L B Foster Co (FSTR) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the L.B. Foster earnings conference call. My name is Erica and I will be your operator for today.

At this time all participants are in a listen-only mode. We will conduct 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 call over to David Russo. Please proceed.

Thank you, Erica. 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 2012 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster.

Hosting may call today is Mr. Robert Bauer, L.B. Foster's President and CEO. This morning Bob 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 Company's fourth-quarter financial results, and in certain cases, our annual financial performance. Then Bob will close the review by discussing our 2013 outlook. And then we will open the session up 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 2013 and beyond, our thoughts regarding these outlook items, and our markets, cash flows, margins, and capital expenditures. These 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 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 L.B. Foster's annual report on Form 10-K for the year ended December 31, 2011, as well as to 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.

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

Thank you, Dave. Good morning, everyone. Thank you for joining us.

We will report on two periods with our announcement this quarter. First, our results for the fourth quarter and, second, our results for the 2012 year. In this section we will speak mostly to the year's results adjusted for the costs related to concrete tie warranty claims we have discussed in prior quarters.

The fourth quarter was a nice finish to the year. Sales increased 5.2% over last year driven by continued success in the rail and tubular businesses. The rail business sales were up 23% over prior year while tubular sales were up almost 49% in Q4. The strong performance helped us overcome the continuing difficult environment we have faced in the construction business with sales down almost 28% in the quarter.

The construction market has continued to suffer from lack of new investment in transportation infrastructure as well as improvements that usually rely on state and federal funding. However, throughout the quarter we did see improving order trends in construction.

Our buildings business has leveled off and is no longer declining. Our bridge business has worked off quite a bit of backlog in the last 12 months, which will make for tougher comparisons over the next year, but we do have some encouraging projects we are bidding right now. And so we are getting more upbeat on the future of construction, particularly in light of the low spending levels we are at. I will say more about that in our future outlook later in my remarks.

So we are exiting the year with a total company backlog of $211 million, that is 50% above the level we exited 2011. So while the bookings number for the quarter is below last year's Q4 we have really had a pretty good order activity throughout the year. It is not uncommon for us to have wide swings from one quarter to the next, which is why we avoid too much focus on any one quarter.

So turning to profitability; before I comment on profit margins in that area I want to remind everyone that we divested two businesses this year, our shipping systems division in June and our precise bridge business in August, so you will hear us focus on continuing operations numbers to better reflect the future company.

For the quarter we reported EPS of $0.65 on a continuing operations basis, up 14% over the prior year. Our net income on this basis for the quarter was $6.6 million, that was up 14% as well, and our before tax income was up 19% to 7.7% of sales, which is 90 basis points above last year. I was really pleased that our rail and tubular businesses could do so well and make up for the challenging environment we had in the construction market.

We are seeing some favorable profit impact from the fact that rail and tubular are growing while construction is not. This has been a benefit this year which I expect to see reverse next year as construction rebounds. Achieving 7.7% pretax margins for the quarter, though, has put us in a much improved position versus last year where we were at 6.8%. And that has left me feeling pretty good about the current operational performance of the Company and our ability to fund growth programs going forward.

From a cash standpoint, as we ended the year we recognized several items in the fourth quarter that had a substantial impact on Q4 cash flow. Number of project schedule delays affected inventory as customers wouldn't take possession of product we were able to ship. Second, we booked a few nice construction orders in which we had to bring material in for early first-quarter shipments. And, third, we reconciled a large portion of the concrete tie replacements in the field for which we booked charges during the year.

So we will talk more about the details of that as some of our comments unfold here.

I do have to say that inventory did not improve this year. This has already become a focus area for 2013. We did do a nice job on receivables through the year and payables will become another area of increased focus going forward. We have a lot of opportunity in this area, but the net result is we did finish the year with an additional $27 million in our cash position over last year.

So let me turn my attention and comments toward each of the three segments of our business. I thought I would combine my fourth-quarter and full-year comments regarding the business segment, as there is quite a bit of overlap in the two. One of the consistent overlaps is the benefit we are seeing from energy investments in the US.

As gas production increases across the shale gas regions, both our tubular and rail businesses are benefiting. It is more obvious with our pipe products in the tubular business of the impact, but the rail companies are making up for shortfalls in coal carloads, with carloads of petroleum products, liquefied gas, frac sand, other materials needed for fracturing. This development is really affecting transportation as well as the energy space, and that is good for us.

So specifically with the rail business, while there has been a lot of talk about coal transport being off, the increases in automotive, industrial, intermodal and energy commodities are all making up for the unexpected decline in coal traffic. We turned in another excellent year of results in this business, wrapping up the year with 23% growth in Q4 to finish the year with $370 million in sales, which is 17.5% over 2011, but clearly exceeding our expectations when we started the year.

