L B Foster Co (FSTR) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2012 L.B. Foster Earnings Conference Call. My name is Kirstie and I will be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

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

Thank you, Kirstie. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster companies earnings conference call to review the Company's first-quarter 2012 operating results.

My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. This morning, Bob will provide an overview of the Company's first-quarter performances, give an update on critical business issues, and discussed market conditions. Afterward, I will review the Company's first-quarter financial performance 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.

During today's call, our commentary and responses to your questions may contain forward-looking statements, including items such as the Company's outlook for 2012 and beyond, our thoughts regarding the concrete tie product claim, cash flows, margins, and capital expenditures.

The statements involve a number of risks and uncertainties that could cause actual results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation and we do undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information or future events.

All participants are encouraged to refer to LB Foster's annual report on Form 10-K for the year ended December 31, 2011 as well as two other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the risk factors that may affect our results. Additionally, while forward-looking statements will be made today, L.B. Foster does not provide specific earnings guidance.

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

Thank you, Dave, and thank you everyone for joining us this morning. I'm happy to report that overall, it was a very good quarter for the Company, and I'm very pleased to announce our earnings per share of $0.33 for the quarter.

I want to begin by thanking our employees for their efforts delivering another solid quarter with numerous programs underway aimed at improving operations and customer focus and the Company and I'm happy to report that our customer satisfaction ratings remain very high, which I think is indicative of the order input that we've also had in the first quarter.

We reported sales of our hundred and $18 million and bookings of $175 million. I was particularly happy with the bookings number which is up around 7% over the prior year which helped us increase back log $56 million in the quarter.

And as we'll discuss together, the rail and tubular products businesses are doing very well. They've helped us make up for a weaker than expected construction market and are really the drivers in this quarter's operating results.

I'll go through each of free businesses here briefly before Dave covers more information on the financials. The rail business sales were up 7.2% and we continue to benefit from continuing strength in the capital projects and maintenance programs with Class I railroads. Spending was strong for them in the first quarter which we think was helped by mild weather and the fact that they could pull some of these projects forward and get started on them a little bit earlier.

Activity with our core rail distribution business and our insulated joint products was very good. Our backlog in the concrete ties product line for our two facilities is very strong, in some cases with backlog that goes out into the last quarter of the year. The pipeline for projects continues to look good, even in the transit market it's showing signs of modest improvement over the months ahead.

The only real negative sign that I saw was the drop in coal shipments in the quarter which was down almost 10% in the US; although Canada was up around 13%. We did see some impact from this in our friction management products which rely heavily on the coal routes.

At the same time, though, we saw increases in other commodities that run over the rail lines vehicles included other metals, petroleum products including oil, all of which were helping to make up for the shortfall in coal. So, the revenue ton miles and the other measures that the rail lines used all looked pretty strong. Our sales outside of North America and UK were also strong in the quarter, despite the fact that most of the news that you see out of the UK isn't very optimistic. We had a good quarter there.

We have some great products to launch in the coming quarters in this particular market segment. Were making some progress with OEMs around the world and putting some of our friction management products on cars that will help us serve the aftermarket friction modifiers so all of that I expect will help us going forward into the rest of the year and in the coming years ahead.

You will get a detailed report on margins, but as reported, our margin improvement was helped by some cost last year. But operationally, we had at least 200 basis points of margin improvement from real operational programs in our manufactured products were material costs were favorable; cost reductions were helping us in this area.

Productivity programs in our operations are also contributing to that. And I feel pretty comfortable about our ability to maintain price above inflation which also looks like it's in pretty good shape as well.

Turning to the construction business, this quarter remains soft as we had expected down around 14% year over year largely driven by the core piling business. The entire nonresidential construction market still seems to be struggling to get some momentum particularly in the heavy civil projects that require government spending, which is where we participate the most.

However, the nonresidential construction for industrial manufacturing, that outlook is improving. Some are even forecasting around 17% growth in 2012. We're beginning to see some success in that market here in the last quarter where we were getting some business from energy companies that are actually building new industrial facilities and we picked up some business there. So I look forward to continuing to try to focus on that market to try to make up for some of these other heavy civil projects.

