L B Foster Co (FSTR) 2008 Q1 法說會逐字稿

Thank you for your patience, and welcome to the First Quarter 2008 L.B. Foster Earnings Conference Call. My name is Candice and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session after the prepared remarks.

(OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to our host for today's conference, Mr. David Russo, Chief Financial Officer. Sir, you may proceed.

Thank you, Candice. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's Earnings Conference Call to review the Company's first quarter 2008 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 the Company's results. Give an update on critical business issues and discuss market conditions. Afterward, I will review the earnings press release issued earlier this morning before we open up the session for questions.

Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the "Investor Relations" page. This webcast will be archived and available for seven days.

Today's call includes forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations, and include known and unknown risks and uncertainties. Future actual results may differ greatly from these statements and expectations that are expressed today.

All participants are encouraged to refer to L.B. Foster's Annual Report on Form 10-K for the year ended December 31, 2007, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster.

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 2008 earnings call and webcast. This morning, we announced record earnings for the first quarter. It was also the 13th consecutive quarter our Company has recorded an earnings increase over the previous year quarter. Sales were $93.4 million, compared to $110.7 million in the first quarter 2007.

Income from continuing operations was $6.3 million or $0.57 per diluted share, exclusive of a $2 million gain related to the sale last year of our assets in the Dakota, Minnesota and Eastern Railroad, and the gain of a sale in leaseback agreement of our Houston threading facility. Income from continuing operations was $0.36 per share, compared to $0.28 per share in the first quarter 2007, a 29% improvement.

David will discuss the financials in detail later, but first, I would like to talk about operational performance. Let's start with rail, where a (inaudible) production in new rail distribution revenues was offset by higher billing margins and operational efficiencies on the manufacturing side. New rail sales totaled $14.7 million, down 49% from first quarter 2007. They're two primary reasons for this drop-off. Number one, non-recoverable business due to the sale of the DM&E; and two, A strategic decision to support domestic mills as opposed to Chinese imports.

We believe this decision is very much in the long-term best interests of our shareholders particularly when the domestic supply sites opens up later in the year, when we expect Steel Dynamics to achieve production levels of rail at their Columbia City, Indiana facility.

On the rail manufacturing side. While revenues were relatively flat, increased billing margins and plant efficiencies were the reason for year-over-year profit increase, and were largely responsible for the 390 basis point margin improvement in the Company. To my point, on operating efficiencies, we continue to see improvements throughout our organization and plant performance.

Over the past five years, John Castle our Senior Vice President of Operation and his team have number one, implemented lean at our plants; have initiated balance score cards to measure and track performance; continued to rollout ISO registration programs at our manufacturing facilities, and drove our safety initiative which has reduced both recordable and lost time injuries by over 80%. We're especially proud of this last initiative, as the safety and well being of our employees is a cornerstone of corporate culture at L.B. Foster.

Operational excellence will be critical in 2008 to offset the expected decline in our rail distribution and concrete tie revenue. Data we track indicates the constructions markets we are involved in are slowing down. Reconstruction data states that through March of this year, heavy engineering starts were off 11%, highway bridge starts were down 90% and residential -- excuse me, non-residential starts decreased by 5% compared to the same period in 2007.

Our construction revenues were mixed in the first quarter. While piling sales were down 90% due to weather related shipment delays, both fab products and concrete buildings experienced sales improvements. Contrary to the forecasted downturn in the construction markets, we expect all three product lines in our construction group to exceed their 2007 performance this year.

In our third product segment, tubular experienced another excellent quarter at the coating facility in Birmingham, Alabama. We coated 6.1 million square feet, versus 4.4 million in the first quarter of 2007. Activity in the energy market remains strong, and we are effectively booked for the year on one turn.

Of course, the challenge to our tubular group is to load the plant to two shifts, as we did in our record breaking performance last year in coated products. Overall, revenues for the quarter in tubular were $7.9 million -- excuse me, $7.3 million, 19% ahead of the first quarter in 2007, a great start to what we believe will be a very good year in pipe.

