L.B. Foster Company (FSTR) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the quarter one 2015 L.B. Foster earnings conference call. My name is Emma and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Thank you, Emma. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's first quarter 2015 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. This morning, Bob will review the company's first quarter performance and provide an update on significant business issues and company developments. Afterward, I will review the company's fist quarter financial performance and then we will then open up the session for questions. Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the Investor Relations page. This webcast will be archived and available for 30 days. 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 in 2015, cash flows, margins, operating costs, capital expenditures and other key business issues. 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 or future events, except as required by law. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31, 2014, as updated by any subsequent Form 10-Qs or other pertinent items filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the risk factors that may affect our results. In addition to the results provided in accordance with U.S. Generally Accepted Accounting Principles, our commentary includes certain non-GAAP statements which present earnings before interest, taxes, depreciation and amortization or EBITDA. A reconciliation of U.S. GAAP to this non-GAAP measurement has been included within the company's 8-K filing. Statements referring to EBITDA are considered non-GAAP measurements and while it is not intended to replace the presentation of our financial results in accordance with GAAP, the company believes that the presentation of the EBITDA, especially after the recent acquisitions will provide additional meaningful information to investors to facilitate the comparison of past and present and forecasted operating results. With that, we will commence our discussion and I will turn it over to Bob Bauer.

