L B Foster Co (FSTR) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 L.B. Foster's Earnings Conference Call. My name is Karissa, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to your host for today, Mr. David Russo, Chief Financial Officer. Please proceed sir.

Thank you, Karissa. 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 third 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,. and 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 earning 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 31, 2005 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.

Thank you, David, and thanks to all of you for attending our third quarter 2006 earnings call and webcast. Overall, revenues and income were up, compared to third quarter of 2005. Sales were 95.9 million, compared to 90.9 million last year. Income was 3.4 million from continuing operations, a 56% improvement over the third quarter 2005. Our third quarter performance was the seventh consecutive quarter the company recorded an earnings increase over the same period the previous year. 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 third quarter.

Let's start by looking at Rail, where revenues totaled $45.8 million, 20% ahead of the third quarter last year. New rail was the largest contributor with $19 million in sales, 53% ahead of last year on the strength of a robust rail market. We feel we are in the midst of a secular, rather than cyclical rebound in the North American railroad industry. Data we track continues to support that statement.

To begin with, the Class Ones, most of which have recently announced record profits and operating ratios continue to report strong maintenance-of-way and capital spending programs. The Burlington Northern recently announced that total maintenance-of-way spending is up 23% year-to-date, while capital spending for expansion projects is up 40% for the same period. RMI, the largest and leading provider of rail information, published data from its group of 274 short line, regional and terminal switching railroads that showed carload traffic increases of 3.8% in the first half of this year.

Revenue ton miles, historically the best indicator of current performance and future spending plans, has grown by 2.6% in the first nine months of 2006, compared to 2% in the same period last year. And domestic consumption of standard rail was up 7.4% through July of 2006 versus 2005, which annualizes over 900,000 tons. Revenues in our CXT Concrete Tie division were up 50% over last year due to increased volumes at our Spokane and Grand Island facilities.

We have discussed in the past performance at our Grand Island Plant continues to improve. Production for October will be 40,000 ties and our reject rate is declining, approaching the one half of 1% level we expect from the new equipment at the refurbished plant. At our new facility in Tucson, however, start-up issues including concrete mix design and permit problems have prolonged our commissioning phase and delayed full production. We produced 10,000 ties in September; expect to produce 20,000 ties in October, and will continue to make improvements until we achieve full production level.

As we look at the market for concrete ties in North America, our business will continue to benefit from not only the increased maintenance-of-way spending and capital expenditures by the railroads, but from commuter lines as they expand capacity. Our new ARP facility in Pueblo, Colorado was successfully commissioned in July and August, and reached full production levels in September. We expect this plant to be accretive to earnings going forward.

On the construction side of our business, we benefited in the quarter by the contribution of our Fabricated Products Group. In the Bridge area, [Marks Maxwell] and his Bedford, PA Group continue to utilize process improvements in the form of lean manufacturing and Six Sigma to drive improved profitability on existing jobs. Jack Klimp and his team at Precise in Georgetown, Mass are utilizing just-in-time techniques to turn around drawings in two to three hours and next-day delivery of fabricated material on the Central Artery Project in the Boston area that you've no doubt heard about over the past few months.

To date, we have booked over 2.5 million in revenue and made over 100 deliveries to the job site. We were profitable at both Bridge and Precise in the third quarter, and in fact, expect to be profitable at both facilities combined at year-end, a vast improvement from the significant losses we incurred at those two facilities over the last two years.

While we have been encouraged by the strong non-residential construction level we have experienced in the past year, we continue to be disappointed at the bidding level of highway and bridge work. The passage of [SAFETLU] over one year ago, led to a 34% increase in announced starts according to a Reed Construction Data. However, with substantial price increases in construction material such as cement and steel, many projects have actually been delayed.

Given some recent moderation of raw material price inflation, along with unanticipated tax surpluses at the state and local level, many projects that were delayed are now expected to bid in the last part of 2006 and 2007. Currently, we have a challenge to get work into the system to prevent production voids at our fab product facilities in the first half of next year.

Piling sales were 29.5 million in the quarter, down 10% when compared to the same period last year. The primary reason for this shortfall was project delays on three jobs totaling $7 million. This material has been rolled and is in storage, and the revenue will be recognized in the fourth quarter. Overall, the sheet piling market remained strong. We feel the domestic consumption will exceed 300,000 tons this year, and sheet piling on rent, an area which drives margin expansion, continues to improve. Average tonnage on rent for the quarter was 25% ahead of the same period last year.