Overall, we continue to be optimistic about the year. We know we have challenges. Rail distribution, concrete ties and coated pipe volumes are expected to be down this year-over-year, but our fundamentals remain strong. We're not expanding as rapidly as in the past three years. Our core markets remain solid. Inventories are priced to provide upside opportunity in a rapidly steel escalating market.

An excellent balance sheet allows us both financial stability and flexibility in this turbulent credit environment. And just last week, L.B. Foster received The People Do Matter award, which recognizes innovation in human resources and is given annually by the Pittsburgh Human Resources Association. Our continued investment in the development of our employees will enable us to meet the challenges and opportunities of the future. Thank you.

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

Thank you, Stan. Before I begin the discussion on operating results, I would like to discuss the impact that two special items had on the Company's first quarter results. The first time was $2 million of proceeds received late in the first quarter, related to a favorable working capital adjustment pursuant to the prior year's sale of our investment in the DM&E Railroad. Estimated EPS impact of these proceeds was approximately $0.12 per diluted share.

The second item was the sale and leaseback of our threaded products facility in Houston, Texas. We received approximately $6.5 million for this facility which encompasses 63 acres, and simultaneously leased back 20 acres. The gain on the sale was approximately $1.5 million, and there was an additional $2.1 million gain that was deferred and will be amortized into income over the life of the lease which is ten years.

The estimated EPS impact of the sale of this facility was approximately $0.09 per diluted share. Excluding these two items, income from continuing operations was approximately $4.1 million or $0.36 per diluted share. In an effort to discuss meaningful comparative results, the ensuing discussion will exclude the impact of these special items.

Okay. So with that said, I'll begin. Sales for the first quarter of 2008 were $93.4 million, compared to $110.7 million in the prior year, a 15.6% decrease which we still managed to convert into a 32% increase in pretax income, which represents a record income first quarter for L.B. Foster.

Sales decrease was due to a 27% decrease in rail product sales, and a 3.0% decrease in construction product sales, partially offset by a 19% increase in tubular sales compared to last year's first quarter. First quarter tubular sales increased, due to growth in coated 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 throughout 2008 and beyond. However, the first quarter increase, compared to the prior year, will not continue into the coming summer months when our coated division went into a second shift throughout the summer and into September of last year.

As we had mentioned on prior calls, our threaded division has reconfigured its Houston facility, refurbished its critical equipment, and has entered the OCTG market on a limited service basis and also the micropile market. It also continues to take advantage of opportunities in the irrigation market. The construction product sales decrease was due to decreased piling sales, partially offset by an increase in our fabricated products division sales.

The first quarter rail sales decline was driven by a substantial reduction as Stan mentioned in new rail sales, and to a lesser extent decreased transit product sales. CXT ties also experienced a small sales decrease, compared to the first quarter of 2007, keeping in mind that Tucson's production and sales did not ramp up significantly until the third quarter of last year.

Our Grand Island and Tucson facilities were a little more than 50% utilized for the Union Pacific Railroad, and we are actively marketing those heavy haul ties, as well as a newly developed industrial concrete tie from these two facilities. We also continue to review cost reduction opportunities of these operations.

In Spokane, we continue to produce concrete ties for other Class One railroads, transit authorities, contractors and industrial customers, and we continue to experience reasonably active inquiry and bidding activity. As a percentage of consolidated sales, tubular accounted for 8% of sales, construction was 43% and rails 49%.

Turning to backlog. As we mentioned in our earnings release, backlog stood at $173.7 million at the end of the first quarter, compared to $195.8 million at the end of last year's first quarter, an 11% reduction, but also with better margins. Bookings for the first quarter declined 23% to $132.8 million, also with improved margins.

Gross profit margins were 16.7% in the first quarter, an increase of 390 basis points over last year's first quarter. The positive margin expansion this year compared to the prior year was due to an increase in gross profit that's standard before manufacturing and other variances, decreased unfavorable manufacturing variances, and decreased warranty costs.

The businesses that drove the margin improvement in the first quarter were Tucson Ties, due primarily to significant improvements made in plant processes, concrete mix and increased volumes, and Allegheny Rail Products, due principally to plant process improvements as well as volume increases.

