L B Foster Co (FSTR) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 LB Foster earnings conference call. My name is Thomas and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

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

Thank you, Thomas. Good morning, ladies and gentlemen. Thank you for joining us for LB Foster Company's earnings conference call to review the Company's third quarter 2009 operating results. My name is David Russo and I'm the Chief Financial Officer of LB Foster.

Hosting the call today is Mr. Stan Hasselbusch, LB Foster's President and CEO. This morning, Stan will provide an overview of the Company's third-quarter performance, give an update on critical business issues, and discuss market conditions. Afterwards, 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 LB 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 LB 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 LB Foster. Additionally while forward-looking statements will be made today, it is LB Foster's company policy to not provide specific earnings guidance. With that, we will commence our discussion and I'll turn it over to Stan Hasselbusch.

Good morning. Thank you, David, and thanks to all of you for attending our third quarter 2009 earnings call and webcast. This morning, we announced the results for the third quarter.

Sales were $92.4 million, down 36.5% from third quarter last year. Earnings per share for the quarter were $0.60, down 21% from the previous year's quarter. Bookings were $107.5 million and corresponding backlog was $155.5 million. While this was a 13% less than the backlog at the end of the third quarter last year, we were actually 10.7% ahead of this year's second quarter backlog numbers.

The global recession continues to negatively impact all of our major product lines. Tubular sales were down 69%, construction sales were down 31% and rail sales were down 37%.

From a product standpoint, let's start with tubular where well head prices and rig counts are both down over 50% from last year and continue to hurt our coating business. Square footage coated in the quarter was off 80% when compared to last year and we do not expect any major improvements in coating until the second half of 2010.

On a positive note, in tubular we were pleased to announce the formation of a joint venture with Lally Pipe and Tube to manufacture pipe couplings in Houston. The couplings will service both our needs in the pump column business and Lally's needs in their limited service applications.

Initially, we will produce couplings for internal consumption but eventually would expect to explore other threading and market opportunities. This facility is currently under construction and is expected to be operational in January, utilizing state of the art robotic equipment. We are pleased to be working with Lally in this venture. Their values and culture match up very well with ours.

On the construction side, while revenues were down in piling, we were buoyed by the fact that bookings were $47.6 million, 86% ahead of third quarter 2008. We of course benefited from the $20.5 million order we received to supply flat sheet piling to the Panama Canal rehabilitation program.

This along with a slightly larger US Army Corps of Engineer project in New Orleans will provide a solid revenue base for piling over the next three quarters. Expectations in the construction market are weak for 2010.

Heavy federal spending will be flat at best and the combination of shrinking revenue and the tight credit markets will continue to drive nonresidential spending down significantly. This coupled with the inability of Congress to pass a new transportation bill will make the construction segment of our business seriously challenged again next year.

In rail, car loadings and intermodal traffic continue to be off significantly, 16% and 16.6%, respectively. The drop-off which further indicates economic decline is severely impacting markets that formulate our sweet spot in rail distribution, the industrial [shoreline] in regional markets.

As a result, our distribution business was down in rail in the quarter 52.5% from last year. Concrete ties were also down 8.4% quarter over quarter. The drop-off was primarily in Spokane and related to the economic downturn in the industrial market.

Regarding the concrete tie issue discussed in the past two quarters, we continue to work with the UP on this matter and the systemwide inspection process is expected to be concluded by year-end. A real bright spot in rail has been our transit business.

As I said last quarter, they are one of the beneficiaries of the stimulus package. (inaudible) and his group booked a record $10.3 million in the quarter, substantially ahead of the $1.7 million booked in the third quarter of 2008.

In summary, our markets continue to be challenged in this difficult economic environment. I can assure you that we remain committed to focusing our energies on containing costs and improving our operational efficiencies to generate positive cash flow for the Company.

We have a strong balance sheet and intend to use it to our advantage in the future. And by the way, I'm not sure whether you had seen this yet, but in the November 2 edition of Forbes magazine that hit the newsstands this week, LB Foster Company was again named to their 200 Best Small Companies in America list.

