L B Foster Co (FSTR) 2005 Q3 法說會逐字稿

Good day and welcome ladies and gentlemen to the Q3 2005 L.B. Foster earnings conference call. My name is Audrey and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to Mr. David Russo, Chief Financial Officer. You may proceed.

Thank you, Audrey. Good morning and thank you for joining us for L.B. Foster Company's investor call to review the company's third quarter and year-to-date 2005 operating results. My name is David Russo and I am the Chief Financial Officer of the company.

On the call today, we have Mr. Stan Hasselbusch, President and CEO, and Mr. Lee Foster, our Chairman of the Board. This morning, Stan Hasselbusch will provide an overview of the company's results and discuss business conditions. Mr. Lee Foster will then provide an informational statement on the DM&E Railroad.

Afterwards, I will review the earnings release issued earlier this morning before we open up the session for questions. (inaudible) to access this conference call via Web Cast were disclosed in our earnings press release and were posted on the L.B. Foster Company Web site under the investor page. This Web Cast will be archived and available for 7 days.

Today's call includes forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and include known and unknown risks and uncertainties.

Future actual results may differ greatly from these statements and expectations that are expressed today. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ending on December 31, 2004, for additional information, as well as to other information filed with the Securities and Exchange Commission.

I should also reiterate at the beginning of this call that while forward-looking statements will be made, it is the policy of the L.B. Foster Company to not provide specific earnings guidance.

With that, we will commence our discussion and I will turn it over to Stan Hasselbusch.

Good morning. Thank you, David and thanks to all of you for attending this quarterly earnings call and Web Cast. David will discuss earnings in more detail later, but first I'd like to take a few minutes to review highlights of our operations in the third quarter.

Overall, revenues and earnings were both up considerably compared to the same period last year. Sales were 97.5 million, up 14% from last year, while net income was 2.3 million, up 75% from last year. As noted in our press release, we had strong performance in both our construction and tubular groups.

Construction products performance was driven by piling. Piling sales were 32.7 million in the quarter, up 57% from the same period last year as we continue to increase our share and expanding domestic sheet pile market. Current data that we file indicates our share of increase from 10 to 30% in the last year.

This is primarily a result of consistent availability of sheet pile sections from our strategic partner, Chaparral Steel. Another key indicator of piling performance is sheet piling tonnage on rent. We entered the quarter with approximately 4,300 times on rent, which is the highest level since Chaparral began railing sheet piling.

This compares favorably with only 1,430 times on rent this time last year. Our tubular business was also very strong in the third quarter. Tubular sales were $6.2 million, 42% ahead of the third quarter, 2004. Performance in that sector was led by coated pipe with sales of 4.5 million. Coated pipe had their best quarter in 6 years.

Our Birmingham pipe plant quoted 6.4 million square feet in the quarter, which compares favorably with 2.3 million square feet in the third quarter of last year as they continue to benefit from a strong energy market. Overall, rail performance was negatively influenced by concrete ties.

The poor financial performance in ties was caused primarily by the shutdown of the Grand Island facility while we installed new equipment at this location. The shutdown occurred on July 10th and I am pleased to announce that the newly refurbished plant was capped and tied on September 21st, on time and on budget.

Currently, we are in the commissioning stage of this new facility and expect to be in full production next year. I'd like to take a minute of this Web Cast to point out to the audience that this plant was built by the same L.B. Foster workforce that is now operating it.

They did it with the help of 2 representatives from the European company that helped us manufacture the equipment. They did it by working 7 days a week, 12 hours a day, and they did it with a perfect safety record. I just have to thank them for their effort and congratulate them on their success.

Construction on the Tucson facility, however, has been delayed due to permit issues. We are working very closely with the City of Tucson and expect to commence production in the second quarter, 2006. Overall, we are very bullish on concrete ties in 2006.

Indications are that the Union Pacific will utilize all of our production capacity in both Grand Island and Tucson next year. Also we have secured 2 key transit projects for production in the first half of 2006 at our Spokane plant. 110,000 ties for Utah transit and 21,000 ties for the City of Calgary, which combine (through the) solid base for this facility next year.

