L B Foster Co (FSTR) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2013 L.B. Foster earnings conference call. My name is Dave, 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 this conference. (Operator Instructions). As a reminder, the 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, Dave. Good morning, ladies and gentlemen, thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's first-quarter 2013 operating results. My name is David Russo and I'm 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 performance, give an update on critical business issues and discuss market conditions. Afterward I will review the Company's first-quarter financial results.

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 our markets in 2013, 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, 2012 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, and good morning, everyone. Thanks for joining us. As I reflected on the first-quarter results my first reaction was this was a good way to start the year.

We wanted to get out of the starting gate strong, particularly in light of the continued speculation on whether budget cuts and tax policy could have an unfavorable impact on the economy. And more specifically how could these actions impact investment in transportation systems and would it delay projects in government budgets, even though recent reports on the status of US transportation infrastructure would indicate the need for continued spending.

At this point I don't hear customers talk much anymore about concern over the economy and everyone seems to be getting their head around spending changes for government projects, although the real impact from cuts is hard to predict. So at this point I am pleased to report that our first-quarter results were in line with what we were targeting and it put us in a good position to make our plans for 2013.

Our top-line sales increase of 13% followed the trend we have been talking about for several quarters with Rail and Tubular products leading the way and growing nicely. The Rail business grew 22% over prior years -- prior year quarter and that was better than we expected and had forecast. And the Tubular business reported 19% growth in the quarter which was very solid and, as we expected, did moderate from prior quarter growth rates.

The Construction segment was down 4% year over year, it continues to move along at the low volume levels we saw in prior quarters, although the year-over-year comparisons don't look quite as bad.

So all in all I was pleased to see continued strength in the Rail segment, I continue to believe that the agriculture and energy markets will be stable but with fluctuating order input. And the construction market has enough uncertainty that it is making it a bit difficult to forecast the pace of growth right now.

Our orders in the first quarter were $163 million, they were down 4.5% from prior-year, but this decline can be entirely attributed to concrete ties where timing of orders or planned volume changes -- they were part of our plans. And lower piling orders, which are fluctuating quite a bit in the unpredictable market environment, were also anticipated.

But these order input patterns have led us to change our future outlook in the following ways. First, we expect to see the upturn in construction -- and by that really what I mean is the piling product business. We expect that to take longer than we first thought. It appears this is going to be more of a drawn out upturn that will be more gradual and may struggle to reach the double-digit growth increase we expected for the year, although it looks to still be positive.

In addition, our concrete buildings business is now expected to see fewer orders from the state and federal sectors as the projected spending is being cut, particularly at the federal level. It is difficult to put our finger on exactly how significant this will be and many of the departments that we talk to are struggling to figure out what exactly is going to take place there.

On the positive side, we are off to a good start in Rail, which is now 63% of our business, threaded products is well over plan in Q1. And although concrete buildings will be a bit challenging going forward, we finished the first quarter 34% over plan and our backlog is building in the bridge business. We booked a new bridge business order in Q1 valued at $14 million for a project in New York State and it comes at a time when we have worked off some backlog through 2012.

And so we are in a good position to begin shipments for this project in the second half of 2013. That puts us in a situation where we exit the quarter with a total Company backlog of $248 million, up 26% over Q1 of last year, and all of that increase is in the Rail business. Our transit product business alone is up $42 million from 2012 with a significant amount of that from our Honolulu project, which is yet to ship.

Turning our attention to profitability, for the quarter we reported EPS of $0.48 on a continuing basis, up 65% for the year. Pre-tax income looked very similar at $7.4 million, up 65% also. I thought that was a great improvement over prior year. Growth in the more profitable Rail and Tubular business segments is having a favorable profit impact and we'll likely be depending on this for the balance of the year to make up for some shortfalls in sales and piling products.

Our gross margin performance I think is largely a good story. The unfavorable year-over-year change in Rail was impacted by a faster growing and lower margin distribution business and some of the lower-priced transit backlog that was shipping that, again, we had planned on. But the balance of our product lines are meeting their targets.

The increase in gross margins in construction was driven by our precast concrete buildings, as I said they had a great quarter. And while there has been some increased pressure around pricing for piling products, it hasn't been enough to unfavorably impact gross margins on this product line.