Thank you, Dave, and good morning, everyone. Thank you for joining us today. I am pleased to be discussing the company's results with you today. It was an exceptional quarter for us because not only are the financial results in line with our expectations, it had several accomplishments that support our initiatives aimed at creating long-term value for our shareholders. Some of the financial highlights for the quarter include sales increasing 24%, our gross margin is up over prior year, EPS growth came in at 17% and the EBITDA growth came in at 46% in the quarter. And among our strategic highlights that include completing the acquisitions of to TEW Engineering and Inspection Oilfield Services, which I will refer to as IOS throughout the remainder of the call and that follows the December 30 completion of Chemtec Energy Systems. So it's been a busy time for us. This is change in the mix of company sales in a way that will increase our exposure, particularly to long-term energy investments as well as increasing our mix toward service business models which has been our intent. We will have more solutions capabilities for pipeline customers and much deeper solutions capabilities for rail customers, especially in Europe. We have added engineering talent with these and we have created the kind of scale we needed in Europe to reach more customers. And we now have a footprint of service centers across the U.S. in key energy development areas from which we can launch additional services. We are particularly excited about that. And we have expanded the number of customers we do business with, again, particularly in the energy markets. Completing these acquisitions in such a condensed period of time was a significant accomplishment for us. Some of this was guided by the need to see how energy customers were going to react to lower oil prices before finalizing at least all of the energy related transactions. That, of course was very important and I will talk more about that later. And switching gears, in the operations area, highlights include the fact that we completed Phase 1 of our ERP project, which was aimed at all the upfront work of data cleanup and other fundamental process work, all aimed at being prepared for what's about to come in the next phases which are now underway. And we reopened our Birmingham coated products plant in mid-January after a complete overhaul of the production technology. I am happy to report that the plant is up and running and meeting expectations although as expected, we did lose volume in Q1 as a result of the shutdown. So as I look back on the quarter, I am particularly grateful to our team that spent countless hours focusing on the priorities needed to keep our business running while we took action to shape the company of the future and completed all of these acquisitions that I am speaking about. So let me now turn back to Q1 after those highlights and talk a little bit more about some of the specifics. Acquisitions in the quarter, certainly helped drive the 24% sales increase, however the base company still performed well with nearly 6% sales growth year-over-year and 16% growth in pretax income from the base company. The base company, from a gross margin standpoint, improved 40 basis points, which helped contribute to the 60 basis point improvement for the overall company. And as expected, we incurred considerable expenses for completing the acquisitions in the quarter, somewhat compounded by the fact that there wasn't a lot of time between all of these transactions. We did not realize a full quarter of sales for TEW Engineering or IOS. In fact, with IOS, we closed that transaction on March 13. So there wasn't very much in our first-quarter from that business. It is worth pointing out that EBIT DA year-over-year grew from $8.2 million to $12 million or 130 basis points as a percentage of sales on a reported basis, including the acquisitions, which reflects the profit improvement coming from the new companies. And EPS increased to $0.41 in the quarter. I feel like we are headed in a direction where the acquisitions are expected to be accretive to earnings, as we previously mentioned as each of these deals were completed. So let me spend some time on these acquisitions. As mentioned in prior meetings regarding the company's strategy, we were aiming at acquisitions that would have a favorable impact on the overall company profit margins. I believe we have accomplished that. The gross margin contribution in Q1 from the acquired companies was favorable. And when factoring in the impact of D&A and interest cost from the new companies, they are expected to provide us with EPS growth and profit margin impacted is positive and for the full year as well. I wanted to focus a little bit more on those that are aimed at the energy market which was particularly interesting to us. The Chemtec Energy and IOS acquisitions can best be described as for us moving into adjacent market segments that will give us exposure to energy infrastructure demand but in segments very closely related to the ones we already serve. So first, if I take Chemtec, we are expanding, primarily into the midstream market where we will design and build tailored systems for critical pipeline measurement applications. Pipeline operators expect these investments to continue for the foreseeable future. They are not considered short-term investment decisions and the infrastructure is needed, regardless of the cost of oil. In fact, one can argue that as the industry is in search of lower cost, the pipeline capacity and new installations into the unserved areas will be in even greater demand going forward. This is precisely where our coated tubular products business comes from and we are seeing steady project activity there at the moment. Second, turning to IOS. IOS is a service business that provides nondestructive testing and inspection services and allows us to expand our service oriented business models, building on the our expertise in services for tubular products. The ability to test, inspect and then rehabilitate tubular products for end-users and distributors in a meaningful way for users to cut operating costs by redeploying existing tubular assets, we think is going to be of great benefit to them. The overall asset integrity services combined with logistics support that they provide throughout the entire U.S. development areas, in our opinion makes us uniquely positioned to serve E&P companies in this market. And we can do this all without owning the tubular products which are maintained in customer inventory as supposed our inventory while we perform these services. Drilling demand, of course, can certainly impact the amount of activity IOS realizes. I would like to say that we got a good feel for this before completing the transaction. It was obviously important for us to understand. And so our analysis of the business has taken this into account and went into our revised outlook for the market going forward before we completed the transaction. So specifically with regard to the oil and gas markets and now that we have more exposure to that, the extremely fast reaction to reducing capital expenditures on the part of development companies using tubulars for oil and gas drilling leads us to believe that 2015 is looking like the low point in the market. We have already lowered our forecast in line with the projections of capital spending cuts and other operating cutbacks which have been published by virtually every operator out there at this point. But it's also worth noting that we made these acquisitions for the long-term. They are a great fit with L.B. Foster Company and there are great management teams at both companies that are enthusiastic about our collective opportunity. So these acquisitions are really about the years ahead of us and not just about what's happening in 2015. So let me turn my comments now to the balance sheet that are going to really be brief. Restructuring our credit agreement was a key component of completing the acquisitions. So our balance sheet is reflecting, what I would call, the new environment with long-term debt of $218 million at the end of March. Our credit agreement and the bank group behind it put us in a favorable position to use these funds in a very effective way. Our Board of Directors is very much in support of the way we are utilizing capital to create value for our shareholders and very much behind the strategy that the company is embarking on. So with that, I would like to wrap up with the 2015 outlook. I would go through that now and then turn it back over to Dave to talk about Q1 and then if you have some outlook questions, we will take those as we open the floor for questions. We did provide the 2015 forecast, which is our best estimate of how the year will unfold. We did note some specific issues that influenced our forecast, some of which included a recognition that there still is some uncertainty and volatility that could exist in the energy markets, although as I said a moment ago, it does feel like a more stable environment at the moment. We are planning on much lower business in 2015 from Union Pacific. In the remaining quarters, we have factored in substantially no sales from Union Pacific as we have been told that they will move business away from L.B. Foster. This action is connected to the ongoing litigation regarding warranty claims for concrete ties. Our position with regard to that has not changed regarding that dispute and we continue to maintain that certain claims submitted for warranty are not valid claims. From a standpoint of currency headwinds, they are affecting us much like everyone else doing business in Europe and Canada as well. This is currently expected to reduce sales by about $7 million for the year. And then finally, we have taken into consideration, but to a much lesser extent, steel prices, which have been falling throughout the quarter and some projects which are being delayed as customers attempt to find the best timing to save money from the cost the steel, whether that's for tubular products or some of our construction products. We did not put a cash flow projection in for the year. We are juggling a number of capital spending projects and prioritizing programs related to the new opportunities largely brought in front of us by these acquisitions. So that might be of a bit fluid from time to time. We do plan to pay down debt as quickly as possible and we will watch how that unfolds as cash flow unfolds in the quarters ahead. So that's all I will say about that. So with that, let me turn it back over to Dave and he will run through more comments regarding the quarter before we head into questions.