In Tubular Products, we are pleased to note that we were awarded last month with our strategic partner ACIPCO in Birmingham, Alabama, the largest coating job in our corporate history, 425 miles of 16-inch, and 85 miles of 14-inch for the [Yagi] and Overland Pass jobs, a major natural gas expansion project in Kansas and Eastern Colorado. We will begin coating this project in the fourth quarter this year and substantially book one shift well into the third quarter of 2007. Our Tubular Sales group is aggressively pushing the marketplace for additional business to add a second shift at the plant during this period.

In conclusion, overall business activity and backlog are solid. Bookings during the first nine months of 2006 were up 24% versus 2005, and totaled $344 million. Backlog at quarter-end stood at 171 million, which was 62% ahead of last year. And as a result, we are forecasting a strong performance in our typically weak fourth quarter.

And now, I would like to turn it back to David for a financial review.

Thank you, Stan. Sales for the third quarter of 2006 were $95.9 million, compared to 90.9 million in the prior year, an increase of 5%, which we were able to leverage into a 56% increase in income from continuing operations. Sales increase was due principally to a 20% increase in Rail Products, sales offset in part by a 5% decrease in construction product sales, and a 5% decrease in Tubular sales compared to last year's third quarter. Tubular segment sales were down 5% due to a decrease in coated product sales, partially offset by an increase in threaded product sales.

Year-to-date 2006, coated sales have fallen behind 2005, but we expect a strong fourth quarter and we will have a nice backlog going into 2007 as Stan just alluded to. The construction product sales decrease was due to a decrease in piling sales, partially offset by increases in Fabricated Products and Concrete Building sales. As you may remember from prior calls, our Fabricated Products Group is the business that had an extremely poor year in 2005. Their third quarter results have improved significantly over last year's quarter and also improved over the first and second quarters of this year.

As Stan mentioned, this group has done an excellent job operationally. But, as we have mentioned on prior calls, one of the keys for us in evaluating this business would be the bidding activity in the second half of 2006, which thus far has not been as strong as we had expected. The Rail sales increase was driven by a concrete tie sales increase, as well increased sales in new rail distribution and transit products.

Concrete tie sales continued to increase at both locations currently in operation, Spokane, Washington and Grand Island, Nebraska. And gross profit margins were up as well. This also holds true on a year-to-date basis. We are producing concrete ties for some large transit projects at our Spokane facility and continue to experience strong inquiry and bidding activity. 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 be strong in the third quarter, as total third quarter production was up 1% over Q2 of this year and 11% over the first quarter. Comparison to last year's third quarter is not meaningful as the facility was shut down for majority of the third quarter last year. However, what is meaningful is that the third quarter production was 27% over the maximum capacity of the old equipment that was replaced with the new technology last year.

We continue to encounter minor production issues on a one-off basis and believe there is further improvement to achieve in Grand Island. As a percentage of consolidated sales, Tubular accounted for 6%, Construction 46% and Rail was 48%, which is the same revenue split as the second quarter this year.

Gross profit margins were 14.5% for the third quarter, an increase of 260 basis points from last year's quarter; approximately a 100 basis points higher than the second quarter of this year and 280 basis points higher than Q1 of this year. Positive margin expansion this year compared to the prior year is due to a significant increase in product profit at standard before plant and other variances, which was partially offset by an increase in net plant expenses, increased scrap and obsolescence costs, and decreased favorable purchase price variances.

The businesses that drove the margin improvement were Rail Distribution, Fabricated Products, Concrete Buildings, Concrete Ties and Piling. Increased net plant costs were primarily due to the start-up of the new facilities this year, ARP Rail in Pueblo, Colorado and the Tucson, Arizona concrete tie plant.

SG&A expenses increased 13% in the third quarter to $8.2 million due primarily to personnel-related costs including salaries, incentive pay and benefits and to a lesser extent to bad debts. SG&A represented 8.6% of sales in the third quarter of 2006 as compared to 8.1% of sales in last year's third quarter. We continue to believe that the 2006 annual SG&A as a percentage of sales will be lower than 2005, but will be a little tighter than we originally thought.

Other income decreased $156,000 in the third quarter compared to last year, due primarily to the prior year recognition of a one-time favorable rental income adjustment related to the sale of a facility. As a result of the foregoing third quarter operating income was $6 million, compared to $4 million in last year's third quarter, $2 million or 49% improvement. Operating income as a percentage of sales was 6.2% in this year's quarter versus 4.4% last year.

