L.B. Foster Company (FSTR) Q2 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the L.B. Foster Company Second Quarter 2019 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Judy Balog, Investor Relations Manager.

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 2019 operating results and full-year outlook. 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. James Maloney, L.B. Foster's Chief Financial 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, 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 31st, 2018, 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 earnings before interest, tax, depreciation and amortization, or EBITDA statements and non-GAAP net debt. A reconciliation of net income or loss to non-GAAP EBITDA and a reconciliation of total debt to net debt has been included within the company's 8K filing. Statements referring to EBITDA and net debt 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 this measure provides additional meaningful information for investors to facilitate the comparison of past, present and forecasted operating results. Our accompanying earning's presentation reconciles these non-GAAP measures to the corresponding GAAP measure. With that, we'll commence our financial review discussion, and I'll turn it over to Jim.

Thank you, Judy. Thank you, everyone, for joining us today. I would like to begin my discussion with net sales for the 2019 second quarter, which were $201 million compared to $173 million in the prior year quarter, an increase of $28 million or 16.2%. The sales increase was due to improvements within each of our three reporting segments. Starting with the Construction segment. Sales increased from the prior year quarter by $13 million or 31.3%. The increase was supported by each division within the segment led by the Piling Products with an increase of 55.9%, Fabricated Bridge with an increase of 15.7%, and Precast Concrete Products with an increase of 8.9%. The increase was driven by the strong backlog accumulated as we entered 2019, as well as an increase of 13% in new order activity over the prior year quarter. In the Rail segment, sales improved by $10 million or 10.4%, driven by the Rail Products business unit. Our Rail Products business saw a sales increase of 25.1%, mainly due to demand in new rail and insulated joint products, and also expanding transit projects. Our rail technology sales partially offset the segment increase with a 11% decline in sales. This decline was primarily due to European transit market, as activity levels on the London Crossrail began to decline as we approach the completion of that project. The Tubular and Energy Services sales increased $5 million or 13.7%, driven by growth in our protective coatings and measurement system business unit, which increased 27.5%. This increase was partially offset by a reduction in Test Inspection threaded service sales of 8%. As a percentage of second quarter 2019 consolidated sales, Rail accounted for 50.5%, Tubular and Energy Services was 21.9% and Construction was 27.6%. Now looking at gross profit. There were a number of encouraging results in gross profit performance. Consolidated gross profit increased $4 million or 12.3% over the prior year quarter to $37 million, with each of the three reporting segments contributing to the increase. However, gross profit margin of 18.5% was a reduction of 60 basis points from the prior year quarter. The Rail segment gross profit increased 15.5%, driven by increased sales volume from our domestic Rail products business unit, also contributing to the growth with a gross profit margin increase of 90 basis points, which was primarily attributable to our Allegheny Rail and domestic transit products. Our Construction segment gross profit saw a 12.1% improvement over the prior year quarter due to significant sales growth within the Piling division. The segment's gross profit margin decreased 250 basis points, the decrease primarily resulted from the dilutive impact of a greater sales contribution by our lower margin distribution products and lower margins in our Precast concrete products business. The Tubular and Energy Services gross profit increased 7% over the prior year quarter, driven by our protective coatings and measurement systems business. Conversely, gross profit margin decreased by 150 basis points compared to the prior year, primarily due to Test Inspection and threaded services business unit. Moving onto our expenses. Our consolidated, selling and administrative expenses decreased by $1 million or 2.2% to $23 million in the second quarter, mainly due to a $2 million decrease in legal expenses compared to the prior year, which were related to the Union