SG&A expense increased 11.5% to $9.4 million in the first quarter of 2008, due primarily to personnel related costs including salaries and benefits. SG&A represented 10% of sales in the first quarter of 2008, as compared to 7.6% of sales in last year's first quarter, a 240 basis point increase.

While we certainly do not like that comparison, to add a little perspective to it, SG&A was $9.3 million in the fourth quarter of 2007, when revenues were $114 million. SG&A for this quarter was up $100,000 from Q4, but obviously sales were down $20 million [from] the fourth quarter.

As a result of the foregoing, first quarter operating income was $6.1 million, compared to $5.8 million in last year's first quarter, a $300,000 or 5% improvement. As a percentage of sales, operating income was 6.5% in this year's quarter, versus 5.2% last year.

Interest expense was $555,000 in the first quarter of 2008, $700,000 or 55% less than the first quarter of 2007. The decrease was principally to a decrease in average borrowings during the first quarter of 2008 as compared to 2007, and to a lesser extent, lower interest rates on certain debt instruments. The lower borrowings are a result of the strong cash flow generated from operations in 2007.

As I mentioned during our fourth quarter conference call, none of the DM&E proceeds have been used to pay down debt as of yet. Since March 31st of 2007, we have paid down approximately $36.4 million of debt with internally generated cash flows.

First quarter pretax income from continuing operations was $6.4 million, compared to $4.8 million in last year's quarter, a $1.5 million or 32% increase. As a percentage of sales first quarter 2008 pretax was 6.8% versus 4.4% of sales in last year's quarter. The first quarter 2008 income tax provision was 36.1%, compared to 35.9% in last year's quarter.

Income from continuing operations increased 31% to $4.1 million or $0.36 per diluted share, compared to $3.1 million or $0.28 per diluted share last year. Including the special items that we mentioned above, income from continuing operations was $6.3 million which was 104% above the prior year.

Turning to the balance sheet. Debt at the end of the first quarter was $32.7 million, compared to $34.2 million at the end of 2007 and $69.1 million at the end of last March. As I discussed, $36.4 million decrease in debt during the past 12 months was due to cash generated from operations.

Capital expenditures was $2.1 million for the first quarter, and $1.5 million for the prior year quarter. We continue to expect capital expenditures to be less than $8 million in 2008. We also expect to generate positive cash flow from operating activities well in excess of that capital estimate.

Debt as a percentage of capitalization was 13% at the end of March 2008, compared to 41% at the end of March 2007. Our leverage ratio is approximately 0.7 to 1, down from 2.3 to 1 at the end of March last year, and our interest coverage strengthened to over 14 to 1.

Cash at the end of the quarter was $117.2 million, and we had $115 million invested in tax-free money market funds all rated AAA. With regard to working capital, costs receivable and inventory, net of accounts payable increased by approximately $3.9 million in the first quarter of 2008, but is $8.7 million less than March of 2007.

Accounts receivable decreased by $7.9 million during the quarter, primarily due to the 15% decrease in quarter-over-quarter sales, while DSO moved up approximately five days. We believe our accounts receivable portfolio is in excellent condition. Bad debt expense has been consistently below 0.1% of sales. Inventory decreased $1.7 million during the first quarter of 2008, which was due primarily to decreases in our construction products segment.

In summary, we believe 2008 will be challenging, but also rich with opportunities. Those opportunities lie both internally in the area of process improvements, research and development, and improving our customer experience and development of our human capital, as well as external opportunities with regard to market expansion and acquisitions.

That concludes my comments on the first quarter. We will now open the session up to questions. Candice?

Thank you, sir.

(OPERATOR INSTRUCTIONS).

Our first question will come from the line of Rod Damron of 21st Century Equities. Please proceed.

Good morning, guys. Let's see. I wanted to start I guess with the top line first. You mentioned in the press release a few reasons on why you think 2008 sales will be challenging. And I was wondering if you could give us maybe a little bit more detail into how much revenue each of these issues is really causing you in 2008, for example, the reduction in sales to the DM&E Railroad.

