L B Foster Co (FSTR) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q2 2013 L.B. Foster earnings conference call. My name is Daloo and I will be your operator 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, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Robert Russo. Please proceed, sir.

Thank you, Daloo. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's second-quarter 2013 operating results. My name of 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, I will review the Company's second-quarter financial results and then Bob Bauer will provide an overview of the Company's performance and give an update on business issues and market conditions. 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 such items 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.

In order to frame up our discussion today, it is important to note that L.B. Foster's second-quarter 2012 results contained a $19 million warranty charge which was included in cost of goods sold. Due to the resulting lower profitability, we also reduced our incentive expenses in the prior year's second quarter by $1.2 million, which was included in SG&A expense. While my discussion will focus primarily on our GAAP results, when we feel it beneficial to the audience, I will refer to adjusted results, which assumes the exclusion of these adjustments in order to present another look at quarter to quarter and six month to six month comparative results.

So I will begin with sales for the second quarter of 2012, which were $149.9 million compared to $163.2 million in the prior year, an 8.1% decrease. The sales reduction was due to a 10.3% decline in Rail segment sales and an 8.7% decrease in Construction segment sales, partially offset by a 10% increase in Tubular segment sales.

The Rail segment sales decline was due principally to a reduction in concrete tie sales and a reduction in rail technologies, partially offset by an improvement in transit product sales. The Construction sales decline was due to a reduction in sales of fabricated bridge products and, to a lesser extent, a decline in tiling product sales. The Tubular segment sales increase was due to volume-related increases in our Coated Products division.

Year-to-date sales were up slightly, as Tubular sales increased 13.8% and Rail sales improved by 2.6%, while Construction segment sales trailed 2013 by 6.6%.

As mentioned in our earnings release, backlog stood at $220.3 million at the end of the second quarter of 2013, down $31.8 million or 12.6% from the second quarter of last year and 11% lower than March of 2013. The year-over-year reduction was due to a 17% decrease in our Rail segment backlog and a 79% decline in our Tubular segment backlog, partially offset by a 14% improvement in our Construction segment backlog.

Second-quarter bookings were down 43.2% compared to the second quarter of last year. Bookings declined from last year's second quarter in our Tubular segment by 47% and by 61% in our Rail segment, but increased in the Construction segment by almost 22%. As a reminder, last year's second quarter was a record quarter for orders booked and included the $60 million Honolulu transit project order.

Heavy civil construction, which is a key end-use market for our Construction Product segment, has experienced erratic performance throughout this year. This widely-dispersed sector was up overall by 8.2% in 2012, but decreased 2.3% in the first half of 2013, mostly due to highways and bridges and conservation and conservation in development markets, while the Transportation segment increased 10%.

Regarding our Rail business, second-quarter capital spending among the Class I railroads was down 5% compared to last year and declined by 7% for the first six months of 2013, which is trending lower than the original Class I projections, which ranged from flat to a 3% increase in 2013 compared to a very strong 2012 spend.

It should be noted that the Class I forecasted full-year spend is still strong. North American Class I railroad commodity carloads were flat in Q2 compared to the prior-year quarter; however, intermodal traffic increased by 2.3% and Class I railroads results were generally higher than the prior year.

During the second quarter, our Tucson tie facility operated between 60% to 65% of capacity. As announced in December, we reached a multiyear extension of the Tucson concrete tie supply agreement with the Union Pacific Railroad. This year in Tucson, we are producing 200,000 ties to sell to the UPRR and 100,000 ties for warranty replacements, which is one of the primary factors causing the decrease in concrete tie sales referred to earlier. In Spokane, we are producing concretize for transit authorities, Class I railroads, contractors, and industrial customers.

We continue to see robust inquiry and bidding activity, and the Spokane facility has been highly utilized. Our Spokane concrete tie facility experienced a record year in 2012, and while we expect another strong performance this year, it will not return to the 2012 levels.