Interest expense was 892,000 in the third quarter, compared to 778,000 in 2005, 15% increase due principally to higher interest rates. Our average borrowings have increased only slightly this year, and the rates on our borrowings have increased approximately 150 basis points. As you are all aware, the Fed has increased interest rates by 425 basis points since June of '04, and approximately 200 basis points since June of 2005.

Third quarter pretax income was $5.1 million, compared to 3.2 million in last year's third quarter, a 58% increase. As a percentage of sales, third quarter 2006 pretax income was 5.3% versus 3.4% last year. The third quarter 2006 income tax provision was 32.2% compared to 31.5% in last year's third quarter. Income from continuing operations increased 56% to $3.4 million or $0.32 per diluted share, compared to 2.2 million or $0.21 per diluted share last year.

Turning to the balance sheet, debt at the end of the quarter was $50.6 million, compared to 47.2 million at the end of last year's third quarter, and compared to $36.9 million at the end of 2005. The 13.7 million increase during this year is due to $7 million of cash used by operations due principally to increases in accounts receivable and inventory, and $12.8 million of capital expenditures, partially offset by the proceeds from the sale of our former Geotechnical business, which we sold in February of this year.

For the quarter however, we did generate positive cash flow from operations of $7.3 million and capital expenditures were $4.1 million. The $12.8 million of capital expenditures this year was primarily for the Tucson and Grand Island concrete tie facilities, and for our new Pueblo facility that we have discussed in the past, where we have commenced production of insulated rail joints. We expect total year capital expenditures to reach approximately $14 million to $15 million.

Debt as a percentage of capitalization was 34.8% compared to 31.6% at year-end and 36.4% at the end of Q2. Our leverage ratio is below 2.5 to 1 and our interest coverage is strong. We did have however a $5.6 million increase in inventory, as we mentioned earlier during the quarter. The majority of this increase was in the Rail segment. Rail also accounts for the majority of the inventory increase from December. We have discussed increases of piling inventory during the last several calls, and while it remains somewhat high, it has come down from the last quarter and despite -- I'm sorry, come down from last quarter despite the continued increase of our rental tons.

In summary, we are pleased with the operational progress we are making within the company. We remain confident that our strategies are sound, and 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, that have the highest possible potential to make a substantial positive impact on the future of the business, by realizing an appropriate return for these investment strategies while our markets are strong.

That concludes my comments on the third quarter. We will now open the session to questions to those of you on the call. Karissa?

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Rob Damron of 21st Century Research. Please proceed.

Good morning, guys, and great quarter. Wanted to start out with the gross margin line; that was certainly better than what we were looking for. Maybe -- I know you did break out some of those categories that improved the gross margin during the quarter, but maybe you could let us know what were the major drivers of the gross margin, and if you think those are sustainable over the longer term?

Yes, Rob. Hi, how are you?

Good.

It has really been certain of our products that we just mentioned, ties, new rail distribution and buildings. It's a mixture of cost containment and pushing the selling prices up. That has been the primary impetus and that's what those groups have done a pretty job of achieving this quarter.

Well, if we look at the margin even going into next year, is that -- is that a level that we can maintain or is there still improvement from that level going forward?

We think there is still improvement, Rob. We still -- is that we talked about with some of the startup at our facilities. ARP is online and will start contributing its higher margins. The plants next year will both -- all of them will be fully operational and will be able -- we will be able to capitalize on that on the tie side. And so, we think that there is -- there is opportunities to take that up further.

Okay. And then, just on the Tucson facility, you mentioned 10,000 ties in September; 20,000 in October. I guess what's the expectation for the remainder of this quarter? And then, what is the full -- when you are at full capacity, what is that number? Where do you expect that to be?

We continue to take that up in -- in the fourth quarter. We are looking at 15,000 to 20,000 tons in November and 20 -- 25,000 tons is what we are expecting to do in December. That plant is similar to our Grand Island facility, and we would have the capacity to produce in the neighborhood of 400,000 ties there going forward.

Okay. And then, you mentioned the fab business had a good quarter, but yet you are a little concerned about the outlook of that business going into the first half of next year. Could you just give us a little bit more insight into what kind of expectations we should look at for that?