It was a year which started with a fair amount of uncertainty. Class I capital spending by the rail companies was up 8% for the full year. I think all of those companies still have a generally bullish view of the market, although I expected them to report more conservative spending plans for 2013 as they sometimes typically do.

We have also benefited from winning some key projects at short-line railroads and transit projects. In fact, a large part of our growth is from the new rail distribution business and concrete ties, both of which had a good quarter and a good year with a lot of help from transit projects. In fact, transit ridership continues to grow having reported increases in each of the last 10 quarters.

This was also a year in which our strengths really helped us succeed. Our rail distribution business led the way with over a 34% growth for the year, further illustrating our strong position in serving the smaller markets and transit agencies.

Sizable projects drove double-digit growth in most all of our core rail products for the year. Our concrete tie business was up almost 20% this year and transit products was up over 25%.

And maybe as important as any of those, we demonstrated that we can have success at total solutions in bringing multiple products and services to a project by being the single source for core track components on the Honolulu transit project. I think this was demonstrated by the fact that the prime contractor saw this as a key benefit to managing the project and running more efficient supply chain process. And, of course, we earlier reported that we had booked the largest order for the history of the Company with that, so I feel pretty good about that.

We did see some of our strongest growth in product lines with lower gross margins and subsequently realized lower gross margins in rail in Q4. Our new rail business has a significant unfavorable margin mix, and when growing 73% for the quarter and 35% for the year it has made a significant impact on reported gross margin for that business segment.

The transit products business is also affecting these results as product began shipping in Q4 for the Honolulu project. But there is also a significant impact from inventory costs in the year-over-year comparison and Dave is going to cover that as he makes his comments.

For the Tubular Products business, they had another great quarter and a great year. Tubular Product sales were up 48% in the quarter and 51% for the year. We thought growth would moderate somewhat as the year progressed but it remained pretty strong.

The real driver behind this robust growth is the coated products business that is primarily serving the midstream gas pipeline markets that just continue to invest. Despite the current low price for gas, I believe there is a long-term bullish view of the role this commodity will play and investment continues to follow that trend.

Our threaded products division also had another very good year considering the normally slower growing agricultural market we serve. It seems that the drought conditions lately are actually helping us. We first thought it would depress spending since the users are seeing tough times, but instead it is driving the need for more irrigation to compensate for those conditions.

We have continued to benefit from the sales growth and leverage of volume in this segment. We also had a favorable mix of product with our high-end abrasion-resistant coatings. I believe margin that is in this business though have peaked as we dial back the growth rates somewhat in the coming year and won't see as much leverage benefits from volume growth.

Also, we must make some investments in capacity in the coming year to keep up with demand. We will see capital spending increase and other assets increase over the next 24 months. But, finally, we are exiting the year with $11 million in Tubular Products backlog and that is really good for this business segment.

So looking then finally at construction, the construction business finished the quarter with sales down 28%. The year was down 26%. Our buildings business has leveled off and was flat in Q4, but our bridge business and piling were well off last year's volumes.

We began seeing an upturn, though, in piling orders in the last part of the year before the normal seasonal impact took place. For us this is one of the best indicators of improving conditions, supporting our belief that the overall construction market will improve in 2013 once the normal seasonal low period is behind us.

We maintained a pretty healthy GP in this business in Q4. It was only down 70 basis points from last year and the full-year gross margin was 14.8%. Also down 70 basis points in what was a pretty tough market.

The sales decline though was too significant to overcome the deleverage from our fixed costs. Our pretax margins fell 250 basis points as a result of that, but we should regain this once volume returns to prior levels.

So with that I'm going to turn it back over to Dave. He will make some further comments on these results and then we will talk a bit about 2013.

Thank you, Bob. Sales for the fourth quarter of 2012 were $140.7 million compared to $133.7 million last year, a 5.2% increase. Sales improvement was due to a 23.2% increase in rail segment sales and a 48.6% increase in tubular segment sales, which were partially offset by a 27.8% decline in construction segment activity.

The rail segment sales improvement was principally due to a 73% increase in rail distribution sales and a 129% increase in transit products sales. The aforementioned sales increases were largely due to unit sales increases.

Tubular segment sales increases were also principally volume related. The construction sales decline was due to reduction in sales of piling products and fabricated bridge products.

Full-year 2012 sales came in at $588.5 million, up $13.2 million or 2.3%. This increase was driven by 17.5% increase in rail sales, 50.8% increase in tubular partially offset by a 25.7% decline in construction segment sales. The 2012 rail sales increase was again due to rail distribution, transit products, as well as concrete ties; all of which again principally volume related.

The tubular increase was due principally to our coated division and, to a lesser extent, increases at our threaded products division. The construction decline due principally to across the board double-digit reductions in piling, fabricated bridge products, as well as concrete buildings.

As mentioned in our earnings release, backlog stood at $210.9 million at the end of the fourth quarter of 2012, up $70.6 million from the fourth quarter of 2011 and down 6.5% from Q3 of 2012. The year-over-year improvement is due to a 109% increase in our rail segment backlog and a 3% increase in tubular segment backlog, which was partially offset by a 6% decline in construction segment backlog.

