L B Foster Co (FSTR) 2005 Q4 法說會逐字稿

[in progress] Good morning everyone and thank you for joining us for LB Foster Company's Earnings Call to review the company's fourth quarter and full year 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.

This morning Stan will provide an overview of the company's results and discuss business conditions. Afterward I will review the Earnings Press Release issued earlier this morning before we open up the session for questions. Means to access this conference call via web cast were disclosed in our Earnings Press Release and were posted on the LB Foster Company website under the Investor page. This web cast will be archived and available for 10 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 LB 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 SEC. I should also reiterate at the beginning of this call that while forward-looking statements will be made, it is the policy of the LB Foster Company to not provide specific earnings guidance.

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

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 the highlights of our operation in the fourth quarter and for the full year. Overall, revenues and earnings were both up considerably compared to the same period in 2004. Sales were 82.8 million, up 19% from last year, while net income was 860,000 compared to a loss of $1 million in the fourth quarter of 2004. For the year, revenues were 353 million, also up 19% from last year, and net income to the shareholders was a fully diluted $0.52 per share, up 267% from 2004. I would like to add that the 5.4 million of net income for the year was the highest since 1994.

As noted in the press release, we had strong performances in our Piling, Coated Pipe and Rail groups. Our Piling segment completed its best year in history with sales of 27 million for the quarter and 106 million for the year. The annual revenue was a 47% increase over 2004. As discussed in the past most of the volume increase has been driven by the consistent availability of sheet piling from our partner Chaparral Steel. And I would be remiss if I didn't mention improvements in a couple of other segments of Piling, the first being piling rental where tonnage on rent at year-end stood at 4,700 tons compared to 2,000 tons in December of 2004, an increase of over 130%. And pipe piling sales exceeded $20 million for the year, more than doubling revenue in 2004.

To meet the increased product availability in all areas of Piling, we will be adding additional sales personnel in key markets and have recently opened an office in Florida. I would also add that we were extremely pleased with the alliance we announced last week with Northwest Pipe as their national distributor for foundation pipe. Production from their five facilities will allow us national coverage in large-diameter applications.

On the Tubular front, a strong energy market continues to favor our Coated Pipe business. The Birmingham plant coated 3.6 million square feet of pipe in the fourth quarter for gas transmission applications. This was an increase of 83% over 2004. Square footage coated for the year was 17.4 million, up 138% over 2004. The significant inquiry level and a number of new projects on the horizon give us an indication that coated pipe market will remain strong over the next few years.

With the exception of CXT Concrete Ties, all segments in the Rail Product group performed better in the fourth quarter 2005 than they did in the same period of 2004. Their sales were 28.5 million, which was up 34% for the quarter. Of particular note in this area is that construction on our new Allegheny Rail facility in Pueblo, Colorado is on schedule and expected to be operational in March. A few of the indicators that we follow lead us to believe that the rail markets will continue to remain strong in 2006. First, Class I maintenance of weigh spending is projected to increase by 16% this year. Second, RIF loans, which benefit freight railroads other than Class I, were up $100 million or 338% in 2005. And third, Federal Transit Appropriations in 2006 are expected to be $8.6 billion, a 12% increase over last year.

To conclude this discussion on Rail Products, let me give you an update on CXT Concrete Ties. As stated in the press release, sales for Concrete Ties in the fourth quarter were down compared to the same period in 2004, due to the start up of Grand Island. However the commissioning period at Grand Island was completed in December and we produced 25,000 ties that month. We expect to produce 28,000 ties in January, exceed 30,000 ties in February and continue at that rate for the balance of the year for the Union Pacific Railroad. Final permits were received in January for construction of our new Tucson, Arizona plant.

We have begun construction with the same dedicated team of employees that built Grand Island. Construction is expected to take 140 days, which will be followed by three months of commissioning, and we expect to be in full production in September. At the Spokane tie facility major contracts received for projects in Calgary and Salt Lake City have given us a strong backlog for 2006. Total concrete ties produced in 2005 by LB Foster were 500,000. With a full year at Grand Island, a strong backlog at Spokane and a partial year of production in Tucson, we expect to increase tie production by 60% in 2006.

