L B Foster Co (FSTR) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 LB Foster Earnings Conference Call. My name is Francine and I am 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)

I would now like to turn the presentation over to your host for today's call, Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Thank you, Francine. Good morning, ladies and gentlemen. Thank you for joining us for LB Foster Company's earnings conference call to review the Company's first quarter 2010 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 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 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, 2009, as well as to other documents filed with the Securities and Exchange Commission for additional information about LB 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 2010 earnings call and webcast.

This morning we announced results for the first quarter. Sales were $82 million, down 19% from the first quarter 2009. Earnings for the quarter were $0.17 per diluted shared, down from $0.29 in the first quarter last year.

Order entry in the quarter was $106.1 million, which was up 6% from last year's comparative quarter. And quarter end backlog stood at a historical high of $204.8 million, which is 53% ahead of last year's first quarter.

The booking increase was primarily in our concrete products group. Precast buildings entered $14.8 million, 20% of last year due to federal stimulus spending. And concrete ties booked $29.9 million, up 46% over last year. We had a nice mix of new orders at all three of our plants, which bodes well for tie performance through the balance of this year.

Overall business conditions, while improving, remain inconsistent. In general, new business activity in our manufacturing sector outpaced distribution businesses in the first quarter. Combined order entry in our distribution business was $39.9 million, down 25% from last year. A large part of that is due to the continued decline of non-residential spending, which dropped over 9% and is expected to fall another 20% this year. But more importantly, transaction pricing in our distribution businesses is at levels 20% to 25% below March of 2009.

Let's take a look at the products and let's start with rail. From a macro perspective, rail traffic in the first quarter has continued to improve steadily and is up versus first quarter 2009. 14 of 19 commodity categories posted year-over-year gains in the quarter and intermodal traffic was up sharply at 8.4%. A strengthening US economy and weak US dollar are the primary reasons.

While we see conditions improving, rail distribution performance in the first quarter 2010 was not able to overcome declining sale prices and the strong backlog we carried into 2009. As a result, new rail revenues in the quarter were $15 million, down 56% from last year. Increased volume in concrete ties drove improved efficiencies and higher revenues in that product and sales in the quarter were up 16% compared to last year.

In construction, piling was somewhat of a dichotomy. While tonnage shipped was up in the quarter, revenue was down over 13% due to lower selling prices. Our backlog in piling stands at $66 million compared to only $23.7 million at the end of the first quarter last year, largely as a result of our Corps of Engineer job down in New Orleans and weather-related delays in the upper Midwest and Northeast in the first quarter. This backlog is expected to ship in the next two quarters.

Credit issues are still negatively impacting private and industrial work and 49 of our 50 states are facing tax revenue shortfalls this year, constraining public work spending. This coupled with ongoing weakness in the structural steel market leads us to expect continuing pricing and margin pressures on piling in the near term.

Also in construction, we're in the process of integrating the IDSI acquisition we announced last month. We are currently rationalizing capacity. Because of the number of major projects either in bidding or design stage, we believe activity in the bridge decking will be very strong in the next three to five years. The IDSI acquisition will allow us to more fully participate in these opportunities.

In tubular, pursuant to my comments in the fourth quarter webcast in January when I stated order entry in 2009 compared to 2008 was down 78%, first quarter sales in coated were down 73%. However, we are seeing an uptick in natural gas drilling and pricing. This was reflected in new bid activity in the quarter. Bookings were quoted in the quarter were just over $4 million, 7 times more than we entered in the weak first quarter of 2009. These new orders have extended our production backlog through the second quarter.

Before I turn the discussion back to David for the financials, I'd like to make one final statement. As you are aware, we announced in a press release on February 17th, our intention to acquire Portec Rail Products. We also noted in that press release that the transaction is subject to the satisfaction of certain conditions including, but not limited to, Hart-Scott-Rodino antitrust clearance. On March 22nd, we announced that we had received a formal second request for information from the Antitrust Division of the Department of Justice. We stated at that time that we expected to promptly respond to the second request and continue to work cooperatively with the Antitrust Division as it conducts its review of the proposed transaction. We have been providing information as requested.

