L.B. Foster Company (FSTR) Q2 2017 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to L.B. Foster second quarter 2017 results conference call. As a reminder, all participants are in listen-only-mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I will now like to turn the conference over to Judy Balog. Please go ahead.

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 second quarter 2017 operating results. My name is Judy Balog and I am the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. Also on the call is Mr. Christopher Scanlon, L.B. Foster's Controller and Chief Accounting Officer. In addition to our press release, we have a second quarter presentation on our website under the Investor Relations tab for those who have online access. This evening, Chris will review the company's second quarter financial results. Afterwards, Bob will review the company's second quarter performance and provide an update on significant business issues as well as company and market developments. And then, we will open up the session for questions. During today's call, our commentary and responses to your questions may contain forward-looking statements including items such as the company's outlook for our businesses and markets, cash flows, margins, operating costs, capital expenditures and other key business metrics, issues and projections. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make today. These forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information, except as required by securities laws. All participants are encouraged to refer to L.B. Foster's Annual Report on Form 10-K for the year ended December 31, 2016, as updated by subsequent items filed with the Securities and Exchange Commission for additional information regarding risk factors that may affect our results. In addition to the results provided in accordance with United States Generally Accepted Accounting Principles, our commentary includes non-GAAP EBITDA and adjusted EBITDA and certain other metrics where we have added back the effect of an impairment charge. A reconciliation of U.S. GAAP to non-GAAP measurements has been included within the company's 8-K filing. Statements referring to EBITDA, adjusted EBITDA as well as certain measures excluding the impairment charges are considered non-GAAP measures and while they are not intended to replace the presentation of our financial results in accordance with GAAP, the company believes that the presentation of these measures provides additional meaningful information for investors to facilitate the comparison of past, present and forecasted operating results. Our accompanying earnings presentation reconciles these non-GAAP measures to the corresponding GAAP measure. With that, we will commence our financial review discussion and I will turn it over to Chris.

Thank you Judy. Net sales for the 2017 second quarter were $144.9 million compared to $136 million in the prior year quarter, an increase of $8.9 million or 6.5%. The 6.5% second quarter sales increase was due to improvements across all three segments, led by a 12.7% increase in our construction products segment with the tubular and energy services segment increasing 6.8% and our rail products and services segment increasing by 2.7%. Our second quarter construction segment sales improved form the prior year by $5.1 million or 12.7%. Both our piling products and fabricated bridge divisions drove the year-over-year improvement with piling sales increasing by 29.9% and fabricated bridge sales increasing by 43.2%. The tubular and energy services sales increase was driven by substantial improvement in both our upstream test and inspection division as well as our midstream protective coatings division. This growth was partially offset by precision measurement system sales which declined in the quarter. The rail sales improvement was led by our rail technologies business. The rail technology sales increase of 8.3% included a year-over-year increase at both our European and North American divisions. As a percentage of second quarter 2017 sales, rail accounted for 48%, construction was 31% and tubular and energy services was 21%. Now, looking at gross profit. Our consolidated second quarter 2017 gross profit margin was 19.1%, a decline of 140 basis points from the prior year quarter. Rail gross profit margins declined by 190 basis points. This reduction was partially offset by a 430 basis point improvement in tubular gross profit margins. Construction gross profit remained flat to prior year, however gross profit margin declined by 210 basis points. The rail segment gross profit margin decline was due to lower margins within transit products and the continued gross profit margin decline within our rail distribution business. Offsetting these declines were favorable year-over-year gross profit margins within concrete rail products. The tubular and energy services gross profit margin increase was led by our midstream protective coatings division and our upstream test and inspection business, both of which were helped by improving working conditions. These increases were offset by lower gross profit margin in our midstream precision measurement systems business. Construction segment gross profit margins decreased by 210 basis points to 19.9%. This decline was primarily due to our concrete products division. Moving on to our expenses. Our consolidated selling and administrative expenses decreased by $2.7 million or 11.7% to $20.6 million in the second quarter due to personnel related cost reductions totaling $2.1 million as well as lower Union Pacific rail road litigation costs of approximately $580,000. As a percentage of sales, selling and administrative expense decreased by 290 basis points to 14.2% from 17.1% in the 2016 second quarter. Amortization expense decreased by $1.1 million to $1.7 million in the second quarter, primarily due to the intangible asset impairments recorded second and third