L B Foster Co (FSTR) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2006 L.B. Foster earnings conference call. My name is Eric, and I will be your conference coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Thank you, Eric. Good morning, ladies and gentlemen, and thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's first-quarter 2006 operating results. My name is David Russo, and I am the Chief Financial Officer of LB L.B. Foster. On the call today in addition to myself is Mr. Stan Hasselbusch, L.B. Foster's President and CEO, and Mr. Lee Foster, the Chairman of the Board. This morning, Stan will provide an overview of the Company's results, provide updates on issues 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 Webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company Website under the Investor Relations page. This Webcast will be archived and available for seven 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, 2005 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 L.B. Foster Company to not provide specific earnings guidance. I would also like to point out that due to the sale of our geotechnical division in February of 2006, our financial results as well as our discussion today excludes the results of operations, cash flows and financial position of this business from continuing operations and instead classifies it as discontinued operations for all periods presented.

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

Thank you, David, and thanks to all of you for attending our first-quarter 2006 earnings call and Webcast. David will review earnings in more detail later. But first, I would like to discuss a few of the highlights of our operations in the first quarter.

Overall, revenues and earnings were up significantly compared to the same period in 2005. Sales were 84.2 million, up 24% from last year, while income from continuing operations was 1.2 million, a 96% improvement over last year. When the gain from the divestiture of our geotech division is folded in, net income to the shareholder climbs to 3.9 million or $0.36 per share on a diluted basis. With the exception of tubular products, the performances of all other major product segments was improved over last year. As noted in the press release, performance in the first quarter was driven by our piling and rail segment.

Piling revenue was 26.3 million in the quarter, a 30% increase over last year. The following indications lead us to think this upward trend will continue. New orders totaled $40 million, a 33% increase over the same period last year. Piling rental continues to expand. Material on rent at the end of the first quarter was 45% ahead of the same period in 2005. Chaparral has recently introduced the PCZ 26 section. From a sheet pile section standpoint, we feel the PCZ 26 will be the second-most utilized section and will provide significant upside opportunity in the marketplace. It will round out the current family of sections that we now offer.

On a trailing 12-month basis ending in March, total domestic consumption of sheet piling held steady in the range of 290,000 tons. This is approximately 35% ahead of last year's levels. Performance in the rail segment was led by our concrete tie division. Revenues were $9.7 million, 120% ahead of last year. A couple of comments of note in this area. Bookings are strong. New orders for the quarter in our tie division were 13.2 million, up 57% from last year. Interestingly, this entire increase is non-Union Pacific crosstie business.

The March production level at our refurbished Grand Island facility was 37,000 ties, which exceeded our initial expectations of 34,000 ties. Our new facility in Tucson is scheduled to begin producing ties in mid-June and will be at full production in mid September. A pleasant surprise has been the load level at our flagship tie facility in Spokane. Activity in the Northwest has been exceptionally strong, and the projections are that that plant will exceed 275,000 ties this year. Total tie production at our three plants should be between 820,000 and 850,000 ties, which is up from 500,000 ties last year. With the anticipated market strength and the completion of Tucson, we expect to produce in excess of 1 million ties in 2007.

In another major capital development, our new rail facility in Pueblo, Colorado is also on schedule. We are currently manufacturing insulated bonded joints and expect to be in full production of our complete line by the end of May. Despite a relatively weak first quarter, the tubulars group's order entry improved substantially in March and April. And it is a point where we expect it to reach 2005 performance levels by year-end.

Now, I would like to take a couple of minutes and talk about some of our future opportunities. Overall, we are very excited about what we see. On the construction side, Reed Construction, which is one of the industry's recognized leaders for construction data, has stated non-residential construction increased 10.2% in the first quarter compared to the same period last year. The component with one of the largest gains is in bridge construction, which was up 23.2% in that period.

We will continue to get improved benefits from our supplier alliances and piling. It is part of our strategic objectives to bring our customers a wider range of innovative foundation solutions in the future. We are just beginning to see the bidding activity on the new transportation bill, otherwise known as SAFETEA. As we have discussed in the past, this $286 billion federal bill is a key driver in both our construction and rail products group. We expect the bidding activity to increase substantially as the year unfolds.

