L B Foster Co (FSTR) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2006 L.B. Foster earnings conference call. My name is Latasha, 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. Please proceed, sir.

Thank you, Latasha. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's second quarter 2006 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Also on the call today is Mr. Stan Hasselbusch, L.B. Foster's President and CEO, and Mr. Lee Foster, Chairman of the Board.

This morning, Stan will provide an overview of the Company's results, give an update on key 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 December 31st, 2005, for additional information, as well as to other information filed with 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.

Thank you, David, and thanks to all of you for attending our second quarter 2006 earnings call and webcast. David will review earnings in more detail later, but first I'd like to discuss a few of the highlights of our operations in the second quarter. Overall, revenues and income were up compared to the second quarter in 2005. Sales were $99.3 million, compared to 90.7 million last year.

Income was 3.1 million from continuing operations, a 93% improvement over the second quarter in 2005. Our second quarter performance was the sixth consecutive quarter the Company recorded an earnings increase over the previous year. As noted in our press release, construction and rail led the way.

Let's look at construction first, where piling, fab products and concrete buildings all had marked improvements over 2005. In piling, revenue for the quarter was 32.4 million, 22% ahead of last year. The trends we follow indicate growth opportunities will continue in the future.

First, Reed Construction Data reported the value of total U.S. non-residential construction was up a strong 15% during the first six months of 2006 versus 2005. The value of heavy engineering construction startups increased by almost 9% during the first half of the year and was led by an increase of 28% in bridge construction, and the overall sheet piling market continues to show strength.

On a trailing 12-month basis, shipments in May exceeded 300,000 tons, a 30% increase over 2005. Our piling group is meeting this opportunity head on. Bookings for the quarter were 39.8 million, compared to $25.5 million last year, a 56% increase. The result is a backlog at quarter end of 32.9 million, compared to 21.9 million at the end of the second quarter last year, a 50% improvement.

Results in both our concrete products and fabricated product units have been greatly enhanced by process improvement measures in the form of Lean and Balanced Scorecard. We began using the Balanced Scorecard concept, which is a measurement tool to drive improvement, at our concrete buildings monthly product review meeting in January.

Balanced Scorecard links our day to day processes to our strategic objectives and breaks down issues to focus on specific problems and their solutions. The process was openly and successfully embraced by Dave Steiger, who is the manager of concrete buildings, and his team.

All L.B. Foster products were phased into this process by May. The emphasis concrete products placed on the resolution of issues such as freight and installation, order to cash and cost of quality was largely responsible for generating a 32% increase in gross profit on only a 9% increase in revenues in the quarter for concrete buildings. We expect to realize benefits from the Balanced Scorecard process throughout the Company in the future.

Next, I'd like to discuss fabricated products, which had an increase in revenue of 40%, compared to the second quarter of 2005, due to their backlog, product mix and process improvement on the plant floor. While we are encouraged by the operational improvements we have made in the fabricated product plants, the anticipated benefit of the new highway bill is yet to be seen on the bidding and sales side. We expect to see improvement from a bidding standpoint in the third quarter as states begin their new fiscal years, but not soon enough to see the benefit at our facilities until possibly the second quarter of 2007.

On the rail side of our business, performance was driven by our concrete tie division in the second quarter. The Spokane facility led the way with sales of 6.9 million, which was 67% ahead of last year. Bookings for the first half were also strong at Spokane. Order entry for that period was 11.7 million, 75% ahead of last year, and backlog at the end of the quarter stood at 12.3 million, compared to 4.9 million in 2005.

The Spokane facility is essentially booked for the balance of this year and quickly filling up for next year. The market in the Northwest is an excellent mix between Canadian railroads, transit products and industrial applications. Indications lead us to believe the strength of the market in this area will continue for the foreseeable future.

The newly refurbished Grand Island plant is up and running. We are still fine-tuning the equipment to achieve optimum performance. We produced 34,000 to 36,000 ties per month in the second quarter. Our expected production levels are in the 36,000 to 38,000 tie range.

As I indicated in the past, Tucson will be in the commissioning stage during the third quarter, ramping up to production levels in late September. For the year, we are on target to produce at the high end of the 810,000 to 850,000 tie range I reported during the April webcast.

