L.B. Foster Company
Q4 2018 Earnings Call Transcript

Published: 18 Mar 2019

[Operator:]

Greetings, and welcome to the L.B. Foster's Fourth Quarter 2018 Results Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. Please note this conference is being recorded. I would now like to turn the conference over to, Judy Balog, Investor Relations Manager. Thank you, you may begin.

[Judy Balog:]

Thank you. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's fourth quarter and full year 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 morning, Bob will discuss UP settlement that was announced last week. Afterwards, Jim will review the company's fourth quarter financial results. Bob will then 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 through 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 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 adjusted EBITDA statements and other adjusted results. A reconciliation of net loss to non-GAAP adjusted EBITDA and other non-GAAP measures 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. Additionally, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP measures, which include certain adjustments to EBITDA and reported GAAP net loss and diluted earnings per share. In 2018, the company made adjustments to exclude the impact of the Union Pacific Railroad Concrete settlement expense. Our accompanying earnings presentation reconciles these non-GAAP measures to the corresponding GAAP measure. Before proceeding, I have an important announcement to make on an accounting method change. During the fourth quarter of 2018, the company changed its method of accounting for certain inventory in the United States from the last-in first-out method to the average cost method. All prior periods presented in our financial information has been retrospectively adjusted to apply the new method of accounting. Quantitative reconciliation of the prior period adjustments are included within our earnings presentation and press release. With that, we will commence our discussion. And I will turn it over to Bob.

[Robert Bauer:]

Thank you, Judy. As Judy mentioned before we begin discussing the fourth quarter and full year results, I will address the recent announcement around the resolution of litigation with Union Pacific Railroad. Last Thursday, March 14th, the company announced that we have reached the settlement with Union Pacific on litigation they filed in 2015 for warranty claims related to concrete ties manufactured at our Grand Island, Nebraska facility. The brief history behind the lawsuit begins with L. B. Foster furnishing approximately 3.2 million ties from our Grand Island, Nebraska facility to Union Pacific between the years of 1998 and 2011. In 2011, Union Pacific claimed it was entitled to replacement of concrete ties get claimed or cracking and failing prematurely. L. B. Foster identified manufacturing conditions, largely related to the 2006 to 2007 period, which could shorten the life of ties produced in that timeframe. The parties entered into an agreement in 2012 to identify tiles eligible for warranty replacement and create a process for managing the replacement of defective ties. As claims were submitted following this agreement, L. B. Foster provided ties to the Union Pacific but also disputed several of the claims in the number of ties eligible for warranty replacement. This was followed by a complaint Union Pacific filed in 2015, alleging that ties were cracking due to manufacturing workmanship or defect and saw damages for the value of unfulfilled warranty ties and ties it had claimed would become warranty eligible, cost for replacement ties and other damages. L.B. Foster denied liability, asserted that Union Pacific's conduct was wrongful and asserted defenses and counterclaims for damages. And this has all been a matter of public record. Turning now to the settlement agreement. We announced last week, on March 14th, the material terms of the settlement agreement on Form 8-K, which include the following. L.B. Foster has agreed to pay Union Pacific $50 million in installments, without interest over six years. Payment of $2 million was made after signing the agreement and will be followed by installments of $8 million annually over the next six years beginning in 2019. Union Pacific has agreed to purchase products and services from the company in an aggregate amount of $48 million over the same six year period, or approximately $8 million annually. This of course means that L.B. Foster is once again an approved supplier to the Union Pacific Railroad for certain products and services. Specific terms of the purchase agreement, such as product names, services, pricing and terms of sale will remain confidential as is the case with all of our customer agreements. The agreement also includes a mutual release of all claims and warranty obligations relating to all concrete ties that we sold to the Union Pacific Railroad. As I mentioned in the published announcement, it is always very positive when a resolution to a matter of this type can include restoring the commercial relationship between the two companies, the entire L.B. Foster team and our Board of Directors looks forward to conducting business with Union Pacific once again. And finally, I want to emphasize that the Board of Directors and management of the company believe that this settlement agreement is in the best long-term interest of our shareholders, particularly since it includes the restoration of our commercial relationship, resolves all past and future claims regarding concrete ties and eliminate the litigation costs, uncertainty and risk associated with a possible unfavorable outcome at trial. So, I will now turn the call over to Jim Maloney. He will proceed with discussing the financial reporting impact and the results for the quarter. And I will then return following his comments and discuss some of the highlights of the fourth quarter and the full year 2018. Jim?