On the rail side, alternative fuel in the form of ethanol and biodiesel production and new coal-fired electricity plants will favor railroads as the preferred mode of transportation, as capacity in these areas expand in the future. Many of these new facilities will be coming on-stream in 2006 and 2007. Maintenance of way improvement and capacity issues will continue to create opportunities with the railroads. The Association of American Railroads reported a 21% expected increase or maintenance of way among the Class I's. This was confirmed by Progressive Railroading in their annual maintenance of way spending survey, which expects overall spending to also increase by over 20% among all freight and transit lines.

I would like to close by saying that we are very optimistic about our future and feel that we are in strong position to participate if opportunities develop. Though it is not our policy to provide specific guidance, we feel confident that the progress that we have made thus far will continue to drive improved year-over-year profitability through the balance of 2006.

Now, I would like to turn back to David Russo for our financial review.

Thanks, Stan. Sales for the first quarter of 2006, as Stan mentioned, were $84.2 million compared to 67.6 million in the prior year, an increase of 24%, which we were able to leverage into 108% increase in pretax income. The sales increase was due principally to a 34% increase in construction products segment sales and a 20% increase in our rail products segment. Tubular segment sales increased 1% compared to last year's first quarter.

The construction products sales increase was driven by a 30% increase in piling sales and a 66% increase in fabricated product sales. As you may recall from prior calls, our fabricated products group is the business that had an extremely poor year in 2005. While their first-quarter results have improved significantly over last year and we expect them to continue to improve during the remainder of the year, the color of the ink is still red and is expected to remain red for the remainder of the year.

The rail segment sales increase was due primarily to a 120% increase in CXT concrete tie sales and a 55% increase in relay rail sales. During last quarter's earnings call, we indicated that we expected improvement in the concrete tie business in 2006 and we are seeing it. Concrete tie sales increased at both locations, and gross profit margins were up as well. We're working some large projects at our Spokane facility, and we have recently won some favorable business for that facility for the future the remainder of this year.

Grand Island continues to allocate all of its production for the Union Pacific Railroad. It is our expectation that the Tucson facility will follow suit for at least the first two years of production. Tie production at our refurbished Grand Island facility has continued to improve every month this quarter, and the total first-quarter production was up 10% over last year when we were running the older equipment. During last year's first quarter, Grand Island was running at maximum capacity in anticipation of the expected refurbishment shutdown. So, the fact that we are already beating those prior-year volumes is excellent, and we are very excited about it. We are also very pleased with the quality of the ties being produced.

Tubular segment sales were up 1% due to an increase in coated sales, offset by an almost equal decline in threaded product sales. Gross profit margin however declined in this division as compared to last year. As a percentage of consolidated sales, tubular accounted for just under 5%, construction was 40% and rail was 55% of the consolidated sales. The split between construction and rail represents a marked change, as the business that we sold this quarter, our former geotechnical division, was a part of the construction product segment.

Gross profit margins for the first quarter increased 80 basis points from last year to 11.6%. This positive comparison is due to the following items. We had improvement in the first quarter and net plant expenses of 6%, favorable purchase price variances and also slightly-improved product profit at standard before plant and other variances. With regard to margins, we're frankly disappointed with our margins at standard. In my opening remarks, I touched on two areas of margin expansion, which were concrete ties and fabricated products, two areas that significantly tempered our full year results last year. The reason that our gross profit margins were not higher for this quarter is that while rail distribution sales remain strong in 2006, margins were compressed considerably due primarily to the fact that we no longer have access to significant volumes of industrial-quality rail for sale to the regional and short-line railroads. This product offered us a lower-cost alternate product that we could use strategically in bidding projects as well as private jobs. We are aggressively pursuing alternatives to be able to expand the margins in this business.

