L B Foster Co (FSTR) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2009 L.B. Foster earnings conference call. My name is Chanel and I'll be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (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 for today's call, Mr. David Russo, Chief Financial Officer. Please proceed.

Thank you, Chanel. 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 2009 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.

This morning Stan will provide an overview of the Company's first-quarter performance, give an update on critical business issues and discuss market conditions. Afterward I will review the earnings press release issued earlier this morning and then we will 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, 2008 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 to Stan Hasselbusch.

Thank you, David, and thanks to all of you for attending our first-quarter 2009 earnings call and webcast. This morning we announced results for the first quarter. Sales were $97.7 million, up 4.6% compared to the prior year sales, and net income was $3 million compared to $6.3 million in the first quarter of 2008. Last year's first-quarter income included a $2 million gain related to the COMPANY'S investment in the DM&E railroad as well as a $1.5 million pretax gain on the sale and lease back of our Houston, Texas pipe threading facility.

This year's quarter results were negatively impacted by a $1.6 million warrantee charge related to concrete ties. While we are still investigating the root cause of this issue, we believe a large part of the problem is isolated to production on one tie bed from February to August 2004 at our Grand Island, Nebraska facility. This bed was removed and scrapped when we retrofitted our facilities with new upgraded equipment and improved manufacturing processes in 2005.

In the quarter overall booking activity was down significantly compared to last year. Order entry for the Company was $97.2 million, off 26.8% from last year; corresponding backlog was $130.9 million, down 24.6%. Now I'll review the individual products and I'd like to start with Tubular where sales totaled $7.3 million which was flat with 2008.

Income from pipe products was 33 -- was up 33% due to increased volume at our Birmingham coated plant and higher margins micro-pile work at our threading facility in Houston, Texas. The problem we have in Tubular is similar to a number of our other products in this difficult economic period, a severe drop-off in bookings negatively impacting backlog. Tubular order entry was down 19% and the backlog was off 20%. The impact on our plants is obvious, in coating, for example, current workloads run only through the second quarter.

In piling sales were down 18.2% from last year and bookings were down even more as our cut construction-related markets were in a steep decline in the first quarter. Following heavy construction growth of 12% in 2008 reconstruction data has forecasted a decline of 6.6% in 2009. Total North America shipments of steel piling, which include both sheet piling and 'H' bearing pile, dropped dramatically in the fourth quarter of 2008 and has continued to be weak in the first quarter of this year.

Nationwide the current annual consumption rate is only 500,000 tons which is down significantly from the run rate of 700,000 plus tons we were seeing just 18 months ago. Because of reduced spending at the state levels and a continued tight credit market in the nonresidential sector, we expect this extremely weak construction market to continue throughout the year.

A bright spot in piling could develop from the stimulus package in which $4.6 billion was allocated to the United States Corps of Engineers and, in addition, $5.4 billion was included in the 2009 Omnibus Spending Bill which was passed several weeks ago. This infusion of cash should jumpstart a number of waterway projects throughout the United States including construction of the new levy systems in New Orleans over the next two years.

Another product line positively affected by the stimulus package is our pre-cast buildings group. Bookings in the quarter were $11.7 million, up 55% largely as a result of infrastructure spending for the national park system. From a billing standpoint we will begin to see the benefit of this activity in the second half of the year.

And a third area impacted by the stimulus package is rail, particularly on the transit side where we are seeing significantly higher bidding activity across the country. Though bookings were up only 3% at $7.1 million in transit for the quarter, we feel confident we will win increased business throughout the year. We expect transit's business will be soft in the first half and much improved in the second half.

Overall rail performance was solid in the first quarter, $54.4 million, up 17.7% over last year. New rail led the way with sales of $32.9 million which was up 123.5%. During the quarter we complemented supply from our domestic manufacturer's Rocky Mountain Steel and Arcelor with additional material from Steel Dynamics.

My main concerns in the rail markets are relay rail where depressed scrap prices have severely reduced both revenues and profit numbers. We expect this pricing level will continue into the foreseeable future. In addition, in CXT ties we expect demand at all three of our manufacturing facilities to be down from 2008 levels.

To recap our products, in rail we'll be challenged in both CXT concrete ties and relay rail. In pipe both product lines are managed well and we will be profitable despite a weak year. In construction buildings will benefit nicely from the stimulus package, fab products is coming off of a record year in 2008 and I expect with a strong backlog and active bidding we will improve on that in 2009.

The real wild card is piling, though activity was down in the first quarter opportunities on the horizon could turn the year around very quickly. I'll match our product and sales group against any of our competitors as we aggressively pursue these prospects. Finally, across all of our businesses we are being challenged to maintain our margins, particularly with our distribution businesses, as we have seen declining prices and intense competitive pressure.