Fourth-quarter bookings were down 6.7% compared to the fourth quarter of last year, both the construction and tubular segment bookings declined compared to last year's fourth quarter, while rail bookings increased somewhat. While we are disappointed that this decline breaks a streak of seven quarterly year-over-year increases in overall bookings, we also recognize that our quarter-to-quarter booking activity tends to be rather lumpy given the nature and magnitude of the types of projects that are being bid.

Heavy civil construction, which is a key end-use market for our construction products segment, has experienced erratic performance throughout this year. This widely dispersed sector was up overall by 7.3% at the end of 2012, mostly due to the power generation market. Spending in highways and bridges were flat, but the conservation and development sector, where our piling products have significant exposure, was off by 17%.

Regarding our rail business, capital spending amongst the Class I railroads increased by 8.1% in 2012 as compared to 2011. During the fourth quarter our Tucson tie facility operated at between 85% to 90% of capacity. As we announced in December, we did reach a multi-year extension of the Tucson concrete tie supply agreement with the Union Pacific Railroad.

In Spokane we are producing concrete ties for Transit Authority's Class I railroads, contractors, and industrial customers. We continue to see robust inquiry and bidding activity, and the Spokane facility is highly utilized as well. Our Spokane concrete tie facility did turn in another very strong performance in the fourth quarter, and we anticipate a comparable 2013 performance from that division.

As a percentage of this quarter's consolidated sales, tubular accounted for 9%, construction was 26% of sales, and rail 65% of sales. Gross profit margins were 19.6% in the fourth quarter of 2012, a decrease of 20 basis points from last year's fourth quarter. The decrease in margin was due to sales of lower cost inventory in the fourth quarter of 2011 that resulted in higher margins, which was partially offset by a $1.8 million warranty charge taken in last year's fourth quarter, as well as a favorable fourth-quarter year-over-year swing in LIFO adjustments 2012.

Gross profit margin for the full year of 2012 was 15.7% compared to 17.1% in 2011, a decline of 140 basis points. Excluding the concrete tie charges incurred in both years, gross profit margins would be 19.4% in 2012 compared to 18.3% in 2011, an increase of approximately 110 basis points.

Selling and administrative expenses for the quarter decreased by $0.4 million, or 2.4%, to $16.5 million. The decrease was due to a reduction in concrete tie testing expenses and favorable bad debt expense, partially offset by increased salaries and incentive costs. S&A expense represented 11.7% of sales in the fourth quarter of 2012 as compared to 12.6% of sales in last year's fourth quarter.

For the full year, selling and admin expenses increased by $1.8 million, or 2.8%, due principally to concrete tie testing cost increases as well as increased salaries and incentives which were partially offset by favorable bad debt expense. As a percentage of sales, full year selling and admin expense was flat at 11.3%.

Fourth-quarter pretax income was $10.8 million, or 7.7% of sales, compared to $9.1 million, or 6.8% of sales, an increase of $1.7 million, or 19%. For the full year pretax income was $23.8 million compared to $32.7 million. Excluding the impact of charges related to the Grand Island-manufactured concrete ties for both periods, pretax income would have been $45 million, or 7.6% of sales, compared to $39.6 million, or 6.9% of sales.

As mentioned in our earnings press release, the effective tax rate for 2012, the full year, was 38% compared to 32.4% in 2011. The difference in rate between the years is due principally to the mix of earnings weighted heavier towards higher-rate jurisdictions in 2012, certain discrete items recorded in 2012 that increased the provision, and the receipt of state tax refunds in 2011 which brought that rate down below the statutory rate. Going forward, our rate should be in the 35.5% to 36% range.

Full-year EPS from continuing operations was $1.44 per diluted share in 2012 compared to $2.14 per diluted share in 2011. Excluding the impact of charges related to the Grand Island-manufactured concrete ties for both periods, diluted EPS would have been $2.72 in 2012 versus $2.59 in 2011, an increase of 5%.

Turning to the balance sheet, debt at the end of the fourth quarter was $62,000 compared to $2.4 million at the end of 2011, a $2.3 million reduction. And I believe this will be the last quarter that we even mention debt for a while.

Cash generated by continuing operating activities in the fourth quarter of 2012 was $1.6 million compared to $20.8 million in the prior year, a $19.2 million unfavorable comparison. This is a result of a number of items that transpired in the quarter and I will take a little time to review those.

The first, and most significant, was inventory. We saw an uncharacteristic increase in fourth-quarter inventory of approximately $16.3 million and this increase relates to a few key items. It first relates to our elevated transit project in Honolulu that Bob mentioned a little while ago.