Pacific Railroad concrete tie litigation. As a percentage of sales, this led to a decline of 210 basis points compared to the prior year quarter. We were pleased to see our cost containment efforts continue to improve our bottom line results. Net interest expense was flat when compared to the prior year. The company's income tax expense for the second quarter 2019 was $2 million with an effective tax rate of 15%. Our effective tax rate includes a 9.2% benefit related to the realization of U.S. deferred tax assets that were previously offset by a valuation allowance. This resulted in second quarter 2019 net income of $10 million or $0.90 per diluted share, compared to $5 million or $0.52 per diluted share last year. EBITDA totaled $17 million in the second quarter of 2019, an increase of $5 million compared to last year. This resulted in EBITDA as a percent of net sales of 8.6%, a 140 basis point improvement when compared to the prior year quarter. Turning to the balance sheet; our working capital increased by $7 million compared to March 31st, 2019. Accounts receivables were flat when compared to the March 31st, 2019 balance, despite the 33.5% increase in sales quarter-over-quarter. Our 12 month DSO remained flat at 50 days. So I feel good about our collections effort to keep our receivables at a manageable level, while our sales continue to grow. Inventory decreased by $8 million compared to March 31st, 2019, as our backlog order fulfillment began to outpace our new order activity within the current quarter. Accounts payable and deferred revenue decreased $18 million during the second quarter of 2019, as compared to March 31st, 2019. Our net debt decreased $2 million in the current quarter. As of June 30th, 2019, we remain compliant with all of our covenants. Now, moving onto our cash flow activities. Our cash provided from operating activities in the second quarter of 2019 was $4 million, compared to $5 million in 2018. The $1 million decrease in operating cash flow was primarily related to the need to support increased trade working capital due to our higher sales levels during the quarter. During the second quarter of 2019, our investing activities included capital expenditures of $1 million, a nominal increase over the prior year quarter. The current year expenditures relate to plan expansion and automation integration programs within our Tubular and Energy Services segment. We anticipate our 2019 capital expenditures to range between $8 million and $11 million, and we'll continue to focus on programs that are targeted at growth and improve operational efficiencies. I will provide some commentary on our new order and backlog activity next. Our second quarter 2019 new orders were $164 million, a decrease of 12.4% compared to last year's second quarter, primarily driven by our Rail segment, which had several significant transit orders in the prior year quarter. For the trailing 12 months ended June 30th, 2019, new orders were $669 million, a 7.2% increase over the prior trailing 12 month period. The Tubular segment new orders increased 31.5% over the prior year quarter. This was driven by our midstream protective coatings and measurement systems business unit, partially offset by a reduction in our Test Inspection and threaded services business when compared to the prior year quarter. Construction segment new orders increased 13% as our Piling and Precast concrete products division saw a 32.7% and 23.1% increases in orders respectively, compared to the prior year quarter. Partially offsetting the increase was a decrease in our Fabricated Bridge products orders. Second quarter orders for the Rail segment decreased 32.9% compared to the prior year quarter. This decline was most significantly felt in our North American rail distribution business, which had several significant transit orders in the prior year quarter. The decline was also attributable to a lesser extent to our North American friction management offerings and European transit projects. Backlog stood at $209 million at the end of the second quarter, a reduction of $22 million or 9.5% from the prior year backlog of $231 million. The decrease was attributable to a 25.9% decline in our Rail segment, which was partially offset by increases of 18.5% and 8.3% in our Tubular and Construction segments respectively. We remain pleased with our backlog levels, as we enter the second half of 2019. As we move into the second half of 2019, our focus remains on increasing sales and profitability. We will also continue to focus on maximizing our working capital and free cash flow. That includes my comments on the second quarter of 2019. With that, I will now turn it over to Bob for his business review.