Looking forward we feel that we have much more clarity about the balance of this year than we did at our fourth-quarter webcast in late January in part because of the benefit we will be receiving in the second half from the previously discussed stimulus package. Regardless of the state of these markets and our economy, as a 107-year-old company whose foundation centers on integrity, safety, quality and continuous improvement, we remain committed to the ongoing creation of growth and value of our business for all of our shareholders. And now I'd like to turn this back to Dave for the financial review.

Thank you, Stan. Before I begin the discussion on operating results I'd like to remind everyone that in the first quarter of 2008 there were two special items that had a one-time positive impact on our financial results.

The first item was $2 million of proceeds received late in the first quarter of last year related to a favorable working capital adjustment pursuant to the prior year sale of our investment in DM&E. The estimated EPS impact of those proceeds was approximately $0.12 per diluted share.

The second item was the sale and lease back of our threaded products facility in Houston, Texas. We received approximately $6.5 million for this facility which encompassed 63 acres and simultaneously leased back 20 acres. The gain on the sale was approximately $1.5 million. The estimated EPS impact of that sale was approximately $0.09 per diluted share.

So both items positively impacted last year's first quarter by $3.5 million on a pretax basis and approximately $2.2 million after-tax or $0.21 per diluted share. As in prior periods, in an effort to discuss meaningful comparative results, my discussion will exclude these items from the year-to-year comparisons unless otherwise indicated. So with that in mind I'll begin the review.

Sales for the first quarter of 2009, as Stan mentioned, were $97.7 million compared to $93.4 million in the prior year, a 4.6% increase. The sales increase was due to a 17.7% increase in Rail Products sales partially offset by a 9.8% decrease in Construction Products sales. Tubular Products sales were flat compared to last year's first quarter. The Construction Products sales decline was due entirely to a decrease in piling sales partially offset by increases in precast buildings and fabricated products.

First-quarter tubular sales, as we mentioned, were flat in the first quarter as coated sales increased but was offset by a decrease in threaded product sales. After both tubular divisions had stronger years in 2008, we anticipate they will both deliver reduced profitability in 2009.

The energy markets served by our coated division have been robust for the past several years and, while we still anticipate continued longer-term strength, there will definitely be a negative impact in the short-term. Our threaded pipe division is experiencing slow activity and the underlying pipe pricing has moved downward with scrap prices.

The rail sales increase of 17.7% was driven by new rail distribution while all other product lines experienced declines. New rail volumes increased 51% and pricing was also up substantially. First-quarter concrete tie sales declined at all facilities in 2009 compared to last year. Our Grand Island and Tucson facilities were approximately 40% utilized for the Union Pacific Railroad and we are actively marketing both heavy hull ties as well as an industrial concrete tie from Grand Island. The newer industrial tie is currently being produced and sold.

As Stan mentioned earlier, we became aware of a significant number of concrete ties failing in track and have recorded a $1.6 million warrantee charge to accommodate the estimated cost of fulfilling our obligations related to this issue. In Spokane we continue to produce concrete ties for other Class 1 railroads, transit authorities and contractors and we continue to experience reasonable but reduced inquiry and bidding activity. As a percentage of consolidated sales, Tubular accounted for 7% of sales, construction was 37% and rail was 56%.

As mentioned in our earnings release, backlog stood at $130.9 million at the end of the first quarter, down 24.6% from March 2008. Bookings for the quarter decreased 26.8% to $97.2 million. As Stan mentioned, we continue to see weakness in all segments, but our markets are not without a few areas of upside opportunity primarily as a result of basic infrastructure needs and, of course, the stimulus legislation.

Gross profit margins were 14.0% in the first quarter, a decrease of 270 basis points from last year's first quarter. The reduction in margin was due to the $1.6 million warrantee charge discussed earlier by Stan and a decrease in selling margins before manufacturing and other variances as well as increased unfavorable manufacturing variances. These negatives were partially offset by decreased scrap and obsolescence costs as well as decreased LIFO costs. First-quarter LIFO expense was actually a credit of $250,000 compared to an expense last year of $293,000.

SG&A expense decreased by 3.6% to $9 million in the first quarter of 2009 due primarily to reduced travel and entertainment and outside service costs offset by increased salary expense. SG&A represented 9.2% of sales in the first quarter of 2009 as compared to 10% of sales in last year's first quarter, an 80 basis points decrease. As a result of the foregoing, first-quarter operating income was $4.8 million compared to $6.1 million in last year's first quarter, a 21.4% reduction. As a percentage of sales operating income was 4.9% in this year's quarter versus 6.5% last year.