We are very proud of this honor and on behalf of the dedicated employees at LB Foster, I would like to thank all of our many stakeholders for your ongoing confidence and continued support. And now I would like to turn it back to David for our financial review.

Thank you, Stan. I would like to summarize some of the adjustments reported in the earnings release from this morning.

The first one is that we did realize a gain on the sale of marketable securities of $1.2 million which is included in the other income expense line on the income statement from the earnings release table. We also recorded slow moving inventory charges of $1 million and reductions in inventory values resulted in unfavorable gross profit adjustments of approximately $1.5 million.

The gain on the sale of marketable securities will be excluded from the ensuing discussion of operating results as it is non-operating in nature. So with that in mind, I will begin the review.

Sales for the third quarter of 2009 were $92.4 million compared to $145.6 million in the prior year, a 36.5% decrease. The sales decrease was due to a 37.2% decline in rail product sales, 31.1% decrease in construction product sales, and a 69.1% reduction in tubular product sales compared to last year's third quarter.

The construction product sales decline was due to a decrease in piling sales, partially offset by an increase in fabricated product sales and an increase in concrete building sales. Both the bridge and concrete buildings markets have benefited from stimulus funds.

The third quarter tubular decrease was due to a sales reduction in coated products and to a lesser extent, to a sales decline in threaded products. After both tubular divisions had strong years in 2007 and 2008, it appears that 2009 will be one of the segment's worst years in quite a while.

The energy markets served by our coated division have been robust for the past several years and while we continue to anticipate strength over the longer-term, we experiencing an extremely weak market at this time and expect it to continue into 2010. Our threaded pipe division is also experiencing very slow activity and pipe pricing has moved downward with steel prices.

37.2% decrease in rail sales was driven by across-the-board reductions in all product lines with the exception of our Allegheny rail products group. Rail distribution which has been one of our more consistent performers over the past several years was down over 50% compared to last year's third quarter.

Our transit division revenues declined 39% in the third quarter of 2009 compared to the prior year. However, as Stan has mentioned, the popularity of mass transit coupled with the stimulus legislation has aided this division to book enough business to increase its backlog by almost 300% compared to last year. Concrete ties sales have held up fairly well. They're reporting a sales decline of 8.4% for the quarter.

Our Grand Island Tucson tie facilities were approximately 45% utilized for the Union Pacific Railroad and we are actively marketing both heavy haul ties as well as an industrial concrete tie from Grand Island. This new tie is currently being marketed into a very soft industrial marketplace.

In Spokane, we continued to produce ties for transit authorities, other Class I railroads, contractors and industrial customers and we continue to experience reduced inquiry and bidding activity. As a percentage of this quarter's consolidated sales, tubular accounted for 3%, construction was 52% and rail was 45% of the total.

As mentioned in our earnings release and as Stan also mentioned, backlog stood at $155.5 million at the end of the third quarter, down 13% from September of 2008. This number did actually increase however over June of this year by 10.7%.

Bookings for the third quarter decreased by 7.2% to $107.5 million. This year's year-to-date nine-month bookings totaled $316 million, down approximately 23% compared to the prior year.

Gross profit margins were 19.2% in the third quarter, an increase of 360 basis points from last year's third quarter. The increase in margins was due to a favorable swing in LIFO adjustments of $10 million, partially offset by an increase in unfavorable inventory valuation adjustments of $3.9 million based upon declining material costs, increased unfavorable manufacturing variances of $827,000 and increased slow-moving scrap and obsolescence costs of $0.5 million.

The unfavorable manufacturing costs are certainly due to significantly reduced production volumes at every facility with the exception of our bridge division and our concrete buildings business. SG&A expense decreased by 10.2% to $9.1 million in the third quarter of 2009 due primarily to decreased costs related to incentive compensation, travel and entertainment expenses and decreased bad debt expense.