Well, we will -- as I said, we will -- we do expect to be profitable at both of those facilities. This year, we have really benefited by some of the operational improvements that we have made at both plants. We got [voids] in the first half, Rob, in our -- primarily in our Bridge Group at Bedford actively looking at picking up work and booking work for the first half of next year. We expect to be booking some work.

We've got a nice commitment in the New York area, which would really benefit both Precise and fab products in Bedford, the Bridge Group. But getting it in, getting it engineered, getting the material bought and getting it out is going to be a -- is going to be a challenge. But right now, we do have some voids in the first half of next year at Bedford. The Precise operation is a little bit better off; we have got a pretty steady backlog through the year up there, but we have got some challenges at Bedford.

And then, are you becoming a little bit more optimistic on the highway construction bill and the relating business with that? I know it has been a little disappointing this year but you mentioned a little bit better booking activity. What kind of outlook should we expect for '07?

The business has got to loosen up. We know what's out there. We know what's going to come. It's just -- it's not coming fast enough. The businesses that are involved with it are across the board with the company, Rob, but piling is involved with it. Their business, once the work is released and it is bid, that's going to be one of the first products on a job; that is not as much concern.

Transit products is starting to get some benefit from some of the transit work that's starting to be released, and transit product was actually up in the third quarter and we expect that to continue. But the big concern that we have is in the fab products group.

Okay. And then, just lastly, maybe you could provide an update for us on the DM&E project?

Hi, Rob. It's Lee Foster.

Hi, Lee.

The DM&E, the dual tracks of course are the regulatory process. There are two main things that have happened there. One, the STB has -- is undertaking a separate process for the ICE. And secondly, the Eighth Circuit --. And by the way, that was expected. And secondly, the Eighth Circuit is scheduled to hear the oral arguments in mid-November. I don't have that exact date, but there still is no specific time frame as to when they will render a decision.

On the financing front, the FRA did receive comments. We don't have specific feedback on that, but to my knowledge at this point, there is nothing that would cause them to basically alter the environmental impact statement that they put forth. And we would hope that there would be a decision made on that sometime within the next 90 days.

Okay, that's helpful. Thank you.

Your next question comes from the line of [Robert Canters] of Smith Barney. Please proceed.

Yes, congratulations on another good quarter.

Thanks, Bob.

My question was on the DM&E, but while I have you, those bookings are very good. Can you give us a little flavor of it? And specifically also regarding the fourth quarter, is this kind of a result of that? And will -- when you say a strong fourth quarter, and I know you can't give me a number, but do you think will be exceeding the first quarter? I mean, is that what you are shooting for and will this carry on over into the first quarter in 2007?

Our expectations are buoyed by the -- our backlog. The backlog remains strong; the bookings are strong. We expect the fourth quarter to be very good and we are looking at next year, the first quarter of next year to be an improvement over the first quarter of last year.

Okay, thank you.

Your next question comes from the line of [Mark Close] of Oppenheimer & Co. Please proceed.

Good morning. I wonder if you could give us a number on your D&A for the quarter? And also on the Tucson plant, would you expect production to be sort of closing in on expectation in sometime in Q1, and on Pueblo, we understand that that is now up and running efficiently?

Yes, you got three questions there. The first on Tucson, we expect to be at full production in the first quarter. We are getting production from -- full production at ARP. The challenge is right now on our sales group to continue to book it up. We had a backlog going in, and we are -- we have got great production levels and the challenge right now going forward is to get business in there. On the D&A?

D&A for the quarter, Mark, was around $1.5 million.

Thank you.

Your next question comes from the line of [Ken Grossman] of SG Capital Management. Please proceed.

Good morning, guys, good quarter. Can we talk a little bit about the bookings and the backlog? And given your view concerning Q4 and Q1, is it fair to assume that bookings and backlog should grow sequentially as we move forward?

That's a good question. We -- our activities are still strong; that would support improvements of bookings. Our bookings in the third quarter were approximately $100 million, which was up about 7% over last year. We've got some really good activity that's going into the fourth quarter. We expect to have similar improvements through the balance of the year. One thing that's been very exciting to us is that our backlog margins continue to expand and improve, and that should carry well into next year.

The backlog itself, if you look at the backlog, how long does it take you all to work through your backlog? Is it a year, 18 months, what's the maximum?

It really depends. It really depends. Some of our manufacturing backlogs can take up to -- sometimes, they drag out longer than a year. But, some of our threaded pipe, our piling, some of our rail businesses can turn very quickly. They can turn in 30 to 60 days.

