L B Foster Co (FSTR) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2011 LB Foster Company earnings conference. My name is Marisa and I will be your coordinator for today. At this time all participants are in a 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, the Chief Financial Officer. Please proceed.

Thank you Marisa. 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 2011 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 7 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, 2010 as well as 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 will turn it over to Stan Hasselbusch.

Good morning. Thank you David and thanks to all of you for attending our first quarter 2011 earnings call and webcast. This morning we announced consolidated sales for the first quarter of $117 million, up 42% from the first quarter last year. Earnings for the quarter were $0.07 per diluted share down from $0.17 per share in the same quarter last year. The drop off was largely the result of a one-time charge of $0.17 per share related to the Portec Rail Products, Inc acquisition and product performance primarily in our Concrete businesses. Order entry for the quarter was strong, $163.8 million, up 54% from last year. Even with the Portec contribution not included, legacy Foster bookings were $135 million, up 27% from last year. As a result of strong order entry, backlog stood at a record $237.1 million, 16% above first quarter 2010.

Let's take a look at the products and let's start with the 2 previously mentioned areas, Concrete and Portec. In Concrete Buildings revenues were $4.5 million, down 33% from last year. Bookings were down 40%. This drop off was not unexpected and is generally inline with our 2011 budget. As you know, Concrete Buildings had been the recipient of significant funding over the last 2 years from the federal stimulus package. Funding from this program is complete and we're settling into a more normalized business pattern. However, we continue to be bullish on this product and are exploring avenues into the expansion of this business into the East. This could enhance the breadth of the product offerings and complement our western plants in Spokane and Hillsboro.

Our Concrete Tie business was adversely affected in the quarter by costs associated with the shutdown of Grand Island, Nebraska. It's revenue was off 55% as we halted production in mid-February. We expect to be out of Grand Island in September and we do expect some additional cost to be incurred with the shutdown. One of the 5 lines from Grand Island has been moved to Tucson to increase capacity. We continue to explore both domestic and international opportunities for the balance of the equipment from the dismantled plant. With the exception of Grand Island, the balance of the year looks good for Ties, both Spokane and Tucson are booked close to capacity.

Now let's take a look at the Portec merger where a lot of time and energy has been spent by the Company in the last 4 months. To begin with we have just completed an intense 120 day initial integration phase in which we one, have combined all facets of the lubrication business into one all encompassing entity which we've named Total Friction Management. This will bring all the international aspects of this business together under the leadership of Kostas Papazoglou, Portec's former Chief Operating Officer. We believe this is a huge opportunity to work effectively in partnership with the major road railroads to minimize rail wear and an increase railroad fuel efficiency.

Second, we have initiated oversight of their operations. We've facilitated physical move out of the Huntington, West Virginia to a new location in Kenova, West Virginia. We are in the midst of construction to transfer their Pittsburgh area employees into our headquarters. We have appropriated resources to effectively triple the size of their Vancouver, British Columbia facility, and we began process improvement programs consistent with our lean initiatives throughout their locations.

And third, we have ramped up international marketing and manufacturing efforts, initially focusing on expanding our presence in China and Australia. We fully understand that integration does not end at the completion of this initial phase. We've mapped out plans and processes for the remainder of the year as we bring the two cultures together.

Looking out to the balance of the Company, let's start with Rail. While revenues were relatively flat, bookings were up substantially. The major contributors were Allegheny Rail product were bookings were up 20% over last year based on strong insulated joint business activity at Pueblo from the Union Pacific and BNSF. And in new Rail where order entry was up 65% largely as a result of increased production of a [reamer] rail by SDI. The drawback of their stepped up production of course is an intensified competitive landscape which we expect will put pressure on margins in the near-term as Foster pushes for higher market share in the eastern US. In Piling, both revenues and bookings were up substantially in the quarter. Sales were up 54%, primarily on large, low margin projects carrying into the first quarter from last year. And bookings were up 116% largely because of major projects which we quoted in the fourth quarter, closed the first quarter and a weak order entry in Q1 of last year. Fab product had a good first quarter with sales up 13%. As we have previously discussed, backlog at Fab is at record levels and will bode well for strong performance in these areas over the next 18 months.

Overall we continue to view our Construction markets with a certain amount of apprehension. The economy, while improving modestly, will be challenging on all fronts. In the private sector as it relates to nonresidential construction, Reed Construction data expects a decline of 9% to 10% this year on the heels of a 23% decline last year. And on the public side the prospects of having a new transportation bill in place by year end is highly unlikely. States are somewhat in the same dilemma with budget shortfalls negatively impacting 46 out of 50 states.