Also the -- I guess the reduction in ties to the Union Pacific. Maybe give us some idea how many ties you sold to Union Pacific last year versus what you expect this year. And then also in the coated products area -- what -- I know you saw growth this quarter, but it looks like it's going to be challenging comparisons going forward. So just give us a little color on those issues.

Yes, Rob. On those three areas, and of course, we do not give guidance, but I can give you a pretty good idea of what -- where we are at the first quarter and what we're looking at in these three areas.

With the DM&E Railroad, last year we did a new rail over $15 million with them, and we did I believe in the first quarter a 6.8, so that was lost in the first quarter. And the first quarter last year, also in new rail we had three projects, which I think added up to about 9 million. So between those four, I believe we had 15 million and our total revenues were under that in the first quarter this year.

With the tie situation we touched on that in January on the fourth quarter. We made the Union Pacific last year 850,000 ties, and we will be down 300,000 to 400,000 ties from that number is what we're expecting this year. And then related to the coated business, Rob, last year, we coated -- I believe we coated 31 million square feet.

This year, right now I think I said that we coated 6 million in the first quarter. I really don't know how that is going to totally play out, but we're looking at somewhere in the [mid-20s -- 1 million] square feet in levels is kind of what we're forecasting right now, which would be in and of itself the second best year that we've ever had at Birmingham. I mean, last year was such a blowout year, and as we've talked about everything came together for the year. So that's what I'm looking at in those three areas.

Okay. And then just moving down to the gross margin line. Despite the revenue decline the gross profit was very impressive, and maybe you can just give us a little more color there. I guess I'm a bit surprised given lower volumes you can still generate higher gross profit. So just give us a little color on how you were able to do that.

One of the things that really comes into play there, I think, when you look at margins -- well there's a couple of things. But one of the things that we really haven't talked about is the mix and the product mix. And when you reduce our new rail by 50%, and new rail as a product standalone in the distribution side I believe is probably -- if it isn't it's one of our lowest gross profits -- products.

And so, we've cut back there, but that really didn't hurt us as much as that shows from a gross profit standpoint. We did have good margin -- or we did have good manufacturing efficiencies. I believe we had a -- we're starting to really get the benefits of our Alleghany Rail Products at both Pueblo, and the facility that we utilize here and -- up by [Pittsburgh] and Niles, Ohio.

And we also as David eluded to we did get -- are getting efficiencies at our plant in Tucson. We had a good quarter at Petersburg. We're getting better from an operations standpoint in the manufacturing, and I really wanted to stress that. We've got a -- we're going to be really critical in driving profitability and the bottom line this year, and they did it in the first quarter.

Okay. And then -- maybe you gave us a little color on what you thought were the I guess the expected decline in the construction segment, or construction industry in 2008, but how about just the rail in general? How does that end-market feel for you as we look into '08?

I believe -- there's a couple of things that come into that. And really what we -- one of the things that we really want to talk about is public spending. I think that public spending from a matching standpoint comes from the states. And I believe that what we track that -- the coffers are lower, and so that matching portion is going to become much more difficult, particularly when you talk the rail on the transit side of it.

But Class One's up. We're not seeing the double-digit increases that we've seen in the last couple of years, but spending in -- with the Class Ones both in the maintenance of way and capital expenditures should be relatively flat, or up from what it was last year, Rob.

Part of the other issue too, Rob, is the nature of the Class One spend. I mean, over the last several years, it's been a very good benefit to us, especially with new construction favors -- certainly favors concrete ties. This year, obviously as we've announced the railroads are cutting back on some of that a little bit, so that's what has negatively impacted us at least so far this year.

Okay. And then last question for me is the cash on the balance sheet. What are the plans for that cash? What's the acquisition pipeline look like, and should we expect an acquisition in '08?

That's a good point, Rob. I think that a couple of things can be said about that. We are very much into the acquisition mode. We have in the last quarter looked very closely at a couple of companies. When we couldn't get real comfortable with -- for a couple of reasons, and another situation I don't think the other company could really get comfortable with us.