In addition to the Grand Island and Tucson tie plants, we have also initiated another major capital program within our rail products group. The bulk of our production that (insulated down to joints) is being relocated from Indiana to Pueblo, Colorado to better serve our 2 largest customers, the Union Pacific and B&SF Railroads.

We expect this plant to be operational in March of next year. Our introduction of (inaudible) coated insulated (inaudible) has been accepted by both lines and is largely responsible for a 42% increase in bookings of this product year to date.

In addition, we recently have been notified by B&SF Railroad of their acceptance of the new Electro 20 Lubricator, which is a track-monitored lubrication device used to minimize (inaudible). We will see revenues from this product beginning in the fourth quarter of this year and expect to eventually assemble these units at our new Pueblo facility.

Our (inaudible) our overall bidding activity and bookings remain strong. Order entry for the company in the third quarter was 102 million, up 38% from last year, and (back) (inaudible) at 141 million, up 29% from last September. We expect this trend to continue into next year.

I would now like to turn our attention to our (inaudible) in the DM&E Railroad. We continue to receive numerous questions regarding various items of interest and we cannot usually respond in a one-on-one, non-public forum.

So I'd like to introduce Lee Foster, who has prepared an informal summary regarding some key points of interest for the DM&E Railroad. Good morning, Lee.

Thank you, Stan. As most of you are aware, the company has owned an equity interest in the Dakota/Minnesota and Eastern Railroad since the DM&E was created in 1986. the DM&E is a privately held regional railroad which directly or indirectly owns over 2,500 miles of track in 8 states.

Included in these holdings are approximately 1,400 miles of track owned by the Iowa, Chicago & Eastern, which is wholly owned by Cedar American Railroad Holdings. The DM&E in turn is the sole owner of Cedar American Railroad Holdings. L.B. Foster Company has invested $200,000 in the DM&E's common stock and owns 118,750 shares of the DM&E's currently outstanding 715,999 shares of common stock.

The company has also invested approximately 8.8 million in several series of DM&E preferred stock and associated warrants. These warrants are exercisable after certain conditions are met at 1 penny - one cents a share.

If all of the DM&E's warrant holders exercised all of their warrants, L.B. Foster would then own slightly more than 13% of the DM&E's common stock. The company has recorded as of September 30, 2005, a receivable of approximately $6.4 million related to a crude dividend income from its DM&E preferred stock investment.

In 1997, the DM&E announced a plan to extend its existing line into the low sulphur coal market of the Powder River Basin in Wyoming. This project has undergone extensive regulatory and judicial review and it appears that this legal process may soon be nearing a successful conclusion.

While we are pleased with our investment in the DM&E, as we have stated before, we will not speculate on any potential range of values for this investment.

Now I'd like to return the conversation to Dave Russo for the financial review.

Thank you, Lee. Let's start off with a discussion on sales. Sales for the third quarter of 2005 were 97.5 million compared to 85.9 million in the prior year, an increase of 13.6%, which we were able to leverage into a 63% increase in pre-tax income.

Sales increase was due principally to a 31% increase in our construction product segment, 43% sales increase in our tubular segment, offset in part by a decline in our rail products segment of 7%. The construction product sales increase was driven by a 57% increase in piling sales and a 17% increase in concrete building sales.

The tubular increase was due to an astounding 168% increase in coated product sales, partially offset by a decline in (threaded) products. Rail segment sales declined by 7% due to a 13% reduction in rail distribution sales and a 12% decline in concrete tie sales.

The rail distribution decline really was due to a $6.2 million sales transaction in the third quarter of last year, where we acted as an intermediary between a class one railroad and a foreign rail mill. These transactions happen quite infrequently. The concrete tie sales reduction is due to 2 items.

The first one is the fact that Grand Island was shut down for most of the quarter and the second is due to reduced sales volumes at our Spokane facility due to a decline in its class one sales. Spokane is no longer a preferable logistical location for the Union Pacific Railroad regarding standard concrete ties.

As a percentage of consolidated sales, tubular accounted for 6%, construction, 55%, and rail was 39%. On a year-to-date basis, tubular again accounted for 6%, rail up to 46%, and construction was 48%, and those year-to-date results are fairly typical of the company for the last 18 months.

