L B Foster Co (FSTR) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q1 2007 L.B. Foster Earnings Conference Call. My name is Antoine, and I'll be your operator for today.

At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference.

[OPERATOR INSTRUCTIONS]

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

Thank you, Antoine. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company Earnings Conference Call to review the company's first quarter 2007 operating results. My name is David Russo, and I'm 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 Company's results, give an update on critical issues and discuss the 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 discussed today. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31, 2006, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster.

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 first quarter 2007 earnings call and webcast. Again, as stated in our press release, revenues and income in the first quarter were up substantially when compared to first quarter results of 2006. Results in the quarter were $110.7 million, up 32% from the same period last year, and income from continuing ops was $3.1 million, up 156% from last year. Both sales and income from continuing operations were record first quarter performances.

David will review the financials in more detail later, but first I'd like to discuss some of the first quarter highlights.

Let's start with rail. Our rail distribution revenues were up sharply in the first quarter. Sales totaled $34.6 million, up 36%. This track data, which shows domestic rail consumption on a 12-month rolling basis, totaled 1.1 million tons through January of 2007, which was up 17% from January of 2006.

We continue to believe our rail sales are tied directly to a key long-term strategic objective at all railroads, which is to resolve capacity constraints. Indications are that capital spending will remain strong at the Class 1 levels again this year. The Association of American Railroads is projecting this figure to approach $10 billion, exceeding by over 10% the record spend levels set in 2006.

Concrete tie demand is also up. Railroad Track Construction Magazine projects usage of concrete ties to be up 27% this year. Despite challenges at Tucson in the first quarter, we expect our total tie production to increase over 30% in 2007.

Regarding Tucson, we have been disappointed with the progress to date. Struggling through initial construction delays caused by permit problems and, more recently, concrete mix design issues, we have, in effect, lost eight to ten weeks production. In the past five -- four weeks, however, we have made significant progress, and the 25,000 ties we expect to produce at Tucson in April will be our best month to date.

We expect to follow April production with 30,000 ties in May and 35,000 ties in June. I can assure you that, from an operational standpoint, achieving success at Tucson is our top priority.

The other two operations of CXT rail are doing very well. We hit 40,000 ties at Grand Island last month for the first time, and at Spokane revenues in the first quarter were 15% ahead of last year.

In construction products, overall sales totaled $41.1 -- $41.4 million in the first quarter, which was up 21% from last year with our precast building groups leading the way. Their revenues were up 100% for the quarter. Revenues for the rest of construction were mixed. Piling was up 23%, and fab products was down 21%. The bright spots in fab products were booking and backlog. Bookings were $10.2 million, [61%] ahead of the first quarter in 2006, and quarter-ending backlogs stood at $22.8 million for fab products, which was 22% ahead of the quarter end 2006.

Indications are 2007 will be another banner year in the heavy and civil construction industry. First, passage of safety will continue to be implemented. On February the 14th, Congress authorized the 9% increase on federal highway spending for the current fiscal year. And as initially discussed in that fourth quarter 2006 webcast, reconstruction data continues to project non-residential spending to increase another 12% this year on the heels of last year's 13% increase.

In tubular products a strong backlog in both our coated and threaded segments entering 2007, coupled with an exceptional first quarter in threaded pipe where we threaded an average of nearly 10,000 pieces per month -- which, by the way, is our best quarter in over ten years -- led to a 54% increase in revenue for tubular.

We expect to see continued strength in tubular throughout the year because, number one, bookings in the quarter were $10.3 million compared to $6.8 million for the first quarter last year. Quarter-ending backlog stood at $14.7 million compared to $4.3 million at the end of 2006. The bulk of this backlog is from the coated division in Birmingham, where we expect to coat over 24 million square feet this year, which will surpass our previous best at that facility of 22.4 million square feet.

In conclusion, as we have stated in the past, we continue to be upbeat about the future. First quarter bookings were $172 million, our best quarter since becoming a publicly traded company in 1981, and backlog on March 31 stood at $172.5 million, which is 43% ahead of last year. These revenue numbers aside, I can assure you that the major focus of management is on continued margin expansion and bottom line improvement, which will drive overall performance and enhance shareholder value now and in the future.

A little side note before I turn the webcast back to Dave for the financial review. We're excited about our 25th anniversary as a public company, and to celebrate, senior management will be traveling to New York on May 7 to ring the closing bell at NASDAQ. And now I'd like to turn it back over to David for the financial review.