And as you may be aware, this morning we issued a joint press release stating that the Court of Common Pleas of Allegheny County granted a preliminary injunction in joining our tender offer. LB Foster and Portec are reviewing the court's opinion with our advisors to determine a future course of action. We are very respectful of the government's review process that is currently underway. We believe that this transaction is good for our customers and our shareholders. The combination of the two organizations will create a stronger company that will provide high-quality, cost-effective solutions to the global rail industry. Further, this is an important step in completing our strategic objective of becoming a premiere global supplier of products and services below the rail.

Given the preceding statement, we will not make any additional comments nor will we take any questions related to this transaction this morning.

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

Thank you, Stan. As Stan mentioned, sales for the first quarter of 2010 were $82 million, compared to $101.6 million in the prior year, a 19.3% decrease. The sales decrease was due to a 27.1 decline in rail product sales, 4.5% decrease in construction product sales, and a 35.8% reduction in tubular product sales compared to last year's first 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. The piling decline was sales pricing, primarily, as their volumes were higher. Both the bridge and concrete building markets have benefited from stimulus funding. And those businesses continue to experience robust bidding activity and have strong backlogs.

The first quarter tubular decrease was due to a sales reduction in coated products, partially offset by an increase in threaded products.

The energy markets served by our coated division have been robust for the past several years and then turned extremely weak in 2009. While first quarter coated products results were unfavorable to last year, we have begun to see increased bidding activity during 2010 as Stan has mentioned, which should improve sales volumes later this year.

The 27% decrease in rail sales was driven by across-the-broad reductions in all product categories except for concrete ties and transit products. Rail distribution, which has been one of our more consistent performers over the past several years, was down approximately 49% compared to last year's first quarter. Our Allegheny rail products division revenues were basically flat in the first quarter of 2010 compared to the prior year. And concrete tie sales increased 15.9% in the quarter.

Our Grand Island and Tucson facilities were approximately 60% 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. The new tie is being marketed into a very soft industrial market.

In Spokane, we continue to produce concrete ties for transit authorities, other Class I railroads, contractors, and industrial customers. And we continue to experience stable inquiry and bidding activity.

As a percentage of this quarter's consolidated sales, tubular accounted for 6%, construction was 44%, and rail was 50% of total consolidated sales.

As mentioned in our earnings release, backlog stood at $204.8 million at the end of the first quarter, up 53% from March 2009 and 18.6% higher than December of 2009. Bookings for the first quarter increased by 6% to $106.1 million as compared to $99.9 million last year.

Gross profit margins were 14.7% in the first quarter, an increase of 120 basis points from last year's first quarter. The improvement in margin was due principally to the $1.6 million warranty charge taken in the first quarter of 2009, partially offset by a slight increase in unfavorable purchase price and inventory valuation adjustments.

Manufacturing variances, scrap and other plant and yard variances were basically flat for the quarter. SG&A expenses increased by 1.8% to $9.2 million in the first quarter of 2010, due entirely to M&A transaction costs of approximately $500,000, partially offset by salary, benefits and incentive compensation expense reductions.

SG&A represented approximately 11.2% of sales in the first quarter of 2010 as compared to 8.9% of sales in last year's first quarter, the preponderance of the increase being the result of a reduction in this quarter's sales.

As a result of the foregoing, first quarter operating income was $2.8 million compared to $4.8 million in last year's first quarter, a $2 million or 40.9% reduction. As a percentage of sales, operating income was 3.5% in this year's quarter versus 4.7% last year. As a point of reference, when the economy and our markets were very strong back in 2007 and 2008, our first quarter operating income as a percentage of sales was in the 5% to 6.5% range.