I'd like to close by commenting on my earlier statement that net income for the year ended at the highest level since 1994. While we are very pleased with the results, we consider them to be a baseline, a point on which to build our future. LB Foster has dedicated employees, excellent product lines, strong markets and a proactive strategy in place to continue this trend going forward. Now I'd like to turn this over to our CFO, David Russo, for the financial review. David?

Thanks, Stan. I'd like to start off with a quick fourth quarter review and then get into some of our results for the year, since some of those are much more meaningful when you can see the full year and see how some of our financial fundamentals have improved compared to prior years. Sales for the fourth quarter of '05, as Stan mentioned, were just over -- just under $83 million compared to 69.7 in the prior year, an increase of 19%, which we were able to leverage into a 2.6 million increase pre-tax income. Some of the comps between this quarter and last year's quarter are not meaningful because last year's fourth quarter ended in a pre-tax and net loss.

Sales increase this year was due principally to a 20% increase in our Construction Product segment sales, an 18% in Rail Product segment sales and an 11% increase in our Tubular segment. The Construction sales increase was driven principally by a 40% in Piling sales. Rail sales increased 18% due to a more than 100% increase in relay rail sales and to a lesser extent sales increases in all major product categories, with the exception of Concrete Ties. Concrete Tie sales decreased more than 25% due to the fact that our Grand Island facility was just ramping up production in the fourth quarter, after being shut down for most of the third quarter.

We are very pleased with the quality and volume of ties being produced as our expectations are being exceeded in both of these areas. The Tubular segment increase was due to a 67% increase in Coated Product sales, partially offset by a decrease in Threaded Products. As a percentage of consolidated sales, Tubular accounted for just under 6%, Construction was 53% of the total and Rail 41.

Gross profit margins for the fourth quarter increased 300 basis points from last year to 11.6%. This positive comparison is due to the following items, one, decreased LIFO expense of approximately $1.8 million in the fourth quarter. This represents an improvement of almost 200 basis points. Product profit at standard before plant and other variances increased 130 basis points over last year's quarter, due principally to improved productivity and certain project closeouts. These items were partially offset by increased net plant expenses of approximately $1.2 million. SG&A expenses for the quarter increased 8% due primarily to personnel related costs. SG&A represented 9.7% of sales in the 2005 fourth quarter compared to 10.7% of sales in the prior year quarter, so we are starting to see some of the positive leverage when the higher sales volumes materialized as these costs will not rise proportionately with sales.

Other income decreased $124,000 in the quarter due primarily to a loss on the disposal of certain fixed assets in our Rail business that were no longer required. As a result of the foregoing, fourth quarter operating income was $1.7 million compared to $1.2 million operating loss in 2004, a $2.9 million improvement over the prior year period. Interest expense was just under 700,000 in the fourth quarter of 2005 compared to 417,000 in '04, a 67% increase due to higher average borrowings as well as higher interest rates. Our stronger sales volumes have increased our working capital requirements and therefore our average borrowings. Our average revolver borrowings have grown by more than 50% during the course of this year and, as you are all aware, the Fed has increased interest rates by 325 basis points since June of 2004. The increased borrowings were due to higher working capital and larger than typical capital expenditures, both of which we have discussed in previous calls and we will update in more detail later in this review.

Fourth quarter pre-tax income was $1 million compared to a $1.7 million loss in last year's fourth quarter, which is obviously a nice increase for us. The fourth quarter 2005 income tax provision was 10.6% compared to 36.1% in last year's fourth quarter. As mentioned in the earnings release, the low rate was due to adjustments related to the reconciliation of certain tax accounts and releasing a portion of the valuation allowance provided for State deferred assets. Net income for the quarter was $860,000 or $0.08 per diluted share, compared to a $1 million loss or $0.10 loss for last year's fourth quarter.

I wanted to spend a little time now talking about the year as well. Sales for 2005, as Stan mentioned, were $353.5 million, a 55.6 million or 19% increase over last year, the increase once again driven by a 47% increase in Piling sales, 9% increase in Rail sales, and a 23% increase in Tubular sales. Please bear in mind that the Rail sales increase was inclusive of a 26% reduction in Concrete Tie sales. The Rail increase was driven by Rail distribution, which was comprised of new and relay rail, which rose 21%.