Thank you, Stan. Sales for the first quarter of 2007, as Stan alluded, to were $110.7 million compared to $84.2 million in the prior year, a 32% increase, which we were able to convert into a 156% increase in income from continuing operations. The sales increase was due principally to a 37% increase in rail product sales, 21% increase in construction product sales and a 54% increase in tubular sales compared to last year's first quarter.

This quarter's sales volume follows a very strong fourth quarter that was coincidentally also $110 million sales quarter. Tubular sales increased due to increases in both coated and threaded product sales. The energy market served by our coated division has been robust for the past two years, and we expect that strength to continue into 2008 and beyond. Our threaded division has rearranged its Houston facility, refurbished its critical equipment and has entered the OCTG and micropile markets, which have successfully mitigated the seasonal swings experienced in the municipal and irrigation market.

The construction product sales increase was due to continued sales increases in piling of 23% and in concrete buildings, where sales doubled over last year's first quarter. Our fabricated products group, however, as Stan mentioned, experienced a sales decrease due to the completion of a large job in our bridge division that was in full swing last year while our Precise Division in Boston continued its strong performance from last year. Bidding activity has been reasonable, but we have a few holes in our production schedule in our decking business that will present some challenges in 2007.

The first quarter rail sales increase was driven by rail distribution, transit products and to CXT ties. Concrete tie sales were well ahead of last year, but less than we expected as Grand Island volumes were strong, but problems at Tucson, which we have discussed, kept us from hitting our first quarter targets. First quarter tie production was up over 40% compared to last year, keeping in mind that Tucson wasn't in production last year. Excluding Tucson production, total tie production was still up 12%.

Our Grand Island team really rang the bell this quarter and turned in an excellent performance culminating with an outstanding March result regarding production, quality and productivity. Our Grand Island and Tucson facilities are booked out for the Union Pacific Railroad for 2007. In Spokane, we are producing concrete ties for other tracks on railroads, transit authorities, contractors and industrial customers, and we continue to experience strong inquiry and bidding activity.

As a percentage of consolidated sales, tubular accounted for 6%, construction 37% and rail was 57% of the total. Gross profit margins were 12.8% in the first quarter, an increase of 120 basis points from last year's first quarter. The positive margin expansion this year compared to the prior year was due to a significant increase in product profit of standard before plant and other variances and increased favorable purchase price variances. These favorable conditions were offset by an increase in net plant expenses, increased scrap and obsolescence costs and increased LIFO expense in the first quarter of 2007.

As I mentioned, net plant expenses did increase in the first quarter primarily due to the Tucson, Arizona, concrete tie plant and the ARP rail plant in Pueblo, Colorado. Tucson alone accounted for 70% of the quarter-over-quarter increase in unabsorbed plant costs. One of our highest priorities is to reduce these costs via increased productivity and decreasing the spend where possible. The businesses that drove the margin improvement in the first quarter were concrete buildings, fab products, tubular, transit products and pilings.

SG&A expenses increased 8.7% to $8.4 million in the first quarter of 2007, due primarily to personnel-related costs including salaries and incentive pay. SG&A represented 7.6% of sales in the first quarter of '07 as compared to 9.2% of sales in last year's first quarter, demonstrating some nice leverage at these sales levels. As a result of the foregoing, first quarter operating income was $6 million compared to $2.5 million in last year's first quarter, a $3.5 million or 141% improvement. As a percentage of sales, operating income was 5.5% in this year's quarter versus 3% last year.

Interest expense was $1.2 million in the first quarter of '07 compared to $0.7 million in 2006, an 84% increase principally due to higher average borrowings and, to a lesser extent, increased interest rates.

As we have stated on previous calls, average borrowings have increased due to significant investment in plant and equipment over the past year and due to increased investment in working capital. The year-to-year rate comparison has substantially flattened out, as rates have not changed substantially since June of 2006.

First quarter pre-tax income from continuing operations was $4.8 million compared to $1.8 million in last year's first quarter, a 152% increase. The first quarter 2007 income tax provision was 35.9% compared to 34.4% in last year's first quarter. The increase was due primarily to higher anticipated income and to releasing a larger portion of the valuation allowance provided for state deferred assets in 2006.

Income from continuing operations increased 156% to $3.1 million or $0.28 per diluted share compared to $1.2 million or $0.11 per diluted share last year.

