L.B. Foster Company (FSTR) Q2 2018 Earnings Report, Transcript and Summary

Thank you for standing by. This is the Conference Operator. Welcome to the L.B. Foster's Second Quarter 2018 Results Conference Call. As a reminder, all participants are in listen-only mode, and that conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Judy Balog, Investor Relations Manager. Please go ahead.

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 second quarter 2018 operating results. My name is Judy Balog, and I'm the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. Also on the call is Mr. James Maloney, L.B. Foster's CFO and Treasurer. In addition to our press release, we have a second quarter presentation on our Web site under the Investor Relation's tab for those who have online access. This morning, Jim 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 and market developments. We will then open the session for questions. During today's call, our commentary and responses to your questions may contain forward-looking statements, including items such as the company's outlook for our businesses and markets, cash flows, margins, operating costs, capital expenditures and other key business metrics, issues and projections. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make today. These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information, except as required by securities laws. All participants are encouraged to refer to L.B. Foster's Annual Report on Form 10-K for the year ended December 31, 2017, as updated by subsequent items filed with the Securities and Exchange Commission or additional information regarding risk factors that may affect our results. In addition to the results provided in accordance with United States Generally Accepted Accounting Principles, our commentary includes non-GAAP EBITDA statements. A reconciliation of net income to non-GAAP EBITDA has been included within the company's 8-K filings. Statements referring to EBITDA are considered non-GAAP measures, and while they are not intended to replace the presentation of our financial results in accordance with GAAP, the company believes that the presentation of these measures provides additional meaningful information for investors to facilitate the comparison of past, present, and forecasted operating results. Our accompanying earnings presentation reconciles this non-GAAP measure to the corresponding GAAP measure. With that, we will commence our financial review discussion, and I will turn it over to Jim.