Thank you, Jim, and hello, everyone. Again, thanks for joining us today. I'm planning to comment on areas that I think will help you understand our second quarter and year-to-date results. And I plan to circle back on a few numbers, Jim, covered to add more context on our overall performance. We're all very pleased to be discussing results for a really solid quarter that has capped off a first half with solid growth and profit improvement. We managed to break the $200 million level on sales in the quarter, and do so without substantial investments in capacity across our facilities. Well, we did make capacity investments, such as our measurement solutions business, the improvement led to immediate growth and contributed to the increase in second quarter sales and gross profit. All three of the company's reporting segments saw double digit increases in sales for the quarter and the first half. The Construction segment increase was particularly strong as the Florida cruise ship marine terminal project ramped up in the second quarter. This was a project we booked in 2018. The story so far this year has been our strong backlog, which is now converting into revenue as expected, driving a 19% first half sales growth. Our Rail and Tubular segments saw 15% and 16% growth respectively, and Construction reported 30% sales growth in the first half. As Jim mentioned, our backlog stood at $209 million at the end of the quarter, a healthy level for us. The decline in backlog came from the Rail segment as expected, the strong backlog of new rail largely for transit projects that were booked in previous quarters are working their way through operations. The construction and tubular backlog increased in the quarter, as Jim noted. I'll comment more on this when I discuss new order activity. Turning to bottom line profitability. We were very pleased with the improvement in our operating margins in the second quarter, particularly in light of having unfavorable mix impact from substantial growth in new rail and piling, which further emphasizes the strength in our other product lines, as well as the operating leverage we get on $200 million of sales volume. Through the first half of the year, gross margin improved 20 basis points despite unfavorable mix. So the balance of our revenue produced improvements in gross margins that more than offset the unfavorable mix. Improvements are coming from operational productivity and to some extent favorable impact on project costs for certain transit projects and rail products sold the various transit rail operators. We've continued to experience stable pricing conditions as prices for products with significant steel content have remained at levels above the prior year, even though many steel producers have experienced softer pricing conditions recently. I think it's worth noting again that the combination of solid operational performance and continued expense control pushed our second quarter pre-tax income up 82%, and earnings per share finished the quarter at $0.90, bringing the year-to-date EPS to $1.25 a share, a level that has exceeded all of last year's adjusted EPS results. In addition to the 20 basis points of gross margin improvement, SG&A expenses, including the reduced legal expenses, contributed 210 basis points of improvement to year-to-date profit margins that helped deliver our first half with over 200% of pre-tax profit improvement. We set goals for making a real impact on profitability, and I feel like these results reflect significant progress. Although there are still some divisions we'd like to see perform better, which will help us when the next cycle emerges. All three reporting segments had significant pre-tax income growth in the second quarter and the first six months. The year-over-year segment profit improvement for the Tubular and Energy segment continues to be driven by strength from our midstream energy focus divisions that provide protective coatings and measurement systems for pipelines. Investment and pipeline capacity needed for oil and gas production growth in U.S. shale territories is continuing, and some of these projects are fairly large, requiring hundreds of miles of pipe and several large metering systems along the way. The segment profit growth in the Rail segment has been driven by strong sales growth in Rail Products. The backlog for transit projects has remained strong, new rail sales are well above prior year and steel prices remain steady at levels above last year. A combination of gross profit improvement and solid operating efficiency drove the segment profit growth and margin expansion in the quarter and the first half. Finally, the Construction segment has delivered profit growth in all product lines in the first half of the year. Although a significant improvement in piling products in the second quarter provided a real boost to year-to-date segment profit. Turning to cash flow, we did generate cash in the second quarter, although not enough to make up for cash used in the first quarter. The cash usage through the first half of the year is primarily funding working capital to support sales growth. We did make some progress on inventory reduction in the second quarter and still have room for improvement. The two divisions with the majority of the increase in inventory this year are our piling division, where inventory is supporting the Florida Cruise Ship Terminal Project that's underway and expected to be complete by the end of the third quarter. And our European Rail business, where services for the London underground Crossrail projects are expected to continue working their way through our operations in the second half. We expect some continued challenges, reducing working capital related to these projects for the balance of the year, although we are confident in our forecast for further working capital reductions in the second half. Capital spending through the first half of the year was $3.8 million. We continue to see opportunities to expand products and services in existing and adjacent markets. There are enough opportunities available that could enable us to finish the year a little closer to the upper end of Jim's forecast range, depending on timing of the more complex programs. I want to wrap up by commenting further on the order input comparison to prior year. Orders through six months were $344 million, a reduction of 5% from prior year. This was largely attributed to a decline in new rail orders, where the year-to-date decline exceeded the entire decline for the company. In 2018, we booked an $18.5 million, five year delivery project and an $8 million multi-year order from two transit agencies. Only $4.8 million of the total of these was shipped in 2018, $13 million is scheduled to ship in 2019 and the balance will ship beyond 2019. The Piling Marine project was another 2018 order that we expected to have backlog reduction impact. The two transit rail projects alone impact the orders growth compared to sales by more than the $19 million consolidated year-to-date decline in orders. Another way to look at the comparison is, if you exclude the new rail division from our consolidated order total for each six month period, the balance of the business had ordered growth of 6.7%. Based on these order patterns, we expect to have a decline in backlog in the second half with sales and backlog more in-line with historical seasonality patterns. This means the fourth quarter is expected to decline in sales sequentially from the third quarter, a pattern we're used to seeing and one that typically results in sequentially lower operating margins in the fourth quarter, as well as reductions in working capital. As a result, we also expect to generate significant cash flow in the second half of the year, which also assumes that we will make progress on working capital for the European rail and piling marine projects I spoke about earlier. I'm going to conclude my remarks there. But before I turn the call back over to the operator, I want to acknowledge all of our employees and the efforts they have made toward improving the company's results. The improvement this quarter and the first half of the year is extraordinary and so are our people. With that, I'm going to conclude my remarks and we'll turn the call back over to our operator for questions.