As you may recall during the first quarter of last year, we sold our former Geotechnical Division, which is reported in the earnings release as discontinued operations in both periods presented. The transaction generated a pre-tax gain on the sale of approximately $3 million, which is why income from discontinued operations is significantly positive last year and why net income is higher in the first quarter of 2006 than 2007 as net income includes both income from continuing operations as well as income from discontinued operations.

Turning to the balance sheet, debt at the end of the first quarter was $69.1 million compared to $58.1 million at the end of 2006. The $11 million increase during the first quarter was principally due to $7.8 million of cash used from operations and $1.5 million of capital expenditures.

In 2007, we anticipate capital expenditures to be less than $10 million and also expect to generate positive cash flow from operating activities. Debt as a percent of capitalization was 41% compared to 37% at the end of '06. Our leverage ratio is approximately 2.34 to 1, and our interest coverage remains strong.

With regard to working capital, accounts receivable and inventory net of accounts payable increased by approximately $11.2 million in the first quarter of 2007. Accounts receivable decreased by $4.4 million from December of 2006 to March of '07. DSO was 45 days at the end of March compared to 46 days at 12/31/2006. We believe our accounts receivable portfolio is in excellent condition. Inventory, however, increased $10.3 million during the first quarter of 2007. The majority of this increase was in the piling business and, to a lesser extent, rail distribution.

In summary, we are pleased with the continued improvement demonstrated by these results. We have only 690 employees working at the company, and each one of them plays a daily role in the continuous improvement challenge that L.B. Foster has, and their efforts are very much appreciated. We continue to believe that our strategies are sound and that we have the right people to get it done.

That concludes my comments on the first quarter of 2007, and we will now open the session up to questions. Antoine?

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Rob Damron with 21st Century Equities. Please proceed.

Good morning, guys. Outstanding quarter.

Thanks, Rob.

Thanks, Rob.

I wanted to talk a little bit more about -- you put together these fabulous results, but yet you really didn't even hit on all cylinders. And just wanted to talk about some of the cylinders that didn't fire completely this quarter, including the Tucson facility, the Allegheny rail products and also the fabricated products. It appears that those three were kind of your underperformers, and maybe you could just take us through where you are in the process of getting those to where you want them to be?

Yes, Rob. Really, as we have talked, those -- operational excellence is really at the top of our list for challenges and room for improvement this year.

Our negative variances at the plant level was $1.5 million more in the first quarter this year than it was last year, which was disappointing to us. A large part of that did come -- in fact, most of it -- well, almost two-thirds of it came at Tucson. We did not have a good quarter, as both David and I alluded to. I think we produced only 51,000 ties there in the quarter.

March was not a good month. In fact it was a bust. We have had challenges with permitting. But more recently, as I said, with the -- the challenges with the mix design of the concrete. We think we've got our arms around it. We expect to continue -- our expectations are to produce 90,000 plus ties in the quarter -- in the second quarter, which is up substantially. We expect most of that to go away.

And to your point on a couple of the other facilities, performance at Pueblo is improving. We have made a number of changes at the plant level. The volumes are starting to come in. We saw a marked improvement in March over January and February. We continue to -- we expect to see that continue in the second quarter.

We did have some other challenges at our Niles facility, where we do -- we do a couple of products up there that are rail related. We do some ARP work up there with a plug line, and we do some transit line, some work up there with third rail -- power rail applications, and we do some industrial track work. We've made some changes up there in management, and we think that we have got our arms around that. And we'll continue going forward with improvements in that area.

Regarding the fab products, it was -- it was not a good quarter across the board from an operations standpoint. As I did say in my remarks that volumes from a revenue standpoint are down. We've got some good works that we're looking at. Precise, the latter part of the second quarter should fill up, and we've got a backlog up there, Rob, of a little over $15 million, which is almost twice as much where we were last year. And we expect the third and fourth quarter to be really strong there.

We're going to be weak in the second quarter at Bedford. We've got some work on the books. Our backlog is a little bit less than it was last year. I think our backlog is a little over $7 million. Last year at this time it was around $9 million.

Most of that work -- the problem is in second quarter we've got a couple of jobs that are coming online, which should make the third and fourth quarter. So in fab products, we expect to be a little weak yet in the second quarter, but we expect that to pick up in the last half of the year.