Gross profit margins for the year increased 100 basis points from last year to 11.3%. This positive comparison, somewhat like the quarter, is due to decreased LIFO expense of about $1.9 million. Product profit at standard before plant and other variances of 40 basis points and again these improvements were partially offset by net plant expenses. These variances, meaning the net plant expenses, occurred primarily in our Concrete Tie and Fabricated Products businesses. Gross profit margins of the Concrete Tie division were down over 60%, primarily because our Grand Island plant could not absorb its cost as a result of no production activity during the third quarter shutdown and low production during its commission phase in the fourth quarter, and also due to lower sales as a result of the much discussed decline in production.

As mentioned in the last two earnings calls, we projected a poor second half of the year for concrete ties due to Grand Island being shut down, Tucson not even having commenced construction and Spokane having better volumes during the first half of the year but not enough to overcome the negative impact of Grand Island. We also incurred certain costs this quarter at our Tucson site where we are preparing to construct a new facility. We will continue to incur these costs as they are comprised of items such as salaries and rent expense. We do however anticipate significant improvement in the Concrete Tie division in 2006. Regarding Tucson, as Stan mentioned, we're happy to be able to announce construction permit approval so that we can immediately commence construction at the Tucson facility.

On a full year basis, going to SG&A, SG&A expense increased $3.2 million or 11% over 2004. SG&A was 8.85 of revenue versus 9.4% in the prior year. Operating income was 10.2 million compared to 4.2 in 2004, an increase of $6 million or 143%. On a year-to-date basis, interest was 2.5 million compared to 1.8 million last year, a 37% increase due to increased borrowings and higher rates discussed in the quarter comparison. The year-to-date increase is less precipitous than the quarter comparison as our debt increased primarily after the fourth quarter of '05 and in April of last year, being 2004, we retired an interest rate collar agreement that was costing more than $30,000 per month.

Pre-tax income for the year was $7.7 million versus 2.4 million, an increase of $5.3 million or 222%. The tax rate for all of 2005 was 29.8% compared to 38.4% for '04. Net income was 5.4 million versus 1.5 last year, an increase of 3.9 million or 267%. As a percentage of sales, 2005's pre-tax income was 1.5% compared to '04's, which was 0.5% of sales. While we are glad to see the hard work of our employees and the strength of our markets begin to favorably impact these metrics a little, we're certainly not satisfied. While we continue to be encouraged by this improvement, we realize that we must continue to expand our margins in the coming quarters. The strategy we have set is simple, but that doesn't mean that it's easy. We need to execute flawlessly on the construction of our two facilities in 2006, we need to continue to improve our plant and administrative productivity and we must enhance the quality of our products and the manner in which we deal with our customers. We are currently implementing various techniques to be able to better measure ourselves and we have initiated certain tools whereby vendors and customers measure us as well. These are the ways that we will take our processes to the next level.

Just to give a quick discussion of the balance sheet and cash flows, debt at the end of the year was 36.9 million compared to 47.2 million at the end of the third quarter. So we generated some strong cash flow in the fourth quarter, principally from the reduction of accounts receivable flows from operation. Debt at the end of December was only 18 -- I'm sorry at the end of December '04 was only 18 million, so for the year we borrowed almost $19 million. We will discuss the reason for the increase in debt levels now as we discuss cash flows.

For the full year, even though we had some good fourth quarter cash flow, we used $4 million of cash from operating activities. Additionally we spent $15.3 million on capital executes and we financed these activities by borrowing the $15 million via our revolving credit facility as well as the long-term fixed rate leases. We also sold a facility located in Atlanta, Georgia that was no longer being utilized by the company for approximately $3.2 million. Accounts receivable and inventory net of AP decreased approximately 6.5 million in the quarter, but increased $19 million during the year. This increase from December of '04 was due to the following items: an increase of accounts receivable of 7.5 million, due principally to increased sales volume; and a $26.9 million increase in inventory, due primarily to increased volume and an intentional increase in sheet piling inventory due to availability of sheet piling from our key supplier. We added new sections of sheet piling this year to avail ourselves of higher margin stock sales and piling inventory has increased just under $18 million from last year.

