Monday, August 17, 2015

Big Drop in Conrad Industries Income $CNRD

For the quarter ended June 30, 2015, Conrad had net income of $1.2 million and earnings per diluted share of $0.21 compared to net income of $6.8 million and earnings per diluted share of $1.14 during the second quarter of 2014. The Company had net income of $5.2 million and earnings per diluted share of $0.89 for the six months ended June 30, 2015 compared to net income of $13.2 million and earnings per diluted share of $2.21 for the six months ended June 30, 2014. Results for the three and six months ended June 30, 2015 included research and development tax credits of $0.8 million and $1.7 million, respectively.

Conrad’s backlog was $131.7 million at June 30, 2015, $180.2 million at December 31, 2014 and $173.0 million at June 30, 2014.

Johnny Conrad, President and CEO, stated, “While we remain optimistic about the long-term prospects for our business, we continue to experience near term challenges. We have experienced a decline in demand for inland tank barges primarily used to transport petroleum products produced from shale plays, and also a delay by our customers in placing orders for the larger projects that we expected to convert to backlog. Although bid activity has been good and we are pursuing various opportunities, we have not signed contracts as anticipated which is leading to gaps in our production schedules. The decline in demand and underperformance on some of our newer jobs have resulted in a decline in revenue, margins and profits.”

Conrad continued, “Additionally, we have experienced a softer repair market, which we believe is due primarily to the decline in crude oil prices. These factors negatively impacted our results for the first six months of 2015, and we currently expect these factors to negatively impact our financial performance during 2015, compared to 2014, and possibly through the first six months of 2016. We plan to continue to be responsive to changing market conditions and look for ways to continue to enhance shareholder value.”

Conrad Industries, Inc. announced today that its Board of Directors has declared a quarterly dividend of $0.25 per share of common stock. The dividend is payable on September 17, 2015 to shareholders of record on August 27, 2015.
First half net income was down 61% versus 2014, but quarterly income was down 82% over the previous year's quarter, so the deterioration got worse. Also, backlog is down 24% year over year.

Our previous Conrad posts. I have to say I called this. Last October, the price was $36 and I pointed out the offshore drilling crash would hit Conrad's repair business. And in March 2014, I said, "always remembering that in general you want to sell cyclical stocks at cyclical peaks when P/Es will be low."

They did do the first big share repurchase in a long time: "during the second quarter of 2015, we purchased 121,155 shares at an average price of $31 per share." Pretty funny; you couldn't get them to buy back shares when they were half this level.


CP said...

The CNRD chart has been hideous for a year.

Of course, value investors can't read a chart.

Taylor Conant said...

Wow, that's terrible capital allocation!

Sorry, I missed this on my RSS feed, you must've justed posted.

CP said...

It's been fun watching this company.

They are great operators, but they could have benefited from engaging more with some of their smarter shareholders.

By the way, they've also been spending a ton of money on expansion capex.

Taylor Conant said...

Speaking from personal experience here, I think it's actually not too uncommon for people to be strong operators but relatively poor capital allocators. I have some varied thoughts about why this is so, with examples. Would be happy to go into detail offline.

Anonymous said...

The buyback though odd was not that much as a % of market cap. Yes they could have bought back shares in the past. They did when it was $15 at BV. then they stopped. So the buyback here above book does seem odd. But you cannot fault their cap allocation totally. They gave out two $2 special dividends and one $1 (when it was on the way down) when they enjoyed boom. Those dividends helped returns and may have saved some shareholders today. The expansion capex started earlier in 2013/14 and now they are spending for capability to construct bigger vessels.

If you go back years, BV/ share has increased at a healthy clip.

Tim Eriksen said...

You might want to check the facts in regards to your comment "you couldn't get them to buy back shares when they were half this level." Actually that was when they repurchased shares. They repurchased over 200,000 shares in 2011 at $15. 255,000 in 2010 between $13 and $15. And don't forget the 809,000 shares in 2008 at under $12. Did they fail to buy in 2009? Yes. But to say they reused to buy at half this level is not true. They stopped as the stock rose above $15, and chose to pay dividends instead. They restarted repurchases as the stock came back down to the low 30's. Clearly to early, but to say they are poor capital allocators is not supported by the facts.

Taylor Conant said...

I think I said "terrible capital allocation" in relation to this specific buyback, and CP didn't actually level the accusation of them being poor capital allocators overall. That was another implication I made referring to the idea that many operators do better with their operations than with their capital allocation. I apologize for any false implications that created. Your updated facts are duly noted, Tim.

Appaloosa said...

CP was the one who discovered CNRD and has written 108 posts about it, I'm sure he knows the facts about buying back shares.

CP said...

Here was a comment on buybacks in 2013.

What is driving the capital allocation decisions? What is the rate of return on the new capex? A rational management should only spend money on expanding capacity if the IRR of the new capacity exceeds the IRR of share buybacks. Share buybacks should have a 25 percent cash flow yield, based on the current enterprise value and trailing five year average EBITDA. Is IRR for capital used in the expansion of the Deepwater facility going to exceed that?