As a percentage of this quarter's consolidated sales, Tubular accounted for 10% of sales, Construction was 29%, and Rail was 61% of sales. We do expect this mix to change in the second half of 2013, as we anticipate Tubular sales to fall to 4% of consolidated sales, Construction to remain at 29% of sales, and Rail sales to increase to 67% of consolidated sales.

Gross profit margins were 19.5% in the second quarter of 2013 compared to 7.6% in the prior-year quarter. Excluding the prior-year $19 million warranty charge, prior year gross profit margins would have been 19.2%, resulting in a favorable 2013 to 2012 comparison of 26 basis points.

Selling and administrative expenses increased by $1.3 million or 8% to $18 million in the second quarter of 2013 due to higher headcount-related costs. SG&A expense represented 12% of sales in the second quarter of this year as compared to 10.2% of sales in the second quarter of 2012.

For the six-month period, SG&A expense increased by $1.5 million or 4.5%, and represented 12.6% of sales in 2013 compared to 12.1% of sales in 2012.

Second-quarter pretax income was $11.1 million or 7.4% of sales compared to a $4.6 million loss in the prior-year period. Excluding the warranty-related adjustments in the prior year, pretax income would've been $13.3 million or 8.1% of sales.

Pretax income for the six-month period of this year was $18.5 million or 6.6% of sales. Excluding the prior-period adjustments again last year, the comparable prior-year period pretax income would've been $17.7 million or 6.4% of sales.

As mentioned in our earnings press release, the effective tax rate for the second quarter of this year was 34.6% compared to 27.6% in 2012. Of course, since the prior-year quarter results were a small loss, the tax rate was significantly impacted by certain discrete items.

Second-quarter earnings per share from continuing operations was $0.71 per diluted share this year compared to a 33% loss in the prior year. Excluding the warranty-related adjustments, as we have described, earnings per share in the second quarter of 2012 would have been $0.86 per diluted share.

Six-month earnings per share from continuing operations was $1.19 per diluted share in 2013 compared to a $0.03 loss in the prior year. Once again, excluding the warranty adjustments, earnings per diluted share for the comparative six-month periods would've been $1.19 in 2013 compared to $1.15 in 2012.

Turning to the balance sheet, working capital net of cash decreased by $7.4 million in the current-year quarter. Accounts receivable increased by $6.6 million or 9.2%, due mostly to a 15.9% increase in sales from Q1 to Q2, but also due to an increase in DSO. Our DSO at June 30, 2013 increased to 44 days from 38 days at the end of March, 2013, due mostly to large projects ramping up paying a little slower than our normal accounts, as well as some customer prepayments being worked down by product shipments. DSO at June 30, 2012 was 41 days. We believe that our AR portfolio is in very good condition.

Inventory decreased by $8.5 million and accounts payable and deferred revenue increased by $9.4 million for the quarter, having a nice impact on our cash flows this year in the quarter. In fact, our primary working capital components were significant factors, resulting in cash flow generated from operations of $16.7 million in the second quarter of 2013 as compared to $6.5 million of cash generated in the second quarter of last year.

Capital expenditures were [$2.1] million for the second quarter of 2013 compared to $2.3 million in the prior-year quarter. This spend was principally for items such as plant production equipment and inventory handling equipment. We anticipate that the Company's 2013 capital expenditures will range between $7 million and $8 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 June 30, 2013 was $94.7 million, up $13.2 million from March 31, 2013, and down $6.8 million from year-end 2012. Cash 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 the second half of this year will see a change in mix that will have a negative impact on margins as we anticipate our Tubular segment sales will weaken and our Construction segment sales begin to improve compared to the prior year and to the first half of 2013.

That concludes my comments on the second quarter of 2013. I will now turn it over to Bob Bauer. Bob?