Thank you. [Operator Instructions] And our first question comes from the line of Chris Van Horn with FBR. Please proceed with your question.

Good afternoon, guys, and congrats on the quarter.

Thank you, Chris.

I guess, just, maybe we can start from a macro perspective, what are you seeing in your business lines that are either you are positive or negative heading into the back half of this year and into 2020?

Well, I'd say, there's a lot of positive factors. If you look at what we've done through the first half of the year here. The large majority of our businesses, we feel like they're in pretty good shape. As you've noticed, we worked off a little bit of backlog as anticipated, but this is how the year normally goes and we thank most of our markets are really in pretty good shape. I would only point out maybe one or two areas where there has been some indications of weakness. One of those is in a upstream oil and gas market, which occurred in the second quarter. It was not as strong as the rest of the energy markets, and we think that was due to the fact that there was a little bit of disruption in the price of oil earlier in the quarter and rig counts fell a bit. But it's not in bad shape by any means, but it certainly wasn't I think moving along as strong as it was earlier in the year. And then one of our smaller businesses that threads pipe for Waterwell Applications that go into the agricultural market has been weak. And I think if you're reading any of the news on the ag market, it's really been quite soft. But again, other than that, rail has been driven by transit. In our construction area, piling was really strong in the quarter. Our precast concrete has been strong all year, even our bridge business has been doing pretty good. So by and large, we're still feeling positive about our business.

Okay, great. Thanks for that color. Are you seeing the lead times change at all for any of the businesses?

For our businesses, no. I can't really speak to any at this point. When our backlog increased during the year, that is largely due to the schedule of projects, more so than it is an indication of our factory's inability to deliver. One of the comments I made at the outset was, we were able to deal with that $250 million backlog we started to quarter and we reached $200 million in sales, we were able to do that largely with operations as they had been. We only have one facility expansion. So our lead times look pretty good. And at the moment, we don't have supply chain issues in that area, at least nothing that is holding us back from delivering.

Okay. Then on -- you've mentioned in the past -- within the construction products, the possibility for these mega project orders. Any update on the pipeline there?