quarters of 2016. Interest expense increased by $529,000, due principally to higher interest rates on our outstanding debt. Company's income tax expense for the second quarter was $475,000 on pretax income of $3.5 million. Second quarter 2017 income tax expense relates primarily to foreign jurisdiction income taxes. As a reminder, the company recorded a full valuation allowance against its U.S. deferred tax assets as of December 31, 2016. Therefore, no tax benefit was recorded on our domestic losses in the second quarter of 2017. Second quarter 2017 net income was $3 million or $0.29 per diluted share, compared to a loss of $92 million or $8.96 per diluted share last year. Our prior year second quarter earnings included impairment charges totaling $128.9 million or $90.9 million net of tax. Excluding the prior year impairment charge, the 2016 adjusted net loss would have totaled $1.1 million or $0.11 per diluted share. Adjusted earnings before interest, taxes, depreciation, amortization and adding back prior year impairment charges totaled $10.6 million in the second quarter of 2017, compared to $7.5 million in last year's second quarter. Our revised credit agreement contains an $18.5 million minimum EBITDA covenant on a trailing 12-month basis, which applies to the second quarter of 2017. EBITDA, as defined in credit agreement, has certain non-cash adjustments that a traditional financial EBITDA calculation might not incorporate. As a result, the second quarter 2017 EBITDA calculation, pursuant to the amended credit agreement for the trailing 12 month period, is approximately $7.7 million higher than the $18.5 million minimum EBITDA covenant calculation. Turning to the balance sheet. Working capital, net of cash and current debt, decreased by $10.3 million compared to the 2017 first quarter. This decrease was driven by the receipt of $9.9 million of federal income tax refund proceeds which reduced prepaid income taxes. Our core working capital items remained relatively flat compared to the 2017 first quarter. Accounts receivable increased by approximately $400,000 but our related DSO increased slightly to 49 days in the second quarter, compared to 48 days in the first quarter. Inventory increased by $2 million compared to the 2017 first quarter while accounts payable and deferred revenue increased by approximately $300,000. We feel good about our accounts receivable and inventory management results and we will continue to focus on overall working capital management. Our total outstanding debt declined by $17.3 million in the current quarter. As previously mentioned, we received $9.9 million of federal income tax refunds proceeds in the current quarter, which were applied to our term loan. This amount, combined with our quarterly term loan payment, reduced our term loan balance by $12.3 million in the current quarter. Additionally, favorable operations and working capital management allowed us to reduce our revolving credit facility by $4.8 million. For the first six months of 2017, we have reduced our total outstanding debt by $21.6 million. Now moving to our cash flow activities. Our cash provided by operating activities in the current year's second quarter was $19.2 million compared to $11.7 million in the prior year quarter. For the first six months of 2017, cash flow from operating activities provided $29.9 million compared to $6.6 million in 2016. Second quarter capital expenditures were $1.1 million compared to $1.9 million in the prior year. We anticipate our 2017 capital expenditures to range between $6 million and $7 million. Of this amount, approximately $2.5 million relates to our Class I railroad service contract, which was incurred in the first quarter. We will continue to scrutinize our capital expenditures and focus our capital outlay on programs required to improve both new and existing business opportunities. Next, I will provide some commentary on our new orders and backlog activity. Our second quarter 2017 new orders were $128.4 million, a decrease of 8.3% compared to last year's second quarter. Our prior year second quarter construction new orders included $15 million related to the Peace bridge contract. Due to this comparable, construction segment new orders were down 22.1% as our fabricated bridge division orders declined 77%. Partially offsetting this decline was an increase in new orders in both our piling and concrete products division with piling new orders up 28.3% from the prior year quarter and concrete products up 7.8% as well. Second quarter orders for the rail segment declined 10.4% compared to the prior year quarter, primarily due to lower order volumes at our international businesses. Partially offsetting these declines are increases in new orders for our Allegheny rail products and domestic friction management businesses. We are pleased with the continued increase in North American rail traffic but are also encouraged by the current state of the freight rail market as both carloads and intermodal units improved year-over-year. Tubular segment orders improved by 26.1% 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. Our midstream precision measurement systems division did experience a decrease in new orders in the current quarter compared to the prior year quarter. Backlog stood at $176 million at the end of the second quarter, up $26.8 million or 17.9% from the prior year backlog of $149.2 million. Backlog within each of our three business segments increased as of June 30, 2017, compared to 2016. A 25.4% increase in the rail segment, a 13.4% increase in the construction segment and a 9.9% increase in the tubular segment backlog. In closing, we continue to focus on increasing sales and profitability while maximizing our working capital management and free cash flow. We will continue to focus on debt reduction throughout the remainder of 2017. That concludes my comments on the second quarter of 2017. With that, I will now turn it over to Bob.