[James Maloney:]

Thank you, Bob. The company has filed a Form 8-K on March 14th, along with a press release highlighting the financial impact of the settlements with Union Pacific. As settlement negotiations progressed after year-end, we monitored the progress allowing for as much time as possible for reporting fourth quarter and full year 2018 results to comply with requirements of reporting subsequent events if an agreement were reached. Based on reaching a conclusion to the settlement last week, we determined that the company should report the impact in our fourth quarter and full year results for 2018. We are filing our 2018 Form 10-K today, among other exhibits that will furnish details, reflecting operating results with and without the settlement charge. The company has taken $43 million non-cash charge in the fourth quarter, taking into consideration the existing $7 million reserve to establish $50 million liability for future cash payments in 2019 through 2024. For the purpose of helping you understand the underlying business performance, many of our comments today will be based on results, excluding the charge where the non-cash charge has an impact, I will point those out. As a result, I will often refer to adjusted EBITDA or other adjusted results, which do not include the $43 million charge. On that basis, I will begin my remarks. Net sales for the 2018 fourth quarter were $165 million compared to $141 million in the prior year quarter, an increase of $23 million or 16.4%. The 16.4% fourth quarter sales increase was due to improvement across all three segments, led by an 18.7% increase in our Rail Products and Services segment, our Construction Products segment, increasing by 15.3% and Tubular and Energy Services segment increasing by 13.1%. The rail sales improvement of $13 million or 18.7% was led by our North American Rail businesses. Our Rail products businesses saw a 20% increase led by transit, distribution and Allegheny rail products. The rail technology sales increase of 16.7% was primarily supported by our European divisions. These increases were partially offset by reductions within our Canadian operations. Our fourth quarter construction segment sales improved from the prior year by $6 million or 15.3%. Our piling products drove the fourth quarter growth with an 81.6% increase over the prior year period. The increase was partially offset by reductions at our fabricated bridge operations, which was unable to secure a megaproject during 2018 in our precast concrete products. The Tubular and Energy sales increase of $4 million or 13.1% was driven by improvements in both our upstream test and inspection business, as well as our midstream protective coatings business. The growth was partially offset by our precision measurement product sales, which declined in the quarter. As a percentage of fourth quarter 2018 sales, Rail accounted for 49.2%, construction was 28% and Tubular and Energy was 22.8%. Now looking at gross profit. Consolidated fourth quarter 2018 gross profit was $31 million, a $2 million or 8.6% increase over the prior year quarter. The growth was provided by a $4 million increase from Rail gross profit. This was partially offset by a reduction of $1 million in our construction gross profit. Our consolidated fourth quarter 2018 gross profit margin was 18.6%, a decrease of 130 basis points from the prior year quarter. Construction gross profit margin had a decline of 530 basis points and Tubular reported a decline of 290 basis points when compared to the prior year. These declines were partially offset by improvements of 170 basis points in the Rail gross profit margin. The rail segment fourth quarter gross profit increase of $4 million was due to a 90.7% increase within our rail products division, which was supported by both increased volumes and 700 basis point increase in gross profit margin. The increase was partially offset by a 6% reduction in Rail technologies gross profit that was primarily related to our North American operations. Our fourth quarter construction segment gross profit decreased by $1 million or 17.9% compared to prior year quarter. This was primarily driven by our fabricated bridge products and our precast concrete products divisions, which reported reductions of 65.9% and 30.3% respectively. The reduction was partially offset by our piling products, which increased by 78.7%. Fourth quarter segment gross profit margin was reduced by 530 basis points year-over-year due to suppressed volumes within fabricated bridge and precast concrete products. Looking at our expenses, our consolidated selling and administrative expenses increased $2 million or 8.3% to $22.2 million in the fourth quarter due to insurance reserves increasing by $1.1 million and an $800,000 increase in personnel related expenses. As a percentage of sales, selling and administrative expense decreased 100 basis points to 13.5% from 14.5% in 2017 fourth quarter. Management was pleased with the effectiveness of our cost containment programs, while our sales volumes continued to increase. Amortization expense