We basically had to have inventory delivered end Q4 for fabrication before shipment to Honolulu. This amounted to approximately $8 million and this will gradually reverse itself during 2013. Second is that we had several projects, both in the rail and piling distribution businesses, that were supposed to ship in Q4 but did not. These projects caused inventory to be approximately $10 million over our expectations.

The other large item was a cash payment that was made related to our Grand Island concrete tie warranty claim. We made a cash payment for certain ties that were already replaced by the Union Pacific over the last two years that were a part of their original claim. Since they had purchased the ties to use in their replacement program they did not have the need for as much replacement product, so we paid cash to recognize a portion of the replacements that had already occurred.

This in no way changes our estimate of the liability required to fulfill the warranty claim over the next several years. And the cash payment that was made in Q4 was $12 million.

Capital expenditures were $800,000 for the fourth quarter of 2012 compared to $3.8 million in the prior-year quarter. Our year-to-date capital expenditures in 2012 totaled $6.3 million compared to $8 million in the prior year. Our CapEx for -- I'm sorry it was $11 million in the prior year.

Our CapEx for 2012 was for items such as our new friction management facility in Vancouver, British Columbia; our new threaded pipe facility in Magnolia, Texas; and various new plant and yard improvements and equipment. Also, computer network and telecom equipment and mobile equipment.

We anticipate that the Company's 2013 capital expenditures will range between $10 million and $12 million. As in prior years, we anticipate that our 2013 cash generation from operating activities will exceed capital expenditures, debt service payments, dividends, and share repurchases. Cash at December 31, 2012, was $101.5 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.

Our working capital net of cash increased by $10 million during the quarter and increased about $1.4 million for the year. Accounts receivable decreased by $6.8 million compared to December of last year and our DSO decreased by six days to 41 days from 47 at the end of last year. We believe our AR portfolio continues to be in very good condition.

Inventory increased by $17.6 million during 2012 with $16 million of that increase occurring during the fourth quarter, as I noted a short time ago. Accounts payable and deferred revenue increased by $1.9 million during that same period.

So while our working capital efficiency fell off a bit in the fourth quarter, we end 2012 with a very strong financial position and with the opportunity to still make significant improvement in 2013.

That concludes my comments on the fourth quarter and annual results of 2012. I will now turn it over back to Bob who will discuss our expectations for 2013.

Thanks, Dave. I wanted to provide some insight for 2013 and I will start by saying that there are three major themes in 2013 that are in our plans.

One, we expect to see some improvement in the construction market and, therefore, our construction business segment sales. Second, we have some headwinds in GP from business mix and as well capacity costs and start-up costs for some new products that are going to affect the cost of the business. And, third, the profitability and cash position of the Company is good and we will have turned our attention to investing this year since we believe we should be clear of disruptive economic conditions that would concern us otherwise.

We are currently projecting top-line growth for the year to be between 5% and 6.5%. We should see a rebound in the construction segment and are depending on this business to achieve at least 10% growth in 2013. We are still very dependent on heavy civil construction projects, most of which are government-funded to some extent and often geared toward transportation infrastructure.

While there will be continued pressure on government budgets, the state of the US infrastructure coupled with the current low levels of spending lead us to believe that our forecast for 2013 is reasonable. Also, we are coming off of two incredibly strong years in rail and tubular products.

We think it would be wise to suggest these markets will moderate as the Class I rail companies report expected capital spending for 2013, their mixed results, and the direction we see. Some will keep capital spending as a percent of sales at the same levels, some have more aggressive plans, and some are actually reducing the amount of capital projects. There is no question that the industry is healthy and capable of investing more; however, each of them has their own objectives and priorities.

In our tubular products business we will face expanding capacity in the market and our needs to expand production capacity ourselves. Both coated products and threaded products should be in good shape, but we will create lower growth plans this year in coated in order to prepare for the capacity changes that we need to make.

From a standpoint of profitability, when excluding the warranty charge achieving $2.72 a share and $45 million of pretax income for 2012, in my view, was quite an accomplishment. We have lifted the profitability of the business levels now to 7.6% pretax margins. We expect the inflationary environment to remain low and pricing to remain stable throughout 2013 at this point.

But there are a number of reasons for margin improvement to be modest in the coming year, not the least of which is our desire to invest in our growth programs. In addition, we are planning for lower margin business coming from our Honolulu backlog, as well a lower percentage of higher-end overcoated pipeline products, and also the higher mix of construction sales growth which will essentially be driven by our piling sales.

I don't see any of this as a bad picture, but it will put some pressure on margins. We will also start some new long-term cost reduction and productivity programs aimed at helping us offset headwinds in the future, while we plan to invest in growth and make sure we can boost profit margins for our shareholders. I want to emphasize we are still driving a long-term strategy with attractive EPS growth that will be good for our investors.

To that end, we are focusing on investments we want to make in 2013. We have some timing issues in front of us that are creating good windows of opportunity and we want to take advantage of them. We are planning to get into a new line of bridge products. This will take some costs in 2013 and won't produce results until later in the year and into 2014.

