L B Foster Co (FSTR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 L.B. Foster Earnings Conference Call. My name is Annie and I will be your operator for today. (Operator Instructions.) I would now like to turn the conference over to your host for today, Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Thank you, Annie. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's Earnings Conference Call to review the Company's fourth quarter 2010 operating results. My name is David Russo and I'm the Chief Financial Officer of L.B. Foster. Hosting 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 fourth quarter performance, give an update on critical business issues, and discuss market conditions.

Afterward, I will review the earnings press release issue earlier this morning, and then we'll 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's 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 which 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, 2009, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster. Additionally, while forward-looking statements will be made today, it is L.B. Foster Company's policy to not provide specific earnings guidance.

With that, we will commence our discussion and I will turn it over to Stan Hasselbusch.

Good morning. Thank you, David, and thanks to all of you for attending our fourth quarter 2010 earnings call and webcast. This morning we announced consolidated sales for the fourth quarter of $148 million, up 40.7% from the fourth quarter of 2009. Earnings for the quarter were $0.60 per diluted share, up 58% from the fourth quarter of last year. And by the way, income in the fourth quarter was the second highest in corporate history, topped only by the fourth quarter in 2007 when we participated in the sale of the DM&E Railroad. Order entry in the quarter was down 4.2% from last year, 113 million compared to 118 million, but our backlog was 189.3 million, 6% higher than last year, largely on the strength of the Portec businesses. Their backlog at year end was $16 million, up 72% from last year.

Speaking of Portec, as you know, we closed the acquisition on December 15. We spent the month of January visiting each facility and meeting all their employees. We've been impressed by the people we've met and their overall enthusiasm about the changes taking place. We are in the midst of an aggressive initial 120-day integration plan to incorporate the products and operations of Portec into our culture. As we said in our press release, any integration is challenging, but we are pleased by the opportunity that we continue to see in the Portec merger.

As I reflect on the fourth quarter and 2010, I am very proud of our Company's performance in an extremely difficult environment--economic environment. Let me highlight a few areas. We generated in excess of $33 million in cash from operations in the quarter and a record amount for the year in excess of $66 million. The largest contributions came from working capital. On a pre-acquisition L.B. Foster-only basis, year-end accounts receivable percentage of fourth quarter sales stood at 33%, down from 57% in 2009, and inventory, largely fueled by a [Kyzon] event led by our Concrete Products Vice President, Kevin Haugh, ended the year at 71.6 million, down 27% from the preceding year.

On the products side, each of our product groups had marked revenue increases over 2009. In CXT Concrete Buildings we concluded a record year with a strong quarter. Sales totaled 15.4 million, 33% ahead of last year's fourth quarter. For the year, building sales exceeded $60 million, 32% ahead of last year. However, building's [sales] will be severely challenged this year. As an unexpected beneficiary of the stimulus package used for federal park systems, we will strive to obtain new business as that federal program is winding down.

In our other concrete business, concrete ties had fourth quarter sales of 18.5 million, up 53% from last year, largely on increased volume from the Union Pacific at Tucson and Grand Island. The major disappointment of the quarter was not reaching an agreement with the UP to continue manufacturing ties at Grand Island. The UP exercised their option to not extend the contract, which expired December 31. We have begun to disassemble the tie manufacturing equipment and plan to vacate the facility in September. While we are exploring both domestic and global opportunities, we do not have a new location or project for the equipment at this time.

We also had an excellent year and an excellent performance in construction products. Piling revenue in the quarter was 54.3 million, up 31% from last year, and fab product sales were up 27% on $7.6 million in revenue. Piling revenues were led by Z shipments to the Army Corp of Engineer project in New Orleans. This mega project exceeds 13--or excuse me--exceeds 33,000 tons of sheet piling. Approximately 30% or 13 million remains to be shipped and billed this year.

Fabricated bridges backlog will keep our Bedford plant booked until 2012 with the addition of the recently announced Walt Whitman project in Philadelphia. Our construction performance was significant because of the ongoing problems in the construction markets in which we participate. For the year, total construction spending declined 10.4%, led by a drop in non-residential spending of over 20%. Non-residential construction is expected to be down another 5% this year.