Thank you Chris. Thank you everyone for joining us today. I am going to divide my comments into two parts. First, I want to address profitability and cash flow performance and the significant turnaround taking place. And second, I will discuss order sales and backlog including some outlook commentary about the market. So I will begin with the P&L discussion. As many of you are aware, we have been working through actions to restore profitability, then sales began declining in 2015 and we accelerated those actions in 2016 as conditions worsened. The actions were intended to improve profitability at lower sales volume as we faced markets that were cycling downward. This would also put us in a position to benefit from operating leverage as markets and volume improved. The results of our second quarter are now beginning to show the impact of the actions we took with the benefit of rising sales volume. $10.6 million in EBIT DA in Q2, slightly ahead of what we were expecting as was earnings per share of $0.29 a share, both are substantial improvements over prior year. EBITDA is 41% above prior year and EPS is $0.40 better than last year's Q2 adjusted results. We have continued to keep our expenses under tight control resulting in second quarter SG&A expenses that are 11.7% below last year, which lowered our expense as a percent of sales 290 basis points. And on a year-to-date basis, the order of magnitude is similar, SG&A expenses for the first half are down $6.3 million, 250 basis points better than the prior period. Our gross margins did not improve year-over-year in Q2, although I expect an improvement in the second half. The construction and rail segments were each lower. In construction, we struggled with some execution in cost control on concrete product projects. And there continues to be some price pressure in piling as a result of more commodity piling sales. I expect gross margins on precast concrete products to improve as we had into its seasonal high period. In the rail segment, our core rail products business had some projects and backlog with lower pricing than in previous years as market pricing declined throughout 2016 and into the beginning of this year. There were also transit projects that brought overall gross margins down a bit as well as some trailing cost for prior projects that are now behind us. But as I look forward, I expect margins to modestly improve in the second half compared to the first half as price, volume and leverage work in our favor. Tubular and energy services gross margins were certainly among the headlines for the quarter as restoring profitability in this segment is among our top priorities. An improvement of 430 basis points was partially driven by operating leverage on sales in two areas. First, recovery in the upstream market, which drove further improvement and services for tubular products. And second, the substantial increase in sales in protective coatings principally to midstream customers. But the improvement was also driven by actions we have taken the maximize efficiency in operations across all divisions and the efficiency gains from streamlining operations in protective coatings that include recent investments in technology and our ID coating capability that are driving high quality results, while boosting efficiency and capacity. So as we evaluate the improvement in tubular and energy services along with the outlook for the rail segment, I expect gross profit margins for the consolidated company in the third quarter to return to levels around 20% which should help drive second half gross profit margin levels above the first half. Turning now to cash flow and the balance sheet discussion. Among the more favorable performance results this year is the company's free cash flow. In the second quarter, operating cash flow was $19 million bringing the first six months to $30 million and well ahead of where we had projected. Our ability to convert the added sales to cash coupled with very good working capital management led to excellent results. A significant tax refund and continued focus on capital spending, which kept CapEx at $4.6 million through June ultimately helped us reduce debt by over $21 million. We reduced inventory by over $10 million from the end of June last year. We are well below our planned level and we are only $1 million above the start of the year, despite being in the seasonal high period of sales. The receivable balance is also below June of last year, despite the growth in sales. And approximately $9 million in operating cash flow for the first half of 2017 was the result of base trade working capital performance. So I feel like our focus on strengthening the balance sheet is moving forward at a good pace. I am very pleased with the progress we made in the first half of the year. Our management team is very focused on working capital as division leaders are all focused on maximizing free cash flow and they have done a great job helping the company deliver a great first half. I believe we will make continued progress in strengthening our balance sheet over the next two quarters and I expect us to get the net debt below $100 million by the end of the year. I am going to now turn to a discussion on our sales orders and backlog. Following the strong order activity in Q1, we build a solid backlog from which to boost sales for the second quarter and to help support third quarter shipments as well. And at the end of the second quarter, our backlog stood at $176 million, down only $19 million from Q1 when backlog stood at $195 million. It's common for our backlog to peak at the end of Q1 as we prepare for peak shipments in Q2 and Q3. In June our backlog is a healthy $27 million or 18% above prior year and I am happy to report that many divisions are contributing. The underlying strength that's been driving a 12.8% increase in year-to-date new orders over the prior year are tubular and energy services, that's up 28%, the rail segment which is up 22% and construction while the bookings are lower by 8% as a result of a multiyear Peace bridge order that was entered this time last year, we have a backlog that's 13.4% above June of 2016. The upstream energy market has been recovering since Q3 of last year and it's showing more reliable steady order input. Our upstream energy service business that provides integrity services for energy tubulars had Q2 sales that were up 100% over this time last year, which was roughly when the trough occurred. With this market recovering, we expect to see this business improve remarkably going forward. Demand has continued