Thank you, Bob. Net sales for the first quarter of 2015 were $137.9 million compared to $111.4 million in the prior year, a 23.8% increase. Net sales increase was due to a 146% increase in tubular and energy services, a 5.7% increase in rail products and services segment and a 25.2% improvement in our construction segment. The rail segment sales increase was due principally to improved sales in the Rail Distribution, Allegheny Rail Products and concrete tie businesses, partially offset by a decline in our transit products business as activity related to the Honolulu Transit Project is all but complete. It was less than $2.5 million of revenue left to recognize. Sales were negatively impacted in the rail segment by approximately $1.3 million in the quarter due to the strength of the dollar as compared to last year. The tubular segment sales improvement was mostly due to our recent acquisition of Chemtec and IOS, as Bob discussed, as well as increased coated products sales fueled by our ball winch specialty coatings business. This was partially offset by a decline in our threaded products business. Our legacy coated business also reported increased sales over the prior year, even though our Birmingham facility stopped production for the first three weeks of the first quarter to complete the installation of new production equipment which we expect will improve capacity and efficiency of that plant. This improvement was completed successfully and is up and running and meeting all of our expectations thus far. The construction segment sales increase was due to a volume related increase in sales of piling products as well as increases on the concrete buildings division and a contribution from our Carr Concrete products acquisition. This was partially offset by a decline in our fabricated bridge product business sales. As a percentage of first quarter 2015 sales, tubular accounted for 19%, construction was 25% and rail totaled 56% of sales. As mentioned in our earnings release, first quarter bookings were $163.3 million, down 9.2% compared to last year's first quarter. The reduction from last year was due to a decrease in bookings in our coatings, rail distribution, piling and bridge businesses, partially offset by increased bookings in our concrete buildings division and contributions from our recent acquisitions. Order backlog, which is becoming a little less meaningful given our recent acquisitions, stood at $217.3 million at the end of the first quarter of 2015, down 14.2% from the first quarter of last year. This decrease was due to reductions in our coated business, our concrete tie division and piling products and bridge divisions. This was partially offset by the backlog of our recent acquisitions. Chemtec does have a reasonable reported backlog, however our IOS acquisition is not at all backlog driven. They attempt to fill orders as soon as they get them and at the end of any one period of time, there is a very insignificant amount backlog at IOS. Gross profit margin was 22.2% in the first quarter of 2015, 60 basis points higher than the prior year quarter. This operating improvement was principally due to increased tubular and rail margins, partially offset by lower construction products margins. The tubular gross margin increase was driven by our specialty coatings business as well as a positive contribution from our March 2015 IOS acquisition. The rail improvement was due to volume and operational improvements in our Allegheny Rail Products and rail distribution businesses. The construction segment decline was principally due to reduced bridge and piling products gross margins, partially offset by improved volume related leverage in the concrete building division. Selling and administrative expenses increased by $4.2 million or 23.4% to $22.3 million in the first quarter of 2015, principally due to increases in the cost of our acquired businesses, increased personnel related costs in our base business as well as acquisition activity related costs. First quarter S&A expense represented 16.1% of sales in the first quarter of 2015 as compared to 16.2% of sales in the prior year quarter. First quarter pretax income was $6.7 million or 4.8% of sales compared to $5.3 million or 4.8% of sales in the prior year. As mentioned in our earnings release, the effective tax rate for the first quarter of 2015 was 35.7% compared to 31.4% in the first quarter of last year. The increase in the rate was due principally due to the recognition of favorable uncertain state tax positions during the prior year quarter. First quarter net income was $4.3 million or $0.41 per diluted share in 2015 compared to $3.6 million or $0.35 per diluted share in the prior year quarter. EBITDA was $12 million in the first quarter of 2015 compared to $8.2 million in the prior year quarter, an increase of 46.3%. Turning to the balance sheet. Working capital net of cash increased by $30.5 million in the first quarter 2015. Accounts receivable decreased by $16 million during the first quarter and our DSO decreased to 49 days from 50 days at December 31, 2014. Inventory, however, increased by $8.3 million while accounts payable and deferred revenue decreased by $13.6 million. Cash used by operating activities in the first quarter of 2015 was $7.4 million compared to $32.2 million of cash provided in the prior year quarter. The prior year quarter was favorably impacted by a significant reduction in accounts receivable, which was anticipated as we resolved slow collections on certain projects and related to certain customers that built up in the second half of 2013. In 2015, we continued to perform well on the receivable front, but inventory increased more than anticipated due to certain projects shipping slower than expected and accounts payable decreased substantially as we purchased inventory early in the quarter and paid for it before quarter end. Also adding to the unfavorable comparison were increased tax payments. Capital expenditures were $4.5 million for the first quarter, compared to $3.5 million in the prior year. We anticipate spending approximately $18 million to $22 million in capital programs in 2015, which includes an estimated $6 million to $7 million on our ERP program. The 2015 anticipated capital programs are inherent in all three business segments and are aimed at providing new and expanded manufacturing capabilities, improved service and product availability to the customer and increased manufacturing efficiencies in future periods that we believe will improve shareholder value on a longer-term basis. We anticipate that full year cash generated from operating activities will exceed capital expenditures, debt service payments, dividends and share repurchases in 2015. Our debt at the end of the first quarter was $218.2 million. Our revolving credit agreement, as Bob mentioned, was amended and restated during the first quarter to accommodate the increased acquisition activity we have focused on. The revolving credit facility had approximately $216.2 million outstanding at the end of Q1. This revised facility allows for borrowings of up to $335 million, with a $100 million accordion feature and it also has a five-year tenor and provides us strong liquidity and flexibility. That concludes my comments on the first quarter of 2015. I will now send it back to Emma to open up the session for questions.