SG&A represented 9.8% of sales in the third quarter of 2009 as compared to 6.9% of sales in last year's third quarter. As a result of the foregoing, third-quarter operating income was $8.8 million compared to $12.69 in last year's third quarter, a $3.8 million or 30% reduction. As a percentage of sales, operating income was 9.5% of this year's sales versus 8.6% last year.

Interest expense was $328,000 in third quarter of '09, $172,000 or 34.4% less than third quarter of last year. The decline was due to reduced borrowings and to lower interest rates on certain debt instruments.

Interest income was $169,000 this year compared to $617,000 last year, a decrease of $448,000 or over 72% due to a significant decline in interest rates from the third quarter of 2008. We've repeatedly disclosed that our cash has been invested principally in money market funds that have been guaranteed by the United States Treasury Department.

Well, Treasury did announce that they did let their guarantee lapse towards the end of the third quarter. So we will be reevaluating where our cash goes, although protection of principle remains a high priority.

Third-quarter pre-tax income was $8.6 million compared to $12.7 million in last year's third quarter, a $4.1 million or 31.8% decline. As a percentage of sales, third-quarter pre-tax income was 9.4% compared to 8.7 in last year's quarter. The third quarter 2009 income tax rate was 37.6% compared to 35.9% last year.

Net income, once again adjusted for the gain referred to earlier, decreased 33.6% to $5.4 million or $0.52 per diluted share compared to $8.1 million or $0.70 per diluted share last year. Turning to the balance sheet, debt at the end of the quarter was $22 million compared to $24.5 million at the end of the second quarter of 2009 and $27.5 million at year end 2008.

Capital expenditures were $2.5 million for the third quarter compared to $900,000 the prior year quarter. Approximately $1.4 million of this quarter's spend was principally for land and early construction of a building for a joint venture that we recently entered into with Lally Pipe and Tube that Stan mentioned in his discussion. The remainder of the capital was related to facility maintenance capital and IT infrastructure improvements and upgrades.

Depending on the timing of certain planned projects, we expect capital expenditures are likely to range between 6 and $7 million in 2009. We continue to expect to generate positive cash flow from operating activities in 2009 in excess of our capital expenditures, debt service costs and share repurchases.

For the second quarter since the Company announced its share repurchase program in the third quarter of 2008, we did not purchase any LB Foster common stock during this quarter. We continue to believe that our share repurchase strategy helps to provide a balanced approach to providing long-term value for our shareholders.

Debt as a percent of capitalization was 8.8% at the end of September compared to 9.9% at the end of June 2009 and 11.2% at the end of December. The decrease during this quarter was principally due to an early payoff of approximately $1.1 million of fixed rate debt that had higher interest rates and where our prepayments penalties lapsed.

Our leverage ratio is just under 0.6 to 1, down from 0.63 to 1 at the end of June and our interest coverage was more than 25 to 1. Cash at September 30, 2009 was $122 million and we had $121.1 million of that invested principally in AAA rated money market funds which we discussed a little earlier.

With regard to working capital, accounts receivable and inventory net of accounts payable increased $2.4 million during the third quarter and decreased $3.8 million from year end 2008. Accounts receivable increased by $1.7 million during the quarter primarily due to an increase in sales compared at the end of -- for this September compared to June of 2009 and DSO remained flat at 49 days.

While payments related to a couple of large projects have pushed out a little, we believe our AR portfolio remains in very good shape. Turning to inventory, inventory increased by $2.6 million during the third quarter of '09, reversing some of the $8.6 million reduced during the first half of 2009.

Looking forward, we believe that the current recession and continued credit concerns and expected reduction in tax receipts by state governments in upcoming months will present challenges to LB Foster. As a result of reduced demand for certain of our products, continued falling commodity prices over the last several quarters and a heightened competitive environment, we expect to continue to battle margin compression for at least the next two quarters.

We will continue 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.

LB Foster has a tremendous advantage of navigating through this period of uncertainty -- an extremely strong financial position. As I mentioned, we ended the quarter with $122 million of cash and we also have over $72 million of available credit, giving us the ability to take advantage of opportunities as future circumstances develop.