Tubular margins were down primarily due to heightened competition and increased product costs. We have taken several actions in this division to reverse the margin contraction. We have changed the entire layout of this facility during the first quarter of this year so that there is much improved product flow and productivity. To take advantage of this productivity, we are also aggressively pursuing threading work in other markets to increase sales, margins and volumes that are put through the facility.

Moving over to costs and expenses, our SG&A expenses increased 18% or $1.2 million in the first quarter of 2006 due primarily to personnel-related costs, such as payroll and payroll taxes, incentive accruals, medical costs. As most other companies, we this first quarter expensed stock options.

SG&A represented 9.2% of sales in the first quarter of 2006 as compared to 9.7% of sales in last year's first quarter and 9.7% of sales in the fourth quarter of 2005. So, the positive leverage we started to see last year continues so that as higher volumes -- our sales volumes materialize, these costs are not expected to rise proportionally to sales.

Other income decreased $69,000 in the first quarter due primarily to the expiration of an interest rate collar in the first quarter that had a more favorable mark-to-market adjustment last year than this year. As a result of the foregoing, first-quarter operating income was $2.5 million compared to $1.3 million in last year's first quarter, a 1.2 million or 92% improvement.

Interest expense was $665,000 in the first quarter of this year compared to 424,000 last year, a 57% increase due to higher average borrowings as well as higher interest rates. The increase in borrowings was due primarily to an increase in working capital requirements as well as higher-than-typical capital expenditures made by the Company during the past three quarters. Our average revolver borrowings have increased by approximately 35%, and the rates on the facility have increased approximately 170 basis points.

As you are all aware, the Fed has increased interest rates by 375 basis points since June of '04 and approximately 175 to 200 basis points from last year's first quarter to this year. First-quarter pretax income was $1.8 million compared to $900,000 in last year's first quarter, a 108% increase. As a percentage of sales, first-quarter 2006 pretax income was 2.2% versus 1.3% in last year's first quarter. The first-quarter 2006 income tax provision was 34.4% compared to 30.4% in last year's first quarter. As mentioned in the earnings release, last year's lower rate was the result of releasing a portion of the valuation allowance provided for state-deferred assets. Income from continuing operations increased 96% to $1.2 million or $0.11 per diluted share compared to 0.6 million or $0.06 per diluted share last year.

Turning to the balance sheet, debt at the end of the quarter was $42 million compared to 36.9 million at the end of last year and 24 million at the end of last year's first quarter. The $5.1 million increase during this quarter is due to a $5.9 million use of cash flow from operations due principally to an increase in working capital and $5.2 million of capital expenditures in this quarter, partially offset by the proceeds from the sale of our former geotechnical business.

Capital expenditures for the first quarter were primarily for the Tucson and Grand Island tie facilities of approximately $3.7 million and also our new Pueblo facility that we have discussed in the past, where we have commenced limited production of insulated joints and that was $900,000. We expect full year capital expenditures to reach approximately 12 to $14 million, and we will continue to finance our larger capital projects with mid-term, fixed-rate lease financing, primarily capital leases.

Accounts receivable in inventory net of accounts payable increased to approximately $6.5 million this quarter. The increase from December '05 was due to the following items -- an increase of accounts receivable of 7.4 million due to increased sales volume, our DSO was down to 46 days at the end of March from 55 days at the end of December last year, a $4.2 million increase in inventory was scattered across our segments with piling claiming the largest share of the increase.

As you recall in 2005, we made several strategic and tactical moves to ramp up our sales volumes and increase our market share in the piling business. For example, we increased the size of our sales force, stepped up our marketing and promotional efforts, and conducted engineering seminars to positively impact our participation in the piling market. We also purchased significant tonnage of sheet piling sections to avail ourselves of higher margin stock sales and to stock the shelves with new sections. While we have seen steady progress, we have not as yet been able to reduce our stock piling -- stock of sheet piling inventory thus far.

In summary, we're pleased with the operational progress we're making within our Company. We're confident that our strategies are sound and that we have the right people to get it done. We also have an appropriate sense of urgency we believe to make the required investments and changes in our organization to get an improved return for these investment strategies while our markets are strong.