Our other major capital expenditure, the new ARP facility in Pueblo, Colorado, has experienced minor delays due to equipment startup issues that we are working through. We held our board meeting in Colorado earlier this week and toured the facility, and while we are producing a high-quality product, we're not manufacturing at our expected production levels and do not expect to be there for approximately 30 days.

In conclusion, as we stated in the earnings release, overall, business activity remains strong and is reflected in our order entry. Bookings for the Company in the first half were $243 million, which was 32% higher than the same period last year. Improvement in the second quarter bookings over last year was even more dramatic, $122.4 million booked, 57% ahead of 2005.

The result was a backlog on June 30th of 159 million, which was 60% ahead of the backlog at the same time last year. We feel that with the strong markets in which we participate, coupled with an expanding product portfolio and a process improvement focus throughout our organization, improved profitability will continue into 2007. And now I'd like to turn it back to David Russo for a financial review.

Thank you, Stan. Sales for the second quarter of 2006, as Stan mentioned, were 99.3 million, compared to 90.7 million in the prior year, an increase of 9.5%, which we were able to leverage into a 78% increase in pretax income. The sales increase was due principally to a 23% increase in our construction products segment sales, a 1% increase in our rail products segment, offset in part by a 6% decrease in tubular sales compared to last year's second quarter.

The construction products sales increase was driven by a 22% increase in piling sales, a 40% increase in fabricated product sales and a 10% increase in concrete building sales. As you may recall from prior calls, our fabricated products group is the business that had an extremely poor year in 2005. Their second quarter results have improved significantly over last year and also improved over the first quarter of this year.

As mentioned in last quarter's call, while we continue to expect significant improvement over the last year, this business will still lose money in 2006. The key for us in reviewing this business is the bidding activity in the second half of 2006.

The rail sales increase was due primarily to a 39% increase in CXT concrete tie sales and a 21% increase in transit product sales. Concrete tie sales continued to increase at both locations currently in operation, Spokane, Washington, and Grand Island, Nebraska. And margins were up as well.

We are producing concrete ties for some large projects at our Spokane facility and have recently won additional favorable business for that facility. Grand Island continues to allocate all of its production for the Union Pacific railroad. Tie production at our refurbished Grand Island facility has continued to improve this quarter, as total second quarter production was up 30% over last year, when we were running the older equipment.

During last year's second quarter, Grand Island was running at maximum capacity in anticipation of the July shutdown, so we are pleased that we are handily beating those prior-year volumes, even though the new equipment has not been without production issues and minor setbacks. We are also pleased with the quality of the ties being produced.

Tubular segment sales were down 6% due to a decrease in coated product sales, offset by an increase in threaded product sales. However, year to date, 2006 coated sales are even with last year. As a percentage of consolidated sales, tubular accounted for approximately 6%, construction 46% and rail was 48% of the total.

Gross profit margins were 13.5% for the second quarter, an increase of 230 basis points from last year, and approximately 190 basis points higher than the first quarter of this year. This positive comparison to the prior year is due to the following items, the principal reason being for the margin expansion was an increase in product profit at Standard before plant and other variances that increased significantly over last year's second quarter, and, to a lesser extent, a decrease in a LIFO charge in 2006 second quarter.

Also, improved purchase price variances. These items were partially offset by an increase in net plant expenses and scrap and obsolescence costs. The drivers for the margin improvement at product standard was due to progress made in fabricated products, concrete buildings, transit products and concrete ties.

Our SG&A expenses in the second quarter increased 18%, due primarily to personnel-related costs, such as payroll and benefits, incentive accruals and also professional fees and services and stock options. SG&A represented 8.7% of sales in the second quarter of 2006, as compared to 8.1% of sales in last year's second quarter.

We believe this is largely due to the timing of the spend and that the 2006 annual SG&A as a percentage of sales will still be lower than 2005. Other income increased $200,000 in the second quarter, due primarily to the settlement of a claim related to the sale of assets several years ago, and, to a lesser extent, due to a favorable foreign exchange adjustment.