Thank you, Dave. Good morning, everyone. Thanks for joining us. As I share my thoughts with you regarding the Company's performance through the second quarter, I will comment on how I see the balance of the year unfolding. Generally speaking, my comments are going to be focused on the adjusted earnings without the charges for 2012 so that you have a better basis for comparison operationally with the Company without that charge included.

So let me start with our earnings press release this morning, because we intended to say four things with that message. First, revenue in the second quarter wasn't quite as good as we were hoping it would be, but it did follow a good first quarter. We were very pleased about getting off to a good start last quarter in light of the uncertain environment driven by all the sequestration talk at the time. We missed the prediction on when the Construction business would begin to see improvement, which was a key component of our first-half sales forecast.

The second point, our year-over-year orders change looks like a big negative number, but it's not an indication that there's any big problem. The backlog stands at $220 million, which is about what we expected it to be. Yes, it is down $32 million from June of last year, but that was following an off-the-charts booking period in the first half of 2012 in which we booked $382 million in new orders.

The $60 million Honolulu transit project was the most notable of the sizable orders, but it was also an extraordinary period for concrete ties and new rail orders as well. So we expect the backlog to decline further this year as we move into the seasonally lower fourth quarter.

The third point, I wanted to point out the changing order patterns in the second quarter, which has left us in a position to re-forecast the second half. This is particularly important, as the mix of what we expect to ship in the second half has changed and will have an impact on profit margins. I will cover the exact order changes in detail in a moment that will give you more insight on those details.

Fourth and finally, our operating cash flow in the quarter was strong at $16.7 million. Our net cash improved by over $17 million. Our inventory has declined from the beginning of the year by $8.5 million. So I feel good about making some progress in working capital and we will continue to get even better in this area.

With that backdrop in mind, let me make some remarks about all of these four points. With regard to sales revenue, Rail finished the first half with sales up 2.6% over prior year and Tubular finished the half up 13.8% over prior year. Tubular products had a very good first half, but this is where the order patterns changed a lot, with fewer orders from gas pipeline customers.

Construction sales finished the first half down a little over 6.5%. This area too had a change in orders, only showing increasing trends for the first time in several quarters. I thought the sales level after six months would have been a bit stronger. I also thought the construction market was going to turn up sooner. This is really the bulk of the shortfall from where I thought we would be at this time. It looks like I was off by about four months on when this market would make the turn. This resulted in first-half sales just above prior year first half levels as a result.

With regard to our operating performance, ending the second quarter with $150 million in sales and $11.1 million in pretax profit, or 7.4% on pretax margins, did put us in a position to finish the first half with margins up 24 basis points to 6.6%. I do feel good about the margins being better than prior year in what I would describe as competitive and difficult pricing environment for steel-based products. And on top of that, our Rail business was experiencing headwinds from the lower margin in our transit backlog and did not have any growth in the more profitable product lines.

I also thought our performance in managing price at a time when the steel market is under pressure and very competitive helped keep our gross margin levels up. Our productivity programs and factory investments are also helping to keep costs in line and contribute to GP improvements. So this has looked pretty solid to me. On a year-to-date basis, gross profit margins were up 25 basis points to 19.3%.

So we finished the half with after-tax income from continuing operations up 4.3% over the prior-year first half. And EPS of $1.19 for the first two quarters was up $0.04 over last year's rate, so all in all, the half was better than the prior-year half.

Cash was very good in the quarter. Our balance sheet still looks great. We're running a little heavier on expenses, and I expect that will happen during the year as we realize expenses for growth programs being started, as well as expenses related to driving our acquisition strategy.

So overall, I thought our team did a good job in the quarter, and now we have to focus on the second half and adapt to the changing backlog as a result of the order patterns in the second quarter that I spoke about.

So let me shift gears into this discussion and transition to orders. The Rail business had the most difficult of comparisons in the second quarter because of the booking levels last year. However, I would not describe the order activity, or the Rail market, for that matter, as strong at the moment. While many of the rails that report performance had good news this quarter and the industry is healthy, the good results are not being driven by strong unit volume growth. As we continue to see a market in which petroleum products replace coal volume, our business with Class I customers doesn't benefit that much as to wear and tear related to heavy coal traffic declines.