remain flat as compared to prior year fourth quarter. Net interest expense decreased by $580,000 due principally to reductions in our outstanding debt. The company's income tax expense for the fourth quarter was $3.2 million on a pretax loss of $38 million. Fourth quarter 2018, net loss was $41 million or $3.97 per diluted share compared to income of $78,000 or $0.01 per diluted share last year. Our adjusted net income for the fourth quarter of 2018, which excludes the concrete type settlement expense, was $2 million or $0.21 per adjusted diluted share. Earnings before interest, taxes, depreciation and amortization in the concrete ties settlement or adjusted EBITDA totaled $11.4 million in the fourth quarter 2018 compared to $10.6 million in last year's fourth quarter. On the balance sheet side, working capital net of cash and current debt increased by $2 million compared to September 30, 2018. This was primarily driven by $10 million increase in inventory in the fourth quarter as higher levels of inventory are needed to support the fourth quarter order activity and backlog as we move into 2019. Accounts receivable increased by $1 million and our related DSO was 50 days in the fourth quarter, which was flat compared to December 31, 2017. Accounts payable and deferred revenue as of December 31, 2018 were flat when compared to the third quarter. We continue to feel good about accounts receivable and inventory management results during the year in which sales grew 16.9%. We will continue to focus on our working capital management activities as we move into 2019. For 2018, we have reduced our total outstanding debt by $55 million. The company continued to maintain interest rate spreads in the lowest tier on our pricing grid during the fourth quarter of 2018. We are compliance with our credit facility and we are currently negotiating an amendment to our credit facility. Our current facility expires in March 2020. Now, moving to our cash flow activities. Our cash provided by operating activities in the fourth quarter 2018 was $4 million compared to $12 million provided in the prior year quarter. For the full year 2018, cash flow from operating activities provided $26 million compared to $39 million in 2017, which 2017 included the receipt of $12 million from federal income tax refunds in the prior year. Fourth quarter capital expenditures were $2 million compared to $800,000 dollars in the prior year. We anticipate our 2019 capital expenditures to range between $7 million and $11 million. Our capital expenditures will continue to focus on programs that are targeted at developing new business opportunities and improving operational efficiencies. Let’s look at our new orders and backlog activity next. Our fourth quarter 2018 new orders were $139 million, an increase of 20.2% compared to last year's fourth quarter for the full year, new orders increased 24.6%. The full year increase was a result from each of our three segments. Total year new orders were at record levels for the company. We were very pleased with strengthened this activity during the year and believe it is a telling sign of strong market conditions and customer confidence in our products offerings. Fourth quarter orders for the Rail segment increased 42.2% compared to the prior year quarter and were supported by both our North American and European operations. We are pleased with our current North American rail traffic and we continued to be encouraged by the state of the freight rail market as both commodity 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. For the full year 2018, the rail segment new orders increased 33.7% compared to the prior year. During the fourth quarter, tubular segment orders improved 29.4% over the prior year quarter. Increased order activity was reported by each of our business lines within the segment during the quarter. The most significant increases were provided by our protective coatings and test and inspection service business units. For the full year 2018, the tubular segment's new orders increased by 14.7% compared to the prior year with increases in each of our business units. Construction segment fourth quarter new orders were down by 23.4% compared to the prior year. Our piling orders decline 76.9%. Partially offsetting this decline were increases in new orders in our fabricated bridge in precast concrete businesses, which increased 20.4% and 17.5% respectively compared to the prior year. During the full year 2018, the segment new orders increased 17.8% compared to the prior year. Backlog stood at $220 million at the end of the fourth quarter, up $54 million or 32.1% from the prior year backlog of $167 million. Backlog within each of our three segments increased as of December 31, 2018 compared to 2017 with a 41.5% increase in Rail, 33.8% increase in construction and a 3% increase in tubular. During 2018, we attained a record level backlog, which contributed to our increased December 31, 2018 ending balance. In closing, 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 2018. With that, I will now turn it back over to Bob.