Interest expense was $328,000 in the first quarter of '09, $227,000 or 40.9% less than the first quarter of 2008. The decrease was due principally to a decrease in borrowings and to lower interest rates on certain debt instruments. Interest income was $300,000 compared to $800,000 last year, a decrease of $500,000 or 64% due primarily to a decline in interest rates.

First-quarter pretax income was $4.8 million compared to $6.4 million in last year's first quarter, a $1.6 million or 25% decrease. As a percentage of sales, first-quarter 2009 pretax income was 4.9% versus 6.8% in last year's first quarter. Excluding the $1.6 million warrantee charge in this quarter pretax income would have been even with last year's results. First-quarter 2008 income tax rate was 36.6% compared to 36.1% last year. Net income decreased 25.7% to $3 million or $0.29 per diluted share compared to an adjusted $4.1 million or $0.36 per diluted share last year.

Turning to the balance sheet, debt at the end of the first quarter was $26.0 million compared to $27.5 million at the end of 2008. Capital expenditures were $600,000 for the first quarter compared to $2.1 million in the prior year quarter. The 2009 spend was principally for plant and equipment improvements as well as technology infrastructure and application software.

We expect capital expenditures to be approximately $4 million in 2009 and we also expect to generate positive cash flow from operating activities this year in excess of our capital expenditures, debt service costs and share repurchases. The most notable use of cash in the first quarter was the $21.9 million reduction in Accounts Payable and the $1.9 million repurchase of the Company's common stock pursuant to its share repurchase authorizations that were announced in May and again in October of 2008.

As noted in our earnings release, in the first quarter we purchased 86,141 shares at an average price of $21.63 per share. Program to date totals reflect that we purchased 951,673 shares for a little more than $28.3 million. So the second Board authorization is approximately 22% spent. We do not believe that this program conflicts with our stated acquisition strategy. On the contrary, we believe that the combination of the two will help provide a balanced approach to providing long-term value for our shareholders.

Debt as a percent of capitalization was 10.6% at the end of March 2009 compared to 11.2% at the end of 2008 and 12.8% at March 2008. Our leverage ratio is just under 0.6 to 1, slightly better than December of 2008 and our interest coverage was more than 26 to 1. Cash at March 31, 2009 was $99.0 million and we had $96.8 million invested principally in AAA rated money market funds, all of which today are guaranteed by the US Treasury.

With regard to working capital, accounts receivable and inventory, net of accounts payable, increased by $11.4 million compared to the fourth quarter of 2008 and by $9.6 million from March of '08. Accounts receivable decreased by $5.6 million during the quarter, primarily due to the $13.4 million sales decrease in March as compared to December while DSO did increase to 47 days from 42 days at the end of 2008.

Inventory decreased $4.9 million during the first quarter of 2009 adding to the $17.4 million decrease in the fourth quarter of 2008. While our visibility has improved somewhat regarding our 2009 performance, we believe that the current recession, continued credit concerns and expected reductions in tax receipts by state and federal governments in upcoming months will present challenges to L.B. Foster given the markets we serve.

As a result of reduced demand for certain of our products, falling commodity prices over the last several months and a heightened competitive environment we expect to continue to battle margin compression for at least the next two quarters. We do expect to run our business with a balance of opportunism while managing risk in this uncertain environment by proactively adjusting to what we see in our markets.

We believe that when conditions do improve the markets we participate in will be some of the first to benefit from such improvement. We also navigate through this period of uncertainty in an extremely strong financial position with the ability to take advantage of opportunities or weather the storm if need be as future circumstances dictate.

While we know the markets will throw us some curveballs, we are glad to be facing them with the 615 fellow employees that have consistently demonstrated the ability to produce results for all of our stakeholders. That concludes my comments on the first quarter of 2009; we will now open the session up to questions. Chanel?

(Operator Instructions). Liam Burke, Janney Montgomery Scott.

Thank you. Good morning, Stan; good morning, Dave. Stan, the piling -- if I look at piling in two major businesses, you've got commercial construction and then you've got the public construction of the bulkhead business. The commercial is obviously -- things are very tough in that environment. How about the public side? Are you showing any signs of life today or is this something in the future that you're looking for on the stimulus side?

You know, it's something that we're really looking for. There has been a drop off in bidding at the state level. As our Senior Vice President, Don Foster, has told me on a couple of occasions over the past couple months, our business is very lumpy. We've been dragging along and maybe go a week without really seeing a lot of activity and some big job might come up and we're at it very aggressively.

One of the things that we're still -- and we've seen this now for two quarters, is the day in/day out business. And we're not seeing the truckload or two truckload business. A lot of the work that we continue to see, William, is the big jobs. And we expect that that's pretty much going to be the way business is going to be at least through the next couple quarters.