Interest expense was $245,000 in the first quarter of 2010, $83,000 or 25% less than last year. The decline was due to reduced average borrowings and, to a lesser extent, lower average interest rates. Interest income was $74,000 compared to $295,000 last year, a 75% decrease due to a significant decline in interest rates from the first quarter of last year to this year.

Our cash has been invested principally in money market funds, bank certificates of deposit, and other short-term instruments where preservation of principal and quick access to funds has been the focus.

First quarter 2010 pretax income was $2.7 million compared to $4.8 million in last year's first quarter, a $2.1 million or 44% decrease. As a percentage of sales, first quarter 2010 pretax income was 3.2% compared to 4.7% last year.

The first quarter of 2010 effective income tax rate was 34.2% compared to 36.6% last year. The decrease in rate was principally due to an increase in domestic manufacturing deduction and the reversal of a reserve previously recorded for an uncertain tax position.

Net income declined 41.9% to $1.8 million or $0.17 per diluted share compared to $3 million or $0.29 per diluted share last year.

Turning to the balance sheet, debt at the end of the first quarter was $19.2 million compared to $18.6 million at the end of 2009. The increase over last year was principally due to the unpaid purchase price of the IDSI acquisition that Stan referred to, which was partially offset by scheduled payments of our lease debt and our term loan.

Capital expenditures were $1.3 million for the first quarter compared to $600,000 for the prior year quarter. The majority of this quarter's spend was principally for maintenance, capital expenditures and IT infrastructure improvements and upgrades.

Depending on the timing of certain planned projects, we expect capital expenditures are likely to range between $6 million and $7 million in 2010. We believe that during 2010, cash flow from operations will exceed capital expenditures, scheduled debt service payments, and share repurchases.

Debt as a percentage of capitalization was 7.5% at the end of March compared to 7.4% at December of 2009. Our leverage ratio was 0.61 to 1 and our interest coverage was more than 20 to 1.

Cash at March 31st was $124.5 million, which was invested principally in AAA-rated money market funds.

With regard to working capital, accounts receivable and inventory, net of accounts payable, decreased by $5.5 million compared to December of 2010 (sic - see Press Release). Accounts receivable decreased by $20 million during the quarter, due partially to the $2 million decline in sales in March as compared to December as well as a 5-day improvement in our DSO to the 42 days. We believe that our AR portfolio remains in very good condition.

Inventory increased by $6 million during the first quarter of 2010. This is largely due to increases in piling, where we are working certain projects that require us to maintain ownership of materials for an extended period due to necessary value-added processes occurring before final delivery to the customers. We anticipate that this phenomena to gradually diminish over the next two quarters.

Looking forward, we believe that the current economic condition, continued credit concerns, and current and anticipated future reduction in tax receipts by state governments will present challenges to us. As a result of reduced demand for certain of our products, falling commodity prices, and a heightened competitive environment, we expect to continue to struggle with margin compression for the next six months. We will continue to run our business with a balance of opportunism while managing risks in this uncertain environment by proactively adjusting to what we see in our markets. We believe that when conditions do improve, as we've mentioned we are starting to see, the markets we participate in will be poised for significant improvement for us.

LB Foster has a tremendous advantage in navigating through this period of uncertainty and extremely strong financial position. As we mentioned, we ended the quarter with $124.5 million of cash and over $57 million of available credit, giving us the ability to take advantage of opportunities as future circumstances develop.

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

Yes, sir. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Brent Thielman from D.A. Davidson.

Hi, good morning.

Morning, Brent.

Yes, just I guess with respect to the sales number for Q1. I guess I was a little bit surprised. I mean you had a pretty strong book of business coming into the new year. And I think what I'm taking away from you, just in terms of just sort of the consolidated revenue number, I mean it's sort of a timing of execution on orders, lower sales pricing and weather. Is that kind of the-- does that kind of summarize it in terms of the lower sales number in Q1?