We want to invest in selling and new product development programs in the rail business. We see the need for more advanced technology that will help rail companies run more efficiently and improve up-time. And the sooner we can put some of these products into the market the better off we will be.

We want to make some investments in company infrastructure to support a more complex business with tools that will eventually bring operational benefits to us, especially in working capital efficiency.

So as you look at this, this will result in an increase in SG&A as a percent of sales, but not more than we are planning to cover with GP improvements so it shouldn't dilute pretax margins. But we are not forecasting much expansion in pretax margins this year, so the target we are looking at is around 7.6% to 7.8% pretax margins for the year.

So hopefully this helps you understand and plan better what our business will look like in the coming year. I do want to emphasize that we are focusing on our five-year plan and we want to make decisions for the long term. Some of these decisions require a more long-term view. We are confident that the plans we have drawn up will lead us in a very good direction which will benefit our shareholders in the long run.

So with that we will conclude our comments and we can open up the lines for any questions.

(Operator Instructions) Robert Kosowsky.

Good morning, guys. I was just wondering if you could mention why you think the spending in the rail market really slowed down materially in the fourth quarter.

I think generally most of the times we are looking at capital spending by the Class I rail companies, and when they publish their numbers we largely use that as guidance. For the most part our view of that is it is like seasonality. It's project implementation plans on their side.

It's more about scheduling in our view than anything else, which is why we do tend to like to focus on the year-over-year changes rather than any given quarter, because there was no news out there that would be an indication that any of them or all of them together are changing their view of their business.

So we watch these things quarter over quarter, but we tend to focus more on the year because there is nothing that should suggest that they are making any key changes in their outlook.

Okay. Then can you talk about what your expectations are for the Honolulu project contribution in 2013?

I don't have the actual gross margin numbers if that is what you are looking at --

Just the revenue side.

We did have the number for what we have shipped already. It is nearly the balance of the order. Was it -- go ahead, Dave.

It probably in 2013, Rob, is going to be probably a little over $40 million, $45 million. Really most of it will go this year that didn't already bill. There might be a little bit that flows into 2014, but we think the preponderance will go this year.

Okay, so about $40 million. Then, on the construction side of the equation, where are you seeing some of the bids that you are putting out for? Where are you saying that activity? Is it basically on the heavy civil side? Is it a geographic region you can point to?

And are you seeing a pickup on the industrial side, because we keep hearing more about the petchem plants and whatnot being planned for construction?

Let me say no to the regional part of that. It is really kind of widespread more than anything else, but it is both in the normal market that we serve, which is more the heavy civil market in the public areas, but it does include some industrial business.

There is a lot of spending around utility companies and other industrials as you have suggested. We do see some of those on our quotation pipeline, but we also just see a general pickup in some of the commercial area as well, which was really very depressed throughout 2012.

Okay. Then just kind of can you help me frame how you are looking at the growth spending you are putting in place? Is this a multi-year initiative? And what do you see that doing for the growth rate of the Company in excess of what you would see from a cycle or just the market standpoint?

How do you see it shaping out longer term as you are putting some of these growth initiatives in place?

What we have been talking about in our long-term plans is that we would like the Company to grow at rates higher than the market. The target that we have set on that is 5% to 7% for the base company growth rate. We think that through the cycle when you look at the markets that we serve that that would be a couple points better than what the market might grow. And then we are attempting to layer on top of that a few more points from acquisitions.

So our goal is that we want to try to be in that double-digit EPS growth, or as we will talk more about pretax margins as we issue more guidance in the future, that we will be in that double-digit range when we can add acquisitions on top of it.

The spending some of it will be shorter term, some of it will be longer term. It really depends on the kind of programs that we have. But we have an enormous number of opportunities in the markets we serve as well as in markets that are adjacent to those and we want to take advantage of them.

And it does require some hiring. Those are probably the commitments that are more significant when you bring some people into the Company. We don't want to take that number up and down dramatically from one quarter to the next or year to the next, so we have got to hang in there with those while we potentially see a little bit of fluctuation in the market from year to year.

Okay, that is helpful. Then as you look at some of the product gaps maybe that you have, maybe that is not the right word, but the product line extensions that you want to do, how do you look at the make versus build or kind of acquisition standpoint? Do you see the acquisition pace stepping up with a lot of smaller deals to kind of buy versus make organically to have a swifter contribution to the P&L?

I don't see what I would call a number of small deals that you might think of as product lines that we want to go acquire as much as more strategic initiatives that just help improve our overall competitive position in the market as well as potentially bring us greater reach into markets that I would call underserved today by us.

Some of that has a geographic spin to it in markets we just don't access. Some are right in our own backyard, but others are certainly outside of the North American territory where we are currently strong.

So we will look for technologies that we don't have today. I particularly like the condition monitoring space that we are beginning to get into these days that provide a greater degree of value, we think, to the [end marketplace] when we can help them understand and monitor what is actually happening with track conditions. If we can fill that out that maybe nice.