Okay. And then on the release you talked -- the Allegheny business was up this year, what was driving that business?

I think that we've done a -- we're doing a very good job, continue to do a good job. I know that our bookings with one of the Western roads, the Burlington Northern has been much higher than what we've had in the past and we're keeping -- our Pueblo facility has been running pretty much full throttle through the first quarter and we expect that to continue into the second quarter.

And we're starting to get some business from the eastern roads also. We put a facility in Niles, Ohio and really spent some money and upgraded that location last year and we're starting to see the benefits there also. So we're seeing work in both areas. And we continue to see that go. One of the areas that the railroad will not cut back on and that's in maintenance.

You know, across the board we would expect CapEx members to be down somewhere in the neighborhood of 10% this year. They may cut back in capacity and they might cut back in equipment, but they're not going to cut back in maintenance and this product is used quite a bit in that.

Great, thank you.

You're welcome.

Tom Spiro, Spiro Capital Management.

Good morning. A couple of questions. Number one, did I understand that we're now taking rail from Steel Dynamics?

We are.

When did that begin and help us understand what that means going forward?

I think that they've been working in rolling rail for the last couple years. I believe with the downturn in the structural market they've put more emphasis on that in the last quarter. They are producing certain rail. And there's not been a lot of tonnage, Tom, but we have taken some rail -- initially most of the rail coming off has been what we call [IQ rail] and we've been out of that market for the last couple years. So that's really helped fill a gap for us. And we expect them to continue making rail, ream of grade rail in the future. But we've gotten some IQ rail off of them in the first quarter.

Thank you. Number two, the defective ties, are we pretty comfortable now that we've identified or we've determined the size of the problem or is the investigation still ongoing?

We're actually pretty early into this. So these are ties that actually, as we mentioned, were manufactured in 2004. So from time to time we're notified that there are some ties failing here or there. Until we go and investigate along with the customer, in this case it's the UP, and jointly determine, there are other reasons for ties to fail on track other than them being defective. But these ties we went and walked track late March and agreed with the UP that it was our issue and we're dealing with them. We're aware of a couple of other spots in ties where we walked the tract was in Colorado.

So we're aware of a couple of areas where these ties that were manufactured in '04 went to, we're actually still investigating. As Stan mentioned earlier, we believe we know what the root cause was but we're still working it. But we don't know for sure. To Stan's point earlier, the plant that we think -- the equipment that we believe produced these ties and was part of the root cause of the problem is no longer in existence. So it becomes a little more difficult to investigate.

But we're still working it. The other thing is these ties are right at their five-year life and we provide a five-year warrantee to the UP. So we along with the UP are going to be going over a lot of their lines where these ties went. And it's a fluid situation, we've recorded our best estimate for everything that we're aware of today.

Let me add on that a little bit, Tom, also. We take this extremely seriously. Quality is one of our key core values. We're throwing everything at this. We think we know the root cause. We've formed a task force internally working with the UP, it's headed by our corporate head of quality, Neal Dow, and Neal's directions for the next -- for the indefinite future is full time on this problem.

We are going to get our arms around it, we're gaining on it every day. It's an unfortunate situation. We feel very strongly and we believe that concrete ties are a large part of our future and with this in mind we're going forward. We'll get this behind us and we'll go on.

That's helpful, thank you. And lastly on Tubular, I recall perhaps two years ago business was so strong I think we ran two shifts for a number of months and then in '08 it was strong enough for I think a full shift all year. Are we now at a stage where we're coming down from a full shift to some lesser level of utilization?

As I said, Tom, our backlog right now will carry us through the second quarter on one shift. The bad debt activity level is really low, a lot of it is tied in with credit, a lot of it's tied in with fuel pricing. But we are on top of that, it's a very well-managed group, I made note to this meeting that the vice president in charge of that group, Merry Brumbaugh, was named president of NAPCA which is an international organization for coating pipe of all kinds, oil, gas, water, and Merry was elected president of that just last Saturday. So we're very happy about that, she'll do a very good job for the association.

We feel that we're very well-managed, we feel that it is a tough time. That's on the coating side, Tom. On the threaded side we're seeing some depressed pricing and we're working through that. But it's going to be a tough year in Tubular. But as I said in my comments, we will be profitable and this business will come back, we're still bullish on the gas transmission markets also.

Thank you.

James Bank, Sidoti & Company.

Good morning. Just wanted to quickly circle back to the warrantee expense. I'm sorry, you isolated this to one plant just for the year of 2004?

One plant, really one line as well, yes.

That's what we're seeing.

