L B Foster Co (FSTR) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the L.B. Foster's Third Quarter 2007 Earnings Conference Call.

My name is Samuel, and I'll be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to today's host, Mr. David Russo, Chief Financial Officer.

Please proceed, sir.

Thank you, Sam.

Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's Earnings Conference Call to review the company's third quarter 2007 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 third-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 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 Web site 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 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 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 Third Quarter 2007 Earnings Call and Webcast.

This morning, we announced another solid quarter performance. Third quarter sales were $135.8 million, 42% ahead of last year. Net income for the quarter was $14.5 million, or $1.32 per diluted share.

Excluding the dividend income from the sale of our investment in the DM&E Railroad, earnings were $0.64 per share, 89% ahead of third quarter in 2006.

David will discuss the financials in detail later, but first I'd like to talk about the operational performance.

Before I get into the products, let me mention a couple of financial highlights which, in addition to net income, I feel are quite noteworthy. Number one, free cashflow for the quarter was $23 million. Profits are up. Major capital expenses are essentially complete. And working capital management is improving.

Number two, primary working capital as a percentage of sales improved 18% from last year's third quarter. This is an internal balance scorecard measure we use to improve working capital management.

Three, bookings continue to remain solid. Order entry for the quarter was $115 million, 15% above last year.

And, four, operating margins continue to trend up. Exclusive of the DM&E dividend, they were 8.3% in the quarter, up from 6.2% in the third quarter last year, a result of expanded gross profit margins and increased volume.

Now, let's take a look at the products, and let's start with rail. Rail sales remained strong, up 34% in the quarter, largely due to improvements in the manufacturing sector.

Allegheny Rail products or revenues improved 110% in the quarter on increased volumes at both our new facility in Pueblo, Colorado, and existing facility in Niles, Ohio. And concrete ties were up 42% over last year as a result of production at Tucson.

Production at Tucson has improved in the last two quarters. The labor situation has been stabilized and we expect to be over 100,000 ties in the first quarter of 2008 as we strive to achieve the same efficiency levels we were seeing in Grand Island.

And Grand Island, by the way, had the best quarter to date, producing 119,000 ties.

On another note, in concrete a new four-year contract was reached with the steelworkers at our two Spokane facilities. We are pleased a resolution was achieved, as management and labor can now focus on moving forward together to improve our processes and productivity.

We also got a boost in the quarter from our smallest product segment, tubular. Sales for this period were up 106% on strong contributions by both coated and threaded.

In coated, we're on the verge of our best production year since we moved to -- since we opened in Birmingham 15 years ago. On the operation level, we have been extremely fortunate this year, as most major products we bid [fell] perfectly into our size range and production schedule. Tim Chiasson and his group at Birmingham have performed superbly.

Another factor in our coated products' success is the seamless interplay between L.B. Foster's and [Asithco's] sales and admin groups, a true partnership in every sense of the word.

And we had a great quarter in threaded, where we expect to have our best year in over a decade. Success in threaded pipe for the quarter was due to a combination of increased revenue in our traditional pump column business and expansion into the micropile market, a product that benefits both our tubular and piling groups. Micropile sales for the quarter were up 365%.

In construction, revenues were also up substantially in the quarter. Despite a relatively flat domestic sheet pile market, revenues in piling were up 69% in the quarter. Why? The pilings group has done an excellent job expanding into all facets of the foundation market.

In addition to the previously mentioned success in micropile, bearing pile sales were up 100% for the quarter and pipe piling sales were up 175%.

And we continue to provide innovative piling solutions as we work closely with the engineering community on designs for specialty applications such as Combi-Wall and Open Cell technology.

Indications are that the heavy civil market will remain relatively strong in the near term. Reed Construction Data reports heavy civil starts were up a strong 18% in the first nine months of this year. Included in that data was a 34% increase in bridge startups. Another market we follow very closely is the dam and marine work, which was up 43% in the same nine-month period.

This increased activity has played a large part in our current construction results and should continue to drive market viability in the future.

From a consolidated standpoint, our outlook for the fourth quarter is good, and we expect to exceed the income levels we posted in fourth quarter of last year.

I'd like to wrap up by noting that we in L.B. Foster feel honored to be included in Forbes magazine's recent annual list of 200 best companies in America. I feel this is a tribute to the outstanding efforts and contributions by our employees as we strive to drive improvement and create value for our stakeholders.

Thank you.

And now I'd like to turn it back to David for his financial review.

Thank you, Stan.

Before I begin the discussion on operating results, I would like to discuss the impact of the DM&E sale on our third quarter results.

