L B Foster Co (FSTR) 2007 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Second Quarter 2007 L.B. Foster Earnings Conference Call. My name is Shirelle and I will be your facilitator for today.

(OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host, Mr. David Russo, Chief Financial Officer. You may proceed, sir.

Thank you, Shirelle. 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 2007 operating results. My name is David Russo and I am 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 second quarter performance, give an update on critical issues and discuss business conditions. Afterward, I will review the earnings press release, issued earlier this morning, before we open up the session for question.

The 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 on that website 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 10K 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 Company to not provide specific earnings guidance. With that, we will commence our discussion. And I will turn it over Mr. Stan Hasselbusch.

Thank you, David. And thanks to all of you for attending our second quarter 2007 Earnings Call and webcast.

This morning, we announced record performances in both revenues and earnings in our second quarter. Sales in the quarter were $148.5 million, 50% of last year. Net income for the quarter from continuing operations was $6.8 million or $0.63 a share, 117% ahead of second quarter 2006. David will drill down into the financials later, but first I'd like to discuss some of the second quarter highlights with you. Overall, we had strong performances in all of our operations.

Let's start in rail, where Sam Fisher and his group drilled up revenues on the distribution side 89% to $46.9 million for the quarter. This coincides with reported domestic consumption levels of new rail, which exceeded 1.1 million tons on a rolling 12-month average through April 2007. This was up 27% from April of 2006.

In rail, we also had strong performances in the manufacturing sector. In Allegheny Rail, our sales group has reached out and done an excellent job bringing in new accounts to increase volume in both our new Pueblo facility and our recently retrofitted Niles plant,

The results of the quarter was $5.3 million in revenue, which was 47% of the 2006 period. Transit products remained -- revenues in the quarter were $7.1 million, 54% ahead of last year, an historical best for the product.

One of the challenges we have in the second half of the year in transit is to overcome the slow bidding activity we experienced in the first half. In the next few months, we are bidding a number of major products which are critical to ensure strong performance in 2008.

Sales in concrete ties were also higher in the quarter, up 30% over second quarter 2006. Although this was due, in part, to the contribution of our new Tucson facility, we continue to struggle with production at that location.

In the past, we have worked through permitting, construction and concrete-mix issues, which have been resolved. Though, most recently, we have encountered hourly turnover problems. Tucson produced 79,000 ties in the second quarter, short of our forecast of 90,000. We are diligently working on these issues and expect to produce 95,000 ties at this facility in the third quarter. As a Company, we are online to produce in excess of 1 million ties for the year.

The other side of concrete -- our pre-cast building division -- generated revenues of $9.3 million in the quarter, 41% ahead of last year. Our quarter-ending backlog stood at 19.7 million, which is 35% of last year. This growth can be attributed to an expanded sales force, as well as basic change in our core market over the past three years, moving from the National Forest Services to the state and municipal sectors, which are growing due to enhanced spending programs.

In piling for the quarter -- excuse me -- and piling sales for the quarter were 40% of last year. Kudos to Don Foster and his team, led by [Gary Wheeler], [Jim Meyer] and [Alan Sirrapus].

Regarding the impending sale of Chaparral to Gerdau Ameristeel, let me say this -- the strategic partnership between Chaparral and L.B. Foster Company began in late 1998 to address the growing need of sheet piling in North America.

Initially, we at Foster contributed a highly proficient sales-and-distribution team to develop these opportunities. Chaparral added its product development and manufacturing expertise. Since then, L.B. Foster has continued to invest in this relationship by adding resources to our national sales team, along with regional stocking locations and enhanced marketing and technical capabilities.

L.B. Foster has been adept in converting the market to the more efficient PZC sheet pile sections and expanding its use in both public and private sectors. The L.B. Foster Company-Chaparral alliance has created considerable value for both companies, and we expect to do the same going forward with Gerdau in the future.

Continuing with construction -- in [fair] products, revenues were down for the -- were actually down for the quarter, 35%, to $4.4 million. But income was flat compared to the second quarter in 2006 because of higher selling margins and lean implementation at both our Precise and Bedford facilities.