That concludes my remarks. Stan, if you don't have any closing comments, we will turn it back to Eric and open it up for questions.

(Operator Instructions). Robert Damron, 21st Century Research.

Let's see, let's start with the backlog. The backlog again increased very nicely this quarter. Could you just remind us how quickly that backlog typically ships? And then also, if we look at Q2 and Q3 seasonally, we typically see pretty strong Q2s and Q3 versus the Q1. Would you anticipate the same kind of seasonality this year as we've seen historically?

I think to answer your -- both questions, I think I picked up on two of them, Rob. The first question was on the backlog. It depends on the product. We have products that will move through the backlog very quickly, stock items out of inventory that could go through in 30 to 45 days. That's typically as quick as we can move through this system. We do have contracts that are outstanding that would have to -- that could go out as far as a year in fact. I think that part of our inventory -- or our backlog is approximately 5%. So everything will flow in between that, but primarily our distribution businesses will move their inventory in 30 to 45 days. And some of our contract work, primarily in fab products, can go out to as long as a year.

Your second question as far as the seasonality, which we would expect this year, we would expect the seasonality to be very similar to what we've seen in the past. Usually our first quarter is -- our first and our fourth quarter are two of our weakest, and the second and third quarter are typically our strongest.

Then a couple of other questions. In the real rail products accessory business, we're going to be taking that business in-house. Could you talk -- well first of all, how large -- remind us how large that business is again and what the incremental margin opportunity is by bringing that business in-house.

Well, I think you are referring to our Allegheny rail products business, Rob, which is the new facility in Pueblo. A couple of points on that -- that's typically a 14 to $18 million business, and we would expect to improve on that as we move out to Pueblo. We would also expect to move on the improved profitability I think in that area considerably. One of the drawdowns on our margins in the first quarter was incentive that we have used to move out of our current supplier and just make that transformation out to Fort Wayne -- out from Fort Wayne to Pueblo. But, we expect that margin appreciation to be considerable.

Then on the fabricated products division that continues to lose money, you had significant revenue growth there. I would think you would be getting some nice operating leverage in that business. What is it going to take to get that business to profitability?

That business, Rob, is tied in very closely with the highway bill that I referred to in my remarks. We are not even -- we're starting to see some of that work come off of the drawing board and into the bidding stage but really not at the level that we will need to support that program. We expect that to pick up as the year unfolds. And, we will know more in the latter half of this year as we go into '07 of where we're going there. But, that should pick up. Remember that the drought that we've had over the last three years has been the worst situation that we have ever had for that product. We have been in that product since the inception of the highway program, the interstate highway program, going back to the mid 1950s. It's been a very good profit performer over the years. But, the shortfall of taking nearly three or over two years to pass a new highway bill and to build up that backlog has been a challenge. We have implemented; we put in lean manufacturing at both facilities. We're getting productivity improvements. We need the volume to come through there, and we will be watching that very closely as the year unfolds.

Then, just the last question from me would be just on the cost of goods sold. I mean clearly the efficiencies of the concrete ties facilities have helped improve the margin. But, could you talk a little bit about the current cost of goods sold in terms of raw material of the products that you are buying. Are you seeing any incremental pricing pressure from your suppliers that could potentially have a negative impact on margins as we look out to the rest of the year?

We don't think so, Rob. We think that pricing in all of our products are pretty flat. We did have a huge ramp-up in '04 and into '05. But, they are at primarily historic high levels. But they -- they are pretty much where they have been for the last eight to ten months, with the exception of concrete and cement. You know, that's been a challenge and will be a challenge. But, we feel that we are fairly well covered with contracts on those facilities also.

[Robert Canter], Smith Barney.

Congratulations on a good -- on a quarter that's usually not a very good quarter and also on your stock price. I know it's up 76% for the year. So congratulations. A lot of my questions have been kind of touched on by the previous fellow. But we didn't get an update on the DM&E this time. I wonder if you can say something about that and how you see that going forward.