Our year-over-year comparison, though, it's not all market related in terms of it being softness in the market. We did suffer from some supply chain issues with the availability of a product from a strategic partner that did cause some loss in business. We estimate that it cost us around $2 million in sales in the quarter. We think will have that problem behind us in another quarter. That cost us more than a few points of growth year-over-year.

So despite the challenges in the market, we were able to keep our gross margins up. They were up 30 basis points over the prior year, and once again, I think with that indication of gross margins we've been able to make sure that our pricing is covering inflation and were not getting any compression there between price and material costs.

Finally, in the tubular products business, we had a great quarter. Sales were up 61% and the demand in the oil and gas markets for our coated products is extremely strong. We've been able to respond to this with this increase with our existing capacity. We still have more capacity to handle gross the latter part of the year and into next year. I believe this market will have some strength in the foreseeable future. Everything you hear about both exploration and the transport of products through our coated pipe looks good.

I'm not going to project that that growth rate will be the same as what we saw in Q1, but we're certainly bullish about what that market can produce for our tubular products business.

The threaded products business which mainly serves the agriculture industries is also strong. We completed the startup of our new facility in Magnolia, Texas. We have all of our operations now under one roof. That's going to bring greater efficiency in our operations and our joint-venture facility which is next door to that one for coupling products is also making a nice contribution to that business and our ability to perform well for customers with these two facilities side-by-side has become obvious to us.

Needless to say, from a margin standpoint, the sales increased brought some nice margin leverage with it in the quarter. Dave will talk a little bit more about cash flow in the quarter. I'll just say inventories were up in the quarter. We used cash in the quarter of around $2 million. The bulk of that, or a good part of that was with inventory. It's not unusual to build some inventory in the quarter as we get ready for the increase in seasonal business.

We are still holding a little bit more than I'd like to see us have been there's more opportunity for us to reduce this going forward, and I'm sure that'll be a contribution to cash flow in future quarters.

I didn't really have any comments that I thought I'd add today on the legislation subject. There's really been no activity to report on; whether it's tax legislation or the surface transportation bill. So really, no news to update you on there.

I'll close with a comment on Union Pacific. We, in our press release, included the status report in their which essentially looked the same as the report last quarter. That's because the status of these Union Pacific claim is essentially the same as the last quarter. As mentioned in the press release, we will complete the analysis and evaluation and the quarter that were in now. I expect a report on the resolution of this matter in the next quarter.

And I will look forward to getting that behind us and reaching a successful conclusion with Union Pacific. So that dialogue continues, but it would be premature for us to say anything about it at this point until we reach 100% conclusion on the matter. So I'll ask for your patience on that subject for another quarter, and hopefully my report next time around will satisfy your concerns with that.

So with that, I'll go ahead and turn it back over to Dave and he'll cover a few more details in the financial reporting.

Okay. Thank you, Bob. Sales for the first quarter of 2012 were $118.5 million compared to $117.1 million in the prior year, a 1.2% increase. The sales increase was due to a 7.2% increase in rail product sales, a 61.7% increase in tubular product sales that was partially offset by a 14.4% decline in construction product sales.

The rail sales improvement was principally due to increases in rail distribution and our Allegheny rail products line. Concrete tie sales were essentially flat, as the decline caused by the closure of CXT's Grand Island facility was offset by increases at our Spokane and Tucson facilities. The tubular product sales increase was due to sales increases in both tubular divisions; coated products as well as threaded products, which were driven principally by volume increases.

The construction product sales decrease was principally due to a decline in sales of piling products as well as a decline in sales of our fabricated products businesses, partially offset by small sales increase in our concrete buildings divisions in the first quarter of this year.

As mentioned in our earnings release, backlogs stood at $201.7 million at the end of the first quarter, up $56.3 million from December of '11, but down $35.4 million or 15%, from March of 2011. This year-over-year decline was due principally to the construction products backlog decline, which was down by about 38% partially offset by increases in tubular products and a slight increase in our rail products backlog.

The trend on bookings has been positive, as new orders received during the first quarter of 2012 increased by 7.1% as Bob mentioned compared to last year. This increase was due to strong bookings in our rail products group, which increased by about 30% over the prior year quarter. Construction segment bookings declined by about 24% and tubular segment bookings declined by a little bit as well.