That concludes my comments on the third quarter. We will now open up the session for questions. Thomas?

(Operator Instructions) Liam Burke, Janney Montgomery Scott.

(technical difficulty) little more detail on the joint venture? You are contributing -- you're purchasing land and you are contributing capital to the construction of the building. What other assets are being contributed to the venture and roughly what would your ownership be in it?

Assets would be basically -- cash ownership position is 45% and that would be for the equipment, for the land, for the building. We are buying the land and leasing it to the joint venture.

On the piling, there is some good news with New Orleans and the Panama Canal. There's a lot of bad news in the nature of the commercial construction market. Is there anything in the middle where you're seeing any signs of improvement?

Well unfortunately, there's not a lot of good news in the piling side of it. Piling shipments over the last 12 months, total piling shipments are down over 50%. I think our tonnage is down 42%, I believe is what our -- this year to date.

Pricing has dropped 20, 25%. The day in, day out business has not been there. And that is driven by the non-residential building and some of the industrial applications. The truckload business is gone.

We've been very fortunate we have been -- in booking some large jobs which had been good but primarily at compressed margins. But our piling group has just done a very good job really being able to go out and identify. A lot of jobs that we're seeing are being delayed or even canceled.

I think 42 of the states are running at negative budgets. And so there is a hangup of some of the [state work] getting out there and getting approved. So it's very difficult situation. We are dealing with it as best we can and I think our piling group is just doing a very superb job of handling this difficult (technical difficulty)

Thank you, Stan.

Yes, and we do also, Liam, expect to see some pickup from the stimulus. But we are having a lot of it in the piling end of it really.

James Bank, Sidoti & Co.

So you are certainly having some good activity on the larger projects but if I'm hearing you correctly -- I know it's only October but you are more or less implying that the top line -- let's stick with this part now -- just the sales number in 2010 in effect could even be down from 2009?

I'm not going to say that at this point. But I mean it's not going to be any V-shaped recovery, I can assure you that. It's going to be pretty lumpy at least going into the first two quarters of next year.

We didn't really talk about this but the federal transportation bill which expired at the end of September, a new bill that we all get excited about with additional opportunities with it, we don't think that that's going to be approved at least in the first half of next year. So it's going to be tough. I'd be foolish not to tell you that.

Right, I understand. And the backlog of $156 million, David, I think you referenced how quickly that would go but I didn't catch that.

Actually, I don't know if I said anything about it. Typically I guess the sweet spot for our backlog at any one point, James, is anywhere between three and nine months. But at any one point in time for the whole backlog to work off, it's usually the better part of 11 or 12 months.

Okay, so of this number then, you would expect this to not go in the fourth quarter?

Well some of it certainly will, but not all of it.

Okay, now getting into the adjustments in the quarter, it looks like it's more or less net to neutral I think with the sale of the marketable securities, the charge for slow-moving inventory as well as the reduction on the salaried workforce. But the LIFO credit seemed to have benefited you considerably.

I was wondering if I could get on a per-share basis. And I think you had about $4.5 million of LIFO credit in the first half of the year. If I could maybe get the per-share basis in the first and second quarter two just for an apples to apples.

We don't really look at those items discretely and start calculating EPS, James. I mean it's very easy to take for the quarter, the $4.9 million and apply an effective tax rate and you're probably going to get somewhere around $0.30. So -- you can do that for any one quarter or year to date. Certainly the third quarter was where the preponderance of our LIFO credits (multiple speakers)

That was $10 million, right (multiple speakers)

$4.9 million for the quarter (multiple speakers) the entire nine months it's $6.7 million. The $10 million that I referenced is the swing from quarter to quarter this year versus last year because last year, we had LIFO expense.

Okay, because I just see here a favorable change in LIFO adjustments of 14.5.

That's year-to-date now. You're in the year to date. You are looking at nine months.

Okay, I'll just stick with this. So the third quarter, it was 4.9 and then for the first half, it was 6.7?

For the first nine months, it was 6.7.

Year to date, it's 6.7.