In the heavy engineering market, Reed Construction Data expects marginal growth in 2011. Also related to the heavy engineering market with the 212th Congress in session and focused on reducing the federal deficit, the outlook for the next transportation bill is highly uncertain. President Obama has proposed a $556 billion six-year bill, but nothing is in place to completely fund the bill. A much higher revenue stream is needed than what is currently provided by the $0.184 per gallon gasoline tax.

In rail, earnings and operating ratios continue to improve with the Class One railroads. As a result, we expect the Class One capital spending to increase by as much as 20% this year. In addition, the 45G tax credit was extended until the end of 2011. This is expected to have a positive effect on short lines, regionals, and other freight related markets. Sales in the fourth quarter in new rails were 21.5 million, 39% ahead of last year, and we begin 2011 with a backlog of 32.7 million, 71% ahead of backlog at the end of last year.

Also in rail, we concluded a record year in Allegheny Products with a 45% revenue increase in quarter four over last year. We are also pleased to announce long term insulated bond joint contracts with both the Burlington Northern and the Union Pacific for our Pueblo plant. And lastly, from a products standpoint, tubular revenues were up 30% in the quarter, led by a year end surge at our Birmingham coated products plant. Entering this year though, the coated business is tepid because of the lingering lower natural gas prices.

In conclusion, while we remain optimistic about the long term, we continue to be faced with inconsistent markets in construction and tubular. However, with the addition of Portec in a rising rail market we look for ongoing product performance improvement over the course of 2011 and with our excellent team of employees and quality improvement programs in place, I have every confidence that we will be able to do just that.

And now, back to you, David.

Thank you, Stan. As mentioned in our earnings press release, L.B. Foster and Portec Rail Products were under common ownership only for the last 16 days of 2010. The results of operations of Portec Rail for that two week period is included in our consolidated results. And as you might expect, the impact of Portec's results is not material. But to give you an idea of the magnitude, their sales were approximately $4.8 million and they incurred a small loss for that period. Their results are included in the ensuing discussion unless otherwise noted.

Sales for the fourth quarter of 2010 were $148 million, compared to 105.2 million in the prior year, a 40.7% increase. The sales increase was due to a 55.3% increase in rail product sales, a 31.5% improvement in construction product sales, and a 30.2% increase in tubular product sales, compared to last year's fourth quarter. The 55.3% increase in rail sales was driven by across the board increases in all of our major [product] categories - rail distribution, Allegheny Rail products, concrete ties, transit products, and of course, the $4.8 million contribution from Portec. After a weak first quarter, our rail distribution business rebounded nicely in the remainder of the year to end the year with strong results, making it even with 2009. Our Grand Island and Tucson tie sales increased by 77% and those facilities were approximately 83% utilized to the Union Pacific Railroad.

As Stan has mentioned, last week we announced we were not able to renew our contract with the Union Pacific Railroad. We finished production just this week for the UP, as well as another customer, and we have just begun the dismantling and removal process. As Stan mentioned, we do not have immediate plans for the production equipment, but we are assessing next steps. In Tucson, we were actually at maximum capacity for the Union Pacific. In Spokane, we continue to produce concrete ties for transit authorities, other Class One railroads, contractors, and industrial customers, and we continue to experience robust inquiry in bidding activity.

Our rail segment ended the year with a 17.6% increase in sales over last year and our backlog was up 29% for the legacy Foster products and it was 50% higher with the Portec Rail backlog included. The construction products fourth quarter sales increase was due to a 31.6% increase in piling products, a 27.6% increase in fabricated product sales, and a 33% increase in pre-cast concrete buildings. Both the concrete buildings and bridges have benefited nicely in 2010 from stimulus funding.

In October, we mentioned that we expected new pre-cast building orders from the federal customers to decline over the next several months. And as--at the end of 2010, our building division backlog is half of what it was at the end of 2009, and we do expect a significant decline in building sales in 2011. Our bridge division, however, has--it was 52% higher than last year and we expect that division to experience continued robust activity over the next 12 months. For the full year of 2010, the construction products segment experienced a 19.9% sales increase.

Fourth quarter tubular sales improvement was due to a strong sales performance, as Stan mentioned, in our coated products business offset by a small decline in our threaded products business. The energy markets served by our coated division were strong for the past several years, and then turned extremely weak in 2009. After a very weak first quarter, this business ended the year strong and reported a 40% sales increase for the full year over 2009. While low natural gas prices have kept this market contained, business activity is reasonable. However, backlog is well behind last year.