[Operator Instructions]. Okay. The first question comes from the line of Mike Baudendistel from Stifel. Your line is open. Please go ahead.

Thanks and good morning. Just wanted to ask you with the comments on Union Pacific, can you just remind us or give us some guidance as to how big of a customer they are, maybe the 2014 revenue from UP?

Yes. In the past, Mike, on an annual basis, we would do roughly in the neighborhood of about $40 million a year with UP. That has been declining somewhat here lately. And as I mentioned, while we are still making some concrete ties for them, we have removed substantially all of the other business from our forecast. So that wouldn't be in there going forward and wouldn't be something that you had to take into consideration.

Okay. And I think you said on earlier calls that there were certain contracts with Union Pacific that rolled over later in 2015. Is UP under obligation to purchase concrete ties in a certain volume from you? And have they already gone ahead and not renewed those contracts? Just any details on how those things work?

Yes. I will separate the concrete tie from the rest of the business. So with the rest of the business, they can take that business to whomever they want to and there isn't really any contract in place that would assure us that we will retain the business from here going forward. With regard to concrete ties, there is a supply contract in place for revenue ties that they would purchase from us that pertains to our Tucson facility. And so that remains in place. It was the contract that was renewed in 2012 that had a five year term on it. So that meant 2013 through 2017 is the term on that contract.

Great. That's helpful. I also want to ask you on the SG&A. That increased sequentially. I know you said that a lot of that was due to acquisition related costs. I just wanted to get a sense for were any of those acquisition related costs that showed up in the SG&A line, one-time in nature and are likely to go down? Or is the 1Q a good run rate?

Well, we incurred approximately, I would say, $350,000 of just straight acquisition cost, Mike. And then, probably another $150,000 or so of, what we would probably call, integration costs. So both, certainly acquisition costs are behind us. We will certainly continue to spend a little bit of money on integration. And then the rest of it was just, it was a significant amount of SG&A that's just the current run rates of our new acquisitions that will continue.

Okay. And in your press release, you talked about continuing the aggressive acquisition strategy. I was thinking maybe you would take a little bit of a breather now, with lot of the recent acquisitions. It sounds like you are still pursuing them aggressively. Am I interpreting that correctly? And are those likely also be related to energy?

No. I think, Mike, I’d go with what you started off saying earlier in your point, we do need to take a little bit of a breather and digest what we have. So what we tried to say in our earnings release and comments is that we have previously talked about having a more aggressive acquisition strategy. And I think it's pretty fair to say that we have done that and we have got a lot completed. I am incredibly excited about the companies that are now a part of L.B. Foster. And it took a lot of effort to get this done in the last 90 to 120 days. It would be good for us to just settle in here right now and work on those. And that's where our concentration is focused. And beyond that, I will just say that when you have a more aggressive strategy, your funnel tends to get more full of prospects. And so we see more deals out there now than we had in the past. So that means that if you were still always coming across our desk from time to time, but if I could control the timing I would certainly like to take a little bit of a breather right now and get these integrated. But we will see one unfolds and we will see what comes across our desk here the balance of 2015.