A couple of other things, this typically is our slow period in building. Though we had great revenue, it's usually from a production standpoint. It's a little slow. Our second and third quarters are our best quarters there, but we expect to make some huge gains to mitigate those costs going forward for the balance of the year.

Rob, just to make sure we're clear, the fab products that Stan and I both mentioned did have a 21% decline in revenues. But they had a substantial increase in gross profit margins, so that even though we didn't put it on the top line, it actually had improved bottom line results compared to last year's quarter.

Okay, that's helpful. And then I wanted to ask about the seasonality of the business. Typically Q4, Q1 are your weaker quarters, but you've really put up some very strong numbers in both Q4 and Q1. So if we look out into what is your -- typically your stronger quarters, Q2 and Q3, should we expect the same kind of seasonal improvement from Q1 to Q2 and Q3 this year?

It's hard to say. The seasonal improvement as -- you're absolutely right. Our fourth quarter and our first quarter typically are our two weakest quarters. Whether we have that improvement on the comps compared to the previous year, it's going to be hard to say. But we do expect second and third quarters to be strong.

Okay, that's helpful. Thanks.

Your next question comes from the line of Mark Close with Oppenheimer. Please proceed.

Good morning, gentlemen. A couple of questions. One is on the fabricated products, you talked about putting that segment under strategic review, and I wondered if you could kind of update us on that? If I understood Stan's response also to Rob's question, did Tucson costs us about a million in the quarter? And I also wondered, if Lee's available, if he could give us a little update on DM&A?

Okay, Mark. Question number one. We do continue to take a look at the strategic appropriateness of the fabricated products group. We are reviewing that. The group, however, as I just clarified with Rob, was profitable in the first quarter. So we're certainly looking to maximize value, whether that is a sale of one or both of those businesses or based upon the improvement that they are showing and our projection of what their cash flows may be retaining those businesses. So that's still an open issue with us right now. And I apologize, your next question?

The other one was the plant. That plant was a million dollars more -- our variances this year were a million dollars higher -- negative earnings at the plant were a million dollars higher than they were last year. We were just starting to construct it, though, last year, too. And yes, Mr. Foster is here.

Yes, Mark, I wish I could help you out on this. But since the announcement in February regarding the turning down of the FRA loan, there really hasn't been any public information regarding the DM&A, and our policy has always been not to discuss non-public information relative to that private company.

Okay, thanks. I just wanted to have one follow-up on the Pueblo plant and the insulated products generally. Is the problem there one of capacity utilization? That is, are you not getting the order flow that you expected, or is it more production related?

Both. I think initially we had some problems both on -- that were production related in getting the flow of orders. The flow of orders is starting to improve, and I tell you at the same time we're getting improvement also from an operational side.

So both of those have been issues in the past coming on, and they both are improving and we expect to improve second quarter performance. We did have a good March at Pueblo, by the way, relatively speaking, compared to January, February and the fourth quarter last year. So we're doing some things that are from a production standpoint that will really improve the flow out there, Mark, we think.

Okay. Thanks a lot.

You're welcome.

Your next question comes from the line of [Edward Davijian] with Financial Services. Please proceed.

Good morning, gentlemen. And Stan, congratulations to you and your team on another blowout quarter.

My question relates to Chaparral. It's really taken years for this relationship to mature and to have a dependable flow of sheet piling. With Chaparral's recent announcement looking for a strategic alternative, I've got two questions. One, how far into the future is this source of supply secure? And two, what worries you the most about the announcement?

Well, just let me, to begin with, bring everybody up to date on the announcement that Chaparral had yesterday, where they -- and Chaparral, of course, is our sheet piling supplier. We have experienced over the last four years remarkable growth in that product. Last year we ended up in the neighborhood of just over $130 million in sales, and working through Chaparral has been a large part of that.

Chaparral made the announcement yesterday that they had hired Goldman Sachs to consider a range of strategic alternatives including partnerships, acquisitions, a possible sale or recapitalization. Whatever we would say would be pure speculation at this time. There's a number of different directions that this could really go, Ed. What we do know is that we have an excellent reputation throughout the country and in the industry. We have an excellent relationship with Chaparral. We bring them value every day. We would expect to carry that same value commitment forward whatever the case may be for piling in the future.

And with that said, as far as specifically to your question, how far out could we go? I mean, we just -- we heard about this yesterday. We do -- as far as from a buying standpoint would have an opportunity to build inventory further than what they are, and we would expect to -- whatever happens I think is just pure speculation, Ed.