As a result of the foregoing, second quarter operating income was $5.2 million, compared to $3 million in last year's second quarter, a 2.2 million, or 72%, improvement. Operating income as a percentage of sales was 5.2% this year, versus 3.3% last year.

Interest expense was $858,000 in the second quarter of '06, compared to 573,000 in 2005, a 50% 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 during the past four quarters. Our average revolver borrowings have increased by approximately 30% this year, and the rates on that facility have increased approximately 185 basis points.

As you are all aware, the Fed has increased interest rates by 400 basis points since June of 2004 and approximately 225 basis points from last year's second quarter to today. Second quarter pretax income was 4.3 million compared to 2.4 million in last year's second quarter, a 78% increase. As a percentage of sales, second quarter 2006 pretax income was 4.4% versus 2.7% in last year's quarter.

Second quarter 2006 income tax provision was 29%, compared to 34.6% in last year's quarter. As mentioned in the earnings release, this year's lower rate was the result of releasing a portion of the valuation allowance provided for state net operating losses due to a change in the Company's estimate of its ability to utilize those NOLs in future periods.

Income from continuing operations increased 93% to $3.1 million, or $0.29 per diluted share, compared to $1.6 million, or $0.15 per diluted share, last year. Turning to the balance sheet, debt at the end of the quarter was $51.9 million, compared to 42.8 at the end of last year's second quarter and 36.9 million at the end of 2005. The $15 million increase this year is due to $14 million of cash used by operations, due principally to increases in accounts receivable and inventory and $8.7 million of capital expenditures for the year, partially offset by the proceeds from the sale of our formal geotechnical business.

Capital expenditures were primarily for our Tucson and Grand Island facilities, totaling approximately $6 million, and for our new Pueblo facility that we have discussed in the past, where we have commenced, as Stan mentioned, production of insulated rail joints.

We expect full-year capital expenditures to reach approximately 12 to $14 million, and we will continue to finance our larger capital projects with midterm fixed-rate lease financing, primarily capital leases. Accounts receivable and inventory, net of accounts payable, increased to approximately $11.5 million in the second quarter this year. The increase from March 2006 is due to an increase in accounts receivable of $2.4 million, due principally to increased sales volume.

Our DSO at the end of June was 47 days, up a day from March 2006, and down substantially from December of '05, where we stood at 55 days. Also, we had a $3.6 million increase in inventory. The majority of this increase is in the rail segment. Rail also accounts for the majority of the inventory increase from December. We have discussed increases in piling inventory during the last several calls, and while it remains high, it has leveled off, and we look to reduce the tonnage of piling inventory, excluding rental piling, by year end.

In summary, we are pleased with the operational progress we are making within our company. We remain 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 to make the required investments and changes in our organization to get an improved return for these investment strategies while our markets are strong.

I would also like to announce that, as of June 30th of this year, L.B. Foster Company has joined the Russell 3000 index. We were very pleased to be selected by the Russell 3000. That concludes my comments on the quarter. We will now open the session up to questions to those of you on the call.

Latasha?

Thank you.

[OPERATOR INSTRUCTIONS].

And your first question comes from the line of [Rob Damlon]. Please proceed, sir.

Good morning, guys. Excellent quarter. Wanted to first talk about the gross margin. The gross margin had a significant improvement, obviously, from last year in the prior quarter. Could you break that out a little bit more for us by division and which division had the most improvement? And then, is that a sustainable number going forward?

We believe it is sustainable, Rob. As far as the divisions that got it done this quarter, it was, as we've mentioned a little earlier, it was the transit products group, our fabricated products group as well as our concrete buildings and CXT concrete ties. Those four divisions were really the ones that experienced significant improvement over the prior year. Probably the most notable would have been our fabricated products group.

And just to add on that, Rob, we are seeing improvement going forward in our backlog and order entry in the quarter as more and more of the manufacturing processes start to come online.

Okay, and then in that fabricated products unit, obviously, improving but still losing money this year. What is the expectation into '07? Is that a business that can turn profitable into '07?

We're watching that very closely, Rob. We are, as I said in my remarks, not getting the bang that we thought out of the new Highway Bill at this point, but we expect it to, though we are watching that very closely.