And then to the extent we can just be a total solutions provider and go out there in a unique way with more to offer than our competitors have who are much more oriented towards one or two product lines, we think those things will be an advantage to us.

Okay, cool. Thank you very much and good luck with 2013.

Thank you.

Brent Thielman, D.A. Davidson.

Good morning. I was just kind of curious what is embedded in your view for rail in terms of transit projects for 2013.

Well, I think the transit market will continue to remain in pretty good shape. We are working on and see in the pipeline a number of still renovation projects and expansion projects, especially throughout the US.

We are bidding on some outside the US. In fact, we have a very notable project we are bidding on in Asia.

I think it will be -- if I were to look at orders in the year, when you look at the size and magnitude of that Hawaii project that is probably going to be tough to beat the orders maybe from what we booked there in 2012. So that is sort of that one-time huge project and we will see how it goes, but in general in the marketplace I think it will continue to be a pretty decent market.

Okay. Then just on the new investments, capital spending side, as far as tubular goes is that expanding on existing second half in terms of capacity, or are you looking into the potential for a new location there as well for the coatings? I am assuming the coatings.

The answers are yes and yes. Certainly expanding the existing facility that we have is something that needs to be done, but we do continually talk about our footprint and the fact that we may need to improve our footprint in some other parts of the country. It may help us from both a logistics and a cost standpoint.

I will refer to that as a secondary discussion to the primary conversation, which is really about expanding total output capacity, meaning physical space and equipment, in our primary facility in Birmingham.

Okay. Then some of the bridge opportunities that could be out there, any way to quantify what that could be for you?

I think that is difficult to do at this point because you never know until you are down to the final throes of these things how the bids are going to go. So I think I would have trouble characterizing that for you right now or it might be just a little bit too risky to do.

I am happy that there is projects out there and we have got an opportunity to go after them. So we have got enough opportunity, but I think we got to wait until we see how these projects shape up before we could comment more on that.

Okay. Then just lastly, Dave, sorry if I missed this; the tax rate going forward?

Brent, when you take some of the discrete items that occurred really in both years there is quite a swing, obviously, from full year 2011 to 2012. So going forward at this point, depending on where some of the mix of business goes, we believe it would be 35.5% to 36% effective rate is what we are looking at expecting in 2013.

Great. Good luck, guys.

Mike Baudendistel, Stifel Nicolaus.

Thank you. You mentioned that rail CapEx for the Class I was up 8% in 2012. Do you have an assumption for 2013 that is embedded in your rail revenue guidance?

Well, yes, we do. We are going off the numbers that they publish out there. When you put all of the different mix of the companies together it looks like that number is going to be somewhere in the low single digits. I am going to call it at or around 3%, so I'm going to say 2% to 3% in that area. But it is roughly in that 3%, plus or minus some, range.

And that is what they -- they basically publish or report those numbers on what their intentions are. That is where we get that from.

Okay. Then any commentary from the shorter line or regional railroads or some of your other rail customers on that same issue?

They don't do the same thing in terms of putting out a capital plan in advance of the year, but we do sit down with them. We are very close to those customers. We have a terrific position in that market.

I would think at this point in time that normally they kind of follow that Class I level, which essentially mimics the amount of volume in the marketplace. And I think the short lines are seeing volume that probably is roughly similar to the Class I.

There is a good piece of news with regard to the short lines and that is the fact that among the many, many, many things buried in the tax bills in Washington these days one of the things that got in there was the renewal of the 45G tax credit that the short lines get which expired. It expired more than a year ago. And so they actually renewed that. So it is possible that that will give the short lines a bit of a bump in the coming year.

Good. Historically, how have the capital spending of the railroads deviated from this initial plan that they provide in January or February? Does it tend to go up or is it more dependent on the state of the volumes throughout the year?

I think I would probably have to answer that over the long run. Over the long run it is relatively consistent and so in any given year we tend to like to plan that way. In the last year they clearly went over that number and, in fact, I think in 2012 they even went a bit over that number as well.

So conditions were pretty good here in the last couple years. I think part of what drove them over those numbers is their surprise at how much they have gotten into these petroleum and gas and liquefied gas products, which has to have exceeded their expectations, and the fact that we don't have pipelines carrying some of that. So that has been an upside surprise for them.

You can see them leasing new tank cars and there is a lot of news on that out in the marketplace here lately. So they went a little above here in the last couple of years, but we like to take the long run approach to that because you can't say that that will happen again in 2013.

Okay. In the rail segment you mentioned that mix was less favorable. Could you just remind us which are the higher margin products in your rail segment and which are maybe the lower or middle margins?

It is probably to answer that by just focusing on the lower margin, because it is our rail distribution business where our gross profit margins are down in that single-digit area. That is the one where when we see a lot of growth with that, as we did here in 2012, we can get unfavorable mix with it.