What percent of your backlog is the turns business?

The piling business probably turns fairly quickly, and our backlog is at the -- at the end of the quarter was around 40 million, about 25% of our total backlog, and some of the Rail business, the rail distribution. Those are -- the three distribution businesses that we have, piling and relay rail and new rail, turn as quickly as our products that we have, and they probably are close to 45% of our backlog.

That's good. Good job, guys.

Thank you.

Appreciate the call.

Your next question comes from the line of Tom Spiro of Spiro Capital. Please proceed.

Good morning.

Hi, Tom.

Good morning, Tom.

Hi, Tom.

Congratulations on the strong quarter.

Thank you.

A question about the Tubular side, Stan, I thought I understood you to be saying that that's because we won a large order, the first shift is pretty well booked for '07 and that you are thinking of going to a second shift, am I right?

Well, we have -- this order really bodes well with what we are doing. I mean, typically the fourth quarter and the first quarter in our coated pipe businesses are too slow as they tie really right into the construction business. But, this gives us an opportunity to book that plant, which we effectively have done well into the third quarter on one shift.

But, you really -- I mean, we really have some upside opportunity with our partner, ACIPCO, if we can book into a second shift and we are looking at some of that. We have picked up some business, which will -- we think will either expand our hours in the first shift from eight to ten hours a day, or add a second shift. Right now, we'll probably go with one. But we really have an upside opportunity if we can put two shifts in there. We are working very hard to try to book it.

When was the last time you ran a second shift there?

Ten years ago?

It was the Northwest pipeline job. I don't remember the year though. It's been a while.

Wow, that's exciting. The piling rental business, I may have missed the number. I think -- Stan, I think you said that the average tons on rent were up 25%. Was it from this time last year or from Q2?

It's up from this time last year.

How is it trending versus the Q1 and Q2 this year?

Continues to go up. I don't recall what that exact rental number was, but it has continued to increase. We are in the process right now of shipping one of our biggest jobs that we've ever had. It's a job in Ohio and we expect to ship that through the balance of this year. And that business has been good. That was really a challenge for us when we came back online. Right now, I believe we've -- our rental inventory is up 12,000, 13,000 tons and we are very pleased with what the construction piling sales and management group has been able to do to really bring the awareness back and to get tonnage on rents.

I don't really understand the difference in the market between the sales and the rental, is it a different kind of job, a different kind of customer?

It's just the application. A rental application is temporary. It will -- the sheet piling will be driven, it will be used for retention or excavation. When the job is complete, they will pull it out, extract it, and will send it back to us and we will clean it and reclaim it, and use it, put in our inventory and send it out to another job that comes up down the -- in the future. Typically, we -- it varies on the usage, but we try to use anywhere from five to -- the sheet piling five to ten times. So, it's a nice profitable part of our piling overall business.

How does the size of our business today, the rental business today, compare to where it was back in the good years, what, must be six or --?

We get pretty close. Back in the mid-90s, when we were working with Bethlehem, our tonnages available to rent were fairly close. I think that we maintain in the 12,000 to 15,000 ton range.

Yes.

I noticed you guys mention that the SG&A is up for the quarter and the nine months. It's up pretty sharply, I think actually it's rising as a percentage of sales and I was kind of curious why that's going on?

It's actually -- it is a fairly sharp increase, but believe it or not, it's favorable to our plan. We've got two new facilities this year that we didn't have last year and that requires manpower. And there's administrative people and sales people to go along with those efforts and that's big piece of it, along with their costs and their travel and what have you. So, it is high but -- we had -- it brings a lot of those people on before we have recognized our first dollar of revenue that go along with it. So, we do expect that to begin to reverse itself in the fourth quarter, and we look to get a little better leverage next year.

I'm sorry?

I said we look to reverse that trend in the fourth quarter, and get some better leverage next year.

Thank you. A couple of cash flow questions. The company was cash flow positive in Q3. Do you expect to be cash flow positive again in Q4?

We do.

You do, okay. You've had a pretty good CapEx budget in 2006. I know it's a little early yet, but are there any major capital projects for '07 that we need to start thinking about?

We are thinking about some, but the CapEx projects will come if there is work related to it. And right now, that's something we are not ready to discuss.

Well, thanks much and good luck.

I will tell you, without a significant project, CapEx for maintenance certainly comes down.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

You have no further questions at this time.

Thank you, very much for all attending, and have a good balance of the year.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Good day.