In Tubular, we had a solid quarter, revenues were up 20% and bookings were up 69%. Coated Pipe entry was actually up 78% and we are booked into the third quarter at our Birmingham facility. A couple of newsworthy items attributable to Tubular. Number one, as a Company we are very fortunate from a business standpoint following the horrific storms that occurred late last week in the south. A tornado touched down less than 0.5 mile from our Birmingham plant causing minimal production delays. However from a personal perspective, some of our employees were not as fortunate and suffered losses of their homes and personal belongings. We extend our heartfelt thoughts to these employees.

And two, we will be closing down our threading operation on Langfield Road in Houston, that we have occupied for over 50 years and are moving to a new improved facility in Magnolia, Texas. This will be on the location we own in conjunction with LB Pipe Coupling joint venture. This will be a plug-and-play transition and should have minimal production delays. We expect this operation to be fully functional in the fourth quarter.

In conclusion, let me make a couple of personal comments. We took some unexpected and expected charges in the first quarter and the result was that performance was not at the level I expect. But even in our traditional weak first quarter, we are only marginally off our business plan. There's been a lot of time and expense spent on the Portec acquisition. I would like to thank all of our dedicated employees for their hard work during this time. This will come back to us in spades. We have always felt strongly that Portec will be accretive from year one. We truly expect that despite the challenging market and sputtering economy, we will return to better quarter over previous quarter performance in Q2 and we will follow that up with a stronger year over previous year performance for all of 2011. I will now turn it back to David for the financial review.

Thank you Stan. Sales for the first quarter of 2011 were $117.1 million compared to $82 million in the prior year, a 42.8% increase. The sales increase was due to the inclusion of $23.3 million of sales contributed by Portec Rail Products, our December 2010 acquisition, as well as an $11.8 million or 14.4% increase in LB Foster sales compared to last year's quarter. After adjusting for the business that we divested in December 2010, Portec Rail Product sales were approximately $5 million higher than 2010 first quarter sales. The 14.4% increase in Foster sales was driven by 1% increase in Rail product sales, a 29% improvement in Construction product sales, and a 21% increase in Tubular product sales compared to last year's first quarter. The slight increase in Rail sales was driven by increases in Concrete Ties, Allegheny Rail products, and Trackwork, partially offset by declines in Rail Distribution and Transit products. Our Grand Island, Nebraska Tie sale was declined by 55.6% as Stan mentioned due to the expiration of our contract with the UP Railroad However increased sales from Tucson as well as our Spokane facility more than made up for that decline this quarter. As mentioned in our earnings release the Grand Island equipment has been decommissioned and is being dismantled. So there will obviously be no sales from that facility in the future. As a point of reference the amount of Grand Island sales in 2010 were $20.4 million, $4.7 million of which were first quarter 2010 sales. As we mentioned during our fourth quarter earnings call, we do not have immediate plans for the production equipment but we are assessing next steps.

In Tucson we are close to maximum capacity for the Union Pacific Railroad. In Spokane we continue to produce Concrete Ties for transit authorities, other Class I railroads, contractors and industrial customers. We have seen robust inquiry in bidding activity and we are close to capacity for that facility as well.

Our rail segment ended the quarter with bookings up 52.5% over last year and our backlog was higher by 27% for the Foster products. And it was 56.7% higher with the Portec Rail backlog included.

The Construction products first quarter sales increase was due to a 54% increase in Piling products and a 13% increase in Fabricated product sales partially offset by a 33% reduction in Concrete Buildings sales. Last October we mentioned that we expected new pre-cast building orders from federal customers to decline over the following several months. And in February we announced that our year-end 2010 Building division backlog was half of what it was at the end of 2009. And that we expected a significant decline in Building sales in 2011. This anticipated decline is due to the conclusion of the stimulus spend by the federal government. And we expect this negative trend will continue for the remainder of the year as we compare to a record year in 2010. Our 2011 order entry for this business has been approximately 60% of last year and the backlog remains at approximately 50% of March 2010.

On a more positive note, our Fabricated Products Division has a backlog that is 73% higher than last year and we expect that division to perform strongly over the next 18 to 24 months.

Our Piling division had a strong sales and bookings quarter however its backlog is behind last year as this one of our more competitive markets today. The first quarter Tubular sales increase was due to an improved sales performance in our Coated products business and to a lesser extent our Threaded products business. Our Coated products division ended 2010 strong and reported a 40% sales increase over 2009. While low natural gas prices have kept this market contained, this activity is reasonable and backlog has surpassed last year. As a percentage of this quarter's consolidated sales, Tubular accounted for 5% of sales, Construction was 40% and Rail was 55%.