Pretty much, Brent. I think that particularly in our distribution businesses. We talked about piling, the strong backlog in piling. And we just-- we had some issues. And we will. But as David said that getting out, it will pretty much clear up. It's having an impact on revenue. It's having an impact on-- it's really been part of the reason for our historically high backlog. But it's also really ramped up our inventories. And there's been a lot of pressure and right now if you take a look at our balance sheet, probably half our inventory is in piling. And a large part of that is primarily for the big New Orleans job. And a lot of that has not been recognized. So we'll start-- we've gotten some of the cash. I believe that we've received over $10 million cash on the project but we still have the inventory and can't recognize the revenue. And that's the way it works. But, that's been-- that's been a problem in the first quarter.

We do expect that to catch up over the next couple quarters though.

Sure, sure. And then in terms of new bookings, I mean are you seeing any sort of improvement in sort of the-- I think what you talk about is sort of normal truckload type orders or is it still dominated by kind of the larger projects?

Still the big work and particularly in our distribution. Bookings in the piling group were down overall in the quarter. And they were relatively flat and they were down in new rail also. But I know there's a lot of activity that we've bid on in the last month in new rail. And it's big jobs. It's big jobs. And so--

Whether it's construction or rail, Brent, the industrial customer is still pretty soft. The industrial market is still soft. The railroads are doing pretty well and spending some money. But we still need to see the industrial customer come back to the marketplace.

Okay. And then just on your tubular products business, I mean it seems like we're seeing some pretty good trends there. And I'm assuming that was another loss for the quarter. But how quickly does that business sort of get back to profitability? Could we see that in Q2?

We'll have-- in coated we'll see it. One of the things I didn't talk about is our joint venture with couplings down in Houston with Lally. We do have that up and running. We pretty much got most of the bugs worked out of the equipment. We're picking up backlog. And we should see profit contributions in that in the second quarter.

Okay, and then just lastly if I could, what was the LIFO impact in the quarter?

$300,000 positive, Brent.

Okay.

It was pretty close to the amount last-- I think last year was $250,000 for the quarter positive. So not a big deviation from quarter to quarter.

Okay, thanks. I'll jump back in queue.

Our next question comes from the line of James Bank from Sidoti & Company.

Hi, good morning.

Morning, James.

Dave, I'm sorry. You might have already said this, as a lot of info was given. What was the driver in backlog? What was the mix?

You mean the strengthening?

Yes.

It was a lot of concrete buildings and our concrete ties, James, booked a lot of business in the first quarter.

Okay.

And our piling backlog has remained strong. They booked certainly some business, but as we mentioned before, they need to take what the backlog is there and get it out. And we've experienced some delays but we expect to see that alleviate itself over the next five to six months.

We-- yes, large part as David said, I think 40-- over 40% of our bookings in the quarter were in-- were actually in concrete.

Okay.

Between ties and buildings.

Now, Dave again I'm sorry. You mentioned that bidding activity was strong in a particular segment or market. I couldn't quite get that fast enough. Do you remember what you were referring to?

A lot of activity and bidding in our new rail group.

New rails did a lot of business.

Fab products.

We mentioned our fab products as well as concrete buildings.

Okay.

Particularly the bridge side of that product.

And then-- I'm sorry, Stan.

That's okay.

Okay. And then you mentioned I guess in those comments with the previous caller, big work is still out there. I guess what I'm trying to do is in piling. And I guess what I'm trying to figure out is before that jobs creation bill came out, the fear was bidding on those larger projects because no one really knew how the funding was going to be there month to month. But now with the rough $42 billion there and appropriated for, would you say that has something to do with the fact that the big work is still strong or coming back?

No, the big work has been strong. We've seen it in the rail, probably a little bit more so than in the piling.

Okay.