[Robert Bauer:]

Thanks, Jim. I'm going to handle my fourth quarter and full year comments mix together as I go through both my business climate discussion, as well as the operating performance discussion. Our results from fourth quarter without the settlement were very encouraging as the strength in our orders and sales followed the growth trend reported in the prior three quarters. Our new order activity was strong all year, finishing the fourth quarter with 20% order growth over prior year was a signal to us that infrastructure investments continues to move forward. Fourth quarter sales exceeded orders as they typically do and our year-end backlog of $220 million, which ended up 32% over prior year is very strong. The increase was driven by our rail business segment, which is up 42% and the construction segment, up 34%. The rail segment finished the fourth quarter with both orders and backlog increasing 42%. Transit projects continue to remain strong and capitals spending across the freight rail market in the U.S. continued to grow. Price increases had a favorable impact on fourth quarter and full year sales growth, the majority of which came from our new rail division serving the transit and Class II freight operators. On a full-year basis, rail segment sales increased 25%. Included in this increase is approximately $15 million in-price solely from our new rail division. That's equivalent to 6% of the full year sales growth attributed to price. Keep in mind that 100% of price increases do not fall to the bottom line as our input costs are rising at the same time in our distribution businesses. We did however benefit from rising prices in new rail sales, which helped offset rising input costs in other areas. Sales growth in Europe was incredibly strong this year as volume for services related to London underground projects decline throughout the year. Our European division was responsible for about 43% of the $63 million annual sales growth of the rail segment, once again signifying the strength coming from Global transit expansion as many cities deal with the need to move more people from place-to-place. Overall, it was a solid year with double-digit growth in rail products used for track infrastructure and for rail technologies used for operating performance improvement. The construction segment had a very solid second half as orders and sales accelerated during the year. At the midway point, first half orders were down 1% and first half sales were down 14%. The first half was influenced by lower backlog and weak pricing in our piling division and to a lesser extent, our bridge decking business, which does not have a large decking project in backlog for 2018. However, the second half improvement brought total year's new orders for construction to an increase of 18% and full year and full year sales only declined by 2% year-over-year. Our piling business second half was so much better that it flipped from double-digit declining rates in the first half to full year sales growth of 6%. We see demand for piling remaining steady in markets we serve, such as bridge, rehabilitation, port expansions that are needed for import-export growth, energy pipeline construction that’s being funded to increase pipeline throughput capacity and railroads that have numerous maintenance projects planned. It was bridge decking that kept the construction segment from turning positive in full year sales growth. Looking forward we're beginning to see large projects being planned for the next three years and there's a chance we may secure something late this year. Turing to Tubular and Energy. This segment is in so much of a backlog story as we don't carry nearly as much backlog in this business. It’s another example of second half orders and sales that accelerated from the first half. Orders in the first half were up 5% over prior year. We finished the full year of 14.7%. This drove greater sales volume in the second half, resulting in full year sales increasing 26%. Every division had double-digit sales increases with our midstream focus divisions leading the way. Sales for protective coating services, for pipeline tubulars and measurement systems for oil and gas pipeline applications were the strongest. The need for additional takeaway capacity in high-volume areas like the Permian region, coupled with new capacity to connect to growth markets, including export customers has fueled investments. Market research we see is predicting further expansion in capacity driven by increasing forecast for production of oil and gas from U.S. land-based development. As is always the case, the price of oil and gas can affect this outlook in a very short period of time. Our strategy for coping with the risk is to remain lean in the upstream segment of our business and position assets in the most profitable development areas. So I will summarize my business climate comments with these highlights. 2018 saw strong demand in many areas of our business. We were very pleased with the number of areas that saw accelerated growth in new orders in the second half. Each of the three reporting segments has experienced favorable trends in order rates as we exited the year. And a year-end backlog of $220 million is a nice position from which to start the New Year. So I will turn now to operating performance comments. Adjusted net income performance in the fourth quarter was largely a story of the volume increase, coupled with lower SG&A as a percent of sales. Because of the new tax law impact to last year's fourth quarter, I will focus on pretax performance. The overall 43% increase in fourth quarter adjusted pretax income was enough to drive 66% increase in full-year adjusted pretax income growth. Full year SG&A declined by 100 basis points as a percent of sales and interest expense was approximately $2 million lower than prior year. Segment profit improved considerably for the rail and tubular segments. However, the construction segment was the one area that has weighed on our gross margin and pretax income results. The piling and bridge decking businesses have difficult years with gross margins. Piling ended the year with some low margin backlog due to price and struggle to replace some favorable customer mix from 2017. While piling saw improvement through the year, it wasn't enough to make up for a difficult first half. The lack of a megaproject in bridge decking and therefore, more competitive smaller projects, led to much lower gross margins in 2018 in the bridge business. The bridge division reached a low point in backlog for grid decking in the third quarter of 2018. It has since improved and we believe the outlook for improving gross margins will materialize as grid decking volume increases. As Jim covered the highlights of cash flow, but it's worth revisiting a few details given the priority that cash flow has with us. We have a solid year with $26 million of operating cash flow and another year where working capital efficiency helped us maximize cash flow. The pressure came from the growth in receivables in connection with sales growth. However, receivables only grew by $11 million as sales grew by $90 million. Collection days improved over the prior year and our operating teams did a great job in managing all aspects of cash and working capital throughout the year, while growing the sales 17%. I can't emphasize enough how well some business units did in this area. We have another year where capital spending was held below the typical past spending levels with $5.3 million in CapEx in 2018. Certain asset sales exiting our joint venture coupling business and the use of foreign cash we repatriated early in the year, helped create enough cash of $55 million in debt reduction payments. This does have a dramatic impact on our balance sheet. It has made for significant decrease in interest expense. And it has lowered our net debt to adjusted EBITDA ratio below to 1.6 by ending the year with $65 million in net debt on our balance sheet. Overall, 2018 was a year of achieving many goals around operating performance improvement, significant growth and excellent cash flow performance, we still have more work to do and I believe our people across the company are delivering on improved performance and positioning us to take advantage of opportunities ahead. I do expect us to increase capital spending in 2019 as Jim mentioned, as we see several growth opportunities in connection with immediate business and opportunities to continue to differentiate ourselves in key markets. We currently have one expansion underway already to increase production capacity for measurement systems, serving the midstream pipeline market. We will complete the expansion this quarter and have sufficient backlog to fill a good portion of the new shop by the second quarter. There are a few more opportunities where we are attempting to be first to market with new product offerings and expand into territories that are currently underserved. We believe these are all good uses of cash as we expect solid returns on these programs. And finally, I want to point out that our operating cash flow performance is forecasted to remain at a level where we expect no issues funding the installments related to the concretize settlement that we discussed while still meeting our liquidity needs to fund operations. I will include my comments there. I'll turn the call back over to the operator, and we will be happy to take any questions you might have in any area. Thank you.