As you are all aware, the DM&E sale closed in October. So the gain on the sale of our investment of approximately $122.9 million will be reflected in our fourth-quarter results. We did, however, record dividend income in the third quarter of $8.5 million that had previously been deferred. This amount was in addition to the $247,000 of dividend income that we have recorded on a quarterly basis for some time now.

In an effort to discuss meaningful comparative results, my discussion will exclude this incremental income all the way down the income statement.

Again, the amount was just under $8.5 million. The tax provided on that dividend was approximately $0.9 million. And the net amount was approximately $7.6 million, with corresponding diluted earnings per share of $0.69.

Okay. So with that long-winded introduction of my commentary, I'll begin.

Sales for the third quarter of 2007 were $135.8 million, compared to $95.9 million in the prior year, a 42% increase, which we were able to convert into an 89% increase in income from continuing operations.

This represents a record income quarter for L.B. Foster. The sales increase was due to a 34% increase in rail product sales, a 41% increase in construction product sales and a 106% increase in tubular sales, compared to last year's third quarter.

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, although we expect to move into 2008 with a considerably lower backlog than last year.

Our threaded division has reconfigured its Houston facility, refurbished its critical equipment, and has entered the OCTG and micropile markets. This incremental business has successfully mitigated the seasonal swings experienced in the irrigation market.

The construction product sales increase was due to an increase in piling sales, partially offset by decreases in both our fabricated products and our concrete-buildings units.

The third quarter rail sales increase was driven by rail distribution, Allegheny Rail products and CXT concrete ties. Concrete tie sales were well ahead of last year's third quarter, as Grand Island volumes were strong, as Stan mentioned, and Tucson improved its production volumes again. But it is not yet where we want it.

We continue to make improvements in Tucson -- most recently, workforce stabilization, as Stan has discussed -- although that issue did have a negative impact on third-quarter capacity.

Total CXT tie production for the third quarter increased 45%, compared to last year's third quarter, while keeping in mind that Tucson wasn't in production last year. Excluding Tucson, tie production increased 4% due to a 14% increase at Grand Island, partially offset by a 7% decline at Spokane.

Grand Island is now producing approximately 40% more ties than the maximum capacity of the plant before its equipment retrofit in late 2005. Our Grand Island team turned in another outstanding performance this quarter, resulting in the highest production quarter ever, while keeping efficiencies high.

We are still on track to produce a little more than a million ties we projected in our first quarter call. Our Grand Island and Tucson facilities are still fully utilized for the Union Pacific Railroad. In Spokane, we continue to produce concrete ties for other class one railroad, transit authorities, contractors and industrial customers. And we continue to experience strong inquiry and bidding activity.

As a percentage of consolidated sales this quarter, tubular accounted for 9% of sales, construction 46%, and rails 45%.

In July, Stan and I spoke of the second quarter being the strongest quarter for 2007. And indeed, from a sales and pre-tax income perspective, it was. Third quarter sales were 9% lower than Q2, while pre-tax income was only 2% lower than the second quarter of 2007.

We also indicated that the second half of 2007 would be stronger than the second half of 2006. And while our fourth quarter has yet to unfold, we can tell you that third quarter pre-tax income has already exceeded pre-tax income for the entire half -- second half -- of 2006.

Gross profit margins for the quarter were 15.5%, an increase of 100 basis points over last year's third quarter. The positive margin expansion this year compared to the prior year was due to an increase in gross profit at standard before manufacturing and other variances and decreased unfavorable manufacturing variance.

The businesses that drove the margin improvement in the third quarter were threaded pipe, Allegheny Rail products, transit products and Spokane ties. The decreased unfavorable manufacturing variances were primarily at our new Allegheny Rail Products facility and our Hillsboro concrete buildings facility.

SG&A expense increased 20% to $9.9 million in the third quarter of 2007, due primarily to personnel-related costs including salaries and incentive pay. SG&A represented 7.3% of sales in the third quarter of 2007 as compared to 8.6% of sales in last year's third quarter, demonstrating continued improved leverage at these sales levels.

As a result of the foregoing, third quarter operating income was $11.3 million compared to $6 million in last year's third quarter, a $5.3 million, or 89% improvement. As a percentage of sales, operating income was 8.3% in this year's quarter versus 6.2% last year.

Interest expense was $0.9 million in the third quarter of '07, even with 2006. More importantly, this represents considerable improvement compared to interest expense of $1.2 million in both the first and second quarters of this year, due to significant reductions in debt over the past two quarters, as we have generated meaningful positive cash flow from operations.

