L.B. Foster Company (FSTR) Q3 2018 Earnings Report, Transcript and Summary

Greetings and welcome to the L.B. Foster's Third Quarter 2018 Results Conference Call. At this time, all participants are in listen-only mode, a brief question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, 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 third 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 third quarter presentation on our Website under the Investor Relation's tab for those who have online access. This evening, Jim will review the company's third quarter financial results. Afterwards, Bob will review the company's third 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 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 statements. A reconciliation of net income to non-GAAP EBITDA has been included within the company's 8-K filings. Our accompanying earnings presentation also includes statements referring to non-GAAP, segment gross profit. Segment gross profit allows users to understand the operational performance of our reportable segments, provides greater comparability to other registrants with similar businesses and avoids possible non-comparability as reportable segments, pre tax profit level resulting from our specific corporate cost allocations and facilitates a clearer market based perspective on the strength or weakness of our reportable segments in their markets to better aid in investment decisions. Statements referring to EBITDA and segment gross profit 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 third quarter were $167 million compared to $131 million in the prior year quarter, an increase of $36 million or 27.1%. The 27.1% third quarter sales increase was due to improvements within each of our three reporting segments. Rail Products and Services segment increased by 36.1%, Tubular and Energy Services segment increased by 35.5% and Construction Products increased by 6.2%. The rail sales improvement of $22 million or 36.1% was provided by both our rail technologies and our rail products businesses. Rail technologies saw sales increase by 36.8% over the prior year, primarily from expanding transit projects. Our rail products sales increased 35.6% over the prior year period as North American freight activity remained strong during the quarter. The Tubular and Energy Services sales increased by $11 million or 35.5% was driven by improvements in each of our business units within the segment compared to the prior year period. Our third quarter Construction segment sales increased from the prior year by $2 million or 6.2%. The increase was primarily due to the piling division as an increase in demand led to a year-over-year sales increase of 29%. This increase was partially offset by a 22.6% reduction in Fabricated Bridge sales and a 1.3% decrease over the prior year quarter in Precast Concrete product sales. As a percentage of third quarter 2018 sales, rail accounted for 50.6%, construction was 24.9%, and tubular and energy services was 24.5%. Now looking at gross profit; consolidated gross profit increased $3 million over the prior year quarter to $30 million. The increase was primarily attributable to our tubular and rail segments, which increased 42.6% and 19.3% respectively. Those increases were partially offset by a reduction of 27.7% in construction. During the third quarter 2018, we recorded a LIFO reserve of $1.7 million for the consolidated company. Our consolidated third quarter 2018 gross profit margin was 17.7%, a decrease of 240 basis points from the prior year quarter, primarily driven by construction, which saw a reduction of 660 basis points in rail, which decreased by 280 basis points. This was partially offset by our Tubular gross profit margin, which improved 110 basis points. Construction segment gross profit margins decreased by 660 basis points to 14%, this was primarily driven by our piling division and to a lesser extent our Precast Concrete Products business. Product and customer mix within piling and an unexpected production interruption within our Precast Concrete Products business unfavorably impacted the segment during the quarter. The rail segment gross profit margin decreased 280 basis points was due to a charge related to a commercial decision to support a customer concern for an automation project as well as a shift in product mix from favorable, distribution sales volume. 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 lifted by continued improving market conditions significantly increasing demand from our services. Moving onto our expenses; our consolidated selling and administrative expenses increased by $1 million or 7.1% to $22 million in the third quarter due primarily to increases in our personnel related expenses as well as external service costs. As a percentage of sales, our selling and administrative expenses were reduced 240 basis points compared to the prior year quarter. We are pleased to see our cost containment efforts continue as sales increase over the prior year. Interest expense decreased by $1 million due principally to overall reduction in our outstanding debt as well as maintaining the lowest tier within the interest rate spread associated with our credit facility agreement. The company's income tax benefit for the third quarter was $246,000 on pretax income of $5 million. The third quarter 2018 income tax benefit related primarily to changes in our estimated annual effective tax rate. The third quarter 2018 net income was $5 million or $0.47 per diluted share compared to $3 million or $0.31 per diluted share last year. EBITDA or earnings before interest taxes depreciation and amortization totaled $11 million in the third quarter 2018, an increase of $1 million compared to last year's third quarter. Turning to the balance sheet; working capital, net of cash and current debt decreased by $10 million compared to June 30, 2018. This was primarily driven by a reduction in accounts receivable which was partially offset by an increase in inventory. Accounts receivable decreased by approximately $11 million while our related DSO decreased to 44 days in the third quarter compared to 46 days in the second quarter 2018. Accounts payable and deferred revenue decreased $1 million during the third quarter 2018 as compared to June 30 2018. Inventory increased $6 million compared to June 30, 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 – our total outstanding debt decreased $23 million or 22.8% in the current quarter. The company continued to maintain interest rate spreads in the lowest tier on the pricing grid during the third quarter of 2018. Now moving to our cash flow activities. Our cash provided by operating activities in the third quarter of 2018 was $15 million compared to a use of $2 million in 2017, the $17 million increase in operating cash flow was primarily related to decreases in trade working capital. This was accomplished while increasing sales when compared to the prior year quarter. During