Okay. So it could really only be maybe a couple thousand ties, worst-case scenario would be defective, right?

Well, it's more than that. We know right now there are at least 16,000 in Colorado and we know that there are three or four other locations that we're aware of that we're continuing to check. But it will be more than a couple thousand.

Okay. And then the $1.6 million, is that sort of a pretty conservative expense charge on your part?

What it represents, James, is basically what we know today, it's our best estimate. As I mentioned, we've walked this tract, it's in Colorado. We agree with the customer that it's over 16,000 ties and we've recorded that 100%. There are two other areas, one in Iowa and one in I believe New Mexico that we're aware of. We actually have not walked that track yet, but we've recorded a substantial amount related to that as well. We're going to be walking that track this month. And then we also have some excess reserve, if you will, for some areas where we could have an occurrence, but it's just not been reported yet. So our best estimate.

From an operating expense point of view, what's sort of your normal warrantee expense I guess in a quarter?

What we do unless there's a specific issue, James, we typically are booking around $0.25 per tied produced. Per tie sold I should say.

All right, that's helpful.

We take a reserve on all of our products, I don't care whether it's coated pipe or Allegheny rail, that's just part of it. I will say this, we really -- the UP is not -- we expect this year to be better from a quantity standpoint than what it was last year, but it's actually going to be probably very similar. We're probably looking at 200,000 ties at Tucson and 200,000 ties at Grand Island. I think David mentioned running at about 40% capacity.

But the quality of the ties that we're getting out of the two new retrofitted plants with the [Grimbergen] equipment. I know that this month here, for example in Grand Island, we're running considerably less than 1% reject at the plant level and really watching them very closely, we're getting the traction that we expected from them, we just need -- we need the commodity, we need the products and the volume. We're down in that side of it.

And the other thing that's been hurting us, we've talked the last year about setting up an additional line in Grand Island for industrial applications and that's being impacted big time from the credit crunch and that business is down also. And so as I said, this is going to be a very challenging year in the CXT side of our business.

Okay. Alrighty, thank you for that. Just moving on to the billing margins. Could you just split out what the decrease from the billing margins was on a basis point?

I'm sorry, James, I'm not sure I understand.

On the gross profit that you recorded of 14%, it was down 270 points from the quarter year over year. You attribute it to a number of things. I was just trying to isolate the billing margin piece, the variance.

Oh, I'm sorry. The billing margin piece was about 170 basis points.

Okay. Great. The transit stuff, assuming that you guys gave a pretty positive outlook going forward on it, any particular reason why it was down in the first quarter, or just an anomaly?

We had a record year last year, we burned a lot of backlog which I talked about in January in the fourth quarter. We knew the first quarter, in fact the second quarter -- the second quarter was going to be off also. But there's been a lot of activity with the stimulus release of money. Some of that money is freeing up. And keep in mind also with the transit products, I talked specifically about transit products, but what will go hand-in-hand with that is some of our other rail products such as New Rail and insulated bonded joints and power rail and some of this other.

There's a number of things that will go hand in hand that will complement our transit sales. But that's really been a real nice surprise this year. Activity levels are at a point that we haven't seen maybe ever. And we expect really to participate in a strong booking year this year and, as I said, we'll start to see the pickup of that in the second half of the year. But Greg Lippard and [Hawkin Exie] and their groups have really been on top of it and we've got some real good things going in that area.

Okay, great. And Stan, you also mentioned two separate packages under (multiple speakers).

And by the way, also as long as we're talking about that, we're also excited about some of the information we are hearing about high-speed rail, there are some programs going on there as we talked about, that part of the stimulus package, $8 billion was directly associated with the high-speed rail, we're watching some of that and that's going to be a beneficiary of everything going forward.

And we didn't talk about it in either our press release or our comments that were made by Dave and myself as far as the renewal of the transportation bill which is up for this late this year and we surely won't benefit from that this year. But we expect really to participate in that in 2010 going forward.

Right. Well, on the two stimulus packages you had mentioned in your comments, $4.6 billion and, I'm sorry, I quickly picked up on civil engineers but I couldn't quite get --?

There was a $5.4 billion that also came from the omnibus package which passed just a couple of weeks ago.

Okay, what actually is that?

It's current year spending in transportation. It's separate, that's from the stimulus package.

Okay. So that was just sort of an ongoing act. Was this part of the SAFETEA-LU transportation act from 2003?

Not really, it's in addition to it.

Okay. And you'd expect that to kick in and benefit you in the third quarter?

Benefit us -- it should start benefiting us in the second quarter, it's for this year.

Great.

I mean this year whereas the $4.6 billion going to the Corps of Engineers I think is over the next couple years.