The balance of our products which are our manufactured products, I like to think of those all in a similar range. They are much different from the single-digit margins and so they are better. So that is really the distinction that we like to make. It is really just the difference between distribution and the rest is our manufactured business.

Good, that is helpful. In the tubular segment it looks like you are forecasting a decline in at least the rate of growth. You are still expecting it to grow but maybe not in the double digits in 2013. What is driving that deceleration in growth? Is that more competition entering the marketplace or is there some other factor?

Two things. We are coming off of a year with 50% growth and I just think that that is -- it has been white hot. There are a lot of people looking at that space and I think that it's probably not the right level to think that it's going to stay up there.

The other thing I would add to it is purely capacity and our ability, and our partners' ability, to just handle another year that is that far and above where we are currently running. On top of the fact that we have got to make some changes in that facility and it is going to put some constraints on us.

When you make capacity changes in that kind of a product line there are times where you need to shut down parts of what you do and some of that could be occurring late in our 2013 year. If that is the case we will provide some indication of that, but at this point I am suggesting that it is possible that it will be late in 2013 because we are developing those plans right now.

Great, that is great color, very helpful. Final question I have is you mentioned that you are talking about some new products in the areas that are underserved. What areas do you think are the most underserved that you can address well?

I could give you things such as we don't serve the East Coast market, even for the US, in our concrete tie products very well. There are specific customers that I would say are clearly underserved in the area of our friction management products where we do great in one space and not so great in another. So we think we ought to be able to improve penetration in those particular areas.

We have business throughout the Latin America region that I would have to say is clearly underserved. We could improve what we are doing across all of our product lines in that particular space. So those would be some of the examples I might sight as the more obvious ones.

That is good color. Thanks very much.

(Operator Instructions) Brian Rafn, Morgan Dempsey.

Good morning. Give me a sense -- we own Granite Construction so we have been fighting this highway bill thing for the past 14 years. Now that you got a two-year bill in it looks like the design bill work is really starting to come around; certainly a lot of competitors.

When you guys look specifically at your bridge products are you seeing specific isolated bridge products, or are you seeing bridge products that are part of a multi-mile sections of highway? Because you look at the Army Corps of Engineers, some 622,000 bridges, it gets a D or an F relative to rating and safety.

I'm just kind of getting a sense of what you think going forward your bridge demand is going to be.

That bill, upon its renewal, basically kept the spending level roughly where it was at. We keep track of the deficiencies out there and, as you are suggesting, we know that there is pent-up demand from it because there is a lot that just don't meet the requirements that they should.

But also keep in mind that we are just in a segment of the business with our grid decking type bridging, and we are not doing all types of bridge construction around the country. So I would tell you that we don't see the entire market out there; we see the ones where our grid decking makes the most sense. We are expanding into more corrugated bridge form type construction in the coming year to expand the amount of market that we see for where that is the best technology, but for so many of these other bridges we are really not serving that particular market.

Bob, on that comment, if you just look at your grate decking what percentage of other bridge products might you be able to build out? Would that grate decking be 10% of a total bridge product or 5%? And how many other valuable area of product lines could you extend out from just that decking component?

We are -- I don't know if I can comment on the percentage of that in the first part of your question, but we are into some of the accessories as well, if that is the other part of your question. We are doing railings. We are into the aluminum-based products that are there. Some of the other kind of safety barriers that go along with it.

So we are doing more than just the grid decking on the floor. We think that there is some opportunity to improve in some of those other areas which are largely aluminum products, but I would say they are not going to add millions of dollars to our top-line growth.

Okay, okay. What do you guys see -- give me a sense what are you seeing steel costs raw materials? What are you -- 2013 inflation from a feedstock standpoint?

Right now we are planning on a relatively flat market environment. We watch the scrap prices out there and the signals that come with that. There isn't anything out there right now in the signals that suggests that it's going to move in some measurable way.

I think the steel industry would like to see a little bit more volume right now, obviously. So given the current capacity situation in that industry, I certainly wouldn't forecast any increases, not any substantial ones, because I think they have lots of extra capacity at the moment.

Okay. If you shift over to the human component, the payroll, headcount, what are you guys seeing wage salary inflation? Obviously healthcare benefits everybody is talking about that. What are you looking at the human capital side?

I think it will be for us pretty much what we normally see there; a couple of percent is usual in the zone where we are at. There is always continued salary increases out there.

We are not seeing anything substantial in the way of inflation in medical, but we do take our own actions to try to contain costs in those areas and try to manage our rising costs in those areas with wellness programs and other programs we have in the Company. So I think we are going to be able to keep that number probably under 3% or near that number when I look at the total combined work force, both hourly and salary, across the Company.

Any headcount hiring? Are you doing anything -- engineers, construction people, anything -- as far as labor?