That's not all bad news, as the change in mix is good for the industry and long-term investment in rail certainly has a great outlook. There are still good spending levels at the short lines and transit companies. and the outlook for these sectors is good. In fact, the number of transit agencies in the US with expansion or refurbishment plans look solid, and short lines are clearly benefiting from their ability to reach into the developing gas territories as well.

One exception to the solid rail outlook is the European market. Our orders in our UK operation have been soft throughout the first half of the year and I don't expect to see any substantial upturn in the second half. The economic climate in this area has been discussed a lot in the news, and these conditions have a spillover effect in the rail industry.

In our press release, we decided to highlight orders for Tubular Products and Construction Products because these segments are really driving the change in the outlook for the second half. The Tubular Products segment, which has been very strong for several quarters, saw weakness from pipeline customers in the second quarter. The weakness was experienced through the entire supply chain for pipe products that serve the gas pipeline market, and our coated products business was certainly impacted. Speculation about customers waiting to place orders to take advantage of falling pipe prices was among the top reasons cited.

We did see declining costs in powder coating raw materials and also saw our net price to customers move below prior-year levels. However, we have not lost gross profit during this time, as we've covered all of the price impact with lower material costs.

The net impact of the order environment is that we have taken a significant amount of sales out of our second half for Tubular Products, and as one of our better operating margin products, it will have an unfavorable impact on the Company's operating margins in the second half of the year.

This has not changed our outlook for the industry or the growth opportunity that exists in the gas market we serve, and there will be investment for many years to come resulting from the development of new resources in the US. I want to emphasize that point. So I see this as short-term, but it will negatively impact this year. Gross margins and pretax margins in Tubular will be down in the second half compared to the first half because of the volume decline.

We also made a decision to work on capital improvement projects during the second half that will bring efficiency improvements to the coated products plant. This factory has been operating at peak levels with little time for maintenance over the past two years, so we're going to take time during this slower-than-planned production period and make some improvements to that facility.

On the other hand, the Construction segment has realized an improving order trend in the quarter, with orders that were up 21%. I think it's safe to say now that the market is showing signs of improvement that we were looking for this year with first-half orders up 9.7% over prior year, we expect our second-half Construction segment performance to be better than the first half.

It is possible that that second half could be even better than we are forecasting right now, but this is, I think, the last market that I would go out on a limb for with an optimistic forecast at this point. But it is nice to see the improving trends that we were experiencing here in this latest quarter.

Last quarter, we were concerned that our concrete buildings business would be weak, as we saw orders from federal and some state agencies stop immediately after the sequestration went into effect. But the pause looks like it was short-lived and this division should do fine this year, although it's not likely to grow.

So turning my attention now to the full-year forecast as a result of what we have experienced here in the latest order trend, it has resulted in a change to our full-year forecast in revenue and profit for 2013. We revised our revenue projection to come in somewhere around $600 million to $610 million, and earnings per share between $2.70 and $2.80.

These projections do take into account the lower sales from the high-margin Tubular segment, as well as deleverage from the lost volume and our desire to make improvements in the plant during an opportune time. It also takes into account an improving construction market and one where the second half will reflect continued stability in those order trends.

So in the meantime, keep in mind that there's a lot of good news as well. Our Shredded Products business is experiencing steady growth and improving margins from new plant efficiency. Our Transit business will have a record year this year. Our Rail Distribution division has continued to see solid order activity. And our Bridge business backlog is now on another upswing, with some very solid quarters ahead, including backlog that's in place for 2014.

So I hope that gives you some additional insight on how the business looks, current business conditions, how it's going to impact the balance of the year.

