L.B. Foster Company

Greetings and welcome to L.B. Foster's first quarter 2020 results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the form of presentation. If anyone should require operator assistance during the presentation, please press star zero on your telephone keypad. This conference call is being recorded. I would now like to turn the conference over to your host, Mr. Jim Malone, Senior Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you and good evening, everyone. Welcome to L.B. Foster's first quarter earnings call. I am Jim Maloney, Senior Vice President and CFO. Before I begin, I want to introduce two people you may encounter as you interact with us on investment research or other IR matters. Jim Kempton joined us as Controller and Principal Accounting Officer. Jim's been with us for a quarter and has been getting up to speed on our company very quickly. And we also have Stephanie Liswak, who will assume the responsibilities previously held by Judy Balog, who is returning to another role in our company. This evening, I will review the company's first quarter financial results. Afterward, Bob Bauer, President and CEO, will review the company's first quarter performance and provide an update on significant business issues and market developments. We will then open the session up for questions. Today's slide presentation, along with our earnings release and financial disclosures, were posted on our website earlier today and can be accessed on our investor relations tab at lbfoster.com. Some statements we are making are forward-looking and our best view of our markets and business today, including comments related to COVID-19. 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. For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and presentation and our 10-K. We will also discuss non-GAAP financial metrics such as adjusted EBITDA and net debt and encourage you to read our disclosures and reconciliation tables in the earnings release carefully as you consider these metrics. I'm going to cover the first quarter results, but before I do that, I would like to discuss several actions we took which we believe will improve our operating results and cash flows. As we disclosed previously, We relocated a precast facility from Spokane, Washington to Boise, Idaho and closed three service centers in 2019 to reduce headcount, cost, and risk in our test and inspection division. In Q1, the company recorded a total charge of $881,000 for these actions, which are now completed. On April 30, 2020, the Board of Directors authorized closures of three additional test and inspection facilities and other cost-cutting measures which were previously disclosed on Form 8-K. As a result, we expect to incur a charge ranging from $5.5 to $7 million. These non-recurring charges will be recorded during Q2 and the remainder of the year. We also are evaluating additional cost-cutting measures in our Test and Inspection Division to offset the declining crude oil demand due to the COVID-19 pandemic. Bob will be discussing the impact of the pandemic on our business in more detail later on in our presentation. So with that, I will start my financial review beginning with Q1 sales and gross profit. During the first quarter, our sales were $129 million compared to $150 million in Q1 of 2019. A $22 million or 14.4% decrease. Consolidated gross profit decreased $8 million over the prior year quarter. Gross profit margin of 16.8% was a reduction of 260 basis points from the prior year. The decrease in sales and gross profit in the quarter were due to several reasons. Even though the company was generally considered an essential business and allowed to operate during the pandemic, Our operating results in Q1 were negatively affected. While the precise impact of the coronavirus is difficult to quantify, as stay-at-home orders were enacted in Q1, we experienced disruption in our supply chain and in customer acceptance of products and services, as well as a general weakness in demand. Our rail segment was adversely impacted by our rail technologies business in North America and Europe. The rail technologies business had a 9.7% decline in revenue, which also negatively impacted gross margin. These results were driven by lower friction management consumable sales due to weakened demand for our solid consumable offerings in North America due to less movement of freight and transit, coupled with stay-at-home orders that delayed our services for the London Crossrail project. From a tubular and energy segment perspective, the coronavirus pandemic and the associated reduction in energy demand due to reduced travel and movement of goods throughout the world caused U.S. exploration and production companies to decrease activity and implement spending cuts. These actions, in turn, decreased revenues in our test and inspection division by 37.1% compared to last year and had negatively impacted gross profit. The 32.4% decrease in precision measurement systems revenue was due to projects being delayed by customers as pipeline capacity requirements are being reevaluated. Finally, in Q1, our precast concrete Boise facility had a 45.6% less revenue when compared to Spokane, Washington facility last year, which depressed gross margins. This reduction in volume and revenue was expected when we made the decision to relocate our facility last year. The Boise facility and the overall precast concrete division is seeing enough demand that we still have a good chance to meet our 2020 expectations. Now moving on to expenses. Our consolidated selling and administrative expenses decreased $592,000 or 2.7% to $21 million in the first quarter. Net interest expense was reduced by $538,000 or 39.7% for the first quarter due to a $26 million reduction in outstanding debt when compared to March 31, 2019. Our income tax benefit was $828,000 in Q1 with an effective tax rate of 30.7% The 30.7% effective tax rate was higher than the statutory rate primarily due to state income taxes and non-deductible expenses. Our first quarter net loss was $2 million or $0.18 loss per diluted share compared to income of $4 million or $0.35 per diluted share last year. Adjusted EBITDA totaled $3 million in the first quarter, a decrease of $7 million compared to last year, mainly due to the decline in revenues and gross profit. Now turning to the balance sheet. Over the last several years, we have strengthened our balance sheet, which we expect to help us get through these challenging times. Our trade working capital decreased $6 million compared to December 31st, 2019, mainly due to A decrease in inventory of $6 million. The decrease in inventory in Q1 was due to better inventory management in our rail distribution business. Our current ratio as of March 31st, 2020 is a very healthy 1.93. Our net debt was $58 million at March 31st, 2020 compared to $81 million in March of last year. Our trailing 12-month leverage ratio is 1.5 as of March 31, 2020. Our total available funding capacity, that is the available capacity under our revolving credit facility plus our cash, was approximately $105 million as of the end of the quarter, which gives me confidence that we can deal with the issues arising from these unprecedented events. Now I will speak to our cash flow activities. Our cash used in operating activities in the first quarter was $7 million compared to a use of $14 million in 2019. The $7 million improvement in operating cash flow was primarily related to our continued focus on trade working capital improvements. During the first quarter, our capital expenditures were $4 million. The first quarter expenditures primarily relate to the purchase of a continuous weld train car and unloader within our rail segment and continued investment in our precast concrete products business, including our new Boise, Idaho facility. I would note that the continuous weld rail train car and unloader is a very infrequent capital requirement for the company, as these have a very long useful life associated with them. We are anticipating our capital spend to be between $8 million and $10 million for the entire year. Now on to new orders and backlog. In Q1, overall orders were $137 million compared to $180 million last year. There were decreases within all three segments year over year. Historically, we see a ramp up in orders in the month of March each year. However, this year we did not see that trend. More than 50% of the quarter order decrease was in the month of March year over year. The order decline for the quarter was mainly due to the activity in rail distribution and transit and also in tubular and energy segment due to the decline in demand in the upstream and midstream markets we serve. Backlog stood at $238 million at the end of the first quarter An increase of $8 million or 3.3% during the quarter. The backlog decreased by $12 million or 5% compared to March 31st, 2019. Bob will provide more details on our orders and backlog activity as well as our market outlook for all our segments. That concludes my comments on the first quarter. So with that, I will now turn it over to Bob.

Thank you, Jim. And hello, everyone. I appreciate everyone joining us today as we attempt to provide as much insight as possible around the recent quarter's results, as well as how we see our markets being affected by the actions that have been taken around the world to stop the spread of the virus. Unfortunately, there's a lot of uncertainty, but we'll do our best to help you understand what we're seeing. I want to start by giving you some insight into our operating environment and the changes that took place in March as news of the virus led to many countries declaring a state of emergency. Before I get into these details, I feel compelled to recognize all of those around us in the medical community that made it possible for us to operate and do our part in supporting the economies that depend on us. During the month of March, the company reacted to several stay-at-home orders across North America and Europe, as well as recommended preventive measures to help stop the spread of the virus. L.B. Foster was widely considered an essential business and allowed to continue operating under these orders. We took a number of steps to follow recommendations on social distancing and reduce close interaction among employees while continuing to operate. Our employees did a terrific job adapting to the circumstances, working remotely in some cases and also making adjustments in operations to respect the health and well-being of their coworkers. We are extremely proud of our people and the efforts they made to put us in a position to continue supplying products and services to our customers. I can't say enough about the efforts everyone has made. Our people take great pride in continuing to operate for the very reasons we were deemed an essential business. Governments and people around the world depend on support from us to keep infrastructure operating and moving forward in our railways, highways, ports, and pipelines where people, products, and commodities are transported every day, keeping our world moving. Assuming we will continue to operate while keeping our people safe, we believe we are