Gross profit margins for the third quarter increased 100 basis points from last year to 11.9%. This positive comparison is due to the following items. Number one, a decrease LIFO charge of approximately $650,000 in the third quarter. This represents an improvement of approximately 66 basis points.

Product profit at standard before plant and other variances increased 50 basis points over last year due principally to improved pricing. These items were partially offset by a couple of detractors, the first one being gross profit margins at the concrete tie group were negative $.5 million this quarter, primarily because the plant could not absorb its fixed cost as a result of no production activity.

The second, due to a one-time rate charge incurred to transport ties from Spokane to Grand Island to support our customer while Grand Island was shut down.

As mentioned in last quarter's call, we projected a poor second half in the concrete tie division due to Grand Island being shut down, Tucson not even having commenced construction, and Spokane having better volumes in quarter two, but not enough to overcome the negative impact of the plants that were not running.

We also incurred certain costs this quarter at our Tucson site, where we are preparing to construct a new facility. We continue to anticipate a relatively poor fourth quarter in the concrete tie business, although it should be improved over the third quarter just completed.

On a more positive note, we are extremely pleased with the progress being made at Grand Island as we continue to bring all of the equipment on line and increase tie production volumes on a weekly basis. We made 700 ties in September; however, in October, we expect to produce 10,000 ties.

We expect to produce 15,000 in November, and over 20,000 in December. As I'm sure everyone could discern from Stan's discussion, we stand in awe of the effort put forth and the success achieved by the team at the Grand Island facility.

It should also be noted going on to our fabricated products business that we did not have a stellar quarter in that business, but they did beat last year's third quarter and they performed substantially better than the second quarter of this year.

We also believe that we have completed the majority of the projects that contain negative variances due primarily to steel pricing that we discussed last quarter. However, before we get overly optimistic, we have not yet seen any significant business develop as a result of the new transportation bill.

Additionally, the current profitable projects that we are working on will be completed by the end of the first quarter of 2006. We have won some new business, but we need to book more work in this group to keep the positive trend going.

Moving on to SG&A costs, SG&A expenses increased 13% in the third quarter of 2005, due primarily to personnel related costs and professional fees. SG&A represented 8.1% of sales in the third quarter of 2005 compared to 8.14% of sales in prior year quarter.

On a year-to-date basis, SG&A was 8.5% of revenues versus 9% of revenues for the prior year. Other income increased a quarter of a million dollars due primarily to increased rental income of $100,000, and increased derivative income.

The additional rental income was a one-time event that we benefited from when we sold our Doraville, Georgia facility that was not being utilized. As a result of the foregoing, third quarter operating income was $4.2 million compared to $2.6 million in last year's third quarter. This is a 65% increase over last year.

Moving on to interest expense, interest expense was $780,000 in the third quarter of 2005 compared to just over 450,000 in 2004. The 72% increase was due to higher average borrowings as well as higher interest rates. As you are all aware, the FED has increased interest rates by approximately 275 basis points since June of last year.

Our increased sales volumes have increased our working capital requirements and therefore, our average borrowings as well. On a year-to-date basis, interest was $1.8 million compared to $1.4 million last year, a 28% increase, due to increased borrowings and increased rates discussed in the quarter comparison.

The year-to-year increase is less precipitous in the quarter as our debt increased primarily after the first quarter of operations in 2005, and in April of 2004, we retired an interest rate collar agreement that was costing us more than $30,000 per month. This was a favorable comparison for the first four months of this year.

The increased borrowings were due to an increase in working capital and higher than typical capital expenditures, both of which I will discuss in more detail later. Moving on to pre-tax income, pre-tax income was $3.4 million this year for the quarter compared to 2.1 million last year, a 63% increase.

As a percentage of sales, 2005 third quarter pre-tax was 3.5% of sales versus 2.45 last year. The third quarter income tax provision was 31.5% in the third quarter of this year compared to 36.1 last year. The rate differential relates primarily to an increase in evaluation allowance provided against certain deferred assets in '04.