As mentioned in our earnings release, backlog stood at $237.1 million at the end of the first quarter, up 15.8% from March 2010. Portec represented $22.3 million of that backlog. Bookings for the first quarter increased by 54.4% to $163.8 million compared to $106.1 million last year. Portec represented $28.8 million of that activity.

Gross profit margins were 14.9% in the first quarter, an increase of 20 basis points from last year's first quarter. A slight increase in margin was due principally to the inclusion of Portec Rail Products at 21.7% margins. Which included a $2.5 million non-cash charge related to purchase accounting. Also a $0.5 million improvement in net plant expenses. Mostly offset by lower selling margins after including material cost variances. And a $0.4 million unfavorable variance and LIFO adjustments compared to the first quarter of 2010.

Selling and administrative expense increased by $6.5 million or 70.7% to $15.7 million in the first quarter of 2011 due primarily to the inclusion of Portec's S&A expense of $5.6 million. SG&A represented 13.4% of sales for the first quarter of 2011 as compared to 11.2% of sales in the first quarter of 2010. The increase being the result of the inclusion of Portec as its historical S&A as a percentage of sales has ranged between 20% to 25% of sales.

First quarter operating income was $1.1 million compared to $2.8 million in last year's first quarter, a $1.7 million reduction. As we mentioned, Portec Rail Products incur a loss from operations, primarily as a result of the recognition of expense related to the sale of Portec inventory that was written up to fair market value as of the acquisition date, resolving in increased cost of sold of approximately $2.5 million.

As disclosed in our earnings release we provided a calculation of adjusted EBITDA which we believe is meaningful for a Company coming off of a significant acquisition as it compares the results of operations of a Company by excluding certain non-cash items to provide another measure that reflects how business performs. Of course as Companies, such as LB Foster becomes acquisitive, intangible assets will appear on balance sheets much of which will be amortized over various periods of time. However what we thought was particularly meaningful was the inventory write-up due to net realizable value. This write-up was then recognized in cost of goods sold and was not reflected as depreciation or amortization and we believe it is useful and informative to normalize the effective period for comparative purposes. Therefore for at least the remainder of the year we will disclose an adjusted EBITDA calculation which we define as earnings before interest, taxes, depreciation, amortization and other non-cash charges.

For the first quarter of 2011, adjusted EBITDA was $6.5 million compared to $5 million in the prior year, a 30% increase. As a percentage of sales adjusted EBITDA was 5.5% of sales in the current quarter compared to 6.1% of sales last year. Interest expense was $138,000 in the first quarter of 2011, 43.7% less than the same period last year due to reduced average borrowings. Pre-tax income in the first quarter of 2011 was $1 million compared to $2.7 million in last year's first quarter, a decrease of 63%. Excluding the 2011 inventory related purchase accounting charge, pre-tax income was $0.8 million or 30% higher than last year's first quarter. The first quarter 2011 effective income tax rate was 31% compared to 34.2% last year. The reduction in rate was principally due to the impact of Portec Rail Products' results and the relatively lower effective tax rate applicable to its foreign operations. Net income was $0.7 million or $0.07 per diluted share compared to $1.8 million or $0.17 per diluted share last year. Excluding the 2011 inventory related charge, net income would've been $2.4 million in the current year quarter.

Turning to the balance sheet, debt at the end of the first quarter was $3.5 million compared to $4.8 million at the end of 2010, and $19.2 million as of March 2010. Capital expenditures were $2.9 million for the first quarter, compared to $1.3 million in the prior year quarter. Depending upon the timing of certain projects we have planned, we anticipate capital expenditures are likely to range between $7 million and $8 million in 2011. We also expect to generate cash flows from operating activities in excess of capital expenditures, scheduled debt service payments, share repurchases and dividends. Debt as a percentage of capitalization was only 1.3% at the end of March, compared to 1.9% at the end of 2010 and 7.5% at March 2010.

Cash at the end of March was $58.9 million, which was invested principally in AAA rated money market funds and other short-term investments where preservation of principal and quick access to funds has been the priority. Working capital net of cash increased by $15.7 million compared to December 2010. Accounts Receivable decreased by over $7.9 million compared to December while DSO improved 42 days. We believe that our Accounts Receivable portfolio remains in very good condition. Inventory increased by $11.4 million during the first quarter of 2011, while Accounts Payable and deferred revenue increased by $0.9 million.