Thank you, Judy. Net sales for the 2018 second quarter were $172.9 million compared to $144.9 million in the prior year quarter, an increase of $28 million or 19.3%. The 19.3% second quarter sales increase was due to improvements within our Rail Products and Services segment increasing by 32.5% and Tubular and Energy Services segment increasing by 29.1%. These increases were partially offset by a decrease in Construction Product segment of 7.2%. The rail sales improvement of $22.5 million or 32.5% was led by both our rail technologies as well as our rail products businesses. Our rail technologies business saw sales increases of 50.5% over the prior year, primarily from expanding transit projects. Our rail products increased 22.4% over the prior year period as North American freight and transit activity remained strong. The Tubular and Energy Services sales increase of $8.8 million or 29.1% was driven by improvements in each of our business units within the segment compared to the prior year period. Our second quarter Construction segment sales declined from the prior year by $3.3 million or 7.2%. The decrease was primarily due to piling division as a reduction in demand led to year-over-year sales decreasing by 16.5%. This reduction was partially offset by 3.2% increase over the prior year quarter Precast Concrete product sales. Fabricated Bridge sales were flat compared to the prior year quarter. As a percent of second quarter 2018 sales, rail accounted for 53.1%, construction was 24.4%, and tubular and energy services was 22.5%. Now looking at gross profit; our second quarter gross profit was $32.5 million, a 17.2% improvement over the prior year quarter. Second quarter 2018, gross profit margin was 18.8%, a decrease of 30 basis points from the prior year quarter, which was driven by construction, which saw a reduction of 310 basis points in rail, which decreased by 230 basis points. This was partially offset by our Tubular gross profit margin, which significantly improved by 750 basis points. Construction segment gross profit margins decreased 310 basis points to 16.8%, this was primarily driven by our piling division and to a lesser extent our fabricated bridge products business. Pricing pressures and the reduction of mega bridge activity unfavorably impacted the segment during the quarter. These declines were partially offset by our Precast Concrete Products business. The rail segment, gross profit margin decrease of 230 basis points was due to reductions primarily in our non-domestic business units within the segment. The Tubular and Energy Services gross profit margin experienced increases at each of our business units within the segment with the exception of our precision measurement systems business line. Our Protective Coatings and Testing and Inspection Service businesses were the primary contributors, both of which were helped by continued improving market conditions significantly increasing demand for our services. Moving onto our expenses; our consolidated selling and administrative expenses increased by $2.8 million or 13.6% to $23.4 million in the second quarter due primarily to increases in our personnel related expenses as well as litigation costs related to the Union Pacific Railroad matter. As a percent of sales, our selling and administrative expenses were reduced 70 basis points compared to the prior year quarter. Interest expense decreased by $527,000 due principally to the overall reduction in our outstanding debt as well as achieving the lowest tier within the interest rate spread associated with our credit facility agreement. The company's income tax expense for the second quarter was $673,000 on pretax income of $5.6 million. Second quarter 2018 income tax expense related primarily to income taxes in foreign jurisdictions. Second quarter 2018 net income was $4.9 million or $0.47 per diluted share compared to income of $3 million or $0.29 per diluted share last year. EBITDA or earnings before interest taxes depreciation and amortization totaled $12 million in the second quarter 2018, an increase of $1.4 million to last year's second quarter. Our credit agreement contains a minimum EBITDA covenant on a trailing 12-month basis, which increased to $31 million in the second quarter of 2018 per the agreement. EBITDA is defined in the credit agreement as certain non-cash adjustments that a traditional financial EBITDA calculation might not incorporate. As a result, the second quarter 2018 EBITDA calculation pursuant to the credit agreement for the trailing 12-month period is approximately $10.5 million higher than the $31 million minimum EBITDA covenant calculation. Now, turning to the balance sheet. Working capital net of cash and current debt increased by $3.7 million compared to March 31, 2018. This was primarily driven by an increase in accounts receivable driven by an increase in sales volume. Accounts receivable increased by approximately $19.5 million while our related DSO decreased to 46 days in the second quarter compared to 54 days in the first quarter of 2018. Accounts payable and deferred revenue increased $12.1 million during the second quarter of 2018 as compared to March 31, 2018. Inventory increased by $291,000 compared to March 31, 2018. We continue to feel good about our accounts receivable and inventory management results. We will continue to focus on our overall working capital management activities. Our total debt outstanding decreased by $3.4 million or 3.3% in the current quarter. As a result of the company's earnings levels over the trailing 12 month period, our interest rate spread was reduced by 75 basis points to the lowest tier on the pricing grid per our credit facility agreement during the second quarter of 2018. Now moving to our cash flow activities, our cash provided by operating activities in the second quarter of 2018 was $5.3 million compared to $19.2 million in 2017. The $13.9 million reduction in operating cash flow was primarily related to increases in trade working capital to support our second quarter new order activity and outstanding backlog. The 2017 period was favorably impacted $10 million from our 2016 income tax refund. During the second quarter, our investing activities included proceeds from the sale of land of $2.1 million while capital expenditures for 2018 year were $1.8 million compared to $4.6 million in the prior year. We anticipate our 2018 capital expenditures to range between $6 million and $8 million. Our capital expenditures will continue to focus on programs that are targeted at developing new business opportunities and improving existing operations and efficiencies. I will provide some commentary on our new orders and backlog activity next. Our second quarter 2018, new orders were $187.5 million. An increase of 46% compared to last year's second quarter which was primarily driven by our rail segment. We were very pleased with the continued strength in new orders for the year. Second quarter orders for the rail segment increased 110.2% compared to the prior year quarter as volume in both our North American and European markets was up. We are pleased with the current state of the North American rail traffic. And we continue to be encouraged by the current state of the freight rail market as both car loads and intermodal units improved year-over-year. Global transit projects have also contributed to the growth within the segment as we continue to see expansion within those markets we serve. Tubular segment orders were flat to the prior year quarter. Both our precision measurement systems and testing inspection services saw increased order activity which was offset by a reduction in protective coatings compared to the prior year. Construction segment new orders were down 5.4% as our Piling division orders declined compared to the prior year quarter. Partially offsetting this decrease were increases in new orders in our both Fabricated Bridge and Precast Concrete products divisions. Backlog stood at $231.3 million at the end of the second quarter, up $55.2 million or 31.4% from the prior year backlog of $176 million. Increases of 61.7% in the Rail segment and 9.1% in the Construction segment supported the growth over prior year while the Tubular segment was flat to the prior year. In closing, our focus remains on increasing sales and profitability. We will also continue to focus on maximizing our working capital management and free cash flow. That concludes my comments on the second quarter of 2018. With that, I will now turn it over to Bob.