I do expect to see some increased competitive price pressure on these piling products going forward, especially with the excess capacity that exists in the steel industry. But we have always successfully managed these sorts of dynamics in the past.

From a cash standpoint, we used cash in the quarter to fund growth and receivables. We also maintained a relatively high level of inventory to support projects that are underway. It is not uncommon for us to use cash in the first quarter for working capital. And I expect that working capital will contribute to cash generation in the coming quarters.

Before I turn this back to Dave I thought let me go back to these three different business segments here and just say a couple more things about where I think the business is headed and some of the underlying market dynamics, I will start with Rail. And as I said earlier, the strong first quarter in the current market is a good way to start the year.

And our positive outlook for Rail and its impact on us is really being driven by two primary factors. First, the growth in earnings coming from both the Class 1s and the short lines is allowing for continued spending. Despite the volume growth that they are having being somewhat low in certain areas, these companies are reporting solid performance and numerous trends and transportation are in their favor. So that looks very positive.

And second, the continued focus that they have on both operating ratios and uptime require track infrastructure to be performing at high levels. And that is right where our focus is and in fact I like to think of it as a sweet spot for our business. So we are going to continue to invest in programs that can bring operating ratio benefits to these companies and we are going to beef up customer support and selling resources to keep our service levels high for these customers.

With regard to the Tubular segment, we have been reporting solid performance in both our coated products and threaded products business over the past year and Q1 has much the same story. Both categories fueled growth in the quarter, threaded products made excellent gains in gross margin and it is clear that our new facility in Magnolia, Texas is really improving efficiency.

Our joint venture in the threaded business is also helping with synergies in serving the oil country tubular goods market and we've been able to secure business where high levels of service are needed as a result. This is bringing more opportunities to our threaded products business, which, as I said earlier, is running well ahead of plan after the first quarter.

We are still looking at expansion plans for our coated products facility in Birmingham, which will bring needed capacity increases. Spending on this expansion will begin sometime later this year. And we remain bullish on the long-term prospects for gas pipeline investment, which has been and will continue to fuel our growth.

Finally looking at Construction, the areas we will watch closely are the precast concrete buildings and our piling products. Our bridge business looks fine going forward and the recent order win that I spoke of will put us in good shape for 2013. But we need more time to understand how the precast buildings business will be impacted by government spending cuts. We will have to watch this develop and provide updates in the future as we learn more about what is going to take place going forward.

Piling will grow this year. As I mentioned, we are now thinking improving conditions are likely to be in the second half though of 2013 versus the first half. A brief survey of other companies that serve the same markets is indicating a similar view and that projects remain on the drawing board, they are just not starting at the pace we thought they would.

So hopefully that will give you an idea of how we are seeing things. I think overall it is pretty positive, we are just making a few changes in current areas in our three business segments. So with that I will turn it back to Dave and he will go through some more details on the financial performance and numbers for the quarter. Dave?

Thank you, Bob. Sales for the first quarter of 2013 were $129.3 million compared to $114.3 million in the prior year, a 13.2% increase. The sales improvement was due to a 22% increase in Rail segment sales and a 19.5% increase in Tubular segment sales, partially offset by a 4% decline in Construction segment sales.

The Rail segment sales improvement was principally due to an increase in Rail distribution as well as a significant increase in transit product sales. Both of these sales increases were volume driven. The Tubular segment sales increases were also due to volume increases. The Construction sales decline was due to a reduction in sales of fabricated bridge products partially offset by an increase in concrete building sales.

As mentioned in our earnings release and as Bob mentioned, backlog stood at $248.1 million at the end of the first quarter, up $51.7 million or 26.3% from the first quarter of 2012 and also up $37.2 million or 17.6% from December of 2012. The year-over-year improvement is due to a 47% increase in Rail segment backlog partially offset by a 15.7% decrease in our Tubular segment backlog and a 4% decline in the Construction segment backlog.

First-quarter bookings were down 4.5% compared to the first quarter of 2012 and this was pretty much shared across all three segments, Tubular, Rail and Construction. As we have mentioned in the past, our quarter-to-quarter booking activity does tend to be rather lumpy given the nature and magnitude of some of the types of projects that we are bidding.