Yes. Well, what you're referring to -- if you're talking about the Construction segment, it would be the mega bridge orders for bridge decking. And yes, the update would be that those mega projects have not surfaced yet. Last time or last quarter when we talked, I had mentioned that we were anticipating that that would happen later this year in 2019. We're still hopeful that that will occur but we haven't had any inquiries come in the door yet. So certainly over the course of the next quarter, we're going to need to see something if we're going to book and order before the end of the year. But then in the meantime, our base business in Bridge Decking has been increasing. So that that business is doing better than prior year, but it's working off of smaller orders. But they're still out there on the drawing board, the projects that I'm speaking of. We have good visibility of them into 2020 and 2021, so they're still out there. It's just a matter of the organizations responsible for them and funding them, pulling the trigger on them.

Okay, great. And then maybe you could update us on Union Pacific and the returning of them as a customer?

Well, what I can say about that is that, we have restored our commercial relationship with them as we were happy to report earlier this year, that's a very good news and we have started to receive orders from them based on that. I can't really comment much more about the details on that, there are a number of things that, we won't go into the details of them. And certainly want to respect the information as far as Union Pacific goes as well. And I don't want to disrupt anything for their supply chain. So there's a lot of things we're probably not going to comment on as it relates to that. But I would also add that at this point, this commercial relationship is -- it's just getting restarted, it's just ramping up. I think it's fair to say that what we're doing right now is not really material to our annual sales volume. And as it does become more meaningful, we will do our best to tell you what order of magnitude that looks like.

Okay, great. And then maybe lastly for me. Can you identify, obviously you've seen impressive growth over the past number of quarters here. From a competitive perspective can we may be comment on what you're seeing in the market? Is there any pricing pressure. I know you made a comment that the pricing seems to be stable, but anything from a competitive standpoint that we should think about?

Well, I'll be guarded and anything discussing pricing, as it relates to anything in the future, right? But the reason that I put the comment that I did in my remarks was to make sure that the people understood that, particularly in our new rail business and some of our products that carry a great deal of steel content that we have. As we move through 2018 and into '19 some of our growth was attributed to the increase in steel prices that were taking place in the marketplace. And that followed the steel tariffs and a lot of the steel capacity being absorbed from domestic suppliers. I actually reported on a number last quarter, I didn't this time. But on a year-to-date basis, we're still seeing those prices remain stable and at the higher level. But other than that, I'd really like to be careful and not comment on what I think the future of prices is going to be. I'm just happy that the market has been in a stable environment at this point.

Okay. Thank you so much for the time, and congrats again.

Yes. Thank you, Chris. Appreciate you joining us.

Thank you for your question. Our next line comes -- our question comes from line of Chris Sakai with Singular Research. Please proceed with your question.

Hi, just a question on the Test and Inspection and threaded services unit seems as though you mentioned had a negative contribution to gross margin. Just wanted to know why and what were the reasons there?

Well, that is -- and thanks for joining us, Chris. That is the business I was speaking of just a moment ago that had one of the That had one of the -- is one of the areas of some weakness in the second quarter. We do depend on foreign pipe OCTG pipe or oil country tubular goods coming into the port in Houston, and to be serviced by us with a number of different kinds of service offerings that we have that then go on to the ENP companies. That's really been the area of more significant weakness at this point. We're not seeing as much of the foreign OCTG pipe coming in. So that has put a little bit of a strain on that business. And then I would also add that, there was a bit of a pullback in the number of rigs being worked. And these ENP companies that we serve, they can react far more quickly now with regard to taking rig capacity off or putting it back on. And that's what created some of the weakness. And that weakness turned into some impact on gross margin -- gross profit.

Okay, great. And then, you mentioned receiving foreign products. So my next question I guess is, how much did you receive from China and are you -- is L.B. Foster affected by any sort of tariff placed on those goods?