The tax rate for the first nine months of this year was 32.5% compared to 38% last year. We expect our tax rate to be in the 32.5 to 33% range for the remainder of the year. Net income was 2.3 million or 22 cents per diluted share compared to 1.3 million or 13 cents per diluted share in the third quarter of last year.

While we continue to be encouraged by this improvement, we realize we must continue to expand our margins in the coming quarters. Moving on the balance sheet, we'll give you a quick review. Working capital, accounts receivable, and inventory, net of AP, increased almost $6 million this quarter and $25 million for the year.

This increase from December of '04 is due to the following items. We have had a $21 million increase in accounts receivable due principally to increased sales volume. AR however is up a much lower 11.5 million when you compare it to last year's September, so a lot of that is certainly volume.

DSO is approximately the same as it was last September. We've also seen a $24 million increase in inventory due primarily to increased volumes, and an intentional increase in steel sheet piling inventory due primarily to availability of this piling from our key supplier.

We stocked the shelves this year to acquire inventory of each section we currently offer in order to avail ourselves of higher margin stock sales. Piling inventory has increased $15 million from December of '04.

Additionally, the company - getting into our fixed assets, the company has spent $12.7 million in CapEx for the first 9 months of this year compared to $2.1 million last year. Approximately 10 million of this amount was for the new concrete tie facilities that we've been discussing. We continue to expect total, key P&E, expenditures to be approximately $20 million this year.

The majority of the capital spend for the concrete tie facilities will be financed via fixed rate lease agreements with 2 different banks that the company currently already does business with. In addition, approximately 3 million of that financing will be structured via operating leases which will require a sale in lease back transaction later this year.

The details of this discussion are, I'm sure, less than fascinating to everyone on the call, but the key point to take away here is that L.B. Foster is allocating its resources to the business groups that are getting it done and that have the best potential to make a substantial impact in the future.

Piling, rail distribution, insulated joints and lubrication systems and concrete ties. That's where we believe that the investments we are making today, whether they be plant capital or working capital, will have the greatest positive impact for our customers as well as all stakeholders.

Finally, last quarter, we discussed our new amended and restated credit agreement with a consortium of banks and we would like to announce that (inaudible) out there that on September 15, the company amended this agreement by agreeing to increase the credit line from 60 million to 75 million.

Except for an increase in the inventory sub limit from 35 million to 45 million, all terms and conditions remain the same. That concludes my discussion of the financial results.

Unless Lee or Stan have any closing remarks, we will turn it over to Audrey to open up the call for questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, press star, followed by one, on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, press star, followed by two. You may begin by pressing star, one, to ask your question and please stand by.

Your first question comes from the line of Robert Sanders (ph) with Legg Mason. You may proceed.

Yes, good morning and congratulations on another good quarter.

Thanks Bob.

Sure. And I'm kind of looking ahead here to the next one. It's typically the fourth quarter is a, you know, the weak quarter, but you know, with all the things that are going on with the bookings and with the backlog you have, is there any - is that shaping up to be a little untypical maybe this time around?

Can you give me a little color to maybe the fourth quarter? Is that possible?

Well, Bob, you know, typically you're right on. Our fourth quarter is one of our two weakest quarters. It's usually a toss-up between the first and the fourth quarter of business in the construction industry. It typically slows down, but we do expect a better quarter, much better quarter than we had in the fourth quarter last year.

Okay. Thank you.

And your next question comes from the line of Elizabeth Barney with Eagle Capital Partners. You may proceed.

Hi guys. Just a quick question for you on the piling market. It's great that you have a ton more inventory and that the availability is there from Chaparral, but can you speak a little bit about the demand out there for the product? And you know, how long you think it will be until you start working off this inventory that you have?

Good point. You touched on a couple of things, Elizabeth. We track the market between producers, hot roll producers domestically and import, and we have - we felt that from July of '04 to July of '05, compared to July of '03 to July of '04, which is our most recent numbers, is that the market is up about 11%.