We are committed to continue this. We know that this is a strategic objective of the future. We are really concerned with value, but I think that we're in a very good position because of what we have in the balance sheet. And we're starting to see because of some of the credit crunches, and some of that pressure that we're seeing in the financial markets that some of the prices out there are starting to come down.

So we're looking very actively, and we will continue to look. And we think that's an opportunity and also as far as with the cash, and David can talk about that a little bit more, but our board also is exploring and taking a look at share buyback also. So --.

Rob, I can tell you that as being a part of the team along with Stan that's worked on some things, that our organization has expended significant efforts over the past four to five months looking at acquisitions, not only targeting, but negotiating with companies and really drilling down pretty hard. And we were disappointed in the couple that this year so far that have not transpired, but sometimes some of the best deals that you do are the ones that you don't do.

So one we -- as Stan mentioned we couldn't get comfortable with, we spent an inordinate amount of time on. And you never know when things come back to you. But we are continuing to spend a lot of time to continue the dialogues with the companies that are on the top of our list and it takes time.

But as Stan also mentioned, we have seen -- as a matter of fact, during negotiations on one deal, we have seen private equity firms financing dry up to a certain extent, and during the course of the negotiation values come down. So we view that as a good thing, and hopefully our cash position will give us an advantage in the future.

Okay, that's helpful. Thank you very much.

Thanks, Rob.

Our next question will come from the line of James Bank of Sidoti & Company. Please proceed.

Hi. Good morning.

Hey, James.

Hi, James.

With the 390 basis point gain in the quarter, how much of that can I attribute to the billing margin increase?

About 190 basis points, James.

Okay. And the rest was from the Tucson tie and Alleghany Rail?

It was a part of it.

It was a part of it. It wasn't just those two facilities that had improvements by any means. They were a couple of the largest, but not just them.

And (inaudible), could you just bring me up to speed on where you are with the three concrete type plants? How many shifts you're running, and what capacity you're at?

Sure. Capacity and this is just roughly -- we've got capacity of about 500,000 ties at Grand Island, about 375 at Tucson, and we probably have between 300 and 350 at Spokane. With that said, at both Spokane and -- excuse me, at both Grand Island and Tucson we're really running one shift.

I mean, there's an overlapping shift there, James, but we're stretching out for -- operational efficiencies are cure time. Rather than eight hours, we're letting it go out a little bit longer from a cost savings perspective. We don't need as much from an additive standpoint.

And I would tell you, James, total tie production for the first quarter was probably 20% below last year.

Right. Can I have the segment gross profit? We have the sales. Could I have the gross profit and backlog?

We'll be putting that out in our Q, James. We're not -- we don't want to give that just over the call.

Okay. And what is -- what's really the catalyst behind Alleghany Rail this year?

Significant improvement. The facility really -- which they accomplished gradually all year long last year. I mean, they were doing actually a very nice job in the third and fourth quarter of last year as well. But, a lot of excellent process improvement in Pueblo, the Niles facilities is doing -- has been doing an excellent job. And it's one area that the Class Ones, as well as some other customers have really ramped up purchases, so the volumes are very nice as well.

And yes, I think that to David's point the Niles facility has benefited with the pickup of some additional work from the eastern lines last year, which carried into this year, and that activity is pretty good. I mean, we had good bookings in that in the first quarter, and we -- we're ready from a plant standpoint to really get it and we're expecting a very good year in Alleghany Rail.

Okay. And from the bookings and backlog standpoint, was rail really the primary culprit behind that decrease?

New rail was the leading culprit, but the other two areas which we refer to coated and ties were both down, I think, and our backlog which is off $22 million from where it was last year, we're down $28 million in new rails, so that far and away is the big area. And concrete ties are backlogged down about 10.5, so those two lead the way there.

Okay. And one thing I'm looking at with UP, purchasing so many concrete ties this year, and I know that the contract is in place, but are they going to need to double down on their purchases in '09?

I don't know [whether] they're going to need to double down, James, but -- because as we've mentioned, two things really happened to them last year. We talked so much about problems that we were having in the southwest at our Tucson facility with permits. They were having construction permits on the [Sunset] line, we understand in the southwest.