Heavy civil construction, a key end use market for our construction products segment, experienced erratic performance last year. This widely dispersed sector was up almost 10% in 2012, but increased less than 3% in the first couple of months of 2013, mostly due to the transportation and power generation markets. Spending on highways and bridges was up approximately 2.5% but the conservation and development sector where our piling products have significant exposure increased only 1% to 2%.

Regarding our Rail business, capital spending amongst the Class 1 railroads was in line with their previous projections, which basically amounted to a 0% to 3% increase for 2013 compared to a very strong spending year last year in 2012. Railroad commodity carloads declined by 3% during the first quarter; however, intermodal traffic increased by 5.3% and Class one railroad results were generally higher than the prior year.

During the first quarter of this year our Tucson tie facility operated between 60% and 65% of capacity. As we announced in December, we did reach a multi-year extension of the Tucson concrete supply contract with the Union Pacific Railroad and we are proceeding with that.

In Spokane we are producing concrete ties for transit authorities, Class 1 railroads, contractors as well as industrial customers. We continue to see robust inquiry and bidding activity from that facility and it is highly utilized at this point. Our Spokane concrete tie facility experienced a good quarter -- I'm sorry, a strong year in 2012 and we expect another robust performance this year.

As a percentage of this quarter's consolidated sales Tubular accounted for 9% of sales, construction was 28% and Rail was 63%. Gross profit margins were 19.2% in the first quarter, an increase of 30 basis points from last year's first quarter. This increase in margin was due to increased selling margins including inventory cost variances that were partially offset by unfavorable manufacturing variances and increased LIFO adjustments.

Our selling and administrative expenses increased by $0.2 million or 1.2% to $17.1 million in the first quarter of 2013. SG&A expense represented 13.2% of sales in the quarter as compared to 14.8% of sales in the first quarter of 2012. First-quarter pre-tax income was $7.4 million or 5.8% of sales compared to $4.5 million or 3.9% of sales, an increase of $2.9 million or 65.7%.

As mentioned in our earnings press release, the effective tax rate for the first quarter was 33.5% compared to 33.7% last year, so relatively flat. The difference in rate between the years is due principally to additional domestic manufacturing deductions expected in 2013. First-quarter EPS from continuing operations was $0.48 per diluted share this year compared to $0.29 per diluted share in 2012, a 65% increase.

Turning to the balance sheet, as Bob mentioned earlier, working capital net of cash increased by $24.3 million in the current year quarter. Accounts receivable increased by $12.4 million due to a significant ramp in sales towards the second half of the quarter, most of which moved into April before they were collected. Our DSO actually improved to 38 days at March 31, 2013 from 41 days at year end 2012 and compared to 45 days at March 31 of last year. We believe that our accounts receivable portfolio is in very good condition.

Inventory remained flat, however some of the accounts payable related to the $16 million increase in our fourth-quarter inventory balance was paid for in the first quarter of this year resulting in a $9.5 million reduction in payables. These items were the primary causal factors resulting in cash flow from operations using $17.6 million of cash in the first quarter of 2013 as compared to a use of $2.9 million of cash in the first quarter of last year.

Our capital expenditures were $1 million for the first quarter of 2013 compared to $2.5 million in the prior year quarter. This spend was principally for items such as yard improvements and production equipment. We anticipate that the Company's 2013 the capital expenditures will range between $9 million and $10 million.

As in prior years also anticipate that our 2013 cash generation from operating activities will exceed capital expenditures, debt service payments, dividends and share repurchases. Cash at the end of March 2013 was $81.4 million, down $20 million from December 31, 2012, and 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.

Looking forward we believe that our Tubular and Rail markets will continue to be favorable in 2013 but will also be competitive. We are also monitoring, as Bob mentioned, our Construction segment businesses as they struggle to improve over the prior year in a market where state and local budgets are improving but slowly. Their markets remain competitive and the impact of governmental action or inaction continues to provide some uncertainty. That concludes my comments on the first quarter; we will now open up the session for questions. Dave?

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

Congratulations on the quarter. Bob, you provided an outlook for sales and pre-tax margins in the previous quarter. And I guess I didn't hear you allude to it, but are you still assuming the 5% to 6.5% growth and pre-tax margins of 7.5% to 7.8% this year?

