37.7% over the prior year, primarily from expanding transit projects, our domestic rail products increased 8.4% over the prior year period as class I activity remained strong. Our first quarter construction segment sales declined from the prior year by $8.4 million or 22.6%. Both our piling and fabricated bridge divisions drove the year-over-year reduction with piling sales decreasing by 35.5% and fabricated bridge sales decreasing by 35.3%. These reductions were partially offset by a 24% increase over the prior year quarter in precast concrete product sales. As a percent of first quarter 2018 sales, rail accounted for 50.8%, tubular and energy services was 25.6% and construction was 23.6%. Now looking at gross profit, our consolidated first quarter 2018 gross profit margin was 18%, an increase of 10 basis points from the prior year quarter, which was driven by our Tubular and Energy Services segment. Tubular gross profit margin improved significantly by 290 basis points. This was partially offset by construction, which saw a reduction of 220 basis points and rail gross profit margin was decreased by 60 basis points. The Tubular and Energy Services gross profit margin experienced increases at each of our business units within the segment with the exception of Threaded Products. Our midstream Protective Coatings and Precision Measurement Systems businesses were the primary contributors, both of which helped by continued improving market conditions, while to a lesser extent, gross profit margins in our upstream Test and Inspection Services business also improved. Construction segment gross profit margins decreased by 220 basis points to 14%. This was primarily driven by our fabricated bridge division and, to a lesser extent, our Piling Products business. The Rail segment gross profit margin decreased 60 basis points was due to reduced margins within our rail technology business. This was primarily offset by increases in our rail products businesses. Moving on to our expenses. Our consolidated selling and administrative expenses, increased by $1.2 million or 6.4% to $28.5 million in the first quarter due primarily to increased litigation cost related to the Union Pacific Railroad matter. Bob will make some comments regarding this matter after I am completed with my financial review. Amortization expense remained flat as compared to the prior year first quarter. Interest expense decreased by $150,000 due principally to the overall reduction in our outstanding debt as compared to the prior year. The company's income tax for the first quarter was $525,000 on a pretax loss of $1.5 million. First quarter 2018 income tax expense related primarily to income taxes and foreign jurisdictions, the company has a full valuation allowance against its U.S. deferred tax assets. Therefore no tax benefit was recorded on domestic operations during the first quarter 2018. First quarter 2018 net loss was $2 million or $0.20 per diluted share compared to a loss of $2.4 million or $0.23 per diluted share last year. EBITDA or earnings before interest, taxes, depreciation and amortization totaled $5.1 million in the first quarter 2018, which was consistent to last year's first quarter, but the $5.1 million includes increased litigation costs of $1.2 million as discussed. Again Bob will provide more detail on this matter. Our revised credit agreement contains a minimum EBITDA covenant on a trailing 12-month basis, which increased to $29 million in the first quarter 2018 per the agreement. EBITDA as defined in the credit agreement has certain noncash adjustments that a traditional financial EBITDA calculation might not incorporate. As a result, the first quarter 2018 EBITDA calculation pursuant to the credit agreement for the trailing 12 month period is approximately $9.2 million higher than the $29 million minimum EBITDA covenant calculation. Turning on to the balance sheet. Working capital net of cash and current debt increased by $1 million compared to the December 31, 2017. This was primarily driven by an increase in inventory, which is supported by an increase in new orders and ending backlog. Accounts receivable increased approximately $246,000 and our related DSO increased slightly to 54 days in the first quarter compared to the 50 days in the fourth quarter of 2017. Accounts payable and deferred revenue increased $11.2 million during the first quarter of 2018. Inventory increased by $3.5 million compared to December 31, 2017 as we built inventory due to improved first quarter orders and ending backlog levels. We continue to feel good about our accounts receivable and inventory management results. We will continue to focus on our overall working capital management activities. Our total outstanding debt decreased by $27.6 million or 21.3% in the current quarter. This reduction, primarily related to repatriation of $24.7 million of excess cash from our foreign subsidiaries. As a result of the company's earning level over the trailing 12 month period our interest rate spread will be reduced by 75 basis points to the lowest tier on the pricing grid per our debt agreement. This reduction will become effective on May 15, 2018. Now moving on to our cash flow activities. Our cash provided by operating activities in the first three months of 2018 was $2.6 million compared to $10.7 million in 2017. Of the $8.2 million reduction in operating cash flow, $4.1 million related to 2017 incentives that were paid out during the first quarter of 2018 and $3.8 million was due to increase in inventory to support the first quarter new order activity and backlog. First quarter capital expenditures were $723,000 compared to $3.5 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 our new and existing business opportunities. I will provide some commentary on new orders and backlog activity next. Our first quarter 2018 new orders were $176 million an increase of 8.1% compared to last year's first quarter, as each of the three segments experienced growth. We were very pleased with our most successful quarter in new orders since the first quarter of 2014. First quarter orders for the rail segment increased 10.2% compared to the prior year quarter, primarily due to increased volumes at our domestic businesses. We are pleased with the current state of the North American rail traffic and we continue to be encouraged by the current state of the freight rail market as both carloads and intermodal units improved year-over-year. Global transit projects have also contributed to the growth within the segment as we continue to see expansion within those markets we serve. Tubular segment orders improved 9.6% over the prior year quarter, driven by improved upstream order activity in our test and inspection division and our midstream order activity also improved year-over-year with protective coatings seeing an increase as well. Construction segment new orders were up 3% as our fabricated bridge division orders increased nearly 100% compared to the prior year quarter, partially offsetting this increase or decreases new orders in both our piling and precast concrete products division. Backlog stood at $220.3 million at the end of the first quarter up $25 million or 12.8% from the prior year backlog of $195.3 million. This led to the highest level backlog the company has experienced since the third quarter of 2014. As with new orders, each of our three segments had increased backlog compared to the prior year with a 21.1% increase in the tubular segment, a 14.5% increase in the rail segment and a 8.3% increase in construction segment backlog. In closing, our focus remains in increasing sales and profitability. We will also continue to focus on maximizing our working capital management and free cash flow. That concludes my comments on the first quarter of 2018. With that I will now turn it over to Bob.