Great. That's helpful. And then the last one from for me is, IOS' gross margin. It looked like those were a little bit higher than L.B. Foster's legacy business gross margins. Can you just talk about how that margin has trended for the IOS business, since it's new to us? Is that down substantially, because of the lower energy prices?

Well, let me say this. We are not going to put up a full profit numbers on IOS. But in order to help you try to put together a model, the IOS business is off about 30% from prior year, as we anticipated. And we think that is very much in line with what the rest of the industry has seen and given the fact that it is a service business model but it actually helps operators cut costs. We are actually seeing new business come to us as a means that end users are using to actually reduce costs on their tubular assets in lieu of buying new products. As a service business, they can adjust their headcount and it is largely a labor related business with a service model as opposed to manufactured products. So there is bit less overhead as well. They have been able to do that and they have been able to keep their gross margins at a pretty good rate and that rate would be a bit better than the L.B. Foster Company average, yes.

Okay. Great. That's all from me. Thank you.

Yes.

The next question comes from the line of Brent Thielman of D.A. Davidson. Your line is open. Please go ahead.

Hi, Brent.

Good morning, Brent.

Hi. Good morning. Bob or Dave, on your revenue guidance, can you just walk me through the expectations by segment? Are you assuming roughly flattish or lower year for rail and construction with the growth principally coming from tubular and energy services?

Well, I will answer that, Brent, I guess from the base company standpoint. Rail is the least affected by the acquisitions. TEW Engineering was the meaningful one that we got done there in January, but if you look at the base company, the marketplace is still in good shape and we expect continued spending there as well as project activity in the transit space. So as we began the year, we expected that the sales would be up modestly meaning few to mid-single-digit percent, but we have made adjustments to that now because we have removed Union Pacific business from those sales. So that's what would be affecting the rail business. Construction is going to be up nicely in our forecast because piling should rebound. Piling was, we didn't have a great year last year and so we are back to thinking that we ought to have double-digit growth in the piling segment. The bridge segment in construction will be roughly flat year-over-year. But our concrete buildings business is actually looking very good right now and that also includes our adding Carr Concrete acquisition earlier in 2014. So the full year impact of that is not so great, but the integration and synergies and just the rest of the activity in the marketplace, including our organic growth programs, I think are going to result, right now, looks like in a double-digit year for that. So, construction, I have hopes to continue reporting positive news on that. And then tubular, yes, there is so much impact from the acquisitions we are now referring to as the tubular and energy services segment that most of it will be impacted by that. But our core coated products business is doing good, but that's offset a little bit by threaded products, which is probably going to have a little bit of a down year single digit because there isn't much of a drought in the Southeast like there is on the West Coast.

All right. That's very helpful. When you look at all these deals you have done, any thoughts or estimate for cost synergies you think you will realize over the next 12 months or beyond that?

Well, we have some that we are working on. Of course, we are not in a position to really put out a number on that right now. We are still working through some of that. I would tell you that from a cost standpoint, it wouldn't be a very substantial number because we are not consolidating factories. These aren't companies that are going to be smashed together with existing companies. Some more of our synergies are ones that are out in the marketplace and using an IOS service platform to launch new service offerings to customers, things of that nature. We have some facility expansion to do in some cases like for Chemtec. They are already at capacity. So the kinds of things that we are going to get some cost benefit from or in the back office side, some of that infrastructure, but some of it is not going to go down because these companies need a little bit more support from that standpoint. So don't think of that being a real big number anyway.

Okay. And then any, I guess, thoughts on the run rate for amortization and interest costs going forward, just with all these deals combined?

For interest, Brent, our forecast for this year is right around $4.6 million, give or take a little bit depending on where rates may go and when our cash flow will enable us to maybe accelerate some debt pay down versus not, but about $4.6 million. And right now, it's a little difficult to give you a good amortization run rate because we really have not put the IOS excess purchase price allocation into our numbers from the amortization side. We are still working on the valuation and the allocation of purchase price. But the amortization will be in that $12 million range probably this year.

Got you. And just last clarification, the $18 million to $22 million in CapEx this year is inclusive of IOS?

Yes.

Okay.

It includes all the acquisitions, the whole company.

Great. Thank you.

Yes.

I would not like to turn the call over to Mr. Bauer for closing remarks.

Well, all right, great. Well, sounds like the questions were brief this time around. I guess that's good. I will take that as a message that we had a thorough report. Again, I appreciate you joining us today and we will look forward to catching up with you next quarter. Thank you very much.