Okay, and then you touched briefly on the Allegheny rail products division that you moved that business in house, but it sounds like some glitches in the manufacturing process currently. Can you just talk about that and what you're doing to improve the manufacturing process there to get the margins up?

We have had some early delays early on, Rob. We've had some problems with basic equipment, a couple of the basic equipment - the drills, but we feel like we've got a pretty good handle on it. The quality, we can't say enough about the quality that we're getting out of the facility, and we expect it to be up and fully operational and reaching the production levels that we expected when we started the build within the next 30 days.

So, did that division lose money in the second quarter?

No, it did not lose money but was a little - fell a little short of what we did last year in the quarter.

Okay, but if you can get the processes improved then there's significant improvement in margin opportunity there?

Yes, there are.

And then, Dave, just on the tax rate, what is the expected tax rate for the full year, now?

We expect to be in the 31 to 32% range for the year, Rob.

And then if we look into '07, what would that - is that still the number?

It would probably - '07 would probably - it depends on whether we can continue to -- to the extent our results continue, we will continue to eat into the state NOLs, but I would say probably to the 33% level, 33, 34.

Okay, and then lastly, maybe you could just give us an update on the DM&E Railroad, if there's any new news there.

Rob, this is Lee. There really isn't much news since the last quarter. The regulatory process is continuing to slowly move through the courts. Briefs are due in August. There's still not a schedule for either oral arguments or any ultimate determination. And on the [ref] loan process, that's continuing to move forward, but there are no expressed deadlines as to when a decision will be reached.

Okay, that's all I have. Thank you.

And your next question comes from the line of Tom Spiro. Please proceed, sir.

Yes, Tom Spiro, Spiro Capital. Good morning.

Good morning, Tom.

Really strong Q2. Congratulations. A couple of questions, and number one, I know it's the smallest part of the Company, but the tubular business, we didn't discuss it very much in the call up to this point. Can you just give us a little bit of a flavor of why coated was down and what the outlook is for both coated and threaded?

Well, we came into the year as we talked about in Q1 webcast with a lower backlog than what we had last year. Revenues and profitability are relatively flat in the second quarter. What we are looking at, we've got some strong activity. We expect to be booking some major work in the third quarter on the coated side of it. The threaded side of it is also - we expect improvements in the third and the fourth quarter going forward, but we will be back and above levels which we participated in last year by year end.

That's great. That's great. Secondly, on the concrete ties, could you remind me, once Grand Island, Tucson, Spokane, are all up and running, as they should, what's the maximum capacity of the Company to manufacture concrete ties?

Well, right now, we're looking at maximum capacity of 1.2 million, which we will be next year, we expect to be pushing 1.1 million, Tom. As I said in my remarks about Spokane, we're very pleased with the activity level that we've seen up there in the last eight months, and really the activity level that we're seeing in the engineering side of it for upcoming work makes us real upbeat about that.

As we come on with Grand Island and Tucson later on in the year, we will be up and expect to be producing full capacity at those two plants next year, which is the 450,000 tie per year range at each one of the plants.

Wow, that's great. And, lastly, I couldn't help but notice that SG&A was up 18% while sales were up nine, and I just wondered why that was happening.

Tom, this is Dave. We had a couple of things. We had a certain amount of relocation costs, moving material from our third-party, outsourced third-party that was making the insulated rail joints for us, and there was quite a bit of items that were moved from Fort Wayne Indiana to Colorado. Some of that hit that line, as well as we've got a certain amount of incentives that we accrue to the best of our ability when we book the income. This second quarter was certainly a lot stronger than the first, so we try to match those up.

And we actually had some other personnel and severance costs come through this quarter. So, like I said, the full year, we expect to be in line and we expect to see as a percentage of revenues that number be less than last year.

Thanks much.

Thank you.

[OPERATOR INSTRUCTIONS].

And your next question comes from the line of [Barry Haynes]. Please proceed, sir.

Good morning. I had a question relating to the increase in railroad spending that you're seeing, and I wonder if you could characterize it versus whether it's just a big increase in maintenance, whether you're starting to see more expansion projects and whether there are any particular railroad customers or lanes where you're seeing expansion projects. Thanks.