As a percentage of this quarter's consolidated sales, tubular accounted for 5% of sales, construction was 52%, and rail was 43%. As mentioned in our earnings release, backlog stood at $189.3 million at the end of the fourth quarter, up 6% from December 2009. As Stan mentioned, Portec represented approximately $16 million of that backlog.

Bookings for the fourth quarter decreased by 4.2% to 113 million, compared to 118 million last year. For the full year 2010, bookings were $464.5 million, compared to 447.2 million in '09, an increase of 3.9%. Gross profit margins for the fourth quarter were 15.0%, an increase of 20 basis points from last year's fourth quarter. The slight increase in margin was due principally to a $2.1 million improvement in inventory valuation adjustments from last year, a 1.8 million favorable settlement of a supply chain dispute, mostly offset by a $3.5 million reduction in LIFO income compared to last year's fourth quarter.

SG&A expense increased by $4 million, or 45.1%, to $12.8 million in the fourth quarter of 2010 due to incentive compensation expenses of $2 million, deal costs of 1.1 million, and of course, Portec's S&A costs of $0.9 million. S&A increased by 7.1 million, or 20%, for the entire year of 2010 to $42.6 million due to compensation expense, including incentive compensation of 2.1 million, deal costs of 2.4 million, and Portec costs, again, of $0.9 million.

Excluding deal costs, SG&A represented 8.5% of sales for the 12 months of 2010, as compared to 8.8% of sales in 2009, the decrease obviously being the result of the sales increase we experienced this year.

Fourth quarter operating income was $9.4 million, compared to 6.6 million last year, a $2.8 million or 39% improvement. As a percentage of sales, operating income was 6.6% this year versus 6.5% last year.

Year to date operating income was $32 million, or 6.7% of sales, compared to 24.8 million, or 6.1% of sales, a 29% increase. If you were to add back the 2009 negative concrete tie adjustments we had last year, operating income would still be 6.3% higher this year.

Interest expense was $306,000 in the fourth quarter of 2010, flat with the same period last year. Full year interest was $1 million, or 22.4% less than last year, due to reduced average borrowings and to a lesser extent lower average interest rates. Interest income was about $100,000 in the fourth quarter, flat with the prior year. Year to date interest income was $400,000, down 49% from last year, due entirely to a decline in interest rates. Our cash has been invested principally in money market funds and in other short term instruments where preservation of principal and quick access to funds has been the priority.

Pre-tax income for the fourth quarter of 2010 was $10.6 million, compared to 6.6 million in last year's fourth quarter, an increase of 61%. Excluding the 2010 gain on the Portec shares held by the company at the time of the transaction, pre-tax income increased by 40%. As a percentage of sales, fourth quarter 2010 pre-tax income was 6.2%, compared to 6.3% in last year's fourth quarter. Our fourth quarter 2010 effective tax rate was 41.2%, compared to 40.7% last year, the increase principally due to certain acquisition costs incurred in 2010 that are not deductible for tax purposes.

Net income increased 59.5% to 6.2 million, or $0.60 per diluted share, compared to 3.9 million, or $0.38 per diluted share last year. Excluding the gain on the Portec stock, net income increased by 39%.

Turning to the balance sheet, debt at the end of the fourth quarter was $4.8 million, compared to $18.6 million at the end of 2009, an $11.6 million reduction due primarily to an early pay down of our term loan, which was approximately $10.5 million. Capital expenditures were $2 million for the fourth quarter, compared to 1.3 million in the prior year quarter. CapEx for the entire year of 2010 was $6.1 million, compared to $6.1 million last year. The majority of this quarter's spend was principally for new yard upgrades, production equipment, and information technology improvements. Depending on the timing of certain projects, we expect capital expenditures are likely to range between $7 million and $8 million in 2010(Sic).

We said during the course of this year that we expected to generate cash flow from operating activities in excess of capital expenditures, scheduled debt service payment, and share repurchases. Well, we not only exceeded these expenditures, we really did hit it out of the park this year, and cash flow exceeded those expenditures by a multiple of five times. Much of the strong results occurred in the trenches as our product managers, operations staff, and executive team all pushed hard to work on inventory reductions, and our sales and credit managers kept the focus on working with the customers and keeping the DSO in great shape. Once again, we do expect to generate strong cash flow from operations in 2011.