I will conclude my remarks with that. The only other item I wanted to add is to thank the management team across the entire business here. As we've experienced this change and these changing conditions in orders, we are doing a lot to try to make sure that it doesn't impact margins in an adverse way and we will be working hard here in the second half, as we go into the back half of 2013.

So with that, I will return the call back to the operator and we will open the line for questions.

(Operator Instructions) Robert Kosowksy, Sidoti & Company.

Good morning, guys. I just had a quick question on the Rail business, and I might have missed it. How much was the Honolulu contract in revenue in the quarter?

In the quarter, Rob, it was not that significant. It was $1.8 million.

$1.8 million. And then how much do you expect that to hit in 2013?

For the entire year, it's going to be upwards of $35 million to $40 million. It actually is -- that project for us with regard to revenue recognition is going to be ramping up second half of August and through the rest of the year.

Okay. And then otherwise, I guess on the construction side, it's good you are starting to see some life. I was wondering if you could say over the next few years if this is kind of a slow recovery in construction, would you --? How do you see it playing out in your -- in volume versus pricing? Would you expect a greater profit impact over the next few years to be just on margins being elevated by 100, 200 basis points, or is it going to be more similar competitive pricing and just volume coming back? Then any comments to you about Nucor's expansion as well?

Well, let me take the first part of that. I think at this point in time, it's probably too early to predict what might happen with price in 2014. I think the environment right now is going to continue to stay competitive because pricing out in the steel market is still relatively weak. Although if you're looking around the landscape, you will see all sorts of signs of price increases that steel manufacturers are trying to get through. But I think the absorption of the capacity that needs to take place is going to take a while before that will stick.

To your point of 100 to 200 basis points, I think that would be a long shot for next year. I don't think it will be that good. But I think we will wait until the end of the year to see what capacity looks like and what some of these price increases are doing before we make the call on that.

On the Nucore expansion, I am not close enough to that I think to say exactly what it is they are going to put in the capacity that they are adding into their facilities. From our standpoint, we really compete in the piling business with them, and whether or not they will devote a lot of it to that and/or intend on putting any new products in there at this point is unclear to us.

Okay, thank you very much and good luck.

Brent Thielman, D.A. Davidson.

Good morning. Dave, you mentioned Honolulu's 35 to 40 in revs, I think, for the second half of the year. Could you guys just talk about your expectations for the rest of the Rail business as you get into the second half of the year?

Well, there's backlog to ship, of course, from that Honolulu project. Our new Rail Distribution business continues to look pretty strong. That business has been up double digits now for the last few years, so we are continuing to see pretty solid activity from the short lines and the transits where we get a lot of that work.

Our other core product lines are doing well. I think they will be fine in the second half. I don't think there will be an increase in concrete ties. I think that business will be somewhat level from first half to second half, because what we will see in these transit projects will probably remain pretty steady, and there is not forecast to be an increase in the business that we do with Union Pacific.

Then the balance is in our Rail Technologies area. We could use a little bit more coal traffic to help our friction management consumable product line, but that's probably not going to happen in the second half either. So I think that business will just be steady throughout the remainder of the year as well.

Okay, then on the Tubular side, I guess with the segment likely lower here in the second half, do you still think you can kind of sustain those margins in the high 20%s or low 30%s range?

You're talking pretax.

I'm sorry, gross margins. Tubular Products.

Well, you said high 20%s, low 30%s. You are probably pushing it. We are going to wind up seeing deleverage in that business from the volume that's coming out. Those gross profit margins are going to fall as a result of that. I wasn't prepared to put an exact number on that for the Tubular business, but it is going to wind up being at least a few full points, I would imagine.

Sure. And then I guess thinking about the back-half expectations, are you kind of assuming orders in Tubular remain under pressure throughout the period or kind of thinking maybe we see some late improvement in the year?

I don't think they will remain under pressure. I think this thing is going to turn around. We were frankly surprised at the hole that we were staring at in the second quarter.