On construction markets in which we participant, ended the first quarter mixed with heavy civil construction down about 1% and other nonresidential construction up almost 5%. Our visibility through the remainder of this year is still a little bit cloudy with regard to construction, due to a lack of new transportation bill, and an uncertain rebound in nonresidential construction which we believe is bottoming or already may have bottomed.

Regarding our rail business, capital spending among the Class I railroads was stronger-than-expected during the first quarter of 2012, as it was well above 2011's first quarter spend. We anticipate continued year-over-year spending increases, although probably a more subdued rate then quarter one. We're also seeing some projects come forward in transit and industrial markets, although we are not sure that they will actually be built given the uncertainties in various funding sources.

Our Tucson tie facility is operating between 90% and 95% of capacity for the Union Pacific Railroad. The Tucson supply contract with the UPRR expires at the end of 2012, and we are working to extend that agreement in the coming months.

In Spokane, we are producing concretize for transit authorities, Class I railroads, contractors, as well as industrial customers. We continue to see robust inquiry in bidding activity, and we are close to capacity at that facility as well. Our Spokane facility reported very strong sales and profitability in the first quarter and we expect that strength to continue throughout the remainder of this year.

Our Union Pacific Railroad product claim disclosure in the earnings release, as Bob mentioned, contain no changes from our fourth quarter earnings release in February. Our numerous tests and analyses and overall testing process has been very purposeful and thorough. While many tests are still ongoing, we believe the majority of them will be completed during the second quarter, and we will have adequate results from which to conduct meaningful discussions with the UPRR.

Thus far, our test results have not indicated any appreciable defects in workmanship or significant deviations from specifications. As mentioned in our earnings press release, much of the testing is not complete, therefore, the results of those tests have not yet been analyzed and conclusions not drawn. As a result, we have not recorded any charges in the first quarter for this claim, as it is impossible to reasonably estimate the liability, if any we might have.

As a percentage of this quarter's consolidated sales, tubular accounted for 8% of sales, construction was 34% of sales, and rail, 58%. Bob gave an update on gross profit margins. Gross margins were 19.3% in the first quarter of 2012, an increase of 440 basis points from last year. That increase was due principally to increased selling margins across all three of our segments and amounted to about 200 basis points.

A $2.5 million expense in 2011, first quarter related to the sale of inventory that was written up to fair market value as a result of Portec Rail products acquisition and lower manufacturing costs.

Turning to costs and expenses, selling and administrative expense increased by $1.8 million in the first quarter of 2012 or 11.7% compared to $17.5 million. This increase was primarily due to concrete tie testing expenses and increased salaries and benefit costs. Selling and administrative expenses represented 14.8% of sales in the first quarter of 2012, compared to 13.4% of sales in the first quarter of last year.

Amortization expense in the first quarter was $0.7 million, flat with the prior year. This expense principally related to definitive lived intangible assets originating from the Portec acquisition which closed in December of 2010.

As provided in our earnings release, we did disclose a calculation of adjusted EBITDA which we believe has been meaningful and is meaningful for a company which has made significant acquisition, as it compares results of operations excluding certain non-cash items to provide yet another measure that reflects how a business is performing.

For the first quarter of 2012, adjusted EBITDA was $8.2 million compared to $6.5 million in the prior year, a 26.8% increase. As a percentage of sales, adjusted EBITDA was 6.9% of sales in the current quarter versus 5.5% in the prior year quarter.

First quarter 2012 pretax income was $5.1 million compared to $1 million in last year's first quarter, an increase of $4.1 million or more than 400%. The first quarter 2012 effective income tax rate was 33.9% compared to 31% in the first quarter of last year. The increase in the rate was principally attributable to UK rate changes that lowered the prior year quarter rate by about 300 basis points. Net income was $3.4 million or $0.33 per diluted share, compared to $0.7 million or $0.07 per diluted share last year.

Turning to the balance sheet, debt at the end of the first quarter was $1.1 million compared to $2.4 million at the end of 2011, a $1.3 million decrease. Cash used in operating activities in the first quarter of 2012 was $2.4 million compared to cash used in the prior year of $3.4 million, a $1 million improvement.

Capital expenditures were $2.5 million in the first quarter of this year compared to $2.9 million last year. CapEx for the first quarter this year were for items such as our new threaded pipe facility in Magnolia, Texas, new plant and yard improvements, as well as equipment in a couple of our facilities that we have been improving; our Niles and our Columbia City facility in Indiana and our new friction management facility in Vancouver, British Columbia.