[Robert Bauer:]

Thank you, Jim. With first quarter sales volume typically at seasonal low points, we're usually focused on a few other key measures to gauge whether the year is off to a good start. Sales volume was very close to forecast and when adjusting for the increase in legal expenses, EPS and EBITDA would have improved significantly over prior year on 3.2% better sales volume. Working capital was solid with only a modest increase in inventory as we prepare for increased volume in Q2. We generated cash in the quarter and more importantly, new orders and backlog were very strong, putting us in a position to boost sales in Q2 substantially over the first quarter. In addition, our debt position improved further as we took advantage of our foreign cash to pay down debt. We were very pleased to see solid order growth and double-digit backlog growth compared to prior year, particularly in light of the strong start we had last year. I'll spend more time on orders and backlog, but I'll begin with comments regarding the first quarter operating performance, The continued improvement in the tubular and energy services segment drove the consolidated first quarter gross profit increase, increased activity in the energy markets we serve particularly the midstream segment helped deliver a 26% sales increase in our tubular and energy segment over prior year, which drove significant operating leverage in the segment. While we're getting most of the tubular gross profit increase from projects that support midstream pipeline applications, the single greatest increase in sales is from the test and inspection services division that primarily serves upstream applications. The rail business segment had a very good quarter as well with sales up 10%, rail technologies drove most of the growth with a substantial impact from project and service activity in Europe, excellent expense control across the business group led to significant segment profit improvement over prior year. The construction segment unfavorably impacted results as volume declined from a very solid first quarter in 2017 since then grid decking projects have declined and piling sales are lower as a result of declining sales and commodity piling since the first quarter of 2017. We were pleased to see much better piling order activity in Q1 as bookings far exceeded sales. Across the entire company, our discipline around cost control continued in Q1. Excluding the $1.2 million increase in legal expenses, we kept SG&A costs flat with Q1 last year. We were anticipating an increase in legal expenses related to the Union Pacific concrete time matter, as we prepare for an October trial date. We are subject to court established deadlines regarding the completion of discovery, preparation and filing, our pretrial motions and other requirements, which will result in additional work in the second quarter. This activity will keep legal expenses above 2017 levels. A significant amount of work was done in Q1 related to fact and expert discovery, which is necessary to support our position. EBITDA performance in the first quarter was flat; however, excluding the increase in legal expenses, our operations performed much better than prior year. We did incur minor reorganization cost in the quarter and expect a few more small operational projects throughout 2018, intended to reduce cost. The team we have assembled overseeing operations has done a great job focusing on cost control and managing to deal with the growth throughout the last year without adding expenses back too fast. This take a great deal of focus and leadership on the part of our operating leaders, all of whom took on more responsibility late last year, starting with when we put the construction organization under John Castle, who continues to oversee the rail business as well. Greg Lippard is looking after key parts of the rail segment, including oversight of our key rail services expansion and Bill Tracy is looking after the tubular and energy services businesses with a great deal of emphasis on the upstream test and inspection division. These leaders and their teams are driving the key operational improvement programs and implementation of the important processes that are part of our operating business system. Let me turn to cash and the balance sheet discussion. Our ability to generate cash in Q1 is an excellent way to start the year. There's always pressure on cash in the first quarter with the low sales volume and the need to prepare for second quarter shipments. Generating $2.6 million in cash was significant as we strive to make progress every quarter in debt reduction and as previously mentioned, we intended to take advantage of our foreign cash position and apply it to all $24.7 million of cash repatriated to debt reduction. This and other working capital programs have reshaped our balance sheet significantly over the last five quarters. Our leverage ratio has improved further and as Jim said, our interest rates will be lower beginning in May. Capital spending was modest at $723,000 in Q1. Following $814,000 in the fourth quarter of last year, we've completed a period where we had intended to get CapEx to the bare minimum and we expect to increase this spending in future quarters as more opportunities are surfacing to fund growth and efficiency improvement. Turning now to new orders and backlog growth, the highlights, start with the fact that all three reporting segments realized increases in new orders in the first quarter. The rail segment order growth was the greatest at 10.2% lifting our backlog to 14.5% over prior year, new rail orders and projects serving the transit rail market provided the momentum. Our rail distribution business continues to recover from the decline two years ago, including increasing pricing. Across the world, we continue to see transit operators investing in infrastructure with expansion and modernization of existing operations. The freight rail operators in North America have been increasing spending on our products throughout 2017 and the activity in Q1 of 2018 showed continued growth in orders. Freight rail traffic in North America continues to look like it's improving, although Q1 typically has lower traffic due to seasonal demand in the industry. Friction management is becoming increasingly important to freight railroads as some see the demonstrated savings and wear and tear and our initiatives