For the first half, you're looking at less than $2 million, in other words.

As I ex out that LIFO credit, it looks like gross -- or I think you even supplied it was about 15.8% which is pretty good. But then in the press release, you referenced that certain facilities still cannot cover their fixed costs that these little volumes.

I mean I still think that 15.8% is a pretty good achievement. Is this press release trying to imply that that would go south from here or just at the very least is that sustainable from here?

There's two different areas. You've got gross profit on our sales, James, which you're right are still -- they're not better than last year but they're holding up. The other thing is we look -- one of our metrics is just the plants and whether they fully absorb their variable and fixed costs and what we are saying is with these low volumes that we've been experiencing, as many facilities you see in other companies, we're not covering our fixed costs in all areas.

Okay. I think that's all I had. Thank you.

Mark Zinski, 21st Century Equities.

I just wanted to touch on light rail briefly. There's kind of been some enthusiasm related to stimulus funding. Some of the European manufacturers are apparently pretty interested in what is going on in the states. Can you comment as to what kind of activity you are seeing in that particular state?

Well, you broke up quite a bit, Mark. But I think you're talking about high-speed rail?

Yes.

There's something in the stimulus package that's been obligated -- I believe that (technical difficulty) mentioned but I think that the applications that we've seen are much more than the $8 billion that has actually been authorized. We really have not seen any major projects take off yet and we are watching a couple areas that could possibly go but there's nothing that's really taken off yet.

Do you think that there's the potential that light rail could help mitigate some of your declines in the rail business? Or do you think it'll be pretty immaterial?

I think that it's going to be immaterial at least for the next 15 months.

Okay, great. And then do you anticipate any severance expense in the next quarter?

I'm sorry, Mark, could you repeat that?

Do you expect any severance expense in the next quarter?

We certainly don't know. We are going to right-size the business as we get a little more clarity and forecast as we go through our operating plans and see what next year is going to look like. But right now, we don't have any firm plans now.

Okay, great. And then just lastly on the joint venture. Principally what end markets would your products go into then with the joint venture?

Ours would go into the pump column business which is used in water drilling.

So this kind of diversifies the end market a little bit for you?

No, it doesn't. We use them anyway (inaudible) entering the joint -- we entered the joint venture with the intention -- we consume couplings. We consume 50,000 to 60,000 couplings on an annual basis.

Lally I think is very similar in their usage. This will ensure us quality, pricing and availability which has been really a stickler to us. So we don't really plan on expanding that business to other markets initially but we are looking at possible (technical difficulty) to which could include oil and gas and micropiles. There's a number of different areas that we could look at.

(Operator Instructions) Scott Blumenthal, Emerald Advisers.

James got everything I needed on the LIFO adjustments. But, Dave, could you just address what you might see as the reason for the increase in inventory at this point?

Well, kind of ironically, Scott, when we have LIFO credits, that actually reduces our LIFO reserve and increases our net inventory balance. I won't tell you that's the only reason. But some of it is we're working on a couple of longer-term projects where there's a fairly significant amount of logistics before the inventory actually passes over to the customer.

So we are going to actually see some of that have an impact -- not a huge impact but a moderate impact over the next two or three quarters as a couple of big projects get worked through. But I would tell you the $4.9 LIFO credit is a direct increase to the inventory balance you see on our financial statements.

I can also assure you, Scott, that inventory from a corporate operations standpoint is one area that we are looking at very hard and really expect to make some very positive changes in, improvements in our inventory control and management in 2010.

So then it's safe to say with you on the job there, Stan, that if we looked at inventory from a tonnage perspective, it's still continuing to decline?

You know what? Year over year, quarter over quarter, inventory is down 20% from the third quarter last year, I think from $120 million to $96 million. Tonnage is down but we need to take it down more.

Brian Keeley, Keeley Asset Management Corp.

I was just hoping to ask a question regarding your use of cash, what you're seeing in the acquisition market, those type of issues?

