L B Foster Co (FSTR) 2011 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the L.B. Foster Company's second-quarter 2011 earnings conference call. My name is Jen, 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 today's conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the call over to Mr. David Russo, Chief Financial Officer. Please proceed.

Good morning ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's second-quarter 2011 operating results. My name is David Russo, and I am 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 second-quarter performance, give an update on critical business issues and discuss market conditions. Afterward, I will review the earnings press release issued earlier this morning and then we will open up the session for questions.

Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the Investor Relations page. This webcast will be archived and available for seven days.

Today's call includes forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and include known and unknown risks and uncertainties. Future actual results may differ greatly from these statements and expectations that are expressed today. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31, 2010, 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, L.B. Foster Company's policy prohibits us from providing specific earnings guidance.

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

Good morning. Thank you David. Thanks to all of you for attending our second-quarter 2011 earnings call and webcast.

This morning, we announced consolidated sales for the second quarter of $173.7 million, 45% above the second quarter last year. Earnings for the quarter were $0.61 per diluted share, up from $0.58 per diluted share in the same quarter last year. Earnings in the quarter were negatively impacted by $0.26 per share related to a charge for exiting our Grand Island facility as well as inventory write-downs and warranty issues of Grand Island ties. We also announced a warranty claim received by our CXT subsidiary from the Union Pacific Railroad specific to ties manufactured at the Grand Island facility. The UP has asserted that a significant percentage of concrete ties manufactured between 2006 and 2010 at Grand Island failed to meet contract specifications or have defects in workmanship and are cracking and failing prematurely. The 2005 contract calls for each concrete tie that failed to be replaced with 1.5 new concrete ties provided that the UP notifies CXT of such failure within five years of production. The notices received from the UP do not specify how many ties the UP claims are defective, which specifications if claims were not met, nor the nature of the claim to workmanship defect. We have retained outside concrete specialists to assist us in this matter. I want to advise you that because of the sensitive nature and uncertainty of the claims, we will be limited in the responses we can make during the Q&A session at the conclusion of our prepared remarks on the subject of concrete ties.

Looking at the products, current activity and future expectations are mixed. In the area of sales, order entry for the quarter was uneven. Excuse me, in the area of sales, order entry for the quarter was uneven as an indication of our markets. Consolidated bookings were $128.3 million, 6.5% ahead of last year. However, legacy Foster business was $99.4 million, down 17.8%, largely on soft order entry in new rail, which was down 40% due to weak industrial and short-line projects. Fab product order entry was down 65% based on the $12 million Walt Whitman project which booked in the second quarter of last year.

The lack of a new robust transportation bill is dampening any optimism on the future activity of construction, new rail, and transit products. While we optimistically discussed a six-year $550 billion package less than a year ago, the current levels proposed are a two-year bill in the Senate for $109 billion and a six-year bill in the House for $230 billion, which on the average is 20% less than the expired bill. The level of spending would take us back to actual expenditures in the 1999-2005 era.

In a report issued just last week, the American Society of Civil Engineers, ASCE, indicate that infrastructure deficiencies add $97 billion a year to the cost of operating vehicles and result in travel delays that cost over $32 billion per year. Furthermore, the ASCE believes infrastructure costs will rise exponentially if investments are not made now, and that within ten years, US businesses would pay an additional $430 billion in transportation costs and exports will drop by $28 billion.

As another example, considering that currently 25% of the bridges in our country have been deemed either structurally deficient or functionally obsolete, the negative impact at this reduced level of expending is very obvious.

Continuing on with Construction Products, in piling, revenues were up 59%, largely due to final shipments of sheet piling for the Hurricane Katrina rebuilding efforts in New Orleans. Completion of this large project had a negative impact on year-over-year backlog. Current backlog is 42% less than June of last year. In Fab Products -- and Fab Products continues to benefit from a strong backlog, but as I indicated earlier, future business will be impacted by the lack of a new transportation bill. Their revenues in the quarter were 40% ahead of last year, and we think this positive trend will continue through 2012.