Okay.

The only thing that we're looking at that we expect to really kick in is down in New Orleans. I think there's really a lot of work that's going to be coming up down there over the next -- it's going to be bid probably over the next six months and it will be constructed over the next two years, which could be huge for piling.

Right, okay, terrific. And sorry to take everyone's time here. The operating income, Stan, you mentioned in Tubular it was up 33% year over year? And then I didn't get construction and rail. If I could get just the increases or decreases in that margin -- or excuse me, in the income, that would be great.

That was the one we chose to discuss, Mark. We don't usually give that information out.

Okay. Well, I'll get it from the queue. I'll just jump back in line.

Thank you.

Mark Zinski, 21st Century Equity.

Good morning. My sense, at least on the last call, was that at that point you seem to have more concern about margin pressure. You alluded to margin pressure again in this call. But my sense is your tones seem more optimistic now. Is that a fair assessment, are you less concerned than you were --?

Not necessarily. I'm sorry if you got that impression. I think at our last earnings call in January there was just no visibility on the year. It was something that I've never experienced looking out. There's a lot of questions, there's a lot of uncertainty. I think things are coming together. We've still got some pressure on particularly margins on our distribution site. We're seeing a drop-off in pricing, the scrap price continues to drop, competition is as intense as we've seen it. And so that's going to put pressure on the margin in and of itself.

I think that from an inventory position our two main areas are in new rail and piling, we don't have a lot of at risk inventory that we're sitting on. But that's not to say that we're going to see -- that's not to say we won't see reduced margins on some of that as we move that through. So I still think there's going to be a lot of pressure on margins particularly on the distribution side of our business.

Okay, very good. And you did and nice job with SG&A this quarter. Are you pretty comfortable with your current cost structure?

We're watching it all the time. We will talk with our Board about it at our May meeting again. We, just to reiterate what we talked about in January, we've frozen salaries, we have cut back on CapEx which David discussed. Travel and entertainment -- I know that in the first quarter we put a real -- we don't want to -- it's very important to spend the money, but I'm just telling all of our people to spend it wisely. But I think that results in the first quarter were down about 24% in T&E. So some of that's being driven by that. We're watching it all the time and we're going to keep our eye on the ball.

Okay. Then it seems that generally the rail outlook is more positive than originally thought, particularly with some -- certainly the $8 billion in the stimulus package, but then also the additional $5 billion that's been proposed. In terms of high-speed/light rail, what are the nuances of that versus freight rail as it pertains to your business?

Well, both of them will use concrete ties which we're excited about, both and them are going to use new rail and they're going to use transit -- there's going to be a carryover between both sides of it between transit and freight. But let me just say -- I think we do have a little more clarity about rail for the rest of the year and going forward. But the freight railroads have got some huge challenges. Car loadings in the first quarter pretty much across -- average we're down 15%. Automobiles were down 50, I think coal was only down 4% or 5%. But they're going to be struggling.

I had read something earlier this week that one of the lines is sitting on 60,000 empty cars and they've got to fill them up. And so we are expecting CapEx spending to be down and that's going to directly impact our concrete tie business for one. They might slow it down construction of major lines, but we feel better particularly on the transit side of our business, but we're watching this very closely. We feel a little better about the year than we did, but we don't feel as good as we'd like to.

Okay. And then just last question in terms of acquisition activity. Are you looking more at a potential acquisition in rail versus construction or can you comment at all about specifically what your goals might be in terms of an acquisition in the future?

Mark, most of the targeting process has been started with rail and continues to be rail-related and we've actually talked to some companies on the Tubular side and construction is certainly not out of the question as well. So I would say most of the effort has been in the rail marketplace so far. But stuff does pop up from time to time so you never know. But I would tell you most of the effort where we've initiated things has been on the rail side.

Okay, great. Thank you very much. That's it.

Scott Blumenthal, Emerald Advisers.

Good morning, Dave, good morning, Stan. Thank you for taking my questions. Has your experience I guess coming into this month been pretty much the same as in Q1 with regard to the bookings and orders? Have you seen the same softness? Are there any indications that might give you some increased hope here?

You mean our bookings like for April?

Yes.

I think that there's -- they're pretty much the same. I don't think that there's been a big change. We've had a couple things that were booked the first part of the month which were actually carryovers. But there seems to be a sense of increased activity. And we expect, as I said, that to fold into bookings throughout the quarter and into the third quarter. But there's not been any radical change.

As Stan mentioned in his section, there has been some additional bidding and some activity, but those as of yet haven't really translated into bookings and so far April bookings are still lower than 2008, April to April comparison.