Actually in the first half of this year, we saw virtually nothing but deal flow was extremely slow and for LB Foster, just about nonexistent. Things have actually over the last 45 to 60 days picked up somewhat and there's a few things for us to look at and [that] as we move forward, we are hoping to find something that would be a nice match for us in a number of different areas. But there are some things now things that things have sort of picked up a little bit that we are looking at.

We had heard from previous companies that sellers just weren't willing to sell at market multiples. Do you see that sellers are getting more reasonable or is it just that more people are coming to the table?

I think it took a while, number one, for the -- I guess we'll call it the new reality -- to set in. Everybody saw -- a lot of companies were producing some of the best results and highest EBITDA that they had ever produced.

We were in a very good market a year or two years ago and everybody was looking for a multiple of nine or 10 times their best year ever. LB Foster probably isn't going to be willing to pay that even in a good market.

So you've got to take a lot of different things into consideration now. I think multiples are still not terribly low but but they are still fairly high. But they're high off of some pretty mediocre, at least lower results coming in by a lot of companies.

So you have to recognize that we're in -- I don't want to say we're at the bottom -- but we're certainly in somewhat of a trough and buyers have to take that into consideration. There has been a little bit of credit freed up, although lenders still aren't lending to the multiples they were a couple of years ago. And quite honestly, we believe that favors strategic buyers to a certain extent as well. So, yes, I think they're becoming a little more realistic and the deal flow kind of heated up a little bit probably late July, early August.

Scott Blumenthal, Emerald Advisers.

Dave, can you just remind us when you think you will be done with kind of construction and setup in the JV and when you expect to start realizing some activity there?

We expect to have completed the building and installed the equipment by the end of the year, Scott. We expect some tweaking in production and manufacturing for about 30 to 45 days after that. So by the end of the first quarter, we expect to be up and running. We just hope that the market strengthens up a little bit for us.

Would you be able to share with us if you have gotten any contracts or business interests or anything like that?

That's going to be for our own consumption primarily, ours and our partners consumption initially. As we bring it along, Scott, there's a couple other markets we're going to be looking at to tap into. But initially it's going to be for ours. So there's not going to be a lot of contracts they're going to be tied into it except for our own consumption.

I remember, Stan, if I am correct, that you did say that one of the reasons you got into this is because this type of product was of such questionable quality, you were unable to really acquire what it was that you thought that you needed, so that once you were able to supply your own needs that you thought that there may be a market for it going forward.

And that still holds, Scott. But just first foot before the second is all. So I don't think -- if you're expecting a contract announcement in Q1, that probably won't occur. But it's not just couplings. There's other products that we're going to look to manufacture as well as market through that joint venture. But that's going to come a little bit after.

Walk before you run, I guess.

Exactly.

James Bank, Sidoti & Co.

Sorry, one last question on the LIFO credit. Dave, I apologize. I'm kind of writing as you're speaking. Is there more to come now in the fourth quarter on this?

Actually, James, LB Foster records its LIFO credits on a pro rata basis. So we have booked three fourths of what we believe our full-year LIFO credits will be.

Okay, so probably a little bit more to come, maybe a little bit more than the first half which looks -- was roughly 900,000 for the first and second quarter respectively, I guess in each, but nothing (inaudible) material as it was in the third quarter?

I mean the first and second quarter when we were going through that period and prices were dropping, James, those two quarters, the LIFO credit wasn't booked ratably. I think you will see a lot more in the second quarter than the first. And of course as our forecast moved up, you see a lot more in the third quarter as well.

So like I said, it's based on -- of course once we get to year end, it's actual. So there's no more forecasting involved. So year end will just be a true-up as to what our actual LIFO calculations are. But right now, our expectation is a little more, yes.

That's all I have. Thank you.

Sir, you have no questions at this time. I would now like to turn the call back over to Stan Hasselbusch, CEO, for closing remarks.

I would like to thank all of you for your ongoing support. This is our last webcast of the year I hope all of you have a wonderful conclusion to 2009 and have a very safe and enjoyable holiday season. Thanks again. We'll see you all in 2010.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.