The areas of our rail business related to Class I railroads, which are Allegheny, Portec and CXT guys in Tucson in Spokane are doing very well. North America Class Is are on track to increase spending by over 20% this year as they improve operating ratios, increase profitability, and leverage themselves against the trucking industry.

From a freight standpoint, we continue to be in the middle of a rail renaissance.

Let me update you on several of the aspects that are taking place in the Portec Rail acquisition. We are now almost eight months into our aggressive integration plan. I can tell you that we are making excellent progress. On the business side, overall Portec Rail product businesses are beating last year's performance. We recently announced a new combined friction management team under the direction of Kostas Papazoglou, which will be responsible for all global manufacturing, research and development, engineering and sales activity in friction management. We continue to successfully penetrate the North America Class I railroad market with this friction management products and services.

On the international front, we are taking an in-depth look at opportunities, specifically in China and Australia, with plans to ramp up our efforts there this year. I'd like to express my thanks to the many employees who have made significant commitment to making the integration a huge success.

We continue to see positive performance in our Tubular Products group. Bookings were up 25% in the quarter on a combined basis. Production levels were up 45% in coated and 37% in threaded. We expect this positive trend to continue through the end of the year. Our coated plant in Birmingham, Alabama is effectively booked through the end of 2011. Finally, we are on track to complete the move to our new threaded products facility in Magnolia, Texas by year-end.

Lastly, given the inconsistent performance of our key end markets, significant headwinds in the economy, and the charges we announced today related to our Grand Island concrete tie facility, performance in the second half of 2011 will be very challenging.

I'll now turn back to David for the financial review.

Thank you Stan.

Sales for the second quarter of 2011 were $173.7 million compared to $119.5 million in the prior year, a 45.4% increase. The sales increase was due to the inclusion of $28.4 million of sales contributed by Portec Rail Products, our December 2010 acquisition, as well as a $25.8 million or 21.5% increase in L.B. Foster sales compared to last year's quarter. The 21.5% increase in Foster sales was driven by a 19% increase in Rail Products sales, 23.4% improvement in Construction Products sales, and a 26.5% increase in Tubular Products sales compared to last year's second quarter.

The increase in rail sales was driven by increases in rail distribution, transit products, and increased sales from our Spokane tie facility. Our Grand Island, Nebraska tie sales were insignificant in the second quarter due to the expiration of our contract with the Union Pacific 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, we have experienced some problems with our exit from Grand Island in some of the concrete ties and have taken charges as best we can estimate at this time to recognize these problems.

The claim by the Union Pacific Railroad described in the earnings release was received on July 12. While we are moving expeditiously to understand what they are experiencing in track and perform a regimen of tests on different samples of ties to determine what, if anything, the problem is, we've not had nearly enough time to assess the issue or issues. Because we are in the very early stages of this process, we have not recorded any charges in the second quarter for this claim, as it is impossible to reasonably estimate the liability, if any, we might have. Aside from any strictly contractual liability we may have, we certainly have an issue with a valued customer that we need to address.

Our Tucson facility is close to maximum capacity for the Union Pacific Railroad. In Spokane, we continue to produce ties for -- concrete ties for transit authorities, other Class I railroads, contractors, as well as industrial customers. We've seen strong inquiry and bidding activity, and we're close to capacity at that facility as well.

Our Rail segment ended the quarter with bookings up 42.4% over last year, and our backlog was higher by 29% with the Portec Rail backlog included but was just a little lower for the legacy Foster products.

The Construction Products second-quarter sales increase was due to a 59% increase in piling products and a 41% increase in fabricated product sales, partially offset by a 42.7% reduction in concrete building sales.

Last October, we mentioned that we expected new pre-cast building orders from federal government customers to decline over the following several months. 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 was due to the conclusion of stimulus spending 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 58% of last year, and the backlog remains at approximately 48% of that of June of 2010.