Looking forward, we believe that the wind down of federal stimulus spending, the lack of a transportation bill this year will keep our markets inconsistent and highly competitive. However based upon our backlog, our expectation of an improving economy and what we see in some of our businesses, we do anticipate much stronger results during the remainder of the year. We also expect Portec to be accretive for the remainder of the year and for the full year as well.

We believe that should the economy continue to strengthen and if a strong transportation bill is passed, the markets we participate in will be poised for continued improvement. That concludes my comments on the first quarter of 2011 and we will now open up the session for questions.

(Operator Instructions) Brent Thielman, DA Davidson.

Can you guys quantify the impact of the cost in the Nebraska facility, and what we should be thinking about going forward?

Yes, Brent. For this year, or I should say for the first quarter, Grand Island had a negative impact. Not as much because there were a tremendous amount of huge costs, but because of the lack of reduction to cover the fixed overhead, as well as our hourly employees that were actually employed for part of the quarter to dismantle the facility. So that was certainly a fairly significant amount of the cost. Our unabsorbed plant expense in Grand Island was $600,000 compared to less than $200,000 a year ago. So just in that regard we saw over a -- more than a $400,000 swing from year to year.

Now, we expect the operating expenses to decrease in the next couple of quarters certainly as the equipment's dismantled. And some of the employees leave for other opportunities. But we will still have certain fixed costs until we exit the facility.

Do you think it will be at that same sort of magnitude, the $600,000?

No, we expect it to decline over -- in second quarter, and probably decline further in the third.

Okay, that's helpful. And then obviously bookings look solid here. What should we be thinking about in terms of margins baked and the new orders, maybe give a sense of pricing trends out there?

Well, we still continue, as I said, we are seeing pressure on our distribution businesses, new Rail and Piling. And we will continue, Brent, to see them continue. Of course, the margins that we will be bringing in with Portec will really help out a lot. And I think that in our manufacturing products, we have still been able to maintain healthy margins, but the pressure is primarily on the distribution area.

Okay. And then thinking about -- and this Q1 tends to see some seasonality, but should we expect to see sort of a sequential ramp in Portec sales into Q2? I think that's tended to be their trends in the past as well.

I think that it should be up somewhat, but I don't think it's going to be -- it's not going to be a huge impact.

They don't fluctuate quite as much as we do in the Construction months, Brent. But, yes, they will probably -- their second or third quarter we would expect revenues to be higher than the first. But they won't ramp as much as the Construction-impacted businesses, like new Rail and Piling and Bridge that Foster has.

Okay. And actually one more if I could, just on the decline in cash in the quarter, looks like some build in inventories. Is this sort of a one-time deal in the quarter, and you expect to work inventories lower throughout the year, I think as you had mentioned before, or what do you see there in the inventory?

We will continue that. I think there has been a ramp up in a couple of areas; I think Piling was one of them. And that will be the case, Brent, through the next couple of quarters we have -- we're ramping up our Bridge operations, and I know that we ramped up work in process in inventories in that area also. It is still considerably less than it was last year. The pressure is still on from a working capital management standpoint. It is up $11 million in the quarter, but it is down considerably compared to last quarter -- the first quarter of last year.

Liam Burke, Janney Capital Markets.

Stan, you talked about Portec, I guess the revenues, if I adjust for the sale of the Insulated Bonded Joint business was up $5 million. It was almost flat when you consider the fact that you had tough comps with the Insulated Bonded Joint. Where was the growth in the Portec products?

They had a good quarter in their Spike and Anchor businesses. Basically outside of that I think their Friction Management was up a little bit, but outside of that it was pretty flat.

Okay. And on the Piling, you mentioned that you did realize some revenues on lower margin Piling product. How do the margins look on the backlog that you built this quarter?

The backlog was, I would say a little bit less from a margin standpoint than what it had been last year.

Okay. And Dave, 31% was the tax rate for the quarter. I understand that Portec is now part of it. Is that something that you would expect to see through the rest of the year?

Yes. I mean, we expect to see a lower rate than we did last year for those reasons. Portec's foreign operations have a lower rate, and they also take advantage of some R&D tax credits as well.

(Operator Instructions) Scott Blumenthal, Emerald Advisors.

Stan, you talked a little bit about Piling sales during the quarter. And I guess you've had a couple questions already on the margins. Can you talk about volume and price, and how that compared year over year?

Go ahead.

Scott, I mean it certainly depends on some of our product areas. But overall, volumes were mostly up. For example, Piling volumes were up, I think over 60% on a tonnage basis, pricing down a little bit. And the same thing with our new Rail business, volumes were up and pricing was down just a little. So that just reflects a couple of things, number one is there is an overall expectation that commodity prices are going to come back a little bit. They did spike up a little bit.