Additionally the company has spent 15.2 million, as I mentioned before, in capital expenditures compared to 2.6 million last year. Approximately 12.5 million of that amount was related to our new Concrete Tie facility. A majority of the capital spend for the Concrete facilities, as I mentioned, will be financed via fixed-rate lease arrangements with two different banks and in fact in December the lease for the Grand Island facility was closed out and is now classified as long-term debt on our balance sheet. As I mentioned in last quarter's call, we believe that we are allocating our resources to the business opportunities that have the best potential to make a substantial positive impact on the future of the business. Piling, rail distribution, insulated joints, concrete ties, that's where we believe right now our investments are making today -- that 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 our stakeholders.

That concludes my discussion on the financial results. Unless Stan has any closing remarks, we will now turn it over to Carlo for questions.

Carlo?

Yes sir, thank you. [OPERATOR INSTRUCTIONS] And sir, our first question is from the line of Jeremy Hellman with Thompson Davis.

Hi good morning, guys, and I'll apologize in advance if my question is a little off base, I'm new to the story. But I wanted to see if you could characterize the increases in the sales line. Is it due to -- more to pricing or unit increases across the board?

Basically it's a combination. The pricing actually leveled off in 2005 compared to 2004. We did not get the boost in prices that we had in 2004. But volume was up quite a bit across the board in all -- pretty much evenly in a lot of our product lines.

Right.

If you look at the first half of the year, a lot of it was pricing, Jeremy, but that second half -- the comparison on the pricing side was pretty even and it was mostly volume related.

Okay. And would you think that that would continue to be the case on into 2006?

Pretty much. We don't really see any dramatic price increases on the horizon. Our increases will be driven, we feel, by volume.

Okay great. Thank you very much.

And sir our next question is from the line of Michael [Hibbard] with Axiom Asset Management.

Yes gentlemen can you give us an update on the DM&E railroad and what you're hearing there?

Well, really there's two events that took place in the quarter, which had any significance on the DM&E. The first was that they announced a preliminary application to the STB for a $2.5 billion RIF loan and we had issued a press release on that on November the 14th. And secondly, the Surface Transportation Board on December the 30th issued a Supplemental Environmental Impact Statement regarding potential impact of four environmental issues on the Powder River Basin Extension. The STB cannot render final decision until 30 days after the EPA publishes a Notice of Availability and we expect this 30-day period to end on February the 6th. And so at that date we would be -- after that date. It's not going to happen exactly on February 6, but we're going to be as curious and interested as everybody else is on what takes place on that decision.

For 2006 we certainly can't predict what'll happen. The STB has indicated that it would promptly act following the required waiting period, but we don't know what that exactly means.

Thank you.

[OPERATOR INSTRUCTIONS] And sir, our next question is from the line of Tom Spiro with Spiro Capital Management.

Tom Spiro, Spiro Capital. Good morning.

Hey Tom, how are you.

I'm fine, I'm fine and congratulations on a very strong year.

Thank you.

Now, I had a couple of questions, first the Fabricated Products Division, I know it's been struggling a bit with a lack of business. Can you give us a sense of where we stand there, how's the outlook?

Tom, it's been very much a disappointment throughout the year. It's probably -- from a product standpoint it's our most disappointing area and we're looking at that very closely.

We did have improvement in the second half compared to the first half. We didn't have the pickup that we were hoping in the fourth quarter. We did perform better in the fourth quarter of '05 than we did in the fourth quarter of '04. But we didn't perform as well in the fourth quarter as we did in the third quarter. So with that said we do have -- we do see margins coming up, we've gotten some bad jobs out of the system. We're watching this very, very closely. We expect -- we're starting to see a pickup in activity. Our Bridge Division has got four projects that they're looking at that are going to bidding, Tom, over the next 45 days which we'll be following very closely. But we're not getting the pickup from the new Transportation Bill yet, and we know that. We really don't expect any pickup from that until the last part of '06.