Third quarter pre-tax income from continuing operations was $10.4 million compared to $5.1 million in last year's third quarter, a 105% increase. As a percentage of sales, third quarter 2007 pre-tax was 7.6% versus 5.3% in last year's quarter.

The third quarter 2007 income tax provision was 32.6%, compared to 32.2% in last year's third quarter. Once again, as a reminder, this tax rate excludes the dividend income as a discrete item.

Income from continuing operations increased 103% to $7 million, or $0.64 per diluted share, compared to $3.4 million, or $0.32 per diluted share last year.

Turning to the balance sheet, debt at the end of the third quarter was $35.5 million, compared to $55 million at the end of the second quarter; and $69.1 million at the end of the first quarter of 2007, which was our high water mark. The $19.5 million decrease in debt during the third quarter was principally due to $24.4 million of cash generated from operations.

Cash expenditures were $1.1 million for the third quarter and $3.8 million on the year-to-date basis.

For the entire year in 2007, we expect capital expenditures to be less than $7 million. We also expect to generate positive cash flow from operating activities during the fourth quarter of this year.

Debt as a percent of capitalization was 22% at the end of September compared to 34% at June 30, 41% at the end of Q1, and to 37% at the end of last year.

Our leverage ratio is approximately 0.8 to 1, down from 1.5 to 1 and 2.3 to 1 at the end of June and March, respectively. And our interest coverage strengthened substantially as well.

With regard to working capital, accounts receivable and inventory, net of accounts payable decreased by approximately $13.8 million in the third quarter of 2007 as compared to the end of June 2007.

Accounts receivable decreased by $7.3 million from June to September, and DSO was 40 days at September 30, compared to 42 days in June and 45 days at the end of the first quarter. We believe our AR portfolio to be in excellent condition.

Inventory decreased $11 million during the third quarter of 2007. This improvement was driven by a $4.7 million decline in the rail segment inventory and a $6.6 million decrease in construction products inventory.

In summary, we are pleased with the consistent improvement shown by these third quarter results. As I have said before, we have sound strategies and processes in place to be successful. And our 747 employees have demonstrated that they can and do get the job done. And their efforts and accomplishments are very much appreciated.

That concludes my comments on the third quarter of 2007. We will now open the session up to questions.

Sam?

Thank you.

(OPERATOR INSTRUCTIONS)

Our first question comes from Rob Damron with 21st Century Equity.

Please proceed, sir.

Good morning, guys, and congratulations on the excellent quarter.

Thanks, Rob.

I wanted -- let's see. I have a few questions.

Let's see. Let's talk about the -- start with the DM&E sale.

On an after tax basis, what are the net proceeds expected to the company from the DM&E sale?

Approximately $105 million, Rob.

Okay.

Okay. And then I -- oh, and then, will you be able to pay off any incremental debt with that, or will we just see the cash position grow on the balance sheet?

Well, I think you're going to see a little bit of debt paid off and a lot of incremental cash, quite honestly.

Okay.

We've actually -- the last two quarters, given the cash flow we've generated, we've paid off almost all of the variable-rate floating debt that we can pay without incurring pre-payment penalties.

So we're going to be reviewing what else we can look at. And it's sort of a balance between paying something off now that we would pre pay and pay it early, as opposed to maintaining liquidity, depending on acquisition opportunities.

Okay. That's helpful.

And then, moving to the Tucson facility, can you discuss the profit and/or loss that the Tucson facility incurred in Q3 relative to what we saw in Q1 and Q2, and then, the, I guess -- the expected profitability, or when that may occur going forward?

What we probably don't want to talk to each facility's profitability or loss, but I know we have discussed this regarding Tucson in the past, Rob.

Tucson, as we mentioned on the call, continues to improve. They did a little bit better than they did in the second quarter, but they still are in a loss position. And as far as the future goes, we don't expect that to turn around this year.

We're hoping that when they get their volumes up in the -- Stan mentioned 100,000 ties in the first quarter, which would be very good. But that's still not maximum capacity. They need to get closer to that before they're going to turn that loss around.

Okay.

And then, as you look at your other facilities and other operations, where else do you see, I guess, a kind of underperformance, or where there may be incremental opportunities for margin improvement going forward?

Well, good incremental margin improvement is pretty much across the board. We're not at capacity at really any of our plants, and we've talked about that in the past -- except for the tie plant. I think we're at capacity at Grand Island. We hope to be close to capacity in the first quarter at Tucson.

But our fab product facilities, our -- we've got a great backlog up at Precise. We're looking for work at our fab products facility in Bedford, PA. There are a couple of major jobs that are still kind of lurking out there that we would like to capture in the fourth quarter, and really would help fill that plant up for next year.