But do we have agreements with them that regardless of who the acquirer was, that we would have a steady source of supply or could it be cut off rather quickly?

The agreements do have cancellations rights, Ed, that they -- and I don't know exactly what they are. But that agreement can be canceled within a certain amount of -- giving a certain amount of notice, and it's not a significant length notice period.

Okay. Thank you.

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

Tom Spiro, Spiro Capital. Good morning, everyone.

Hey, Tom.

Congratulations on such a strong Q1.

Thank you.

I'm a little curious, with the business generally as strong as it is, I wonder if the margins within your backlog for given product lines are higher than they might have been a year or two ago?

Tom, this is Dave. How are you? That's a good question. And yes, they are. Although it's not something we typically disclose, but in general, yes, they are higher.

And what's your outlook for your various raw materials? You mentioned you had a LIFO charge in Q1. How do the raws look as you go forward?

Well, scrap prices had been down again. There has been quite a variance between structural prices and scrap prices, but they've come back pretty much in lock step again. And we expect that -- we expect prices to be -- we're not seeing a lot of upward push on prices. We expect it to be relatively flat, I think, with moderate -- there's nothing out there that really is scaring us.

We do have inventory, which David talked about, in rail and in pilings. A lot of the rail inventories were built up. We did have an exceptionally strong first quarter, and we're coming into our busy season. We expect that the add to inventory to diminish somewhat in second quarter and the same for piling. But as far as pricing pressures, we don't really expect any.

Do you expect the company to be cash flow positive in Q2?

Yes, we do, Tom.

Yes, we do.

And lastly, I was curious also about the capacity issues. With so much backlog, so much business, are there bottlenecks within the system that we need to begin to address?

Really, we're open at -- we've got plenty of capacity in bridge. As I said precise in the fab side of it is going to be really busy in the second half of the year. Our pipe business, coated work, as I talked about, is booked on 12-hour days well into October, and threaded is doing very well. We've got a strong backlog there, and our production is -- like I said, is at record levels. And we've really done a lot there to improve production capacity.

In the tie side of it, we're going to be up and going at Tucson, and we're really booked there. We've got the same. David said with the Union Pacific that we have got both facilities booked.

Looking out, we brought in -- part of our CapEx spend in the first quarter and in the first half, we'll be adding another line of capacity at Grand Island, which will -- could go both ways. It would really, first off would be to serve the Union Pacific with their needs, but also take care of ethanol, biodiesel, industrial applications and transit applications in the Midwest. But we've got -- it's a real good problem, but we're not at that point yet. But we've got available capacity just around -- just about across the board.

Stan, do you feel that you've got the concrete -- the issue resolved in Tucson, that you've got the right mixture and supply?

I think with the mixture we do. I think we've -- we've moved around in the supply, Tom. We've had some problems with the aggregate, and we think we've got that resolved.

We're up to six beds consistently. We expect to be up to seven beds and getting our break times. And we're talking about going from 12 hours, and we know that we have to get up to eight beds a day, and we need to get up to eight hours from a break time standpoint. We're getting the compression strengths. We're getting the cohesion strengths.

Our ability to make concrete because of some of the challenges that we've had, we've got our arms around. I think that our people down there Jim McCaslin and [John Castle] and his group have really stepped up to the table and really got their arms around. There's a lot of people that have put a lot of time and a lot of hard work. And as I said, we're going to have the best month that we've had down there in April. We expect to produce 25,000 ties, and we're looking for 30,000 to 35,000. And right after into the third quarter, we need to be up between 35,000 and 40,000 ties consistently, and there's challenges, but we've got our arms around it very well, we think.

What's the rated capacity per month? You mentioned 25, 30, 35. What in theory can you do?

I think we would be maxed out at an annual basis of 440 to 450. I mean, that's pretty much what we look at. And so where we got -- we just had an exceptional month because of 31 days left last month, and Grand Island where we cranked out 40,000. We've got a day left this month, and we're going to probably do 38,000. But you could lose a bed. I mean, certain things really happen. But we need to be at -- we need to be looking at 37,500 ties a month.

Well, thanks much. Good luck and congratulations on your 25th anniversary.

Thank you.

[OPERATOR INSTRUCTIONS]

There are no additional questions at this time.

Well, thank you all and look forward to talking with you in July.

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