Yes, they did repurchase shares but the quantity and timing were suboptimal. And planning to spend $27 million on capex this year with revenue and earnings plummeting is pretty breathtaking.

eah said...

the quantity and timing were suboptimal

Re money, are those things ever optimal anytime, anywhere?

Tim Eriksen said...

Appaloosa - I understand that CP has written 108 posts about it and knows the facts. He did not "discover" CNRD. His first post is Jan. 2011. I mentioned CNRD in an article on deregsitrations that I wrote in Walker's Manual Unlisted Newsletter in 2005. I have followed it since and I started buying aggressively in 2010.

Taylor Conant said...

Hi Tim,

Given your history with the stock, could you share with us more of your thinking on why its a good hold? Would you consider adding to your position given recent price action?

The buybacks aside, what do you think of management decision to invest further in capex given the state of the oil industry at present?

Tim Eriksen said...

Once again you guys are expecting perfection but don't hold yourselves to the same standard. CP's quote of his April 2013 comment that CNRD should have repurchased shares instead of expansion shows that. What was the share price when he made the comment ($28) and what is the share price now ($23)? So CP's advice would have been sub-optimal as well.

I am not trying to rip on anyone's analysis. I am just trying to point out that CNRD's management is not going to bat 1.000. Overall they have done very well, and exceptional in comparison to most unlisted micro caps.

Tim Eriksen said...

Taylor - I have not said whether it is a good hold or not. I do still own shares in my fund. I did reduce that a few months back due to declining oil/gas prices. Today it trades at book for a good company with very good, shareholder friendly management. Repair margins are not going to stay negative very long. Historically they average in the high teens. Of course they were doing $60 to $70 million annually in repair and now it is half that. Construction also had a bad quarter. That is occasionally going to happen. To me if everything goes right the best they will do over the next few quarters is similar to the March quarter. My guess is that results will be near the midpoint between the March and June quarters.

In regards to book value. There is $8.50 per share in cash. They have the money to buyback aggressively at these prices. Will they? Don't know for sure.

It is really hard to judge capex from where we sit. Management knows the industry better, yet on the other hand we have all seen management get caught up in optimism. For now I will give them the benefit of the doubt on it.

Taylor Conant said...


Thanks for the color! Helpful to get a different point of view on this.

CP said...

Saturday, August 25, 2012
Decomposing Conrad's Return on Equity ($CNRD)

Sunday, June 21, 2015
Conrad Industries, And a Shipyard As a "Toll Booth"

Think of all the whipsaws in the energy business since 2007. There have been three busts actually! In 2009, in 2010 (post-spill) and now! It actually speaks highly of them that they have been continuously profitable and have continuously built shareholder value over that time period.

However, it is hard to get a clear picture of Conrad's sustainable earning power. What if the tank barges never come back and GoM oil exploration is underwhelming since it's higher cost than the onshore shale basins? Seems like revenue and profit could fall quite a bit.

CP said...

The tank barges have been their bread and butter newbuild product. Profits were high because shipyards were producing them at capacity. I really don't see that coming back.

Maybe the big ship projects, like the LNG bunker barge, will substitute for the easy tank barge and offshore vessel repair work. But it seems like a much riskier bet than buying this when it was a net net.

GTT, the world leader in the design of membrane containment systems for the maritime transportation and storage of LNG (Liquefied Natural Gas), announces that its US subsidiary, GTT North America, has received an order for one LNG bunker barge. This first dedicated LNG barge for the marine market in North America will be built by Conrad Orange Shipyard, Inc., a division of Conrad Shipyard, LLC. at its facility in Orange, Texas. The barge, for WesPac Midstream LLC (WesPac), a leading provider of energy infrastructure and LNG solutions, and its affiliate Clean Marine Energy LLC (CME), the global facilitator of tailored solutions for Emission Control Area (ECA) compliance, is expected to be delivered in the first half of 2016 and will be built with the innovative Mark III Flex cargo containment technology, which allows an optimized boil-off rate of cargo LNG and efficiently utilizes available cargo hold space.

It is interesting that Wespac Midstream chose Conrad to build this.

CP said...

The 2,200 cu m vessel scheduled for delivery in early 2016, is set for deployment in Tacoma, Washington, to service Totem Ocean Trailer Express’s (Totem Ocean) ro-ro vessels, in addition to other LNG-powered vessels.

From there the barge will be relocated to Florida to serve parent company TOTE’s newbuild container vessels and other LNG-powered vessels in the Port of Jacksonville.

“A comprehensive LNG supply and distribution network for the marine market in North America is critical for the shipping industry,” said Pace Ralli, ceo of CME. “Today’s announcement shows that WesPac/CME is taking the necessary steps to complete the LNG supply chain so ship owners can be assured LNG will be available when and where it is needed.”

Wonder how many of these Conrad will be able to sell?

CP said...

Advantage of LNG:

Compared to the use of conventional marine diesel with 0.1 percent sulfur content, no sulfur oxides and no soot particles are emitted with LNG. Nitrogen oxide emissions will be reduced by up to 80 percent and carbon dioxide emissions by 30 percent.

CP said...

CNRD down about 7% since this post.

Wonder how the LNG barge program is doing?