Thank you, that's helpful. A lot of our businesses at Foster are potentially -- have the potential to be impacted positively by stimulus and it looks like a lot of that's coming through at different times. And we've already -- and correct me if I'm wrong here -- seen some impact in the precast buildings business. What do you think, Stan, what do you think about that business? Why did that money come through so quickly? And what are the types of things that might hold up some of the (technical difficulty)?

They were shovel ready, they were ready to go. They have been talking about -- we've heard so much about the national park system being in disrepair. And they had some projects that were on the books and when the money became available they grabbed it. And I think there was $2 billion between four agencies that they actually got. And they've done a pretty good job of advertising and our group out in the Hillsboro and Spokane have done a great job of jumping on it.

So it really had -- it did benefit the first quarter it was right out of the box. That package that -- the stimulus was announced and they were up and running and that should continue from an activity standpoint, from a booking activity and order entry for the next couple quarters and it really will have a good impact on the second half of the year.

Great, that sounds good. And with regard to the concrete ties business, you talked about operating at about 40%, at least in Grand Island and Tucson. I don't know if that also applies to Spokane. At what point do you -- you've got two or three plants running at 40%; at what point do you say we're going to have to close this one for a while and maybe do everything out of one place?

That's surely something that we looked at at the start of the year. But our operations people and engineering people really looked at this hard, we've cut back, we took some big cutbacks at the start of the year at both Tucson and Grand Island. We have lengthened -- we're not -- we're cutting back, we're not -- we've increased secure time, we're doing it with less people, we are taking more -- we're not using the additives, we're cutting some of the cost back there. But it's something that we considered and we'd continue to look at if it gets any worse. But I think that what looking at right now at each location is about the minimum we'd want to go at.

The other issue too, Scott, we're contractually obligated to provide ties for our customers in Grand Island and in Tucson. So that can't be a unilateral decision.

Down to a minimum number which is below the 200,000.

Understood, understood.

When we built them we expected for sure that the bulk of the ties would be produced and would --

-- be consumed by those customers (multiple speakers).

Yes, right. And one of the areas that we had thought we'd get some pickup which we haven't experienced and we look forward to that happening also, was in the transit side, particularly in Southern California. And we haven't seen that coming out of Tucson at all yet.

Okay. And Dave, can you talk about just -- I understand that inventory is down from $102 million to right around $98 million. Can you talk about the units there?

Yes. Scott, as far as -- we typically would look at it in terms of tons. And right now for the most part that reduction that we discussed is all tonnage. We haven't had a whole lot -- a little bit of decreased pricing with some of our purchases in the first quarter. But it's tons and it's piling and a little bit of rail.

If you take a look at last year to this year, Scott, we've come down -- our inventory levels have come down in piling. We're not nearly where we need to be. I think we expect to be down by the end of the year in our inventories by another $13 million to $15 million. But rail inventories are relatively flat from last year, piling inventories are down 14% to 15% and we're up a little bit in ties, concrete ties where we ramped up at the end of last year or last year expecting higher volumes from the UP this year at both Grand Island and Tucson. And we also had produced last year ties for industrial applications which have been slow-moving. So I think that our inventory levels between those two plants are probably up $8 million to $10 million compared to where they were a year ago.

Do you have an overall target for the business, Foster, as a whole? Because right now we're looking at about four and I understand that not every unit or every segment has very high inventories. But we've got about $100 million in inventory and we're selling about $100 million a quarter. So we're looking at overall about four times. Do you have an overall target of where you think you can get those?

You're right in that it does vary substantially business to business. One of the issues, Scott, as Stan has mentioned on previous calls, not today but we've got $15 million or maybe a little less, $13 million worth of rental piling and that rolls up in inventory. But that we're getting rental income off of 50% to 60% of that. And it's high-margin, but at the same time 40% to 50% of that rental piling sits in inventory until it's needed.

So there are certain things that we certainly can do, we're trying to book as much as we can to the rollings. And with regard to a target, it obviously becomes a little more difficult when we were -- things were flying off the shelves over the past 18 months until we get to the fourth quarter of last year and the slowdown was sudden and it was quick. So we are trying to work that down, each one of our businesses are. We'd certainly like to move that 20% or more during the course of this year and get our turns up to 5.

Okay, that is fair. Thanks, Dave. And I guess my last question is you did say that the warrantee charge is in cost of goods sold, correct?

That's right.

Okay. Well thank you.

Brian Rafn, Morgan Dempsey Capital.

Good morning, guys. A question for you, Stan. You talked a little bit about some of the stimulus for the bullet trains. Can you go from an engineering standpoint, if you talk to some of the Amtrak people they'll say if you go over 75 miles an hour the train will rock right off the tracks. Are you -- if they put in new lines are you doing new rail construction, are you doing rehabs, does a bullet train require more concrete ties per linear run? Give us a sense from an engineering what that would -- if you're seeing that stimulus for high-speed trains?