Thank you, Jim, and hello everyone. As Jim outlined, our second quarter report is very positive with several highlights particularly surrounding areas of strength in new orders and backlog coupled with improvement in profitability. Our served markets have been generally strong and several areas continued to see increased demand. The 46% order increase of $59 million had some significant wins for new rail which drove more than half of the increase with the remaining increase coming from several business lines having double digit increases. So it was a very solid bookings quarter. This capped off first half with a new order growth rate of 25% and a noticeable impact from transit rail projects in North America and Europe. As a result, a substantial portion of the backlog increase has been in new rail, rail fastening systems, and services related to automation for transit projects. We are seeing a substantial amount of spending in rail transit networks largely directed toward capital programs for expansion and increased capacity. We continue to have a substantial backlog of work in Europe for the Crossrail program. Much of which is for on-track services for the integration of driver automation, passenger information systems, access control, and security system interface. It's very promising to see North American transit networks receive funding for capacity expansion as ridership levels on a macro basis increase. We booked a large order in the second quarter form the Bay Area Rapid Transit in California that will ship over to next 30 months. Our on-track services in the United States continues to grow where services related to friction management for freight rail operators, another unique offering we pioneered, that's delivering benefits by improving wear and tear on rail and minimizing disruption through reduced rail replacement. The North American freight rail market currently has several positive indicators. One of which is capital spending which rose approximately 4.5% as reported by the public class I operators. Public freight rail companies have described volume growth in the second quarter to be on average about 4.7% above the prior year. That's a pretty good space for this market. Orders in the construction segment were mixed as Piling products had lower year-over-year comparison. We recorded a $5.5 million cancellation in the quarter for a piling project and adjusted our backlog accordingly. Without this impact, construction segment orders grew in both the second quarter and on a year-to-date basis, but driven by both Bridge and Precast Concrete orders that grew in both the quarter and year-to-date. Orders in Tubular and Energy services segment were flat in the quarter due to timing of large coated pipe orders. The coated line pipe backlog has been very high through the first half of the year. We need to book our next big project sometime in the second half to have similar performance in 2019. Overall, the segment orders are up 5% in the first half as all other divisions report double digit increases for this period. Overall ending the quarter with a backlog of $231 million is up 31% from prior year is about as good as we could have imagined. And while a substantial amount of this is in the new rail category, several other areas are above prior year including pipeline measurement systems, transit rail products, European rail services, and precast concrete products which is very encouraging. Turning to the operating highlights, our second quarter operating highlights reflect another quarter of improved profitability over prior year. Sales growth of 19% helped deliver solid net income and EBITDA improvement. The cash we used for working capital to fund the receivables growth, I thought was reasonable particularly since we still had $5 million of operating cash flow and further reduction in debt in the quarter. Sales growth in Tubular and Energy services in the rail product segment were equally strong. In Tubular and Energy services the 29% sales increase was driven by protective coatings for line pipe applications. Bookings this year and last year for these services provided backlog that support strong sales for the first half of 2018. In addition each of the other divisions in the Tubular and Energy segment had double digit sales increases in the quarter as well. And the rail products and services segment had an outstanding quarter with 33% increase in sales driven by transit projects in North America and Europe and sales for friction management and other on-track services which were also very strong in Q2. So looking at profitability, once again, we can point to our efforts around controlling expenses as among the highlights for improved profitability. As SG&A expenses were lower on a percent of sales basis and interest costs were lower both in dollars and percent of sales, both contributed to pretax and net income margin expansion over prior year. The actions we've taken to improve profitability in Tubular and Energy Services had a very favorable impact on Q2 profit. This segment is now much more profitable than it was last year, and was the single greatest contributor to the company's year-over-year improvement this quarter. Rail segment profit grew 48%, outpacing the sales increase despite some headwinds in our cost of goods sold, which highlights the great cost controls that helped deliver the improvement. We were a bit disappointed that the overall company gross profit margin did not improve over prior year. The Construction segment is largely responsible for this performance. Results for piling products were very good last year. And this year's results include a number of lower-margin commodity piling projects that were booker earlier in the year, in addition to lower volume this quarter. In addition, the absence of a super large project in our bridge business has resulted in more small projects that tend to be somewhat more competitive, leading to lower gross margin compared to prior year. Comment for a moment on cash in the balance sheet. Our first-half operating results helped deliver $8 million of operating cash flow on a year-to-date basis, $5.3 million of which was in Q2. The working capital increase after six months was minimal. And while receivables growth has been significant, we've been able to nearly offset the increase through other actions. That has allowed us to reduce debt further in Q2, brining the total debt reduction in the first half to $31 million, and lowering the total company debt down to $99 million. We're really pleased with how we improved the company's leverage ratio over the last several quarters. We have kept capital spending low in the first-half, which was largely due to timing of projects, although $1.8 million of spending in six months is not representative of a new spending rate. In the second-half, we'll begin some programs to fund opportunities to expand services in the hottest energy markets as well as other initiatives aimed at growth and productivity that we're evaluating. In summary, it was a solid quarter. And while we have some work to do, we were very pleased with several factors. I thought I'd end by making a few comments. Looking forward, as we look at the business and the marketplace, first we will start the third quarter with a backlog of $231 million, and believe that the transportation and energy market segments we serve will continue to invest throughout 2018. We expect typical seasonality patterns to affect sales as we approach the winter season in the second half. Most reports from North American freight rail operators include an optimistic outlook for growth, which should translate into spending on operations. Transit system projects remain healthy. And we expect that funding should be available since the macroeconomic environment is favorable. Energy markets have had significant activity as a price of oil has remained above $50 per barrel for many weeks. There appears to be growing confidence that the price will remain above $50 as many operators continue to lift production forecasts which supports a rising forecast for upstream services. We're continuing to make some adjustments to expand service centers in the hottest markets right now, which include our Permian Basin location and a new facility we're opening in the Bakken Basin. We will continue to place a priority on these with continuing strength of the upstream energy market. We are seeing much more proposal activity in measurement systems of pipelines. We expect this backlog to stay elevated or increase in the coming quarter. And we are regularly hearing about the need for additional pipeline capacity in the key basins. Under the backdrop, I'm optimistic about our ability to continue generating free cash flow through the balance of the year. And we anticipate additional reduction in debt by year-end. With that, I'll finish my comments and return it back to the operator so we can take any questions that anyone might have.

We currently have no questioners in the queue. I would like to turn the conference back over to Judy Balog for any closing remarks.

Okay. Thank you, Oreo, and thanks everybody for joining us today. Our second quarter earnings were released and posted on our Web site before this morning's call. We look forward to talking you again next quarter.

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