Our Fabricated Products division has a backlog that is approximately 9% higher than last year and we expect that division to perform strongly over the next 12 to 18 months.

Our piling division had a reasonable bookings quarter and a very strong sales quarter. As a result, its backlog is approximately 42% lower than last year, as this is one of our more competitive markets today.

The second-quarter tubular sales increase was due to an improved sales performance in our threaded products business and to a lesser extent improvement in our coated 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, business activity has been good and backlog is well above last year.

As a percentage of sales of this quarter's consolidated numbers, tubular accounted for 6% of sales, construction was 42%, and rail was 52% of total sales. As mentioned in our earnings release, backlog stood at $191.4 million at the end of the second quarter, down 7.6% from June of 2010. Portec represented approximately $22.3 million of that backlog.

Consolidated bookings for the second quarter increased by 6.3% to $128.3 million compared to $120.6 million last year. Our gross profit margins were 15.1% in the second quarter, a decrease of 190 basis points from last year's second quarter. The decrease in margin was due principally to the $4.4 million of charges related to our CXT Grand Island tie facility described in our earnings release, lower selling margins after including material cost variances, and a $1 million unfavorable swing in LIFO expense, partially offset by the inclusion of our Portec Rail Products acquisition.

SG&A expense increased by $6 million, or 55.9%, to $16.6 million in the second quarter of 2011 due to the inclusion of Portec's selling and administrative expenses of $6.1 million. SG&A represented 9.6% of sales for the second quarter of 2011 as compared to 8.9% of sales in the second quarter of 2010, the increase being the result of the inclusion of Portec as its historical S&A as a percentage of sales has historically been higher than the Foster legacy business.

Second-quarter operating income was $9.2 million compared to $9.5 million in last year's second quarter, a $300,000 reduction. Portec Rail Products' operating income was more than offset by the Grand Island tie charges. As disclosed in our earnings release, we provide a calculation of adjusted EBITDA which we believe is meaningful for a company which has made a significant acquisition as it compares the results of operations, excluding certain non-cash items, to provide another measure that reflects how a business performed.

For the second quarter of 2011, adjusted EBITDA was $12.3 million compared to $11.7 million in the prior year, a 4.7% increase. As a percentage of sales, adjusted EBITDA was 7% of sales in the current quarter versus 9.8% in the prior-year quarter, the reduction being the result of the concrete tie business charges.

Interest expense was $135,000 in the second quarter of 2011, 44% less than the same period last year due to reduced average borrowings. Second-quarter 2011 pretax income was $9.2 million compared to $9.4 million in last year's second quarter, a decrease of 2.2%. Second-quarter 2011 effective income tax rate was 30.4% compared to 36.1% last year. The reduction in rate was princely due to the impact of Portec Rail Products results and relatively lower tax rate applicable to its foreign operations.

Net income was $6.4 million, or $0.61 per diluted share, compared to $6 million, or $0.58 per diluted share, last year.

Turning to the balance sheet, debt at the end of the second quarter was $3.1 million compared to $4.8 million at the end of 2010. Capital expenditures were $3.8 million for the second quarter compared to $1.4 million in the prior-year quarter. We anticipate capital expenditures are likely to range between $7.5 million and $8.5 million in 2011. We also expect to generate cash flows from operating activities in excess of our capital expenditures, scheduled debt service payments, share repurchases, and dividends. We did purchase shares of the Company's common stock pursuant to the Board of Directors' share repurchase authorization that was announced in May 2011. In the second quarter, we purchased 48,043 shares at an average price of $32.22 per share for a total cost of a little over $1.5 million. Approximately $23.5 million remains on the outstanding authorization. We do not believe that this program conflicts with our stated acquisition strategy. On the contrary, we believe that the combination of the two will help provide a balanced approach to providing long-term value to our shareholders.