As in prior years, we anticipate that our 2012 cash generation from operating activities will exceed capital expenditures, schedule debt service payments, and share repurchases and dividends. Cash at the end of March 2012 was $67.8 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 $10.2 million compared to December of 2011, and increased by $8.3 million compared to March of last year. Accounts receivables decreased by $6.6 million compared to December 2011, while DSO was at 45 days. We believe our AR portfolio remains in very strong condition. Inventory increased by $3.9 million during the first quarter of 2012, while accounts payable and deferred revenue declined by $8 million.

Looking forward, we believe that we will continue to experience a continued competitive environment in the construction market that we participate in as only slowly improving state and local budgets and no reauthorization of the transportation bill provide headwinds in an already weak market.

While we hold out hope that Congress will move a new transportation bill ahead, many unresolved issues remain that continue to make passage this year problematic. However, reasonable Class I railroads volumes, robust financial results, and announced strong plans for capital spending in 2012 bold well for our rail segment.

Finally, we expect our tubular segment to continue the upward trend we saw in 2011 and the first quarter of 2012, as we move into our new threading facility and work closely with our joint venture partner and as new natural gas demand continues to grow.

That concludes my comments on the first quarter of 2012, and will now open up the session for questions. Kirstie?

Thank you.

(Operator Instructions)

Your first question comes from the line of Liam Burke from Janney. Please go ahead, Liam.

Thank you. Good morning, Bob. Good morning Dave.

Good morning.

Good morning, Liam.

Bob, you made a comment on friction management that coal volume shipments with the mild winter are down 10% and affected the friction management business. Is that the only gating factor in friction management, or are you seeing some opportunities beyond that? I know you mentioned the UK, but can you give us more detail on friction management?

Yes, there's clearly more opportunities beyond just coal. What I was commenting on was the fact that -- and it wasn't weather related, it was actually just based on the amount of coal that gets moved on the rail lines which accounts for about 45% of the volume in the rail business.

So the fact that those shipments were down in the US 10% while they were up in Canada, what it means is if you are putting friction management product on the heavy coal lines which is where we get a fair amount of our business, we weren't seeing as much traffic there.

So, the replenishment of some of the friction modifiers we put on the rail was lower than we thought we would normally see. So it was really related to the traffic on those lines more so than it was the weather. We get friction management sales direct from OEMs and we are in both the lubricant products, or the friction modifiers as we call them, as well as the equipment to lubricate the track. So, it's not all related to traffic.

And how did Salient do this quarter?

Salient -- their sales were still low. We haven't seen the uptake in that business yet that we'd like to see. There is a next-generation product that we are working on that we'd like to see finished by the completion of the end of the year. That will improve our cost position.

There is a future generation of software that is included with that that'll take it to the more state-of-the-art operating system, as well as improve the database management function of it. We think that's going to give us a boost, and is going to attract more people. But we also need to get some business outside of the US on that product line because our penetration rate in the US is up at a point where we'd really like to start looking outside the US for additional growth opportunities.

Our business leader with Salient, in fact, was just in Brazil and there's some optimistic news coming from customers that we're after in a particular market. So we're beginning to turn our attention there for what we think will be good growth opportunities, but I would tell you that this business is -- the sales are still below where we would like to see them.

We are still funding this business, but we believe it is the right kind of business for us to fund. It has got great technology and it should be able to help the rail companies improve their operations in the long run.

Great, thank you. And, Dave, do you have a forecast for CapEx that you can talk about?

Yes, between $9 million and $10 million this year, Liam.

Great. Thanks, Dave. Thanks, Bob.

Yes.

Thank you. Your next question comes from the line of Brent Thielman from D.A. Davidson. Go ahead please, sir.

Hi, good morning. Congratulations on the quarter.

Good morning, Brent.

Thank you.

Yes, I guess just on the construction products margin -- 14% drop in sales but you're margins are flat year-over-year. Is there a mix shift which is benefiting those comparisons within that segment?