around growth and service contracts for friction management are moving forward as our team now covers U.S. locations from the East Coast to the West Coast. Tubular and energy services was right behind the rail segment in terms of order growth, with 9.6% in Q1 helping drive the backlog increase of 21% year-over-year. The backlog growth looks more substantial due to the increasing pace throughout 2017. Project in the midstream energy market have increased as new projects are getting funded, helping drive significant backlog increase especially from new orders and protective coating services. The increased activity in pipeline projects is most prominent in the regions where production increases are taking place in oil and gas development and where capacity shortfalls or the need to reach new locations exists. We're experiencing the same project activity strength in our measurement solutions business as the same midstream customers are in need of measurement solutions as pipelines are constructed. We're looking forward to this activity turning into an increase in new orders. It's not clear at this time whether the increase in spending is being impacted by users attempting to get ahead of anticipated cost increases in steel pipe that may be forthcoming due to tariff activity. A number of other favorable energy market indicators include the price of oil, finding support in the $60 range as a result of demand strength, low cost developers in the U.S. are better positioned to take production to all-time record levels due to substantial productivity gains and we continue to see rising rig counts in the United States. Tubulars needed to support the growth and number of wells and well depth is expected to drive demand for our services. Pricing is still a struggle in the upstream energy market and we are working diligently to restore margins to prior levels. And finally changes with Pemex are opening doors to other oil companies in Mexico. We are benefiting from new additive and injection systems being supplied to integrated oil companies that are getting more established in Mexico's gasoline distribution network. Construction orders were up 3% in Q1 and we were very pleased to see an 8% increase in backlog over prior year. The backlog growth in piling more than offset the decline in the bridge decking backlog and while we haven't had a large project in the bridge decking business, orders were very solid in the quarter on small and midsized projects. We are making some investments in piling inventory to take advantage of opportunistic projects that can ship from stock. Some projects are moving forward quickly as end-users potentially fear rising cost of steel products due to tariffs. Another strong indicator for the construction segment is backlog improving by $14.4 million or 20% since the beginning of the year, standing at $86 million at the end of March, we have more backlog than we did at any point last year in the construction segment. So in summary, it was a solid quarter for bookings across all three segments. We will start the second quarter with a backlog of $220 million. We anticipate solid revenue growth next quarter both sequentially and year-over-year and while we have a significant amount of piling and rail distribution growth occurring this year, our consolidated gross margins are expected to increase sequentially over Q1 by as much as 200 basis points. Now before I conclude my comments on operations, I thought I would make a quick comment on Section 232 and steel prices. Since the Section 232 Act creating tariffs and quotas on steel was enacted, we've tracked several price increases related to various steel products. We still see a great deal of uncertainty regarding forecasts of bow each market or product may be affected, particularly in light of negotiations and applications for exemption that are still taking place. Markets we serve where steel is a major component have wide raging supply chain characteristics as it relates to foreign-made product. This is making it difficult to quantify changes and forecast the impact of each of our markets at this time. The significant part of our steel spend is within the new rail distribution and piling distribution businesses. In each of these businesses, we buy and resell product often for specific projects where the input costs are known before we price the project. This allows us to evaluate our gross margin on the project and determine the end market price accordingly. During Q1, we did experience increases in steel input costs in both businesses. We are also selling product from inventory and from time to time, this can lead to favorable and unfavorable variances as prices fluctuate. In the past, we've demonstrated that we can manage through environments where prices are changing, increasing the price environments and distribution businesses, are typically viewed as favorable as they lift sales revenue and provide an opportunity to make more profit at the same margin. Raw material prices for bridge decking projects is on the rise. We attempt to pass these costs on, but there can't be a lag before the selling price catches up with rising input costs. We attempt to protect ourselves from such risks through the use of the index escalators or bid expiration dates where possible. We can also be impacted by quotas on foreign sources for oil country tubular goods and line pipe. I believe we are benefiting today from being aligned with an American-made line pipe supplier for midstream pipe applications. Order activity has been very strong since the first of the year and it's all with our American mill partner. We do provide services on foreign-made pipe for drilling applications. Korean made pipe is a significant component of the foreign sourced pipe. Reduction in supply of this pipe could shift supply to American mills in a short period of time. We also serve the American suppliers however. The impact in our revenue will depend on who customers choose as their pipe supplier. I'm going to end my comments there and will turn it back to the operator for questions.

[Operator:]

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back over to Bob Bauer for closing remarks. All right. Thank you, operator. Well, we appreciate everyone's attention today and we'll hope to see you on the call next quarter. Thank you very much.

[Operator:]

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