Cash at June 30, 2011 was $45.7 million, which was invested principally in AAA rated money market funds and other short-term instruments, where preservation of principal and quick access to funds has been the priority.

Working capital, net of cash, increased by $17.5 million in the second quarter, compared to March 2011.

Accounts Receivable increased by over $22.2 million compared to March of 2011 while DSO declined to 41 days. This is primarily due to a $43.6 million increase in sales generated by the last two months of the second quarter when compared to the last were months of the first quarter. We believe that our AR portfolio remains in very good condition.

Inventory decreased by $6 million during the second quarter of 2011, while Accounts Payable and deferred revenue declined by $0.5 million. The inventory reduction was achieved via a 9% reduction in Foster's legacy business with piling leading the way by reducing inventory 13% during the quarter.

Looking forward, we believe that the wind-down of federal stimulus spending, continuing budget deficits at the state level and the lack of a renewed transportation bill and more inconsistent economic growth than we expected will keep our markets on the weaker side, as evidenced by a lower backlog, which will continue to exacerbate the competitive environment.

Portec was nicely accretive in the second quarter and we do expect that to continue for the remainder of the year and for the full year as well. As Stan mentioned, we believe there are a very nice Class I opportunities for Portec as well as international opportunities that we expect to get into a little more in the second half of this year in China.

That concludes my comments on the second quarter of 2011. We will now open up the session to questions.

(Operator Instructions). Brent Thielman, D.A. Davidson.

Stan, I guess, on the product claim, I understand the financial impact of the charges is impossible at this point. But can you discuss I guess your potential liability here, and maybe a coverage for something like this?

No, there's really nothing we can talk about at this time, Brent, on that side of it.

The only thing that we could do to at least give everybody an idea was to discuss the years in question of UP's claim and the number of ties produced for them, but I mean, obviously, if we could put our arms around it, we would have actually said more and perhaps book something. But it's impossible right now.

Okay. I guess, excluding the product claim, what sort of additional costs should we be kind of considering for the Nebraska plant going forward?

I think we pretty -- we think we pretty much got everything cleaned up in there.

There would be some future operating costs over the next several months as it winds down, but other than that, it should be minimal.

Okay. Then I guess you had a bit of a decline in the cash and a pretty significant jump in receivables. Can you talk about what happened there? Do you expect to rebuild that cash in the second half of the year?

Yes. It's -- obviously, we are a seasonal business, and the second-quarter sales were extremely higher than the first-quarter sales. You take a look at June sales were very high in typically whatever we sell -- our DSOs in that, depending on the business, in that 35 to 48 day range, depending on the product group. So those second half of May and June sales, not a lot of those get collected, so as sales ramp up like that, AR will ramp up as well. We'll get that back in the third and fourth quarter this year as things do trend off again. So that was -- there's nothing of concern we believe in our AR portfolio. It's just a question of seasonality.

This last one if I could, you talked about this sort of continuing competition in the market, and obviously a shift in mix in your business as well. How should we think about the margins on new orders booked relative to sort of what you experienced in the quarter? Either if you want to discuss that quantitatively or qualitatively.

I think, from a qualitative standpoint, we really noticed, with some of the downturn in construction, a lot of pressure on our distribution businesses. That's where the margin deterioration we're seeing most. We're still -- we haven't seen as much impact on margin deterioration on the manufacturing side of it, Brent.

Okay, perfect. Thanks a lot guys.

Liam Burke, Janney Montgomery Scott.

Good morning Dave. Stan, can we step back a second? If I look at the Rail -- if we look at the Rail business, Class Is investing. That should trickle down to the short lines and the regionals. We talked a lot about government stimulus and how that probably would affect the transit business, CTX, the concrete shelter business, and piling. But by and large, net of government spending, most of the Rail business looks to be in pretty good shape. Do I have that right?

The railroad is in good shape. I think that really some of the concerns that we have are related to transit. We're looking at some big, major projects, but on the manufacturing side, we feel pretty good because most of that business is tied in with the Class Is.