Coated is -- we're booked there through the first -- I guess -- I think through April of next year, Rob. Pueblo ARP is full. And we're pretty well -- we've got availability, though, across the board in all of our plants. But we're -- you know, there's not a real hole anywhere, if that -- if you can understand that.

Okay. That's helpful.

And then just the last question -- certainly, you had a very strong Q4 last year. And if we look at your -- although the bookings were very strong, it looks like you shifted a good portion of those booking in Q3, so the backlog is only up moderately as we go into Q4.

So I know you don't give guidance, but what -- can you give us any color on -- some expectation for Q4?

I guess I said something in my remarks that we expect to improve on profitability in the fourth quarter.

From last year?

Yes.

Okay. That's helpful.

All right, thank you.

Thanks, Rob.

Thanks, Rob.

And your next question comes from [Robert Kanters] with Citigroup.

Please proceed, sir.

Yes, good morning and congratulations.

Hi, Bob.

My question was really kind of answered, regarding the deployment of the funds you've received.

But expanding on that a little, have you -- I know you've probably been looking at potential acquisition.

You know, Bob, we have. And we've talked about that, Bob --

Yes, I --

We do have an acquisition strategy in place and have been -- we've identified a number of companies that we believe that could bring synergistic value that we're looking for.

There are some challenges out there, there's no doubt about that -- availability of products or of companies, valuations.

I mean, we've established realistic values on each opportunity that we've looked at and we will continue to go down that road.

Okay.

Well, congratulations on another good quarter.

Thanks, Bob.

Thank you.

And your next question comes from James Bank with Sidoti & Company.

Please proceed.

Hi, good morning.

Hey, Jim.

Good morning, James.

A quick question on the Tucson facility -- it seems like it's improving steadily, and I --

It's not moving -- it's -- let me just say this. It's improving. We've got a long ways to go --

Okay.

And as far as using "steadily," I think we're improving. I mean, we are getting there. We've had a -- as we've talked about in the past -- just any number of issues there which we're slowly getting through one-by-one.

I really can't say enough about the diligence and perseverance of that group down there.

Okay.

I think John Kasel and his group leading that charge in Tucson have just really stuck with it. And we're just about there.

And what -- and you guys might have covered this in your prepared remarks. I apologize if I missed.

I mean, what would I really be able to attribute this 100-basis-point gain and gross margin to year-over-year?

It's a couple of things, James.

It's actually improved manufacturing variances and, really, it's improved selling prices, as well, at some of our products lines that we actually did mention at the outset -- our threaded group --

No, he's talking about Tucson, I think.

Oh, overall -- you were talking about that?

Yes, Stan, overall -- because it seems like Tucson -- you know, we don't want to use the word "steadily." So I'm just trying to figure out what attributed to this 100 basis point gain in gross margin, because I'm just trying to get an idea of what the fourth quarter could do.

I mean, this is the third quarter in a row now you've grown the bottom line triple digits. Now, I don't think you'd be able to repeat that in the fourth quarter, but, ultimately, if you're going to be able to expand fourth-quarter margins -- gross margins -- by 100 basis points, and none of that is coming from Tucson improvement -- it's coming from other cost reductions you guys have in place -- then that can be considerable. And that's really trying -- what I'm trying to get at.

Yes, James.

The improvements that we're seeing now -- they're scattered throughout the organization, are not even an entire product category.

I mean, our rail margins have improved, but most of it has been driven by Spokane, that's selling into the transit business and the short lines and regionals. Our transit business had nicely improved margins compared to last year.

And our Allegheny Rail Products business really -- you know, they really hit it well at the plant, and we've expanded volumes, as well, in that business. We're now making insulated bonded joints not only in Pueblo, but we've expanded our capacity in Ohio as well. So that business has done a very nice job expanding margins as well.

Okay.

So is this -- I mean, would this, then, be sustainable, David? Can we assume that?

Well, at some point, as with -- we've mentioned with the revenues -- the growth is going to slow. And as we start to build tougher and tougher comparisons, we expect similarly, with margins, that we will improve. But the improvement is going to slow down a little bit.

And keep in mind, James, that we are also going into the two typically slowest quarters that -- the second and third quarter are our two strongest quarters.

Right. Okay.

Now, in regard to the dividend from DM&E, what was -- well, actually, excuse me. Excluding that dividend, what was the tax rate for the remainder of your business?

About 32%.

Okay, right -- terrific. I might jump around a little bit here. I kind of wrote my questions down haphazard.

What capacity are you at in both Tucson and Grand Island? You kind of used the term "at capacity," and I guess that would mean you'd be at full capacity by the first quarter of last year, but --

Grand Island is at, and has been at, really, full capacity.