Yes, definitely. In the factories it's a mixed bag, depending on which business that we are in, where we are going up or going down. But clearly in the area of more highly skilled people in our salary workforce we are absolutely looking for engineering and technical people.

We have got a few of these growth programs that are going to require some selling and marketing folks, and even some back office types of support things based on the growth in volume of the Company right now. So we actually are in the mode of bringing people into the Company. Not in any kind of super aggressive way, but if I had my wish for 2013 I would say we will end the year with clearly more technical and engineering people that on one hand will be designing products and on the other hand supporting customers.

Okay. You had talked about a capital expenditure budget $10 million to $12 million. How do you see deploying that across the Company? And maybe also talk a little bit about the coated pipelines with the expansion at Birmingham. What type the brick-and-mortar floor space, machinery expansion -- 15%, 20%, 30%? Is it strategic? Is it more tactical and catching up kind up how does Birmingham look?

Birmingham will be a good chunk of that because, even if we don't pull it all off or complete it in 2013, I am certain we are going to start buying some machinery. So there is clearly some machinery capacity that will go in there.

On the amount that we are going to take Birmingham up, I think -- think of it as north of probably 25%. Other than that I don't think I would want to get into the specific details of everything that we are doing there.

But we have some other big capital projects as well, even in our rail distribution area. We have some unique things that we think we can do with some of the logistics and delivery items that we have in terms of the trains that we kind of operate for that.

And we are moving into some new products there and some things that I won't announce on the phone today, but when we are ready to later in the year. But there is some capital that will go in there and there is some that just need to go into the rest of the facilities that we have.

You guys talked a little bit about the Class I rails and what they have spent in CapEx in 2011 and 2012. Would you kind of describe their spending as capacity growth, or would it be just more maintenance and swapping track out? Give me a sense whether it's track lines or rail yards. Where are their CapEx dollars going to?

Well, there is always a substantial part that is maintenance and refurbishment of track. They are not putting in a lot of new lines; they are operating in the lines that they have.

There are new extensions and spurs that are going into particularly some of these shale gas territories that I was talking about. And, of course, there will be increased spending in the positive train control area. They have to meet some mandates in the coming years. If you look at that you will see numbers that are in the tens and for some certainly hundreds of millions of dollars that have to go to this positive train control.

And I know some of it is going to, as I mentioned earlier, some of this equipment in cars and things that they have to take on for volume, particularly the added volume that they are seeing in the petroleum products area. So we like to look at the maintenance side of that the most or the refurbishment side of it most; that is where we get the bulk of our business from. But there is always a large chunk from there.

Okay, okay. Talk a little bit maybe about -- we hear -- it episodically comes up high speed rail and the different types of rail you need versus your normal passenger. If you're running high speed rail obviously it's, as I understand it as a layman, it is a different type of track. Is that -- over the next five, six years is that viable or is that just a lot of wishful thinking out of Washington?

Well, I think you got to watch that unfold. We would like to think that it is, but when you look at the issues that are related to it we just seem to struggle getting those projects funded.

There is an interesting one, I will say, to keep your eye on in Florida, and that is going down the route of some private funding where they think it is going to be profitable and they are not going to rely on as much government funding. Now the geographic situation there lends itself, they think, to be successful with that so we are anxious to see that go forward.

We are bidding on some of what is going on in California, but they are going step by step. This is not going to be the Big Bang project approach. They are going to put in some test lines in that and see how they all work out. Hopefully, that will be successful. But from there, there is a lot of politics involved and it sometimes has a struggle to go through.

You are correct in saying that it is a different piece of track. It needs to be a more precision piece of track. One of the things that we like about it is the use of concrete ties, because you can put together a very precision piece of track using concrete ties as your foundation. So we would look forward to seeing that move forward; that would be to our benefit if this picked up.

Just one more final. What is your sense -- as you guys look across your business, what has been kind of the big quote activity, the forward activity that we don't see maybe as visible as what order bookings are? What is the big quote activity and what is your kind of closure rate?

Are you seeing more competitors, less competitors? Is the closure rate increasing or decreasing? Give me a sense from just the kind of raw big quote activity.

Brian, I am not sure adding any color on that would be helpful. The closure activity for the Company I will just say has always been good. I don't think there is anything that I could comment on that would be helpful with regard to it improving or not. We are certainly not having any trouble with it.

We have share positions that are in some cases in pretty high numbers. So we have got good relationships with customers and we get to see a lot of what goes on in the marketplace. I am pretty happy with the way we are serving them and the rates at which we normally tend to win business.

You guys have done a superb job this year so keep it up. Thanks.

Thank you.

We have no further questions at this time. I will now turn the call over to Robert Bauer for any closing remarks.

All right. Well, I hope that some of what we helped you with in terms of understanding how 2013 is going to unfold will be helpful for you in terms of your planning and the information that you like to have. So we will conclude our comments for the day with that and I appreciate all your interest and joining us for today's call. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a good day.