the third quarter our investing activities included proceeds of $4 million from the sale of our 45% ownership interest in L.B. Pipe JV, as well as a $1 million in proceeds from the receipt of the outstanding credit line from the JV. We anticipate our 2018 capital expenditures to range between $4 million and $6.5 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 third quarter 2018 new orders were $186 million, an increase of 27.8% compared to last year's third quarter which was primarily driven by our construction segment. We were very pleased with the continued strength in our new orders for the year. Construction segment new orders increased 93.5% as our piling division saw a significant increase compared to the prior year quarter. Our Precast Concrete products business also had an increase orders over the prior year quarter, partially offsetting these increases was a decrease in new orders in our fabricated bridge division. Tubular segment orders increased 19% to the prior year quarter. Both are Protective Coatings and Test and Inspection services saw increased order activity which was offset by a reduction in orders in our precision measurement business compared to the prior year. Third quarter orders for the rail segment decreased 4.5% compared to the prior year quarter as volume in both our North American and European markets declined compared to the prior year quarter. Despite the decline we remain pleased with the current state of the North American rail traffic and we continue to be encouraged by the current state of the freight rail market as both carloads and intermodal units improve 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. Backlog stood at $252 million at the end of the third quarter, up $62 million or 32.7% from the prior year backlog of $190 million. Increases of 57.1% in the Construction segment and 26.9% in the Rail segment for the growth over the prior year, while the Tubular segment decline 13.2% to the prior year. In closing, our focus remains on increasing sales and profitability. We also intend to continue to focus on maximizing our working capital management and free cash flow. That concludes my comments on the third quarter of 2018. With that, I will now turn it over to Bob.

Thank you, Jim, and hello everyone. There are a lot of very encouraging trends in this quarter's results, and more importantly in the year to-date results. We continue to report solid growth in sales. There is continued profit improvement including substantial net income improvement or maintaining good control on costs. Our interest expense is declining as well, and working capital management and cash flow results were very good. So overall there are a lot of results going in the right direction. However, there is one area, gross profit margins that could've been better. We expected sales volume in the third quarter to be strong. We ended the quarter with a very solid backlog standing at $231 million, and our operations did a great job to boost sales volume 27% over this time a year ago. Bookings in the third quarter were even more impressive. At $186 million or 28% over prior year the momentum in the market continue to strengthen. Typically, we see orders begin to moderate through the third quarter as we approach the weaker seasonal period in the year. However, the order pace has remain strong this year. With third quarter ending backlog of $252 million, an increase of $20 million sequentially from the second quarter, we have one of the best backlog positions that we've had in some time. All three reporting segments have contributed to the company’s year to-date bookings growth. Our construction segment won some significant projects in the third quarter to bring year to-date bookings up 29%, the piling division had a big quarter as our success rate improved on winning key projects and markets where we've increased our focus. Orders in our Bridge decking division were also very good in the quarter despite not having a very large project to point to. The Rail products and services segment is having a very good year, with year-to-date orders up 32% and sales, up 27%. Transit projects continue to fuel the growth as spending on expansion and modernization of systems in North America and Europe have continued. Sales in Europe are up significantly this year as service work related to transit systems has strengthened considerably. We've expanded our service team and the talent required to deal with major projects for London underground, which is particularly satisfying as it brings a previously unserved market to us made possible through one of our acquisitions in 2015. The North American freight rail market has continued to improve as the industry has reported growth in commodity carloads and significant improvement in intermodal traffic. As we follow industry reports intermodal traffic is expected to provide continued growth and shipments for coal while not expected to drive growth going forward appear to be maintaining volume at steady levels. The tubular and energy services segment has continued to perform very well as energy markets improve and U.S. operators continue to lift production. Forecasts from the EIA suggest that global demand for oil and gas should continue to rise for 2019. There are more reports surfacing about constraints and pipeline capacity in some areas most notably the Permian region. These developments appear to be driving more demand for midstream infrastructure and throughout 2018 have fueled growth in our protective coatings and measurement systems divisions. We have described the strength and precision coatings throughout the year as we started the year with a very significant backlog and since then orders and measurement systems have strengthened, providing 47% year-to-date sales growth and contributing more significantly to the 30% sales growth for Tubular and Energy services on a year-to-date basis. So in summary, the business climate remains very positive, transportation and energy infrastructure investments continue to be funded and we’re well-positioned to participate in the upward momentum. Our scale and capability in Europe coupled with investment in transit in the UK is serving us well and our upstream and midstream services for Energy operators in the U.S. continue to see solid demand as they boost production forecast. I’m going to return to the operating highlights covering both third quarter and year-to-date comments. Our third quarter operating highlights reflect another quarter of improved profitability over prior year with a 54% increase in net income, $14.5 million of operating cash flow and debt reduction of $22.6 million. Our operating teams did another great job managing working capital. As quarter end balances on our trade working capital components were below prior year levels, while sales are up substantially. On a year-to-date basis net income is doubled and EBITDA improved 8.1% over prior year, and the solid working capital