So that market is continuing to grow. We are also expecting in the future, we're starting to begin receiving quite a few inquiries from the results of Katrina in the - in the New Orleans area. The core of engineers are releasing a couple of jobs a week and they have been doing that for the last month. I believe in the last 2 weeks, we've received over 6,000 tons of inventory, but - or 6,000 tons in inquiries, excuse me.

6,000 or 600,000?

6,000 tons ...

6,000.

... of inquiries which we really would play into our inventory position. We are sitting on approximately $25 million of inventory at the end of - at the end of the quarter and we do realize that we have to take that down, but we really feel that we're positioned to take advantage of the upturn in the market which we expect going forward.

We haven't seen any of the transportation bill yet, but again, that will be a - that will be a driver of product in the future.

Okay, but that could be like 6, 12 months out, right?

Well, really, that - you're very much right on that, but I think from our activity level that we're seeing and what we're picking up down in the - down in the Gulf area, you know, we do have to move some inventory. We'd like the end of the year up a little less than what we have, but we are positioned pretty well right now.

Okay. And did you say the total market for pilings are up 11%?

That's what we're seeing, yes.

And is that just more usages of piling, people are using it in different projects they haven't been using it before? Or what's driving that?

I think it's a combination of things, Elizabeth. I believe that, you know, it's part because of the economy, which has been expanding. We've seen quite a bit of work. We are looking at new applications.

We're very much involved with open sell design work and we're starting to pick some of this work up also, but there's an overall increase in usage and the economy is really driving a part of it also.

Okay. And are you guys providing the number for the - how many tons have you sold so far this year of the sheet piling?

From year to date for sheet piling, I believe - I can get this if you just hold on a second.

Great. Thanks so much.

Overall this year through the third quarter, (inaudible) have sold 22,000 tons and that compares to 9,000 tons through the third quarter in last year.

So you sold 22,000 tons from January 1, 2005 until September 30, 2005? Is that correct for the nine months?

That's for the quarter.

Oh, for the quarter, 22,000 tons? Okay. And do you have that number year to date?

I don't have that number year to date.

Okay, all right. Maybe I can give you guys a call later on today to talk about that a little bit more. All right. Thanks so much.

And your next question comes from the line of Tom Spiro with Spiro Capital. You may proceed.

Tom Spiro, Spiro Capital, good morning.

Hi Tom.

Hello Tom.

A very nice quarter and congratulations on your steady progress.

Thank you.

Stan, you mentioned in your commentary some developments with respect to our insulated joint business and some lubrication devices, and frankly, I didn't fully appreciate either of those points. Could you just elaborate a little bit on the significance of those to the company?

Yes. You didn't understand either of those points?

I didn't understand how important these are to the company. For example, the joint business, how large is it? What does the market look like? And you mentioned we're moving manufacturing from point A to point B?

Yes. It's an approximately 12, $13 million market and the two largest accounts that we work with on this account, Tom, are located in the West.

The Western roads (ph) account for over 50% of our business and this is - this move is to accommodate them, but it will also - it will also allow us to get a larger percentage of their overall work and will also have a, you know, have an improvement of our profitability in those two products.

12 to $13 million, is that our business or the overall market?

That's our business.

How large is the market, lets' say from just those two carriers?

Right now, from those two carriers, we are probably getting close to 60 to 70% of the market from those two carriers. We are probably - we feel that we're capturing over 50% of the domestic market in that product.

And I think you mentioned there was some kind of technical development, the Kevlar (ph) insulation. Is this a ...

... with the problems with this product and we've been working on research and development in this area for the last 4 years with both - with primarily the 2 Western roads, but as the loads become heavier and the trains go faster, there has been a lot of wear on this product.

And we have been working with 6 different designs and this Tevlar coating has, we feel, to our test and to the railroads, and the railroads have had this, Tom, in test for 2 years, are providing longer wear, which is providing a safer rail ride for the railroad.

And the lubrication device, is this some kind of wayside application device?

Yes, it is. I mean, you know, one of the - one of the problems with the lines is friction, is rail wear and friction on the wheels and the lubricator is used to minimize this.

Aren't there several such products already out there?

Not really. There is a - from what we understand, there are a couple of major producers and we would be another entrée into that, but there is not a lot of production. I believe that there is one manufacturer that pretty much dominates that market domestically.