Regarding share purchases, we did not repurchase any Foster stock during 2010 and our Board authorization did expire at the end of December 2010.

Cash at the end of December 2010 was $74.8 million, which was invested principally in AAA-rated money market funds. Working capital--and I'm going to go off here and talk just about L.B. Foster because we did not have Portec very long in the fold. But working capital for the year for Foster net of cash decreased by $38.4 million, compared to December of last year. Accounts receivable decreased by over $9 million compared to last year. And our DSO was worked down to 43 days. We believe that our AR portfolio remains in very good condition. Inventory decreased by $23 million during the fourth quarter of 2010 and by $27 million for the year.

So all in all, a very good performance on cash flow, much of it due to working capital reductions.

Looking forward, we believe that the decreased federal stimulus spend going forward and the lack of a transportation bill will keep our markets somewhat contained. But we do anticipate an improving economy and a stronger rail market in 2011. We do intend to continue to run our business with a balance of opportunism, while managing risk in this current environment by proactively adjusting to what we see in our markets. We believe that as conditions continue to improve, the markets we participate in will be poised for significant improvement.

That concludes my comments on the fourth quarter, and we'll now open up the session for questions. Annie?

(Operator Instructions.) And your first question comes from the line of Liam Burke with Janney Capital Markets. Please proceed.

Good morning, Stan. Morning, David.

Hey, Liam. How are you?

Morning, Liam.

Good, thanks. On the first question, on the bookings, they were down slightly in the quarter. Is that a function of construction or the rail products, or is there a blend in there?

I think it's pretty much across the board. I think that our tubular businesses were down I know. And rail businesses, we had a good--new rail had a good quarter and piling was somewhat--it wasn't soft, but it was on par. But I think it was pretty much across the board.

The other--without trying to make any excuses, the fourth quarter of last year was an extremely strong booking quarter for us, too, Liam.

Okay.

But you rarely see L.B. Foster's backlog increase during the fourth quarter of any year, but it did last year.

Okay So there's seasonality in there. The other question I had is on piling. You're showing nice revenue growth on the civil engineering side. Is the construction side of that business completely dormant, so to speak?

Well, the non-residential side took another big hit last year and it's going to be--we expect it to be down a little bit this year. We're not getting any benefit from that side of our business. And the other thing that we really haven't spent a lot of time talking about, but we don't know what's going to go on with the transportation bill. It's still going along at current levels, but we're just really shooting in the dark to try to think that there is going to be a transportation bill in place, which we really truly benefit from, Liam, at any time in the near future. It's not going to happen until the third quarter at the earliest. I don't care what anybody says.

Okay. And Dave, you mentioned a cash balance at year end of 74.8 million?

That's right.

Is that before or after the--is that pre-Portec or post-Portec?

That's post-Portec, Liam.

So you've got a $75 million cash balance after the acquisition of Portec?

That's correct.

Okay. Thank you.

And your next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed.

Hi. Good morning, guys.

Hey, Brent.

Good morning, Brent.

Yes. Stan, I think you talked about the concrete tie equipment out of Nebraska, potentially looking at overseas opportunities there. Can you talk a little bit more about that? Is that a real opportunity for you in the concrete tie arena?

There are a couple of places we're looking at. I mean, there's a couple opportunities that are out there that we have known about and we are exploring. I mean, I think we've got--I think that there is also--depending on what goes on in some of the transit line, I mean, high speed rail is really--has really been--there were a couple of projects. There still are a couple projects. As far as what's going to happen to them, I know that--and I think there's been three states that have really rejected money now with Ohio and Wisconsin and most recently [Florida]. But there's some other projects that I know Kevin and his group are looking at in the United States. But we've got about a half a dozen different opportunities that we think could turn into something that we're exploring over the next couple quarters.

Okay. Terrific. And then, I guess certainly the working capital took us by surprise here at the end of the year, certainly very strong. Can you give us your perspective on that coming out into 2011? I know that's going to be hard to I guess reproduce here, but do you expect working capital to positively contribute to cash in 2011?