Yes. Well, the foreign pipe for oil and gas applications that I'm talking about is largely going to be coming from Korea as well as Turkey and a few other countries, but to a much, much lesser extent that comes from China. We also do not source much of anything else in the way of steel products out of China at least for domestic consumption. From time-to-time, there maybe some Chinese content on projects that we do in other parts of the world, particularly where the specifications are different and where they don't have clauses like By America, clauses like we do for -- lot of our domestic projects, especially transit projects that we work on. And therefore, even for the balance of our business, other products, we don't have a large supply chain that is coming from China.

Okay, great. And then, I guess, lastly, what was the reason for the increase in inventories from the beginning of the year?

Yes. So the bulk of that is in two areas. Our Piling division had a significant increase that was related to a project that was valued at about $25 million for a cruise ship terminal project. We booked an order last year and that's been working through our system since the first quarter of this year. That really had a fairly significant impact. If I go back a little bit prior to Q2, it really rose in Q1 also due to a factory shutdown by our supplier that had a planned maintenance outage so that they could do maintenance on their mills and we had to buy ahead in anticipation of that, and we did. So our inventory was elevated back in the first quarter as a result. So we're still working that down from both of those effects. The second area is our European rail business. We've got large services activity for London Underground and there's a lot of work in process right now for all those service activities due to a number of transit stations we're on, where our contractors are also behind schedule, and so, that's affecting us in terms of whip that we have as a part of those programs.

Okay, great. Thanks.

Yes. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Brett [ph] with Gabelli & Company. Please proceed with your question.

Hi, guys. Thanks for taking my question.

Yes, sure. Thanks, Brett.

You provided a lot of great color in your prepared remarks on just the detail in what's found some of the changes and orders year-over-year. I was wondering just broadly if you can provide maybe any color just on what you're seeing and hearing from customers both on the freight rail and transit rail sides?

Well, from the freight rail side, we are monitoring that closely, because as you probably know and I kind of assumed the question might come from someone with regard to the news that was out there in some of the volumes that were down both, particularly in commodity car loads, but in total traffic. We haven't seen anything that has affected us yet in terms of our serving the freight rail industry. We haven't had any news of projects that have been delayed, any cancellations or anything like that, nor has anyone come to us with any revisions in their forecast. I'd also like to say whenever we see these sorts of things, that our business isn't always directly correlated to capital spending, particularly with the large Class 1 freight rail carriers. And so, our projects sometimes can continue even in the face of a bit of disruption in some volume that's out there. So at this point, we're not changing our forecast and outlook for that particular market. And in the transit rail space, this has been one of the strongest areas for us going back to kind of early 2018, when our backlog really started to rise. We've been winning some significant transit rail projects that's driven growth in largely the rail products portion of our Rail segment, and those programs have been continuing. We still see a number of them out there, throughout North America and Europe. The only piece of this is, that is winding down a bit is that Crossrail project I just spoke about for London Underground. There'll be -- there'll probably be a period where some of those programs will wind down a bit before some others get started. But other than that, we're really continuing to feel positive about transit rail.

Great, that's very helpful. And if I could ask one more. You guys have continued to bring the leverage ratio down, I think close to one and 1.5 times now. Can you help us think about, I guess how you are thinking about capital deployment in the back half of this year and into 2020?

Yes, this is Jim. So we're going to continue to try to bring that leverage ratio down further to the half of the year. We're not able to give any targets on that, but as Bob mentioned in his comments that our working capital levels and the need for higher levels will start decreasing back towards our seasonality and we should be expecting additional cash flows to be able to pay down that debt in the second half. So hopefully that's helpful.

Okay, great. Thank you, guys.

Yes. Thanks, Brett.

Thank you. [Operator Instructions] Okay. I'm seeing no questions in the queue. I would now like to turn the call back over to Bob for any closing remarks.

Yes. All right. Thanks, operator. Well, again, we appreciate everybody's participation in the call today. We're obviously very happy to have such a good report and we look forward to talking with you next quarter. So thanks for joining us, and goodbye.

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.