We have seen an increase in bidding activity this year, as more work related to the transportation bill is released. Backlog at quarter end stood at $23 million in fair products, 45% ahead of the second quarter end in 2006. We expect this to bode well for fair-products performances in the second half.

Last but not least on the product side is tubular. Revenue in tubular was $10.4 million in the quarter, 82% ahead of last year, on the strength of exceptionally high volumes at both of our facilities.

At our Birmingham plant, for example, we coated 9.5 million square feet, a record production level during the 15 years that we've been at that facility -- an excellent performance by Merry Brumbaugh, [Tim Shayson], [Gary Forester] and the entire tubular group. We expect the strength of our energy and water markets to continue to drive exceptional results in the future.

From a consolidated standpoint, our outlook for the second half is very good. With a strong backlog and continued market strength, we fully expect to exceed the numbers we posted in the second half of 2006. I'd like to close by saying that the growth of L.B. Foster -- has experienced over the past few years -- was only made possible by the hard work and dedication of our over 700 employees. My sincere appreciation for their contribution goes out to all of them.

To our fellow share stakeholders listening today, let me assure you that these dedicated employees will continue to focus on driving profitable growth and creating improved value to you in the future. And now, I'd like to turn back to David for our financial review.

Thank you, Stan. Sales from the second quarter of 2007, as Stan mentioned, were $148.5 million, compared to $99.3 million in the prior year, a 50% increase, which we were able to convert into a 122% increase in income for continuing operations.

This represents a record quarter for the L.B. Foster Company. The sales increase was due to a 66% increase in rail-product sales and a 29% increase in construction-product sales and an 82% increase in tubular sales, compared to last year's second quarter.

This quarter's strong sales follows a robust first quarter and fourth quarter of last year. And while we anticipate that the second half of 2007 will exceed the second-half results of 2006, we believe that the second quarter will prove to be the strongest quarter of this fiscal year.

Tubular sales increased due to growth 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 OTCG market, as mentioned last call, and the [micropower] markets. This incremental business has successfully mitigated the seasonal swings experienced in the irrigation markets.

The construction-products sales increase was due to a 40% increase in piling and a 41% increase in concrete-building sales. Our fabricated products group, however, experienced a 36% 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 and from the first quarter.

The second quarter rail-sales increase was driven by rail distribution, transit products, Allegheny Rail products and the CXT tie sales. Concrete-tie sales were well ahead of last year's second quarter, as Grand Island volumes were strong and Tucson was much improved, but it is not where we want it yet.

We have made substantial improvements in Tucson over the past several months, as Stan has mentioned, with the equipment functionality and the concrete-mix design. But as Stan has discussed, we have been hit with workforce turnover issues during the latter half of the second quarter that hampered our production capacity.

This appears to have been caused by increased competition for skilled and unskilled labor, as new businesses have entered the area that are paying higher wages. This has been especially detrimental to our Tucson facility, as we have fewer seasoned workers to backfill and train, since it is still a relatively new operation.

In spite of this additional challenge, Tucson tie production increased by 54% over the first quarter of this year. And we expect another 15% to 20% increase in Q3. Total CXT tie production for the second quarter increased 32%, compared to last year's second quarter, keeping in mind that Tucson wasn't in production last year. Excluding Tucson production, tie production was down 8% due to decreased production in Spokane.

Our Grand Island team turned in another outstanding performance this quarter, resulting in the highest production quarter ever, while keeping efficiency high and rejects at historic lows. They are still on track to produce the 1 million ties that we projected during our first quarter call.

Our Grand Island and Tucson facilities continue to be utilized entirely for the Union Pacific Railroad for 2007. In Spokane, we are producing concrete ties for other class-one railroads, transit authorities, contractors and industrial customers. And we continue to experience strong inquiry and bidding activity.

As a percentage of consolidated sales, tubular segment accounted for 7%, construction 40%, and rail was 53% of consolidated sales. Gross profit margins were 14.3% in the second quarter, an increase of 80 basis points over last year's second quarter. The positive margin expansion this quarter compared to last year was due to an increase in gross profit at standard, before manufacturing and other variances, and increased favorable purchase-price variances, which was partially offset by increased scrap and obsolescence costs and increased LIFO expense.