to rise for the last four sequential quarters and we expect it will have further upward momentum as the pace of new wells moderates. The midstream market, while lagging in recovery, is showing signs of strength as we see solid activity for coated line pipe and renewed project activity for measurement systems. If this market continues to strengthen, it has the ability to provide further upward momentum for tubular and energy service sales. Among the favorable results is new orders for backlog strength in the rail business. This year started very strong compared to 2016 when the weakness was among the worst. Orders were up 60% than the first quarter of this year and down 10% in Q2, bringing the first half to an increase of 22% over the prior year first half. This resulted in rail backlog peaking Q1, although backlog has remained relatively high at $78 million in June, up 25% over the prior year. The recovering order rates are coming from the North American freight rail market, which was very weak last year. Our order growth rate appears to be well in excess of year-over-year capital spending reported by the Class 1 rail carriers. We believe that we are benefiting from the need for spending on maintenance and other track infrastructure programs with capital that is being redirected away from rolling stock programs. We have also had the key wins on transit projects that have included new rail, concrete ties and fastening systems for domestic projects. This has provided some significant backlog for 2017, particularly in concrete ties. Orders and sales activity in Europe have remained solid, supported by project activity across the U.K. for transit projects. Although currency has been more of a headwind this year and has trimmed topline sales a bit, our European business is headed in a very good direction. We continue to be awarded projects that stem from customer confidence in our engineering and operating teams outside of the rail market. Our automation solutions business is relatively strong as it serves other transportation and non-transportation markets. This business is also pioneering unique solutions in software and control platforms that bring operating efficiency to transit operators and while early in the launch phase, we have some promising technology and innovation that can help operators manage difficult and costly maintenance routines. Finally, the construction sales segment increase of 12.7% was driven by piling in our fabricated bridge business. This was a solid quarter turned in by the construction segment, which is finishing the first half with sales up 15% year-over-year. Q2 ending backlog is up 13% above the prior year levels. We were confident our bridge business would do well this year as it started the year with near record backlog. It is more than meeting our expectations and when combined with excellent results from restoring and piling sales, it has helped drive some substantial profit improvement for construction over the prior year. Currently our outlook for the heavy civil construction market remains favorable as we don't see a catalyst that will drive change, although we serve niche applications and our success will often depend more on how customers utilize our solutions versus lower-cost alternatives. If there were going to be a catalyst for change, it might be in infrastructure spending and import restrictions on steel that the U.S. government might enact. So I am going to spend just a moment with some brief comments on those two items. First, if an infrastructure bill is passed, it's very possible that we could see increased demand in certain market segments. But history shown that more often than not, there is some transportation component to these investment bills. When stimulus spending was funded in 2010, we saw increased activity in construction projects with a direct benefit to our construction segment. As for our rail segment, although rail is often discussed with transportation programs, it's more difficult to imagine how any transportation funding might affect this industry and therefore benefit our company. Now turning to actions that would favor U.S. made steel for infrastructure projects. Any action taken on trade agreements or import strategies enacted by the U.S. government could clearly affect our business. It's not likely that all imports of energy tubulars will be blocked from the U.S. market and to the extent they are, our U.S. based suppliers will adapt to fill the void. Although I can't quantify anything right now, I thought the following details might help you think about how many trade restrictions on steel might impact us. We coat pipe that is American made at our line pipe facility in Birmingham and if more line pipe must come from American sources, that's good for us. We coat specialty pipe fittings in Texas that are sourced from foreign and domestic sources by the owners of the pipelines. If these shift to more American-made sources, we would expect those customers to continue sending us fittings and pipe to be coated. If raw materials rise for U.S. pipe mills because flat sheet and coil from U.S. providers has less competition, U.S. line pipe companies could become uncompetitive. This is not the desired outcome but it remains a real possibility and concern and it would not be favorable for us. We do test and inspect a lot of foreign-made OCTG pipe for drilling and production applications. If these imports are blocked or become uncompetitive, we will likely have some adjustment to make as alternative suppliers emerge. And finally, we source our steel rail for the freight and transit projects in the U.S. from U.S. sources. Any change that favors U.S. made rail can only help the suppliers that we are partners with. So I will end those comments with a reminder that both of these situations are unpredictable and we are only attempting to provide information that will help you determine the impact that certain government actions could have on the company's performance, if action is taken at all. So I will end my comments there and return the call back to the operator and we would be happy to take any questions that you might have.

Okay. Operator, you turn it back over to us then?

I will like to turn the conference back over to Mr. Robert Bauer for any closing remarks.

All right. Thank you operator. I appreciate you managing the call for us today. So thanks for joining us, all of those others on the line and we are looking forward to our third quarter and we will catch up with you in another quarter. Thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.