Okay.

So they're making, really, everything that we expected out of that facility.

We added a fifth line in Grand Island in the summer. And they've done just a great job of getting the utilization of that line in. So they're pretty much, right now, at max capacity.

Tucson is certainly, right now, fully utilized, because they're making as much as they can. But they're certainly not at maximum capacity. I think Stan mentioned they did 80,000 ties this quarter. And we'd be looking for more like 100,000 ties a quarter out of Grand Island -- or, sorry -- out of Tucson -- or even a little more.

Okay.

I think, looking into next year, we feel that that capacity utilization will be filled at both of those plants.

Okay.

So Tucson is maybe about 80% right now?

Yes -- not even -- maybe 75% to 80%.

(inaudible)

Okay.

And did you split the absolutes or net-sales dollars for rail construction and tubular in the release?

We didn't.

You did?

We did not.

Oh. Can you or no?

Yes.

We can do that.

(Inaudible) distribution was -- that was almost 50-50, James.

Rail distribution was, actually, a tad under 50% and manufacturing was a little bit more than 50%.

Okay.

And then, construction? This is only for modeling purposes. I don't want to twist your arm.

Rail construction and tubular?

Oh, well, construction was -- are you talking about of the consolidated? I'm sorry.

Oh, yes, consolidated -- just the absolute dollar --

Oh, okay.

Rail was 45% of the total.

Okay.

Tubular was 9% and construction was 46%.

Okay. That -- I'll back into that.

And are you going to split up the backlog or do we have to wait for the Q for that?

That will be in the Q.

All right, terrific. That's all I have.

(OPERATOR INSTRUCTIONS)

Next question comes from Beth Lilly from Gabelli.

Please --

Good morning.

Good morning.

Hi, Beth.

I have two questions.

One is -- you have made a dramatic improvement in -- year-over-year -- both on a quarterly basis and an annual basis in your operating margins. If you back out the dividends this quarter, your operating margins were 7.4% and a year ago, they were around 5.2%. And on a nine-month basis, they were at 6.3% versus 4%.

And I'm wondering if you could talk, directionally speaking, about -- as you start to utilize more capacity and everything, I can imagine that we're not going to see as dramatic improvement in margins, but is it fair to say that we're going to continue to see continual margin improvement out of your businesses?

Beth, hi. This is Dave.

We are expecting, and we have targets -- we're "establishing," I should say -- targets of margin improvement. And we will -- we're going to consider disclosing those at some point in the future. We have not done that yet.

We do anticipate some of the things we're doing will have some -- will have positive continued impact on margins. Although, when you get to the consolidated level, there are other factors, like the LIFO charges we've been taking, which, this year, have been almost $1.7 million. That has had a -- certainly, has had a negative impact on margins.

And mix will play an important factor as well. We've seen, in the second quarter, some of our distribution businesses really kicked in strong and, actually, on the total, had a somewhat negative impact on margins.

So there's a lot of things in there that we're -- when we project the improvement, we also have to sort of factor that in to see what it might give us on a consolidated basis.

So we do expect improvement, but as -- there was another caller that asked something similar -- and we expect, along with the double-digit sales growth that we've seen -- we expect the margin expansion to slow a little bit as well.

Okay.

So just back to your original comment, which is -- do your -- can you talk about your establishing kind or margins that you -- internally, I would imagine. And so would you be willing to talk about those externally, at some point?

We'd have to --

At some point in the future, perhaps. We're not ready to go live and public with those right now, though.

Yes, okay.

But we're talking about, what? '08 budgeting -- is that -- or '09 budgeting?

We're not there yet.

Yes, I mean, we're looking at -- we actually just completed some five-year strat plans.

Okay.

So we're looking at long -- very sort of a long-term outlook.

So for next year -- any one year, there can be market influences that could certainly have an impact, positive or negative, on what we're doing. But if we do go out with anything, it's going to be a longer-term type basis.

Okay. Okay, that's helpful.

And then just back to the question about the wonderful windfall that you've received from the DM&E sale. Can you -- you talked about that you're -- you can't pay off much more debt -- or, you don't -- you've been paying off incremental debt. As you look forward in terms of making acquisitions, is one of your business divisions more attractive than another in terms of making acquisitions?

We think that there is opportunity in both the rail and the construction sides of our business.

Okay -- rail and construction. Okay, terrific.

All right, thank you very much.

Okay. It looks like we have no further questions in the queue. I'll turn the call back over to the hosts for any further remarks.

We thank you all for attending, and have a good day. Thank you.

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

Have a great day.