Yes, we haven't had any reason to change what we forecasted before the year started at this point. As I said earlier, getting out of the gate strong with a good first quarter we think helps us make that plan because, as you heard me say earlier, we are tweaking the forecast a little bit.

There are a few areas in piling and concrete buildings that probably aren't going to get to where we thought, but then it looks like Rail will probably do better than we thought. So as we look at it overall there wasn't any real motivation for us to change what we said in the prior quarter.

Understood. And any impact I guess in this first quarter, I guess particularly in the construction business from weather or was it not very relevant?

Not that we could put our finger on. It just seems to continue to struggle to get some real traction and momentum built. And everybody else we talk to out there seems to say the same thing. So I can't put my finger on any weather-related issues.

Okay, and then on the bridge side you seemed a little bit more optimistic about maybe some prospects there. You've seen a decent level of quotation activity, maybe what gives you some confidence on that side?

Well, the fact that we booked this $14 million order for a bridge in the state of New York is one of those shots in the arm that we always look for. And I was happy to see that it came in the first quarter and wasn't something that we had to chase down during the year.

But the regular book and bill business, which are orders that are below $1 million, there are actually rehab projects that can be in the hundreds of thousands, that actually looks pretty decent at this point given what we normally see out there. So that coupled with the fact that we will start shipping some of that New York project in 2013 means that we'll have a decent year in the bridge business and we will carry some backlog even into 2014.

Okay, just one more if I could. On that Tubular side you mentioned the expansion of the coated facility. Are you still potentially looking at opportunities to set up a new facility in that segment?

I would say that we are always looking for opportunities to expand our footprint in that particular segment. My outlook on the market for coated products is very positive. I think the investment in gas pipeline infrastructure, which is where we are getting a lot of this business, is going to be around for a while. So we are always looking at that opportunity.

This particular investment that I am speaking of, I think it will take place in our existing facility in Birmingham, in fact I know some of it will. But there is some possibility that it could go beyond that facility.

Okay, great. Thanks, guys.

Mike Baudendistel, Stifel.

One question I had was I think you said the Rail capital spending guidance is sort of what you had expected earlier based on what the Rail said during the quarter. I was wondering -- the Canadian National announcement where they talked about raising their CapEx and maybe building in some redundancy in the western part of their network, is that the type of thing that can benefit you?

Yes, it can. Hi, Mike, by the way. Yes, it can benefit us. I wouldn't say that it is to the point where it is going to move the needle a lot when you take a look at the collection of all of these companies that are in that category. But I would go as far as to say that they are a good customer of ours.

I think we are incredibly strong in Canada, which happened to come with the acquisition of Portec back in 2010. We greatly improved our position with customers in that market. So we will have -- we will be in a good position to get some incremental business from added spending plans that they have.

Great, that is helpful. And then I think in the press release you talked about improvements in efficiency. Could you explain that a little bit? Is that in the manufacturing operations or where is that coming from?

Yes, it is in the manufacturing operations. Our threaded products business is a great example of that. Having pulled that operation into a single facility has really improved our gross margins in that business, it's just streamlined our cost and has made us operate a whole lot more efficient.

So the volume has helped us just from a leverage standpoint of leveraging what is going on in our facilities. But I think our -- generally speaking our cost structure in our facilities continues to improve and provided our volume stays up they are running fairly efficient.

Okay, good. And I wanted to ask on the Honolulu Project, I don't think I heard how much in the first quarter was revenue because of that project and it sounds like it is in the early innings. Could you talk about how you expect that to ramp up this year and next?

For the first quarter, Mike, it was $3.5 million was the Honolulu impact. We do expect that to ramp rather significantly the next three quarters. As far as into next year, we believe probably 90% of it is going to go -- obviously it started last year. Probably 90% of it for us will be complete by the end of this year.

Okay.

It is running on schedule on the job site. So there haven't been any delays with it.

That is always good. And then on the cost side, I mean obviously not a lot of growth in SG&A, pretty minimal there. Is that also the expectation for the rest of this year even if you do have sort of a normal seasonal improvement in some of the businesses like you typically do?

Well, I think we'll take it up a bit, in fact I am sure of that. When we started the year, as Dave and I looked at this thing we were a little bit nervous I think like everybody else out there that was unsure about whether or not all the sequestration news and other things, how much that would impact us and whether or not it would cause especially our Rail customers to hold back on spending.