We are seeing indicators that the market will continue going forward in the future, Barry. The spending that we're seeing from the railroads continues to be very strong. Overall, we expect maintenance of way spending to continue at or above the 20% level that we have talked about this year. We are seeing an increase in rail from an ethanol standpoint, from industrial standpoints. The class ones have all announced both new spending and maintenance of way spending at levels which we haven't seen for a number of years.

We expect that to continue on all sides of that business over the next - over the near future.

Sounds great, thank you.

And your next question comes from the line of [Edward Devongine]. Please proceed, sir.

Stan, congratulations to you and your staff on a truly outstanding quarter.

Thank you.

Stan, several things. Could you expand upon what's happening with rental piling? In the past, with Bethlehem, it was a great contributor in terms of profitability, and of course you're building up your rental piling now. Could you speak to that issue, and also, in general, how we're doing with Chaparral and the number of segments that we have, and do we have a full complement at this point?

Okay, thanks. Well, let's start off with rental pilings, and one of the things I didn't say, Ed, in my opening remarks is that we booked the biggest sheet pile rental that we've ever in corporate history last month. It's a job in northwestern Ohio which is for 3,200 tons, and we'll start shipping that through the third quarter. As our tonnage available at our inventory in rental piling now is up towards $7 million, the activity level still continues to be strong, and of course, as we've talked about in the past, we really like the profit levels that come from that.

And when we get this material shipped into northwestern Ohio, throughout the third quarter, we'll have over 50% of our complete inventory on rent, so we're very pleased about the progress that we've made in that area. On your second question, about what's going on with Chaparral, Chaparral is making piling from a full complement standpoint. We are there. There may be one heavier section that they will be looking at to produce later on in the year and into the first part of next year, but fully we're - as we've talked about in the past, we are very pleased with our relationship with Chaparral, and as the tonnage continues to come, we expect our revenues and performance to continue to increase.

Thank you, Stan.

Thank you, Ed.

And your next question comes from the line of [Thomas Bigley]. Please proceed, sir.

Good morning, gentlemen.

Good morning, Tom.

Good morning, Tom.

Stan, could you elaborate a little bit on the comment in the news release concerning the mix design and mechanical issues at Tucson?

Okay, sure. Number one, with the concrete mix in Tucson, we're striving in two areas. We're using a type two cement down there to get the aggregate with the cement right to reach the hardness, which is just a typical startup challenge. It's not an issue. We have worked through this every time we start up a plant and we'll continue to work through it there. And with the new equipment, Tom, it is new equipment. It's state-of-the-art equipment and it is an art in coming online with it.

But we've got two challenges at Tucson or whenever we start up a new tie plant. A is to get the right mix to be able to get the strength down and to be able to keep your costs as to what were expected, and we're making a lot of progress on that. But as we've talked about in the past, in order to get the production, we've got to flip it at least twice a day, and so we have to get that cure time down to the eight-hour period, and we're getting close to that.

But, at Tucson, that's why we have a commissioning stage, Mr. Bigley, is that we need two to three months to get the things right, to get the processes up and to get on to get to the expected levels that we will accomplish by the fourth quarter.

Okay, and, David, maybe you could respond to this. Have the startup costs that have been expensed at the Tucson facility, and also with the startup problems at Pueblo in the second quarter, are they significant in terms of maybe $0.05 a share or something like that?

They have had a little bit of a drag, as we expected, Tom, on margins. No, they don't approach anything close to $0.05 a share. Our unabsorbed costs at Tucson for the quarter was probably in the neighborhood of $0.25 million or so, and now that ARP or Pueblo is up and running, once we get the volumes up we expect to fully absorb that facility.

Until then, there will be a certain amount of cost flowing down to the bottom line and impacting our margins negatively, but not so significant as $0.05 a share.

And I show no further questions in the queue at this time. I would now like to turn the call over to Mr. Hasselbusch for closing remarks.

We thank you all for attending and appreciate the comments that were made, and have a good day.

This concludes the presentation. You may all now disconnect. Have a good day.