Bob, it's Lee Foster. Bob, the events of recent past are really -- as you know on February 13, the Surface Transportation Board did issue its final decision regarding the supplemental environmental impact statement, which essentially reconfirmed the issuing of the permits to the DM&E for the expansion into the PRV as well as the upgrade of existing line. Subsequent to that on I believe it was April 14, that decision was appealed to the 8th Circuit. Our view on this at this point is that notwithstanding the 8th Circuit issuing its stay of the Surface Transportation Board permit, which we don't feel is a likely occurrence, we believe that the process will continue essentially seeking financing for the railroad and not being hindered by the judicial developments. Beyond that, we really -- there's really no other news to tell you.

Okay, thank you. Are you getting any Katrina-related business yet? Is that anything where they are rebuilding down there? Is that something in the immediate future to look at?

You know, that's a good point, Bob. We have been following it very closely. To begin with, our hearts go out to the residents who have suffered through this catastrophe of Katrina. It's just a heart-wrenching situation. One of our own, Ernie Koehler was one of the many who was forced to abandon his home and take up temporary residence. Ernie was working out of his car. He was in customers' offices. He was working just about anywhere that he could find space. And, you know, despite his personal tragedy, Ernie kept on working. Some of this work that's been going on down there, Bob, has been bidding on a seven-day-a-week basis. He's been following the bids on the levies as they are being rebuilt. They are currently being rebuilt to Category 3 levels. Where it goes from here is in the hands of the government.

There has been a lot of piling used on it. We have participated to levels that we are very satisfied with. And we will continue to watch both the private sector and the public work as that continues to develop. By the way, Ernie was just named our Employee of the Quarter. He represents the hard work, dedication and integrity that we see and appreciate from our employees all the time. But we are following that story very closely, and we're on top of that every day.

Tom Spiro, Spiro Capital Management.

Congratulations to all on such a strong start to the year. I just had a couple of questions. Stan, concrete availability for the new Arizona tie facility, do we have concrete lined up?

We do. We do have concrete lined up. It's been a challenge, but we feel pretty good about where we are right now.

Dave, were there any LIFO gains or losses in the quarter of note?

Yes, we had 150,000 LIFO expense for the first quarter compared to 100,000 last year.

I see. Lastly, Stan, you mentioned that orders in the tubular segment had perked up in March and April. I was kind of curious what is driving that and how that looks as we move forward?

We feel pretty good about it. I think there's been business that has picked up, both in our threaded and our coated group. Coated group came into the year -- there's demand in the product. They are energy related. As people look for it as an energy alternative, we think the gas business will be good. Just a little slow coming out of the box the first couple months. But we have booked three or four substantial jobs in the last two months and to the point that we will be at year-end 2005 levels this year if not better.

Those are coated jobs?

Well, those are coated jobs but also our threaded business is up. We looked at a couple of different areas. We are getting some limited-service threading in the oil business. We are also doing some micro pile work for foundation work, which is benefiting the efficiencies of the plant. So, we think that will continue to improve as the year goes through also, Tom.

Sounds good. Thanks a lot and good luck.

[Mark Close], [Oppenheimer Close].

I just wanted to ask, as you finish up your big CapEx bulge here, you know, where would you expect to take the leverage [ed] going forward? Would you expect to pay down debt and where is your comfort level?

We are looking at that. It's an ongoing thing. We are looking and we will continue to look for products for acquisitions (multiple speakers).

We're very comfortable with our leverage today quite honestly. Our leverage ratio is less than 2.5. So, we expect better results than last year this year. So, we have really no major concerns about leverage. The question is what the biddings opportunities are in the future that present themselves and how we adjust our capital structure to deal with that to the extent that after we get this bulge as you call it, the significant spend on it. If there's nothing significant that presents itself, certainly we would be generating some cash and paying down debt. But, our preference is to continue to expand organically and potentially be acquisition as well.

Okay, but would you grow the debt then from these levels?

If there was a good opportunity, sure.

(Operator Instructions). Gentleman, we have no more questions at this time.

Thank you very much to all and have a good day.

Thank you.

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a good day.