[Operator:]

[Operator Instructions] Our first question is from Chris Van Horn with Riley FBR. Please proceed.

[Chris Van Horn:]

So on the litigation, it sounds like obviously UP is coming back as a customer approximately about $8 million a year. I was wondering I think prior to the litigation the customers UP was obviously it was a little bit bigger than $8 million a year. And I’m just curious if you see growth opportunities for them as you look out.

[Robert Bauer:]

First keep in mind, Chris, that in the time period you’re talking about, we were selling a substantial amount of concrete ties. So one of the things that wasn't specifically mentioned in our press release is that we are not an approved supplier for concrete ties as part of the restoration of our commercial relationship. So the products and services that do apply our other products and services that we sell. So it's difficult to make a comparison, and I wouldn't suggest anyone make a comparison at this point to what we were doing previously, which is now more than three years ago. But there may be opportunities for us to expand that business. I wouldn't think about that in the near term but it may be possible for us if you're looking out the past two years, particularly since I would expect us to be launching new products in those time frames as well.

[Chris Van Horn:]

And if I heard you correctly, it sounds like the liability, your cash from operations can more than fund that, so you don’t need to access additional lines of credit, or anything like that in terms of funding that liability going forward?

[James Maloney:]

As we were talking about, Chris, this is Jim. We’re currently negotiating to extend our credit facility past 2020, and we currently have no plans on that increasing that availability due to the settlements.

[Chris Van Horn:]

Could you give us any -- I know you don’t issue formal guidance, but any directional projections on how to think about the segments or margins for 2018?