performance help deliver $22.4 million of operating cash flow and $53.5 million of debt reduction. I'm really proud of the efforts people across our company have made to focus on actions that are driving strong cash flow. We kept SG&A expenses lower on a percent of sales basis and interest costs were considerably lower in both dollars and percent of sales. Year-to-date SG&A was a 100 basis points favorable year-over-year and this includes an increase in legal expenses related to the Union Pacific litigation which are up $3 million over prior year reaching a year-to-date total spend of $4.5 million. I mentioned that we could have done better on gross margins. Let me make a few comments about that now. There are three key points I’ll cover to help you understand third quarter gross margins. They are first charges related to LIFO accounting, second, extraordinary cost from operational issues and restructuring actions. And third, there is unfavorable mix from distribution sales growth and customer mix which had a significant impact particularly on our construction segment results. So first we've been recording LIFO charges all year as the price of steel rises in the market. And as Jim mentioned, $1.7 million of expense related to this non-cash charge was significant in the third quarter, and it brought the year to-date total for LIFO charges to $2.4 million. The second area among the extraordinary costs in Q3 were $0.6 million on costs related to unexpected production interruptions in one of our Precast Concrete plants. The interruptions created numerous inefficiencies which we now have under control and have already restored performance, although there is more to do to bring this operation up to our high standards. There was another $0.6 million charge related to a commercial decision to support customer concerns for an automation project. After many months trying to resolve some specification issues, we decided to put this issue behind us to preserve the customer relationship. An additionally another $0.5 million of restructuring charges were taken related to the closing of two operations that were underway as part of our cost reduction and consolidation efforts. So in all there was a $1.7 million impact in Q3 from these items. And third, the unfavorable mix impact to gross margins is the result of growth in low-margin distribution product sales, which has also been a favorable contributor to the net income and earnings per share growth. Approximately $15 million of the $36 million in Q3 sales growth was from piling and new rail sales. Customer mix in piling had an unfavorable impact on piling gross margins as last year we had some very good pricing on certain customer projects. We are pleased that piling is returning to better volume and also pleased with the growth in transit projects requiring new rail recognizing that this will typically have a dilutive impact on gross margins. The impact from these three items is reflected in construction segment gross margins and to a lesser extent rail segment gross margins; unfavorable customer mix, precast plant operations and a decline in Bridge decking sales all combined to make this a tough quarter for the construction segment. We do not expect further erosion in piling division gross margins from here. In fact, we anticipate some strengthening in this business going forward. Bridge decking is expected to improve once we see mega project come back and I do not anticipate further disruption in our concrete operations. Now, on a positive note for construction, the Bridge decking business is doing a nice job booking smaller projects while we wait on the super large projects to return later next year. We have identified a number of very large projects being planned for late 2019 and into 2021 and anticipate an uplift from this activity as it gets underway. We were very encouraged by the strong bookings for piling in Q3 which far surpass the prior pace. Our volume of commodity piling has increased recently which was one of our issues when steel prices were declining, while we would like to see gross margin improvement in this product line. Our primary objective will be earnings growth and cash flow generation that together should deliver solid return on capital performance for this business. So before concluding I want to point out some of the positive developments in the Rail and Tubular and Energy segments where the bottom line profit improvement is coming from that Jim went through. We've been focusing on profit improvement in Tubular and Energy as the Energy markets have been recovering. Our segment profit more than doubled in the third quarter and has improved more than eight fold year to-date. Each of the operating divisions in this segment has performed very well this year. Our volume of sales to midstream applications as had a significant impact on the improvement as they have provided the majority of the growth for the nine-month period. Rail segment profit was equally impressive as third-quarter segment profit improved 67% and year to-date segment profit was also up 67%. Although the added volume for Rail distribution shipments has been dilutive to gross margin, these sales made a nice contribution to earnings growth as the projects for transit systems and performance of our Rail technologies divisions which all improved in the quarter and year to-date over prior year. The Rail management team has done a great job controlling expenses, and the restructuring actions taken are intended to drive further efficiency going forward. I'm going to conclude my remarks with one more comment on operating cash flow since I covered the cash flow highlights already. The fourth quarter is typically one of our largest cash generating quarters as working capital declines during the seasonally low construction period. We are currently forecasting sales in the fourth quarter to be comparable to the third quarter which is unusually high for a fourth quarter. The current backlog supports such a forecast. If our backlog remains elevated it may lead to lower operating cash flow by historical comparisons, but given the fact that we have already reported $22.4 million of operating cash flow after nine months I still expect this will turn out to be a good year for cash flow. So in summary we are very pleased with the business environment. We look forward to a strong fourth quarter of sales and we’ll be doing our best to maximize cash flow as we close the year. So with that, I will conclude my comments and I'll return it back to the operator for questions.

Okay. Thank you, operator. Well, thank you everyone for joining us. I hope you’ll agree that we had a lot of favorable items in this quarter's results. We got a strong backlog going into the fourth quarter. So we’re very much looking forward to closing the year out. And we hope you'll join us next quarter for our call once we conclude that quarter. Thank you very much.

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