So we thought we would proceed cautiously on the SG&A side and we did and so when you look at growth that is just around 1% there is not much there. But we are hiring for some key positions and particularly where we need some talent to go after some of these growth opportunities we are bringing a few new people into the Company to support that and other important programs. And so, we are loosening up a bit on that at this point.

Great, that makes a lot of sense. just one more from me maybe for Dave. On the working capital side you talked about that starting to improve and help push your cash flow from continuing operations back in the positive territory. Do you have a target for which quarter you expect cash flow from operations or from continuing operations to be positive?

Yes, by the end of Q3, Mike, we expect that year-to-date number to turn positive.

Okay, great. Thank you.

Scott Blumenthal, Emerald Advisers.

Bob, even with the strong quarter and a relatively strong quarter in the precast concrete building your justifiably cautious on the business. Do you expect that business to be up, down or flat year over year?

I think that one is a difficult one for me to answer right now because the first quarter was up around -- I think it was over 30% up year over year. So it was right around that number. But the orders right now, that outlook is clearly not as good. And what we are hearing is that the national parks, for example, is a big marketplace for us. We put these precast concrete buildings into parks and other recreation type facility, so the Department of Forestry and Department of National Parks, those sorts of places we get good business from.

It is in those areas where we are continuing to see the pipeline diminish some and as we make calls to try to find out what is going on we are hearing the news that these budget cuts that are coming out of Washington are affecting those departments and there is nobody there that can actually put their finger on exactly what they think is going to happen. So I think we are going to be wrestling with that one here for at least another quarter or so to put our finger on just how much.

Got it, okay. And, Dave, could you maybe give us an idea somehow as to how much of the growth in Tubular was organic versus maybe what you were able to do -- add due to the addition of the Magnolia facility? Because I think that one opened in Q2 of last year, correct?

You know, it is really all organic, Scott, because the Magnolia facility simply replaced our facility that was in Houston. So all we did was relocate our Houston facility to Magnolia Texas and open up certainly a more modern facility. But day one manufacturing like-for-like products with really the same workforce.

Okay, and capacity at Magnolia is -- greater than Houston? Could you remind me?

Yes, actually greater than Houston with probably I think 30% additional capacity with fewer heads because of the technology we put in there.

Okay, very good. And one more if I may. Bob, you mentioned about $10 million in CapEx. I imagine that much of that is going into your Tubular expansion. Can you give us an idea maybe how much you need to invest ongoing development in what I guess most of us refer to as the legacy Portec business, which kind of has some technology driven products there?

Well, I would say with regard to that business, which we refer to as our Rail Technologies business now, it is not a very capital intensive business. So if I understand your question right of how much of our capital spending will be directed at that, the facilities that support that business are not highly capital-intensive, our friction modifiers do not require a lot of equipment. And even our wayside dispensing systems and that that is largely an assembly type operation, benchtop assembly with typical tools for benchtop type assembly.

So, it doesn't require a lot. The one exception to that is that we have a track components business in that division and they make our spikes and anchors. And there is a part of that that is not operating at the level of efficiency we would like to see, which means there is a little more -- there is much more downtime than we would like. And that is going to take some capital spending into the hundreds of thousands of dollars, not into the millions of dollars though.

Okay, then maybe if I could ask Dave, the R&D that goes into the Rail Technologies business, where does that -- where does that fall in the income statement?

It is in SG&A, Scott. And actually that is something that when there was a question asked about what do we want to invest this year, what is the SG&A going to look like? That is one area that we are probably going to sink some additional dollars into as we move forward and try to move the business towards a more technology -- technologically oriented product line. So we will spend a little more on R&D. But to Bob's point, the Rail Technologies business, more R&D spend but not as capital-intensive.

Got it. Okay, thank you. That is really helpful; I appreciate it.

Thank you very much. You have no further questions at this time, gentlemen. So I would now like to turn the call over to Mr. Robert Bauer for closing remarks.

All right, well thanks for joining us today, we appreciate your interest. We are happy we could get off to a good start here in Q1 and we will look forward to catching up with you over the coming months and next quarter. I appreciate your time in joining us today. Thank you.

Thank you once again for your participation in today's conference call. This concludes the presentation. You may now disconnect. Have a very good day.