The businesses that drove the margin improvement in the second quarter were tubular products and Allegheny Rail products, primarily. While manufacturing variances did increase in the second quarter, they decreased when measured as a percentage of sales.

The increased variances were primarily at the Tucson, Arizona concrete tie plant and the Spokane concrete facilities, offset by significant improvements in the coated and Allegheny Rail facilities. Tucson tie plant manufacturing variances, however, did improve by 66% over the first quarter, and we expect continued improvement into the second half of 2007.

SG&A expense increased 13% to $9.8 million in the second quarter of 2007, due primarily to personnel-related costs, including salaries and incentive pay. SG&A represented 6.6% of sales in the second quarter, as compared to 8.7% of sales in last year's second quarter and 7.6% in the first quarter of this year, demonstrating continued improved leverage at these sales levels.

As a result of the foregoing, second quarter operating income was $11.8 million, compared to $5.2 million in last year's second quarter, a $6.6 million or 127% improvement. As a percentage of sales, operating income was 7.9% in this year's quarter, versus 5.2% last year.

Interest expense was $1.2 million in the second quarter of 2007, compared to $0.9 million in 2006, a 38% increase due to higher average borrowings. As we have stated on previous calls, average borrowings have increased due to a significant investment in plant and equipment and in working capital over the past year.

Interest expense in Q2 did, however, decrease slightly from Q1, as we generated meaningful positive cash flow during the second quarter. Second quarter pre-tax income from continuing operations was $10.6 million, compared to $4.3 million in last year's second quarter, a 145% increase.

The second quarter 2007 income-tax provision was 35.5%, compared to 29% in last year's second quarter. The increase is due, primarily, to higher anticipated income and to releasing a portion of the valuation allowance provided for state-deferred assets in 2006.

Income from continuing operations increased 122% to $6.8 million, or $0.63 per diluted share, compared to $3.1 million, or $0.29 per diluted share last year. Turning to the balance sheet -- debt at the end of the second quarter was $55 million, compared to $69.1 million at the end of the first quarter and $58.1 million at the end of 2006. A $14.1 million decrease in debt during the second quarter was principally due to a $12.4 million of cash generated from operations.

Capital expenditures in the second quarter were $1.3 million and $2.8 million on a year-to-date basis. In 2007, we continue to anticipate capital expenditures to be less than $10 million. We also expect to generate positive cash flow from operating activities during the second half of this year.

Debt as a percentage of capitalization was 34% at June 30, compared to 41% at the end of Q1 and to 37% at the end of 2006. Our leverage ratio was approximately 1.5 to 1, down from 2.3 to 1 at the end of March 2007 and the end of 2006. And our interest coverage strengthened as well.

With regard to working capital, accounts receivable and inventory net of accounts payable was relatively flat in the second quarter of 2007, as compared to the end of the first quarter 2007. Accounts receivable increased by $13.1 million from March to June. DSO was 42 days at June 30, compared to 45 days at March 31. We believe our accounts receivable portfolio to be in excellent condition.

Inventory decreased $5.5 million during the second quarter of 2007. This improvement was driven by a $13 million decline in rail inventory, and was partially offset by an increase in piling inventory. In summary, we are pleased with the continued improvement demonstrated by these results. We have not much more than 700 employees working at the Company, and each one of them plays a big 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 second quarter. We will now open up the session up to question. Shirelle?

Thank you. We will now begin the question-and-answer session.

(OPERATOR INSTRUCTIONS)

And our first question comes from the line of Rob Damron of 21st Century Equity. You may proceed.

Good morning, guys -- outstanding quarter.

I wanted to talk a little bit more about the Tucson facility. I believe you mentioned on your last-quarter conference call that the Tucson facility lost about $1 million during that quarter. I was wondering if you could outline the profit or loss in the second quarter; and then, based on the expectations for the third quarter, where you think that -- the profit or loss might be for that facility.