also making a contribution to the health of the global economy, which is needed for the long-term well-being of everyone, not just our stakeholders. As I'm sure you've heard from so many other companies already, and we're no different, our top priority is the health and well-being of our employees. and guarding against the risk of infection. We did not experience any sickness in the US and Canada up to this point, and only a few cases emerged in the United Kingdom which are headed toward a favorable outcome. In order to give you a sense of the impact the stay-at-home orders had on our business, I'll begin with four anecdotal reports. One, we experienced minor disruption in our supply chains, typically in areas where we source circuit boards, controls, cameras, and other sensors for railway automation solutions. A portion of these are sourced from China and did not meet delivery requirements for projects we had scheduled. Second, we experienced some interruptions on customer acceptance. of shipments as local governments called for a shutdown of the industry or customer type we were serving. Certain construction projects did not move as smoothly as they otherwise would have due to the adjustments being made to follow local orders or address local virus concerns. Third, there have been some delays and cancellation of service work as customer willingness to have us work on-site changed. In some cases, customers were developing new procedures for accepting third-party service providers, and in other cases, customer opinion changed toward acceptable social distancing practices and the risk associated with third-party providers. Some of the service work was stopped, as in the case of London Underground, and some customers have delayed non-critical work as a way to cut back. Fourth and finally, there was some general weakness in demand as customers did not get around to moving certain projects forward, and in some cases were unable to conduct business in a work-from-home environment or with people unable to perform. There was also some decline in volume associated with markets that are experiencing lower volumes, such as the North American freight rail market. To precisely quantify the impact from all of these virus related issues is difficult. We estimate that sales revenue in the first quarter fell short of our expectations in the range of $10 to $17 million, largely due to the impact the virus had from previously mentioned issues. This shortfall includes the impact from weakness in the energy markets, which started before any actions were taken to combat the spread of the virus but were exacerbated as the demand for oil dropped substantially once the public around the world stopped traveling, driving to work, and engaging in other activity that resulted in reduced mobility. Looking ahead, we anticipate continued disruption through at least a portion of the second quarter. The second quarter is an important quarter for the company to see a ramp up in orders and backlog as construction projects are planned and started. The rail and construction segments are currently experiencing good proposal activity despite pockets of weakness that are typically related to traffic volume or working conditions. We expect to experience continued shortfalls in service work that can't be performed We have some customers that haven't gotten back to work and there is likely to be some project deferrals for budget and schedule reasons. The energy market does not have a favorable outlook and the industry expects significant trouble funding ongoing development activity that drives demand for our services. We are revising our outlook for the energy market and forecast sales to decline significantly for this segment. The changes in supply and demand for oil, which have been changing very rapidly, have led to a supply-demand imbalance causing our customers to make dramatic changes that are significantly impacting forecasts for our services. As I discuss the quarter and what we expect to see unfold, There are striking differences among our reporting segments. New orders of $137 million declined $43 million, or 24% from prior year. The largest percentage change is in the tubular and energy segment, with every division declining from widespread slowing across upstream and midstream operations. Customers we serve are reducing capital spending and deferring projects wherever they can. The rail segment was driven by a reduction in transit rail project orders, a decline in services on track, and a decline in certain consumable sales as railway traffic declined. We believe transit project investment should continue as these are projects with long-term planning. Ridership volume is likely to remain low for some time and therefore could impact the timing to fund follow-on projects. Construction declined the least, the decline all driven by lower order input for bridge decking projects. We believe the bridge decking projects are being held up due to obstacles presented from stay-at-home orders. The first quarter ended with a slow pace of order increase as we approached our typical seasonal peak period. Orders in March were well below expectations, accounting for more than half of the year-over-year first quarter decline. This leads us to believe that March was clearly impacted by lost days at work on the part of our customers, project delays, and other virus-related matters such as people adapting to working from home. Under that backdrop, it's worth noting two positive items. First, our backlog sits at $238 million with roughly half of it scheduled for shipment in the second quarter. This