So their need wasn't -- the demand wasn't there as much but they continued to buy, and they entered the year with around 400,000 ties in inventory. So they'll wear that -- they'll work that off this year. But we are --- conversations that we continue to have with them is that they will be back up to '07 levels the next few years going forward as they continue to build out the Sunset line, and continue their line that they're redoing going from Salt Lake City to Chicago.

Okay. And let me just get one more question, and then I'll jump back in line. Is there anything you could tell us in regard to bring us up to speed on the union negotiations you're having at the Bedford plant?

They're done.

Okay.

They're done.

Is it going to be like Spokane, or is it going to be a little bit smoother?

It's done.

They're completed, James.

Okay, great.

It went well. It went very well.

They actually were -- they did go very well, and that contract was completed early in the first quarter.

Okay, that's great. Thank you. I'll just jump back in line.

Thanks, James.

Our next question will come from the line of John Keeley of Keeley Asset Management. Please proceed.

Good morning. My question has to do with the [vary] of acquisitions which I think you've already covered.

Thanks, Mr. Keeley.

(OPERATOR INSTRUCTIONS)

Our next question will come from the line of Scott Blumenthal of Emerald Advisers. Please proceed.

Morning Stan. Good morning, Dave.

Good morning, Scott. How are you?

Good morning, Scott.

Okay. Fine, thank you. Stan, the press release said that consolidated sales declined 15.6% and you expect that trend to continue. You don't expect to see 15.6% sales declines every quarter correct?

No. I think we expect that because of what we've mentioned in those three key product areas that -- looking forward that we think that sales will be down not 15% from last year, but they will -- forecast to be down.

Sure, yes. You had mentioned previously that you expected sales to be down because of these factors, but I think that you can interpret the press release as saying that you anticipate the trend to be15.6% for the rest -- for the next few quarters.

It's really just the downward trend, Scott. Once again, you're going to get us a little close to giving you too much guidance which we won't do, so -- but the trend is downward pressure on sales especially in the rail segment right now.

Yes, okay.

But not at that rate.

Sure. Thank you. Dave, can you talk about the SG&A this quarter? I know that you mentioned that you had taken some actions to reduce staffing, I believe, in Tucson and Grand Island when you found out that the tie count was going to be down considerably. Does this contain some severance, or some things that we probably -- or that we might not see in --?

No. I mean, Scott, number one -- I mean, the plant personnel that we unfortunately had to layoff at the very beginning of this year that rolls up in cost of goods sales not SG&A, so that really had nothing to do with it. And at times, we do have some different items.

We actually did have a deal costs that we to expense in the first quarter, as a result of us walking away from a couple of deals. We did hire some outside assistance related to due diligence and some -- just some internal costs that we incurred, so that stuff goes right to the bottom line.

Sure.

We've had some new hires -- some relocation costs go through our numbers that kind of thing. Nothing that we thought that was significant enough to point out and call out to the public.

But there are just ongoing cost pressures that we do experience, and we are going to be taking a very close look at that especially as we move forward and to the extent that we see the downward sales trend continuing, we're going to take a very hard look at our SG&A costs and really be watchful of those. So that is definitely on our list of high priority things to remain visual and to think about.

Understood, thank you. You mentioned also some operating margin pressures or decline in the tubular products, and can you give us a little bit more idea as to what you're facing there? Costs of materials, energy costs --

Those are -- a little bit has to do with just some of the issues that we have down to one shift some of the costs just as a percentage of sales go up a little bit, Scott. But -- and depending on -- there's usually a couple of different jobs they're working on and each job has its own gross profit margin to it.

So there's nothing in there that we view though as significant that we think is really going to continue. We expect tubular margins, really are good margins for the Company, and we expect them to stay strong this year.

Okay. And you did mention that the backlog has a lot less new rail, I believe, so we can assume that the margin profile is the backlog even though it's down as probably better.

It is than last year.

Okay. And I guess my last question is, you gave some statistics to Rob about the number of ties that -- the number of ties -- comparing the number of ties from last year to this year, and also the amount of -- pipe that was going to be coated -- an estimate, and you also gave some rail statistics that I missed.