Rob, this is Dave. Thank you, by the way, for the comments. We almost cut that loss in half in the second quarter and, certainly, expect to improve upon that again in Q3, although we're not really at an opportunity to indicate how much that will be.

Okay. And then you did mention on the gross margins -- they expanded in two of your segments. But in the rail segment, you saw a decline, at least year-over-year. I guess it makes sense that the concrete-tie margins are down versus last year because of Tucson, but how about on the distribution side? What happened there that created a little lower margin?

You know what? It's actually -- to me, is a -- margins were down in both of those areas, as we reported. But I'll tell you what -- the rail-distribution group just had a blowout quarter. I mean, their volume was just so high that at that point, you're going to get some deals if you want to remain as big a force as they are in the marketplace that are lower margins. But overall, we believe their performance was excellent. And the margin decline was not that significant.

Yes. As we've discussed, Rob, in the past, this year is a transition year for rail distribution. And our rail-distribution group has just, you know, really stepped out. We've try to make buys where we could. We've gone all over the world, as we've discussed before, to bring in inventories. They've been managing inventories and really generating sales and just did a hell of a job in the quarter.

Okay, excellent. And I wanted to talk about the -- your agreement with Chaparral -- and talk about that agreement. And then, has there been any indication from the new owner that there could be any potential change in that agreement?

Well, I guess -- the Chaparral agreement is confidential. And we have not and will not discuss that. But we have -- we have talked with Chaparral, with Gerdau Ameristeel. Consummation of that acquisition is expected to be concluded in the first part of the fourth quarter.

We have not, at this point, talked with Gerdau. We expect to do so in a timely manner in the very near future.

Okay. That's helpful. And then, Dave, you did mention you thought Q2 would be the strongest quarter for the year. Was there any one-time events that really made Q2 exceptionally strong? And as we look into Q3 -- usually Q3 and Q2 are fairly similar kinds of quarters. I guess, what variance would you expect going into Q3 versus Q2?

Rob, there's nothing that we would point to that we view as exceptional in the second quarter. It was catching up with some of the backlog and, especially -- we talked about rail distribution. That's -- a lot of customers want to get that rail delivered early in the year so that construction can start and they can get that done. So Q3 and 4, as we mentioned, in total, we expect the second half to be better than 2006 second half. But you know we don't comment on each individual quarter.

There was -- there was just a lot of activity, Rob, in new rail in the first half of the year. And we were buying inventory, which ran our inventories up. And we were -- had a lot of sales in the regional-rail business -- [shorelines] active in the transits -- just throughout there was just a lot of activity -- ethanol plants, which we talked about in the past -- biodiesel and ethanol plants.

That activity will slow down, we're forecasting, in the second half of the year. It's traditionally stronger in the first half, but we had an exceptionally strong first half. So as I look, I guess, in the second half, with our rail distribution -- that that revenue generated would be more in line with plan, which is probably about 30% to 40% less from a revenue standpoint than we did it in the first half. But at the same time, corresponding with that, we'll be able to reduce inventories.

Okay. That's helpful. And congratulations on the great quarter.

Thanks, Rob.

And now our next question comes from the line of Mark Close with Oppenheimer & Close. You may proceed.

Good morning, gentlemen. Just a question, again, on the fabricated products -- you've often mentioned that that segment has been [under strategic] with you. And I wonder if you could give us any update on that or what your thinking is. Thanks.

We -- the market has picked up. As I indicate, our backlog is strong. We've got just an exceptional backlog at Precise. We've got some really nice work that's bidding at Bedford, which will bode well for the balance of this year and the next year. It's something, strategically, that's still under review, but there's nothing that has been definite going forward on that.

We're certainly not out there looking around at this point, Mark.

Okay, thanks.

(OPERATOR INSTRUCTIONS)

And our next question comes from the line of Tom Spiro of Spiro Capital Management.

You may proceed.

Good morning.

Good morning.

Hi, Tom.

Boy, that's a super quarter. Congratulations to the whole team.

Thank you.