And the rail work is some of the short lines and some of the regional railroads. It will be interesting to see what happens over the next couple quarters. I know the CSX announced last week and the UP announced this morning, but both of them announced record first quarter operating ratios, I believe, and earnings. And typically there is a trending after that, following that as far as capital spending by the railroads. And so, that should really-- we were looking at pretty flat to maybe even a down year this year. So we would think-- and then we would think that that would help in the latter part of the year. And as activity increases, it would continue to move on down to the regionals and the Class 1's or the regionals and the short lines. But we've seen some nice activity in the regionals and the short lines, which we expect to convert in bookings this quarter. But, we haven't put them to bed yet.

Okay. Now, I know you guys don't give guidance, but historically your first quarter seemed to be--

(inaudible)

Right, right. I mean so is there any reason in this-- as you guys are going through your trough year, is there any reason to think that maybe 2010 would be different than historical performance?

No.

No.

Okay. And--

Our backlog is, as we've said, is the highest it's ever been.

Right.

And so that's pretty much indicative. We expect that-- we would expect that 90% of that would filter through the system at least this year.

Okay.

So that would really look-- it should bode well for the second and third quarters.

Okay. And then a LIFO credit in the first quarter. That's-- were you guys still working off some of that cheaper steel I guess earlier in the year or last-- from last year?

Well, we obviously came into the year with lower input costs because of the declining prices that we saw last year, James. But that's-- given the amount of our inventory, $300,000 isn't--

Right.

Isn't really a huge deal. We don't know how that's going to certainly pan out for the rest of the year. But that's certainly based on our current forecast for the entire year of approximately $1.2 million LIFO credit. But a lot of that is really-- we're anticipating that due to reduction in inventories as much as pricing.

So really no fear of a LIFO debit this year then I guess or at least not at this point?

Not from what we see today.

Okay and just more housekeeping questions, if you wouldn't mind, on Portec. Just what was the purchase price?

$112 million.

$112.4 million.

Okay.

$11.71 a share.

Right, right, okay. And normally, I don't even know if you're able to help. What is the duration of these injunctions? Is there a term? Did they give you guys a timeline?

Yes, they're all individual. We're and this thing came so late. I mean we're working on the earnings release and all of a sudden we get this opinion yesterday at like 5:00 in the afternoon. So, we're still working through it. We're going to sit down today internally with some legal counsel and advisors and with-- and figure out next steps. But we haven't done that yet.

Okay, terrific. That's all I have. Thank you both.

You're welcome.

(OPERATOR INSTRUCTIONS) Our next question comes from the line of Mark Zinski from 21st Century Equities Bank.

Yes, good morning.

Morning, Mark.

Do you guys quantify the-- on the sales decline, the 19%. Do you typically comment on how much of that was related to pricing versus volume?

Some of our products are so disparate when it comes to that. But we would tell you that our distribution business pretty much saw pricing declines of 20% to 25%, especially on the steel, the piling and the rail for the most part, Mark. Piling volumes were up substantially this first quarter. But, they were obviously hurt by the pricing. So, and then as you go through item by item, concrete tie volumes were up. And there were other-- all of our, well coated volumes were down, but our threaded volumes were up.

Okay, that's helpful. And then in terms of the stimulus package, I think previously your, I guess, your general opinion was you didn't think it was going to be-- the federal funding would be sufficient enough to mitigate the decreases at the state level. Do you still generally feel that way, even given the new-- given the jobs bill and what you're seeing with stimulus funding?