I see. One last, just a purely financial question. Was there any LIFO charge in Q3?

In Q3, yes, there was.

337.

337?

Yes.

I'm sorry, Tom. Did you say Q3 or 2003?

Q3, the quarter just concluded, it was third quarter?

It was $340,000.

Do you expect another LIFO charge in Q4?

Our current estimates show that yes, the fourth quarter, you know, if everything plays out with no changes in pricing, we'll have a similar such adjustment in the fourth quarter.

Thank you. I'll get back in the queue.

Thanks, Tom.

And your next question comes from the line of Ed Sacks (ph) with UBS. Please proceed.

Hi. You mentioned earlier that the tie facilities, the new tie facility would be producing in full production, full volume for this coming year. Do you have any idea what the volume is of that?

Well, we - at full capacity at Grand Island, we will be able to produce over 400,000 ties. And we will have - the facility in Tucson is a mirror image of that, of the Grand Island plant, from a capacity standpoint.

And what kind of dollar volume does that lead to?

Well, you know, Ed, it's depending on the mix, but that between the 2 plants will be north of $30 million.

So that will be additional volume?

Well, potentially. Now I did mention that we do have - we have permit issues which we're working through at Tucson, so we will not get full production capacity out of that facility next year. It just sort of depends on when we get it up and started.

Right. I have one other question.

Sure.

With the DM&E, since it is a private company, I assume their force (ph) has got the inside track if and when the final go ahead is achieved. Will you be able to get most of the work on the rail?

Ed, I'm not - you really don't expect an answer to that, do you?

Okay. Okay. I thought it was a reasonable question, but ...

Well, you know, obviously the DM&E has a process for purchasing that looks out for the benefit of their entire shareholder group and Foster has gotten a meaningful share of that in the past by being competitive.

Correct. Okay. That's what I meant to say. Thanks.

And your next question comes from the line of Thomas Bigley (ph). You may proceed.

Good morning, gentlemen, and congratulations on a good quarter and also congratulations on a very thorough analysis of the financial results for this quarter.

One question I do have though is on the margins. With business activity as strong as it apparently is and will continue to be, are there a lot of opportunities for increasing our gross margins either through better pricing or through cost reduction?

Yes, that's a good question, Tom. We talk about that a lot and I think that one of the key drivers, if you look at our product mix year to date, over 50% of our volume is from the distribution side of the business. The manufacturing side has been relatively slow and I'm talking about particularly this quarter with ties.

We are - our fab products business has been down and the profitability we've talked about has been low. The panel plants (ph) have been somewhat down, but you know, as that business continues to improve, and we really (ph) are getting a lot of backlog is building an order entry in those manufacturing lines, we expect those margins to expand.

And we have as we've talked about in the past implemented programs in safety, in quality, and lean manufacturing from a process improvement is surely one of our strategic initiatives, is to improve processes throughout and that in and of itself will reduce - will reduce costs at the mill - at the plant.

We're looking I believe through the - through the year, you know, we've experienced over $3 million in unabsorbed plant expenses primarily because of low volumes. And as these start to turn around, Tom, we expect the margin appreciation to start coming into play.

Great. Thank you very much.

And you have a follow-up question from Mr. Tom Spiro with Spiro Capital. You may proceed.

At the tubular business, particularly coated, had such a strong Q3, was that an anomaly or is there enduring strength there?

We think that that's going to continue. The activity in that market, Tom, has been strong for the better part of the year and we feel that with the energy market the way it is, that that will continue through next year.

Actually, we hope it's going to last longer than that, but that activity has been fairly strong and as I said, that quarter was the best quarter we've had in years. But we had a pretty good second quarter too. It's playing out to be probably the best year we've had in a long time in coated.

I don't know whether we'll be able to keep up with that level going forward, but the market will be relatively strong.

Was the fabricated products division profitable in Q3?

No, they weren't.

And I guess we probably can't expect much of an improvement in Q4?

Well, we are. We do expect an improvement in Q4. We expect to break even in Q4. As David had mentioned, we have worked the low margin business for the most part out of our backlog. Work that we're getting, which will come on next year, is much higher than what we carried into this year from a margin standpoint.