[Robert Bauer:]

You are going to stay clear of specific guidance. But I would tell you there is a couple of things that you could think, I guess right off of that. For starters, margin improvement is among our top priorities. But I would expect that there would be more SG&A reduction due to the lower legal expense. So if you think about SG&A as a percent of sales, I would anticipate that that would continue to improve over 2018. Gross profit margin improvement in our construction business is what really suffered in 2018. We are already seeing the piling business improve if we see some better customer mix, particularly from industrial pipeline customers. We had a fair amount of that in 2017 I think that business can improving gross margins. But one of the areas we're really need to get improvement from is bridge decking, that’s the area that has really weighed on our construction segment. But we hit the bottom on grid decking backlog in the third quarter. So we're already seeing that tick up. And there are projects in the pipeline, if we can secure those projects that should get that margin up. And we did suffer a little bit precast concrete. We already have those issues resolved. Those were some manufacturing complications there. So I think as long as our energy business stays strong and we're always working on some continuous improvement actions, I would expect coupled with these other things that we can get improvements in both gross margins and EBITDA margins.

[Chris Van Horn:]

Can you comment on the friction control business? I know there has been some rails who have been outsourcing back to you all and you've seen some solid demand for friction control. I’m just curious an update on the market opportunity there?

[Robert Bauer:]

In terms of outsourcing to us what you should really think of that the fact that they are turning some on track services over to us. So our business model in the past was almost entirely selling product in consumables that go along with that, the actual friction modifiers or lubricants themselves. And we did not do much on track services. We are now doing more on track services that include everything from furnishing some of the actual equipment to managing the consumables that are in Wayside tanks. So we're out there with trucks that are checking them, refilling them. We have software systems that are connected to those tanks that will tell us if we're running out of some of the consumable. And some of the business models even include uptime contracts for certain customers who want to make sure that there is the right amount of friction modifier of lubricants on their track at all times. And we're managing to those types of contracts. So it is one of the faster growing areas for us right now, and we believe that through that we're providing a greater amount of value to customers by managing some of those on track services where they are unable to do that work.

[Chris Van Horn:]

And then on the order growth, obviously, continues to be very strong, especially in rail. Could you highlight what part the overall market improving versus your ability to take share and any dynamics within is each of those?

[Robert Bauer:]

Well, first and foremost, transit rail projects were really strong this year. I think we were winning at least our fair share of projects in the transit space, I'll say globally. Certainly, in North America, it was really strong. All the agencies -- just about all of the agencies had expansion projects out there. But we're really growing in Europe in that area. And so one of the areas where we're picking up share services related to the integration of transit systems, both the systems we work with as well as signaling systems. We're doing some of that immigration for London underground. And that is big and one of the most significant growth areas in 2018. We now have hundreds of service peoples that are involved in those projects in that part of the world. And I believe we are doing pretty good in the freight rail business. I don't know that I would point to anything extraordinary from the standpoint of share gain as much as the fact that the freight rail market in North America has been pretty healthy and continues to look like it will be pretty healthy.

[Chris Van Horn:]

And then the leverage ratio, you've proven you can pay down debt. And it seems like you have that in your capital deployment priorities. I’m just curious do you have like a target leverage ratio that you're aiming for? Or is it can as we move throughout the year or the next two years you'll utilize cash flow as you see fit?

[James Maloney:]

I would say that we called being below 2 is where we want to be. We do plan on continuing to pay down debt. But when we see opportunities to invest in we have the ability now to do that and we will take full advantage of that.

[Robert Bauer:]

I think the only thing I would add to that Chris is that I believe the only thing that could take us up above that assuming business conditions of course remain solid. We have a positive outlook on that right now is that if we were to come across an acquisition, because if you look at our operating cash flow and what we can do in terms of deploying capital. While we believe we will take up the forecast for CapEx in 2018 I mean that -- since we don't see that as that significant, we still wouldn't be able to pay down debt unless we have an acquisition.

[Operator:]

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to management for closing remarks.

[Robert Bauer:]

Okay, well thank you very much. We appreciate everyone's attending and I would just add close by saying that next quarter we will probably have our call at the more normal time following the close of the quarter as opposed to as late as we were this quarter. So look forward to that announcement. Thank you and good bye.

[Operator:]

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