Really all the jobs bill did was extend SAFETEA-LU at current levels. But really-- I mean it took the jitters out of the market, but I really don't think it's provided us any-- as a previous caller asked, any monster jobs. I think the monster type jobs are still going to be waiting for a new transportation bill towards the end of this year. So that certainly didn't hurt. I mean we're not complaining about it. But it's not going to provide any new kind of big order entry for us over the next--

I think from the stimulus package, we've really benefited in a couple, three years as we've discussed in the past. A lot of that-- most of that money has been committed. It's not been spent yet. But we expect to see a slowdown in our activity. And we're going to have a very good year in building. I mean we're going to have an excellent year I think that Kevin Haugh and his group out there have just done a great job with that and bringing a lot of the efficiencies on line. But the slowdown with the stimulus spending in that area will slow down. We're still seeing some activity in the fab product side of it. And we've seen some but it's starting to slow down a little bit in transit. So we don't-- I think that we have a lot in the backlog that will flush through the system throughout the course of the year. But as far as getting a benefit of new bookings from the stimulus package, we don't really expect a lot more.

I guess the economics suggest that they're getting more the bang for their buck in terms of job creation on the rail side. Do you have any opinion about whether or not you see future stimulus funding kind of headed more towards the rail side versus construction because of that fact?

Yes, maybe from the transportation spending. But--

We think that next bill will have more rail and certainly high-speed rail and transit type allocations than we've seen in the past, Mark, but--

Of course, current SAFETEA-LU has been extended till the end of this year and I believe that Reid has been on record as far as he wants to get the bill put together this year from the Senate side, which is great because Oberstar has been driving it from the House side thus far. So, we'd like to see that. And of course they're still talking in terms of close to $500 billion in the package, but there's just not been a lot of conversation beyond that.

And then just last question, have you guys begun to kind of think about or assess what the potential impact on your business from healthcare reform could potentially be?

We wouldn't expect that much. (inaudible)

Okay. Very good. That's it for me. Thank you.

We have a question from the line of Tom Spiro.

Spiro capital, good morning.

Hey Tom, how you doing?

Okay, how are you?

I'm fine.

First, the bridge decking acquisition. That was an asset deal I think. What did you get? Did you get inventory? Did you get a factory? What did you buy and why?

Tom, what we got in that deal was production equipment, inventory, and some different know-how, different processes. And obviously the markets are similar but everybody does things a little differently and they had some different things there and some relationships.

Tom, yes, we've talked about the cyclicality in this market, the bridge decking market for quite a while. We've been in this business I think you can go back close to 60 years. I think we were-- we started in it with the building in the early 50's of the interstate system with aluminum bridge railing we've pretty much involved, we are still in the bridge rail side of it. We've gotten in the decking. And the bulk of this decking is out your way in the Northeast. We really look at the next three to five years where we see on the drawing tables and in the bid rooms that we're really looking at a real strong market in this over the next three to five years. And we think this acquisition will just help us to exercise the opportunities on the product.

Did they have a different group of customers?

A lot of them are similar. Most of them are similar.

I see. Separately, as I recall last year, we had a couple of manufacturing issues in the concrete tie area that led to a couple of charges. Was there anything new there or do you think that's put to bed?

No new developments on that, Tom. Obviously we're still sensitive to that. And you never know if it's fully put to bed or not but we haven't seen any significant-- with the last year's freeze thaw, so far we haven't seen any significant new developments.

And are customers comfortable with the deliveries?

They're comfortable with their delivery and they're very comfortable with the product right now. I think the product that we're manufacturing is the best that we've ever made. And--

Well that's great. Good luck.

Thank you very much.

(OPERATOR INSTRUCTIONS) We have a follow-up question from the line of James Bank from Sidoti & Company.

Well, hi. Dave, I forget to ask, could I have the segment results, top line and gross profit?

I'll give you the top line, James. Tubular was $4.7 million. Rail was $41.1 million. And construction was $36.2 million.

Okay. And I guess tubular was profitable in the quarter, right?

Well, we-- on an internal basis, James, we apply some cost of capital charges for product's use of assets. And when we do that that obviously has an impact. And with that in there, no they were not.

Internally, they were not.

Okay, okay. No, that helps me. It'll allow me to triangulate both rail and construction possibility. Okay. Thank you very much. That's all I had.

And you have no further questions.

Thank you. I hope you all have a good day and be safe. Thank you.

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