The one -- the coated products business had been white-hot for many quarters now. We were growing 50%. So it was really moving along rapidly. And so with growth like that, it doesn't surprise me that the end-users weren't able to pause when they wanted to. They might be managing some inventory out there, from what we hear. We know they were trying to time purchase orders with the best price they could get in the market for pipe, things like that.

But as far as I'm concerned, I think this is temporary. I think this market has a lot of legs to it. It is for us going into a lot of these shale gas territories and the forecasts for that remain solid. So I think it's going to just wind up coming back. It's a little hard to say exactly when it will be at the first-quarter level, but I don't think it will be long.

Beth Lilly, GAMCO Investors.

Good morning. I wanted to just drill down a little bit more into the construction business, and you made a comment in your remarks about the heavy civil business is erratic. Can you just drill down a little bit more on a qualitative basis and talk about what you are seeing on the construction side?

Part of the problem with it, Beth, is we -- our business, unfortunately, doesn't always move along with -- we somewhat compare ourselves to that conservation and development segment within the heavy civil construction market. But at the end of the day, we are such a niche player that we won't necessarily move in the same direction as nonres construction, certainly, and sometimes even the heavy civil markets. So it's -- with us, it's certainly the piling business, the foundation retention business, and we will play in the conservation and development and a little bit in the power and the highways and bridges.

But we -- the market has been -- it was up last year and then it was down for the first half of this year. And we've got continued -- even though it's not as bad as it was -- continued pressure at the state level with the budgets. So we are seeing an uptick, we're seeing some strength in orders and we are enthused about that. But we are not looking for anything earth-shattering over the next 12 months.

The other thing that we usually point to when we talk about some of the erratic nature of orders is that that marketplace for us, a lot of the projects have some sort of government funding behind it, both federal and state. And that has caused a little bit of an on-again/off-again nature to a number of things that we see out there.

So with the way these budgets and the planning for them have struggled in the course of the last year, it's caused a lot of uncertainty with some of these large projects.

Okay, so it's not -- it sounds like you are not forecasting that dramatic recovery that we are all waiting for.

I would not do that at this point. I think when you look at the volume of our business, how far down it is from where it used to be, you would think that there ought to be some sort of a spring-back effect. But I think the debt overhang in federal and state areas is going to put pressure on that.

We also do look to the commercial construction market to help us as well, even though that's to -- makes up a smaller percentage of our business. But that's not on a tear either, even though residential is improving and you hear nonres numbers are getting better. I just think that every project is approached with caution in the marketplace because people have been kind of burned here recently.

Okay. Then of course I wanted to ask -- you have $100 million in cash on the balance sheet. And can you comment on what you are thinking in terms of the priorities of the use of that? Is share buyback one of the options? Are you looking to make acquisitions? What can you say?

The primary use for it is intended for acquisitions. We have a fairly developed pipeline of targets that we have these days. We are anxious to move some of those through our funnel and the process of developing them into a business of ours. It is a key part of our growth strategy. And so we are working on that more aggressively than we are working on anything else.

We may only be very opportunistic on share buyback into very small amounts, but I wouldn't anticipate too much of that. It will be focused on acquisitions. And I can't provide any further detail beyond that, except to say that that will be a key component of our growth strategy going forward. So we will, I'm sure, be reporting something on that over the coming quarters.

Okay, great. Thanks so much.

Mike Baudendistel, Stifel.

Thank you and good morning. I wanted to ask, similar to one of the more recent questions, on the Construction segment, when you think about government spending at the state level, is there any geographic concentration there because some states are in better financial health than others?

You know, I think for our business, not really. One of the things we do a fair amount of work on is ports. But there is as much federal, I think, money behind that as any kind of state money. But that's usually an important category for us.

We've seen quite a bit of activity in California, Mike, which you would think would be counterintuitive. But projects were there and they needed to be done, and so we've gotten some decent activity out there. But we haven't seen any major concentration, I don't think.