But not only that, it reflects what we have talked about the last couple of quarters, the highly competitive nature of some of our markets, especially the distribution markets. In some of our manufacturing businesses we have enjoyed better volumes and an uptick in pricing. So it is mixed across the board. The big distribution businesses certainly increased volumes and a slight down-tick in pricing.

Yes, just to kind of follow-up on that too, Scott. There's been a lot of conversation on scrap prices and pricing of steel products in the first quarter, starting last year. As David said, our pricing compared to last year for both new Rail and Construction are down. But there was a little bit of pick-up in the first quarter, but it really wasn't that much, and so we still see relatively flat prices in the commodity prices of the distribution markets that we play in.

Okay. That's really helpful, Dave and Stan. And Dave, I guess hitting the inventory question just once more, if I may. You talked about inventories being up about $11 million quarter over quarter. In sheer, I guess, tonnage, do you have a comparable amount, or are you slightly up in tonnage as well?

We are up in tonnage a little bit in the distributed products businesses, Scott.

Okay. That's helpful. And I guess my last one is an update on the performance of the JV? I guess it provided a little bit of a contribution last year, and this year a little bit of a loss?

Actually just the opposite. Last year it was a little bit of a loss, and first-quarter this year it contributed positively, I think $87,000.

Sorry, I stand corrected. Thank you.

We do expect that to continue for the rest of the year though. And they have some good things going in that facility, and they're planning to have a nice year this year.

Brent Thielman, DA Davidson.

Just one more from you guys. Just on, I guess the bookings in the quarter, really exclusive of Portec, a pretty significant ramp from where you've been in the last few quarters, just in the core LB Foster business. I'm just wondering how do you think about that run rate going forward? You think there was some pull forward of projects? Maybe just any sense in terms of bookings trends.

I think, Brent, in both our distribution business was where a lot of it -- I think that there was some carry forward, there was a lot of activity. In Rail I believe we probably had as much activity in the quarter for the markets that we play in, in Rail, that we have seen in a couple of years. We don't expect that to continue. I think there's been some one-off programs, and as I said in Piling, there was some nice pick-up in the first quarter in bookings there also. A lot of that was projects that we built -- or we bid actually in the fourth quarter, and then we had a pretty poor first quarter in booking last year I think, so that really made the difference up there.

For the rest of our businesses, we did have a nice booking quarter in Tubular, and I would expect that to continue. It was really one of the areas of concern when we talked at our last webcast, particularly in the Coated side. But the Coated side has picked some business up, and they have some nice volume going into September, and that could continue. We have had some nice business in the Threaded product side of it. I don't know how that is going to continue as it plays out through the year because of the wet and the weather situation that we have had up in this area.

Transit products, hit on a couple of jobs that bid in the fourth-quarter last year, which we picked up this year, which that business is very much tied in with Transportation and that's a big wild card now, Brent. What's going to happen there? I mean high speed rail is basically -- it's just nothing moving with that. Some of the Transit work -- we've bid some big work over in Hawaii, which we are very much involved with, and there's some work in Houston, but overall the activity level there has been somewhat slow.

We did have a good booking quarter in Allegheny Rail, as I mentioned, particularly out in Pueblo, we had a really nice booking and a nice production quarter out there. Probably the best production quarter -- I think we had over 4,000 joints out there that we manufactured, up about 30% or 35% from last year. Fab products, there is still some work that's out there, but we have a big backlog to work through over the next 18 months. So it was a good quarter from a booking standpoint. I would like to say that that trend is going to continue.

We do expect some nice bookings, we have some really good opportunities that we're looking at from the Portec side of it in the Friction Management area. With the high cost of fuels in some of the railroads that really take a much more, a very involved look at what we can bring there. It's kind of like, it's a mixed bag, we have some great things going on. We continue to push, and we'll continue to push for share, and we'll continue to push for opportunities.

From a performance quarter, it was a disappointment, there's no doubt about it. But we are sitting on a record backlog, exclusive of Portec. I mean Portec's share of our backlog is about $22 million. You take that out of the $237 million, and we are still better than we have ever been on any quarter end that we have had since we have been a public company. So there's some really good things going on. And we're, like I said in my remarks, we are pretty bullish about the balance of the year.

And I show no more questions at this time. So I would like to turn it back to Mr. Hasselbusch for closing remarks.

Well, thank you all for the time today. And look forward to talking to you in a couple of months. Take care, and thank you.

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