We are - we do have a good backlog at our facility with Precise in Massachusetts. The Bedford plant is fairly booked through the first quarter of next year, and we're aggressively looking for work on that plant, but we do have some good work at Bedford in the fourth quarter of this year and the first quarter of next year and overall for Fab products, we're looking for a break even in the fourth quarter.

Do your customers give you much hope that '06 will show lots more business and they'll spend some of that highway money?

Well, they're going to be spending - let me just say this, that the jobs are going to be coming out for bid the first part of '06, but I don't think that we're looking for in the fab products side of it any meaningful improvement next year.

But we will have improvement - looking for an improvement next year over this year, but we're not going to start to see a lot of that highway money being freed up, and for our work in being utilized until probably the last quarter of next year and into 2007.

Thanks much and good luck.

Thank you.

And your next question comes from the line of Edward Devision (ph) with Financial Services. You may proceed.

Thank you. Gentlemen, congratulations on a great quarter.

Thanks, Ed.

The question I have is, given the success that you're having with the Union Pacific in terms of contract long term and positioning your plants proximate to their needs, what opportunities are there elsewhere in the country for you to replicate what you've done and produce concrete ties close to the needs of perhaps some of the Eastern railroads?

Well, you know, Ed, the demand for the Eastern lines is not nearly what it is for the Western lines.

Okay.

And you know, that's primarily the driver. There are existing companies that are participating in the Union Eastern markets with the 2 lines and with Amtrak, so I don't think or we don't think that there is really a lot of room at this time to build a new facility there, but we would always look for perhaps opportunities from organic or look for opportunities that might be out there.

But for us to go in there right now and to build something, I don't think is in the best interest of the corporation.

Okay. A couple of follow-up questions if I may? There was a time way back when, when you were with Bethlehem where rentals were significant contributed to earnings and you've talked about it ramping up.

How much further can you ramp up to kind of meet what you were doing way back when, when you had the Bethlehem Steel and the rental pilings with them?

Well, I think there, and I'm going off of memory, that was back when we were in the mid '90s, when we were working with Bethlehem. We were maintaining rental inventories in the neighborhood of 12 to 15,000 tons and we were - we were keeping 60% of that out on rent, 60% to two-thirds, which would - which would equate to 9 or 10,000 tons.

We're about halfway there and we've made huge improvements over last year. It's been difficult for us to, you know, we stepped out of that market and we were effectively out of it for over 5 years and it's been difficult and some of that is coming back, but with the high price of steel, it's been a little bit easier than really what I thought.

It's starting to come and that activity level is coming up. Our salesmen have done a hell of a job, you know, getting back into the business and we're starting to see it, but we're starting to see some of the profits and some of the profit levels are, you know, have been good so far. And we expect it to be more of a contributor as we go forward.

And lastly, as far as the segment of sheet piling that you have, considering where you want to be and what Chaparral ultimately plans to provide, how far along are you as a percentage or however you'd like to measure it in terms of the sections that you have and the sales that they represent or the potential sales they represent relative to when you have the total of all segments that you're looking for?

We're really pleased with what Chaparral has been doing. I mean, they have really - they have really - I can't say enough for how they have - or you know, how they've really performed working with us and how they're coming on line from a production standpoint.

They are looking for a - I think they have basically on design right now one new section, the heavier sections, which would be equal to the PZ35, PZ40 sections, which would be higher strength to weight ratio than what we currently have, which is expected to come on line next year.

But with that completed, I believe that's pretty much their full complement of expected sheet file sections at this time.

Thank you.

But, Ed?

And your next question comes from the line of Elizabeth Barney with Eagle Capital Partners. You may proceed, ma'am.

My question has been answered. Thanks so much.

And at this time, Mr. Russo, there are no questions in the queue, sir.

Okay. There being no other questions, we appreciate everyone dialing in to listen to our third quarter explanation of results and discussion of the business. And thank you very much and we'll be back again next quarter.

Thank you.

So long.

Ladies and gentlemen, thank you for your participation on today's conference. At this time, you may disconnect and have a great day.