New Rail, which has been very cyclical, it's been very up and down in the last year, obvious by the order entry being off 40% in the second quarter compared to we had a strong order entry in the first quarter in new rail. A lot of that is private work. A lot of that a short-line work, and a lot of that is in the transportation side. So we don't work with the Class Is in the new rail side of it, so that's been very inconsistent.

One of the concerns that we have is when you take a look at our construction side of our business, we talk about the lack of a high -- of a transportation bill, which is very concerning. We also talk about the stimulus and the drop-off in stimulus and how that is impacting, as you indicated, two or three of the products, including the precast buildings, but (technical difficulty) residential spending still continues to be down. I think we've looked at, in the last 31 months and you compare year over previous year months, and we've had 31 straight months where we've had drop-offs in non-residential spending. So (inaudible) some of the concerns. Plus the economy overall, plus some of the credit situations, it's going to be very challenging in the second half of the year and probably for the next -- probably for the next nine months.

When I looked at the -- let's put the concrete -- I mean the concrete tie business aside with the $4.4 million charge. Your gross margins would have been north of 17.5%, which would've been pretty good for historical Foster. Your sales growth was nice both organically and with the contribution of Portec.

How much headwind is -- we've gone through the pilings and the concrete, but I would think that the rail business will continue to move along and help you grow margin here.

The manufacturing side, we're seeing a lot of pressure on the distribution on the new rail. But take a look at -- yes, we did have very good strong revenue in the second quarter, but order entry in the legacy Foster was down. We talked about that being down 17% to 20%. That's what's really some of the challenges that we're seeing. The activity level is just not where it was earlier this year into last year. We don't see a lot of signs of that picking back up in the near term.

Thank you Stan.

(Operator Instructions). Tom Spiro, Spiro Capital.

Focusing on the Grand Island situation for a moment, I'm curious. Is the manufacturing process that we're using in Tucson the same process that we're using in Grand Island?

Yes, that's very perplexing, that's an interesting point. We have the same equipment, we have the same specs, and we have basically the same processes. Really the only difference is some of the raw material, and that's what we're really looking at very closely.

Is this a process that other players in the industry overseas or in the United States use, or is this a process that we've developed internally?

No, it's pretty much. We've got European equipment, which is used throughout the world. When we put those two plants together, five or six years ago, we went all over. We feel that we had as good of equipment that's made, and this is very similar to what's done in Europe, what's done in China, what's done in South Africa, and Russia, some of the other heavy-haul areas of the world.

The specs that we're using for the feedstock -- the raw materials that go into the ties, the concrete and such, over in Grand Island, do we have the same specs in Tucson?

Yes, they are the same specs.

I see. That's helpful, thank you. The only other question I had was over on tubular in the coated area. It seems to be stronger than we expected at the start of the year. why is it so strong? What markets are driving the coated strength?

Gas in particular. Really, there's a lot of continued exploration and drilling in gas, and you see a lot of it here in western Pennsylvania with the Marcellus Shale, but you're seeing it in Texas; you're seeing it in Montana; you're seeing it in a number of different areas. That's what's really driving it. But you're right. It's higher than what we thought, and we continue to like the upward trend, but we're also seeing some good movement in threaded. Really those two kind of hand-in-hand have really -- we expect that to continue throughout the year and into next year.

I'm surprised that we can be competitive up in Pennsylvania when we are coming from I think Alabama.

We are really not. I think we had some business up here, don't get me wrong, but that's the activity I think that some of the capacity that we might be competing with out of the Southeast or the Southwest is really focusing on the Marcellus Shale, and we're focusing on the opportunities more in the Southeast and the Southwest.

Thanks much.

If there are no further questions in the queue, I'll turn the call back to management for any closing remarks.

Thank you all for the time and hope you all have a great day and look forward to talking to you in three months. Thank you.

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