But we do expect improvement this year over last year, but it's still not going to be where we expect it to be, Tom.

Is the primary problem volume or are there other factors that you need to address?

It's been both. It's been volume and it's been margin. I mean, we got clipped pretty hard last year and the year before due to rising prices, but we've got ourselves fairly well protected on jobs going forward in the future. And it's pressure on margins. But the volume is picking up, we've implemented a lien at both facilities and the volume is really going to help that turn around.

That's great. Speaking of margins, you've mentioned a couple of times in this call how you hope over time to boost margins. Some of that I'm sure will occur just as the balance of business shifts a little bit towards manufacturing and not so much distribution. Are there things apart from the mix issue that -- initiatives that you folks have underway to try to boost margins, apart from the boost that will naturally occur as the mix shifts?

Now you're, you're -- there are. There's a couple of things to talk about, Tom. To begin with, in our sales if you take a look at our sales last year and you look at piling and -- look at our distribution business, take a look at new rail, relay rail and piling, it was 55% of our revenue and as we look into our plans for this year that's coming down as we come on with the manufacturing sector more involved with ties in particular.

But we really -- margin improvement will come with volume across the board, at our plant, and implementation of lean. So we're looking, our plans this year are for more margin improvement in '06 over '05 and we really recognize that and we will continue to push that up.

Do you now have the full range of piling products that you hope to distribute or are you still waiting on some additional?

Yes Tom, we are looking for some heavy sections which Chaparral is working on very diligently and we expect those to be into the market place in the first half of this year. And that would pretty much complete their rollout of their sections that they're looking at right now. And we would be very pleased with that. I think that will be -- pretty much will fill our inventories and give us -- to compete on all levels.

And lastly, how are the opportunities for the piling rental business to grow?

Well we expect that to continue. I think that what we talked about earlier, I said we had, I believe, 4,700 ton on rent. We're running about, we probably, we have close to 9,000 tons available to rent so we're running at just about, a little over 50%. We expect that to grow but probably not as fast as it's grown in the last year, Tom. But we will continue to push that. I think that you've been around with us for quite a while, that that's a -- has nice margins attached to us and it's been a nice business and we do a very good job at it.

But we go back into the '90's when we were working very closely with Bethlehem in this area and we were maintaining 15, 16,000 tons in rental inventory. And -- so we have a ways to go and we think that the market's going to be there to support that going forward.

Thanks a lot. I'll get back in queue.

Thanks Tom.

[OPERATOR INSTRUCTIONS] And sir, we have another question from the line of Tom Spiro.

And I'm back again. Dave, was there a LIFO charge in Q4?

Yes, Tom there absolutely was. It was just under $600,000.

I see.

But, as I thinkas I mentioned a little bit earlier it was certainly substantially less than 2004's fourth quarter. But yes, we still got hit this year by a LIFO expense to the tune of $1.5 million for the full year.

How are your -- what's your outlook for steel and your other raws?

I'm sorry, outlook for steel --?

Steel and the other raw materials, other --?

It really depends on the market sometimes. But scrap has been fairly steady so we expect 2006 to be a -- not a huge pickup or decrease, especially the first half of the year looks like it's going to be fairly consistent with where we're at now. But we are expecting a fairly tight rail market next year so you never know what the demand is going to be with that. But right now we're expecting fairly flat prices for the foreseeable future.

Cement has been pushing up a little bit, so we're watching the, not only the cement pricing but the cement availability very closely.

And your CapEx plans for '06?

We still have to finish the Tucson facility so we're going to spend another, probably $6 million to complete Tucson. And other than that we've got another project that we're working on in Pueblo which is where we're going to hopefully be up and running in March to manufacture our insulated bonded joints and assemble lubrication devices. And that's going to be about $3 million. And then there's certainly maintenance CapEx and some other things we're going to do. It will exceed $10 million this year.

Well, thanks much and good luck in '06.

Thanks Tom.

And sir we have no further questions at this time.

Okay. Well thank you all for joining us and onwards to an improved 2006. Thank you.