includes rail segment backlog that is up by $5 million and construction segment backlog That is up by $10 million from the beginning of the year. And second, proposal activity has not deteriorated in many parts of the construction and rail segments. Construction projects in the US have been affected by delays in some cases, but the overall projections for existing and new projects remain the same as it was earlier in the year. Similarly, The rail industry, both transit and freight rail, have projects that are expected to move forward. We have not received any indication yet that major rail and construction projects are being canceled at this point. We realize that it's still early and the broad economic impact from the stay-at-home orders has yet to be fully understood, but at the moment, We are not getting signals from customers in these two segments that indicate a widespread reversal in direction from what was planned for 2020. I expect that if there is broad economic decline associated with rising unemployment, along with fear directed toward the transportation industry, then we may see some reversal in this activity in the months ahead. We are revising our forecast for the tubular segment for the year in anticipation of a very weak energy market. The tubular backlog stood at $27 million at the end of March, down $7 million from the start of the year as we completed pipeline projects in our protective coatings operations. The backlog is roughly where it was last year at the end of Q1. But the expected decline in future orders in 2020 leads us to estimate that sales revenue will decline by at least 25% in this reporting segment. Our most challenging area is in the upstream market where the Test and Inspection Services Division had an EBITDA loss of $2.1 million in the first quarter. The magnitude of the loss illustrates how severely the upstream market has deteriorated. Last quarter, we announced actions we were taking to close certain operations in Oklahoma and Louisiana where we did not expect to see the market recover in any way that would support continuing operations. We have added two more territories where we see little potential to return to promising sales levels As a result, we plan to close the service centers we have in North Dakota and Nebraska along with a satellite operation in Colorado. And as Jim noted, we will take charges in the second quarter for the closure of these facilities. We will continue to take action intended to eliminate losses associated with this division. Following the closure of these sites, We will have one site in Wyoming, three in Texas, and one in West Virginia remaining. Jim also mentioned the impact of moving our precast plant from Spokane, Washington to Boise, Idaho, which started in October last year. We also lost production time as we completed the startup of our new facility in Boise, Idaho. Sales in Boise were about half of what sales in Spokane were in Q1 last year. In addition, we had startup costs without the sales volume. This was forecasted, but it does weigh on first quarter results for the construction segment. As you review segment profit results, the year-over-year decline in segment profit in construction was almost entirely due to the precast concrete division, and nearly all of that was associated with the Boise relocation. We expect that to change in the second quarter, and by the third quarter, we expect the Boise facility to be operating at much higher efficiency levels. The segment profit for rail products and services was the result of lower volume on new transit projects A significant decline in consumable friction management materials related to declining rail customer traffic and reduced services at Class 1 U.S. carriers and London Underground. These conditions are likely to persist for at least a portion of the second quarter. And in the tubular segment, half of the segment profit decline was related to the Test and Inspection Services Division. I just spoke about our plans to address that as quickly as possible. The tubular segment accounted for $4.1 million of the $7 million consolidated decline in segment profit. I'll close with a comment on our balance sheet strength. Jim spent time outlining the strength we have today and what our liquidity position looks like. We've worked hard to improve this position. We generated $29 million in operating cash flow in 2019, and on a trailing 12-month basis for March of 2020, we generated $36 million of operating cash flow. We have some key projects we started last year requiring capital that we intend to complete. We do plan to defer other projects out to 2021. But whether you're looking at 2019 or our trailing 12-month results, our net debt to adjusted EBITDA is in the 1.0 to 1.5 range. Again, supporting our position that our balance sheet does provide us with a good starting point from which to react to the anticipated weakness. Our priority right now from a business standpoint is to act as quickly as possible to the new reality of the energy markets. The upstream segment will get significant attention on actions to mitigate the impact of this weakness. And the divisions serving pipeline applications are proactively planning for an expected decline in the second half of the year. Our other priority is to keep everyone in good health. Get through the next quarter without any troubling illnesses and continue to support the economy by doing our part to support critical infrastructure. I'll end my remarks there and I'll go ahead and turn the call back over to the operator and we'll be happy to take any questions you might have.