Rob's question was the impact at which we talked about of the loss of the DM&E. And my comment was is that, I believe that last year we did $15 million worth of new rail business with the DM&E, and approximately $7 million of it came in the first quarter.

Okay. And I guess my last one then -- sorry about that, is that you did say, Stan, that you had made a decision to support domestic mills and not import rails. Is -- am I reading into this? Is there some demand out there that you're just not able to supply at this point?

Well, let me just step back on that, Scott. We were the first company to bring in Chinese rail. We brought in 2006 just about 20,000 tons. And we felt that with relationships -- and we value very much relationships at L.B. Foster Company, both on the supply side, and on the customer side, that in the long run that it would be best served to our shareholders to make a commitment to domestic supply on the rail side of it.

From the Chinese, let me just say we have brought in [Czech] rail in the past. Not that much but -- 80,000 ton of Czech rail -- or excuse me of Chinese rail was brought in last year. We didn't bring anything in. We have -- we believe that there will be supply that will be available. We're seeing the Chinese pricing go up faster than what we're seeing the domestic pricing --

Sure.

And we believe they're coming into play with the domestic supplier will really help us advantageously, and we've been working to that end for a couple of years actually. Steel Dynamics is -- we very much admire them as a company and they are really -- in their Columbia City facility they have a new plant which a second manufacturing operation will be coming online this summer.

They've had some delays with it, but when that happens they will be able to pick up structural steel off of their first facility, and on that first facility will have the capability and have more flexibility to produce rail. So we think it's going to be much better for us and for our shareholders in the long run.

Okay. But from the demand side of the equation, there isn't an issue with demand there that you're not able to supply as you wait for Steel Dynamics to get Columbia City up to speed?

No. Our inventory situation at the end of the quarter was right at $27 million, and as I said, we felt in this rising market -- we've seen price increases of new rail in the first four months in the neighborhood of $250, $300 a ton. We think it's very favorably priced. And the market overall is still been training around a run rate of a million tons per year, and we expect that would continue this year. So, I think we're in a pretty good position.

Okay. That's very helpful. Thank you.

Thanks, Scott.

We have a follow-up question from the line of James Bank of Sidoti & Company. Please proceed.

Hi. Your Birmingham plant. Is that -- they're down to one shift now right?

Yes pretty much. I think, ten-hour a day shift.

I'm just confused how that one is outperforming and doing well. And if you could just help me understand, because the year end backlog at the end of '07 was almost half of where it was at the end of '06. We don't know where it is right now. But you went from three shifts down to one. So I'm just -- I'm definitely missing something here how you're sales were up.

James, it's just timing of -- when we coat the pipe and when we ship it it doesn't always marry up, number one. Because we coat pipe and it gets stored and obviously ships when we get trains in . So the amount coated and the amount sold in anyone quarter may -- aren't going to exactly line up.

And we did have -- last year we really didn't get ramped up until end of February and into March, and obviously we went to a second shift sometime I believe in middle April last year.

So this is something where in the first quarter there's a -- there's obviously a nice positive variance at the coated -- in the coated business compared to last year, but we're going to be comping against much more -- much higher numbers coming in the second and third

Okay. And is there any news we might have if there is any on -- do you have any milestones where if they hit some sort of trigger to the cash payments that are obligated to you?

Well first the CP has to decide to build the line, and they haven't done that yet. As a matter of fact, I believe that the CP, and actually -- Lee probably knows better than me, but the CP is not even approval for the acquisition until October, I believe. But, Lee, --

Yes, the real issue right now is the Service Transportation Board that has deemed us to be a major transaction, and they have set a date for final approval at the end of September. So until that happens, the CP actually does not formally have ownership of the DM&E. Right now it is in a trust, and it is unlikely that they would make a determination on the project until such time as that ownership is complete.

Okay. Do you think they'd break ground next year, next spring, spring '09?

I think you'll have to ask them that question.

Okay. Fair enough, Lee. And that is all I have. Thank you.

Thank you.

This concludes the question and answer portion of today's conference. I will turn the call back to the speakers for any closing remarks.

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

Thank you for your participation. You may now disconnect. Have a great day.