A couple of questions -- one, just to clarify a little bit on the fab side -- is the backlog at Bedford or are the bidding opportunities at Bedford strengthening, or is it really Precise that you're referring to?

Backlog is at, really -- we've got an improved backlog at both facilities, but the bulk of the strong -- the improved backlog is actually at Precise, Tom.

Bidding activities has been strong all year at Precise, up in Boston, and we expect that to continue. We have done a pretty good job booking business at Bedford. We've got a couple big jobs that we're -- that have been delayed through the second quarter that are coming back out to bid in the third quarter, which, really, were looking at very hard for the balance of this year and into next year.

I see.

Yes, we --

Secondly -- I'm sorry? Secondly, could you give us an update on the new Pueblo facility?

Yes.

The new Pueblo facility did very well in the quarter. I think it was really a part of when we talked about operational improvements throughout. We made some great strides. We -- as I said, our sales group has really brought in a lot of business.

We're reaching the -- we're reaching the -- we're reaching the production levels that we expected, getting close to some of the efficiencies that we actually need, Tom, but we're very pleased with what's happened out there.

Did it run at much of a negative variance or was it pretty close to standard?

Pretty close, yes.

There was no negative variance this year -- or this quarter, I should say.

Well, that's great. That's great.

And how about an update on the piling rental business, please?

Piling rental business is still going well. I mean, I -- from a numbers standpoint, it's pretty much steady from where it's been the last year, Tom.

And lastly, the acquisition environment -- what's it look like out there?

Well, as we've talked in the past, we have reviewed with the board strategic alternatives. We have really concentrated the last five years on our core businesses, our balance sheets, driving profitability. And we'll continue to do that.

We think that from that standpoint that there's still -- that there's still organic growth that's really out there. But we are looking and we've got our eyes wide open to see what's out there. And there's a number of companies that, quite frankly, are on the radar screen -- not close to finalizing any of them. But that -- we are actively into that market.

It would seem like you've got a fair amount of fire power. Your CapEx depreciation are roughly equal. Your earnings are strong. I gather working capital is going to come down a bit in the second half. Am I missing something?

No, you're not.

Good luck. Thank you.

Thank you.

And our next question comes from the line of Beth Lilly of Woodland Partners. You may proceed.

Good morning.

Hi, Beth.

Good morning.

I have -- there's two questions. The first question is -- you are experiencing tremendous margin expansion. And in this most recent quarter, your operating margin as a percentage of sales is over 7%. Can you talk about -- I know you don't give guidance -- but can you directionally give us a sense -- do you anticipate that you can sustain that 7% level over -- on a six-month basis, it was 5.6%.

So do you think, over time, you can keep the 7%? Or where do you see that number going?

That's a good question, yes.

I think -- this is Stan speaking -- that we are continuing to -- we are continuing to see operational efficiencies at the plant which will continue to help that. And as we see into the second half of the year, we think there will be continued margin expansion because the distribution business, which is typically a less-margin-gross-profit-standpoint product, will be less than the manufacturing we've -- ties -- we expect Tucson to be contributing more.

We've got a great backlog still at both our threaded and coated facilities in the tubular side of it. We've talked about ARP and the backlog that we're generating there at Pueblo and at Niles, as I mentioned. So -- and fair products has got a strong backlog.

So we believe that the gross-profit margins will be up there, which we should be able to continue or, perhaps, improve.

And then that will --

And with regard to SG&A, Beth, we're comfortable, at least this year, with that 7% -- 6.8% -- type of margin.

Okay. Great. And then secondarily, I wanted to ask just about your ownership in the DM&E and kind of any update -- and I suppose this is directed at Lee. Can you give any update on the valuation of strategic alternatives, or however you want to phrase it?

Beth, this is Lee Foster. It has been our consistent policy to not comment on the private dealings of the DM&E. And we continue to maintain that policy. So, unfortunately, I really can't shed too much light on your question.

Okay. Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS)

Mr. Russo and panelists, there appears to be no further questions at this time.

Well, we thank you very much for your interest and continued support and look forward to talking to you again in three months. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect; and have a wonderful day.