Certainly, some of it depends on which parts of the business show strengths in 2011, Brent. We're certainly focused on continuing the improvement. And step one is to obviously maintain what we have achieved and not lose that. So we can very possibly see some additional improvement. Certainly not what we saw in 2010 though.

David's right, Brent. I think what--I mean, we do plan to--of the continued legacy business we've got plans issued to reduce that inventory more. But we think there's opportunity with Portec as we get into that from an integration standpoint to take that down on their side also.

Okay, perfect. And then, I guess on SG&A, certainly some one-time items here in the fourth quarter. Any thoughts sort of going forward on what SG&A is going to look like? And then, also maybe a little help on the tax rate? I know you guys will have some foreign jurisdictions which are going to fall into there. Any help you can provide there, Dave?

Well, the SG&A, Portec--you didn't see, obviously, a lot of Portec in our numbers in 2010, Brent. What you did see was acquisition costs and we had to make some adjustments in the second half of the year for some incentive plans, some of which are driven by managing assets, which obviously we had some good results this year. So we had to make adjustments for that the second half of the year. Moving forward with regard to SG&A, Portec Rail Products has higher gross profit margins than the legacy Foster business and they also have rather significantly higher SG&A as a percentage of sales than Foster does.

So I think as a percentage of sales with the combined company you'll see the percentage going up compared to what you've seen in Foster in the past. But what we're trying to do is to make it go up certainly slower than you would have expected just by adding the two companies together. We've looked at and gone through business plans with all the Portec managers and we have some plans to take a look at some of those line items and manage the growth of SG&A as Portec's revenues increase.

With regard to the tax rate, you've got a lot going on in the fourth quarter of 2010 that sort of whips some things around. But in the future we would--because of the foreign jurisdictions you mentioned, I think you'll see that rate come down below where we ended the fourth quarter of this year certainly.

Okay. And sorry, one more, if I could squeeze it in. But has the weather been particularly disruptive for you here in the first quarter?

Yes, but it's been where nationally it seems like there is always someplace the--but it's--it always has an impact. First quarter is normally our worst year and of course weather is a part of it--or worst quarter. Of course, weather is a part of it then.

Sure. Okay. Appreciate it, guys. Good luck in the next quarter.

Thanks.

(Operator Instructions.) And your next question comes from the line of Tom Spiro from Spiro Capital. Please proceed.

Tom Spiro, Spiro Capital. Good morning.

Hey, Tom. How are you?

Okay. Congratulations.

Thank you.

I was curious whether there is anything interesting going on in either the pricing of our products or the cost of our raw materials.

Of course, we're being impacted somewhat by it. I think that flat products, which we indirectly participate in with tubular have been--a lot of products that we're involved with are going up. But we are seeing it in our distribution products, such as piling and rail somewhat, but it's not been as much as the flat rolled product.

And our pricing, are we able to pass that through? How competitive are our markets?

We have been. Yes, we have.

Thanks. And a moment on the Portec. I know we haven't owned it very long, but are there particular elements within Portec that make you especially excited about the future? I know we don't have the rail joint business anymore, but perhaps some of the other operations?

Well, I think that there's really some great opportunities. We've made--we're in the midst of integration right now. We like their friction management business. We think there is much opportunity from consolidation and growth of that, both in the States domestically and in international--from an international standpoint. There's--it's everything we have expected so far and we're just very pleased with what we're seeing and very pleased with the people. It's just we're very happy. We're right in the midst of a lot of things. A lot of moving parts, Tom. We've got a lot of things we're looking at from operations, consolidation of sales, and consolidation of offices. We were mandated by the DOJ to move our products out of Huntington and we were only given 60 days to do that, but our operations group really got it on great. And I was down there in Kenova, West Virginia for an open house last week and things are coming on very well. We expect to have their operations in Pittsburgh moved over to our location by the end of the second quarter. And just a lot of moving parts, but we're very pleased with what we see so far.

Well, that's great. Good luck.

(Operator Instructions.) And at this time there are no further questions. I would like to turn the call back over to Stan Hasselbusch for closing remarks.

Well, thanks to all of you for your continued interest and really your support. It was a great quarter for us and we're looking forward to another successful year. Thanks again.

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