The high-speed train is -- high speed rail is interesting, just when you try to get a definition what is high-speed rail, you go to Europe and you're going 180, 200 miles an hour and in Japan. But it remains to be seen yet from an engineering standpoint how it is going to play, if it's going to be -- one of the lines they talk about is Chicago to St. Louis and how is that going to play. Is it going to be new lines? Is it going to be built on existing lines? Is it going to be upgraded lines? A lot of that remains to be seen.

Some of the lines that we see in the United States from a high-speed transit speed are -- they are in excess of over 100 miles an hour. But there's a lot of design work that has to be. I think that a lot of people were caught off guard by the $8 billion in the stimulus package for high-speed rail. It's a very good thing and this will really put the focus on it and I think you're going to see activity on it much sooner than what we would have thought. But there's a lot that's going to go into the design whether it's going to be retrofitted lines or whether it's going to be new lines, if they're going to be -- there's just a lot to be done on that yet.

Yes. Could you see, Stan, as the mph goes up that there will be more call for your products or would there be just a base call for your products irregardless of how fast these trains go?

What was the question again, I'm sorry.

If you see the US model for high-speed trains is more of the 125 mile an hour versus say the (inaudible) will be tested at approaching 180, is the higher the speed of the prototype of the US model in high-speed trains, is a higher mph or a higher speech calling for more of your products or about the same?

When you get up at the various speeds, conceptually it could be all different. There's a lot of engineering that has to go into (multiple speakers).

Brian, there's all kinds of different applications out there for high-speed rail, some of which don't even use concrete ties, a lot of which do. So it really depends on specification and application and what -- a lot of the United States transit authorities are just dipping their toes right now. So there's going to be a lot -- at Stan's point, engineering and design work. And really my guess is they're going to be looking to Europe to see what a lot of the European countries do. Because it's certainly a new ball game for the United States.

Europe uses a lot of concrete ties.

Okay, okay. Back to the issue with the defective ties, you've talked about Colorado. Is there a sense that -- I can remember back 20 years ago with Tylenol and Johnson & Johnson, they really went after that very quickly and at the end of it really developed an awful lot of cachet to their response to the quality of their product. With Union Pacific is your aptitude in fixing this product, at the end of the day do you come out on the other side with maybe a stronger relationship with them depending on how you mitigated this defective tie work?

We surely hope so. That's why I said we're going -- we're throwing everything at it from a quality standpoint, from an engineering standpoint. We want to find out what's wrong, we want to take it out and we want to make it right because --.

And if we can turn that into a stronger tie in the future we certainly intend to do so.

Okay. And I jumped on late so I apologize if this is duplicative. But what kind of US roads from the standpoint of maintenance CapEx, what on an annualized basis would the dollar amount be just for maintenance CapEx?

CapEx and maintenance are two different things. I did mention earlier on that CapEx we expect to be down 10% from last year and that's preliminary right now. And maintenance should be fairly flat, they don't want to lose sight of that. And when you talk about the CapEx, how they look at the capacity could drop off somewhat, equipment could drop off, but they're not going to lose -- the railroads give them so much credit they do a great job at maintaining their way.

Okay. And then I missed it, what are your internal -- kind of your budgeted CapEx for the year (multiple speakers)?

We're targeting right around the $4 million or maybe even a little less range, Brian.

Okay. And Dave, maintenance for you guys would be --?

Maintenance for us is about $2.5 million, $2.5 million to $3 million.

Good job, thanks, guys.

James Bank, Sidoti & Company.

Just some quick follow ups. With your share repurchase what was the average price you guys were buying at in the first quarter?

James, it was around $21.63.

Okay. And the long-term debt that's left, $12.6 million, what's the majority of that?

Most of it is a term loan we have with our bank group that's due at maturity in 2011.

Okay.

We also have some mid-term capital leases out there, probably about $4 million of that was long-term.

Okay. And just sort of a macro picture. Earlier in your comments when you said that the coatings had done well, I understand Tubular could be difficult this year, but coatings tends to go to the natural gas markets and threaded tends to go to the water markets. Is there any read through in regard to how well the coatings business did, maybe how poorly the threaded business did, if those two markets?

We actually had a pretty good coated business in the first quarter, James, but that's working off prior-year backlog. So when you take a look at what we're booking today they're both pretty weak.

Okay. All right, very helpful. Thank you both.

Ladies and gentlemen, that concludes the Q&A process. I would now like to turn the call back over to management.

Thank you and have a good day. Bye.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.