Not really. Piling is by far the biggest sales business in the segments, but all of our business units did a pretty good job. We struggled a little bit on the buildings business because of the low of production levels that we typically experience in the first quarter, but we did a good job in all of the businesses keeping the margins reasonable. And as Bob mentioned, some cost reduction in efficiency programs that kept the margins reasonable.

Should we take that as a sign that pricing isn't getting any worse for you guys? I know it's been tough through this downturn, but is that a reasonable sign --

Yes. I would say that it is. If you just look at piling all by itself, as Dave said, it wasn't mix that contributed to the margin improvement, just piling on its own gross profit margins were better than the prior year on down sales. So, we think we are covering any inflation that we see and haven't had to fight it out so much on price with the projects were winning.

Okay. Then, Bob, you mentioned seeing some energy companies moving forward with sort of industrial facilities and some bookings there. What specifically are you doing for those types of projects?

We are actually selling piling product into those projects. So in the one example I was talking about, it's an integrated oil company building a new facility and in the construction of that particular plant, we are selling our traditional piling products into that construction project.

Okay. Okay, interesting. And then on the tubular segments, real nice contribution there as well, just curious how will the new threaded facility impact margins and profitability as that plant ramps up?

Well, we expect increased efficiency in that facility, Brent, but we obviously made a fairly sizable investment that will start appreciating as well. So the first year, this year, you're probably not going to see a whole lot of change in margin, but we do expect as we are able to improve our volumes and, as Bob mentioned, work with our JV partner we expect margins to increase in future years.

Okay. Just a last one for me. Dave, I'm sorry if you already said this, but on SG&A, were there are significant costs associated with the claim that inflated SG&A this quarter?

Yes, we incurred a little over $900,000, Brent, in testing costs for the concrete ties.

Okay, perfect. Good luck in the quarter. Thanks, guys.

Thank you.

Thank you. Your final question comes from Scott Blumenthal from Emerald Advisers. Please go ahead, Scott.

Good morning. Congratulations, on the quarter.

Thank you, Scott.

Bob, you did make the comment that you expect to report on the resolution sometime maybe this quarter. Could you maybe give us what you believe might be a timeframe as to actually getting the whole thing resolved, or is that just not possible at this point?

It's too difficult to do that. If we get substantial news and conclude not just only all of the testing and the analysis, but the resolution of this with an acceptable agreement with Union Pacific on how we proceed, we may discuss that before our next earnings call. But I'm putting the date out there as far our next earnings call because it always seems that it takes a little bit longer than you'd like to get this done, but I'll be very disappointed if we don't have it done by that time.

Okay. So, I guess from what you're saying, can I gather that there has been some type of an agreement on how at least the resolution will be reached, or do we still have to agree on that, too?

There has been no agreement on how the resolution will be reached.

Okay.

So, all of that still needs to be finalized.

Okay. I guess moving to the tubular business, have you given guidance on what you expect the margins to be in the threaded business? Will that help overall tubular margins, or is that going to be a drag in the near term as we ramp and then eventually help them? Maybe you can give us a little context there.

That's actually getting down probably a little too granule for the type of guidance we give, especially with regards to margins, Scott. It represents perhaps half of that segment, but we can tell you is that threaded margins have improved over the past couple of years and this is the next step to take that next leap and step up as far as our margins in the tubular business goes.

We just had a call where the caller asked about, especially the move to Magnolia, and we expect the remainder of this year to be somewhat consistent with the first quarter results and any step up in improvement really is going to probably come next year.

Okay, well, that's fair. Could you give us an idea as to the uptake of the current customers from the coating business, and what portion of them are actually interested in moving to the next step threading, or how much do you expect to get from the outside of non-coating part of the business?

Maybe we ought to start by saying we don't really share customers between the coating and the threaded business. The bulk of our coated products go into the oil and gas and pipeline markets and our threaded piping goes into largely water well applications in the agricultural market.

So, we really serve those two markets with two different channels so there really isn't any overlap in terms of the go-to-market with those two products.

Okay. That's really helpful. All right. Thank you.

Thank you. We have no further questions, so I would like to turn the call over to the President and CEO for closing remarks.

Well, thank you, everyone. I appreciate your comments and questions. We're happy that you could join us today. We'll look forward to talking with you next quarter. Thank you very much.

Thank you. Ladies and gentlemen, that concludes your presentation for today. You may now disconnect. Thank you for joining, and have a very good day.