Yes, and over the years, we are not tied to one area more than another. The only thing that I would say beyond that is the concrete buildings portion of our business does have a regional focus to it. It is in the area where you -- like the west and southwest; it's in the areas where you see more of the national parks and a concentration of outdoor activity. But other than that, that is about it.

Great, that's helpful. The comments on the volatility and the steel prices impacting the Tubular segment, could you give us a sense of order of magnitude of how much the steel prices would have to retrench in order to -- for that impact to reverse -- if you have a sense of that?

When I was making a comment -- and you're talking about for our Tubular business, right?

Yes.

Yes, what we saw was we saw an opportunity in the marketplace where prices were going down anywhere in the neighborhood of, say, 5% to 10%, you could get reductions on your steel in the marketplace. That's enough for customers with big pipeline projects to wait or to time those projects. So when we saw prices change that much, it didn't surprise us that there could have been a pause in the orders that came in as a result of that.

So right now, they are not declining any further. I think everything in the steel industry right now looks like it has leveled off. And we are monitoring markets that we don't compete in as well. We are monitoring scrap prices and all of those sorts of things. So the environment right now is not a declining environment. It's going to wind up moving up.

So now you are in that situation of when do people place orders before prices start to increase measurably. Now, that's the hard one to predict, exactly how much they might inch up and at what rate they will go up. They would like to get some traction in the steel industry around that, but that's always a hard thing to do. I don't think there will be any kind of rapid increase here over the coming quarter or two.

Okay, that's helpful. Then in the Rail group, it sounds like some of the revenue, if you want to call it shortfalls, you have the same seasonal increase from the first quarter in revenue in the second quarter; it was concentrated in the concrete ties and the friction products. Were there other areas, too, that sort of fell short of your initial expectations, and how was Rail revenue in the quarter versus expectations a quarter or two ago?

We were -- we thought it would be stronger in the quarter -- we thought both incoming orders and we were to turn that into shipments in the quarter, both would've been higher. And I would tell you it was really across the board. There wasn't any other area that I would point to from a product line standpoint that was more disappointing or more troubling than the other.

So it was -- I think I would just have to say generally speaking it was just across all of our different product lines, and I wouldn't point to any other one as being a significant contributor to our shortfall.

Okay, great. That's all my questions, thank you.

Brian Rafn, Morgan Dempsey Capital Management.

Good morning, guys. Talk a little bit -- we've had such a robust last few years, I think you highlighted, on the Railroad, the Class A-I North American. As you look at -- you said from the industry through the balance of the year that you are still going to be up CapEx wise fairly solid.

What do you guys look through to the end of the year for demand in product? Are you seeing -- is it ties, is it track, is it some of your technology componentry? What do you see? And then maybe even in the next year, what do you see demand for L.B. Foster product?

I wouldn't call out any one of them as being dramatically different from the other. We think that demand in the balance of this year will be related to track refurbishment, maintenance programs. The CapEx that the Class I's are talking about, they still have a pretty strong maintenance program. For us, that calls for just about all of our track component products.

They continue to work on operating ratios, so to the extent we can sell both products in track as well as friction management, that helps in all of those categories. So we don't see them shifting capital spending in a way that it would help one of our areas more than another.

And I think that will carry into next year. They typically forecast modest increases in capital spending. They are keeping them all tied pretty close to 1% of sales. They are not forecasting huge sales increases. I think going into 2014, it's more steady growth. And they continue to do a pretty good job at operating their businesses. So we think that the capital spending should still be fine even going into 2014.

Okay, so would you say that from a margin standpoint, a margin accretion, that the mix of products in Rail shouldn't be -- shouldn't change that much throughout the balance of the year?

Yes, I think that's probably a pretty safe estimate on it, yes.

Okay, the Rail area is one area where you can kind of develop new products. Anything on new product technologies, new designs, line extensions?

Well, I don't know that I can mention anything that would be coming in the next quarter or two. What I can say is that we are working on a number of things in both the track components and the friction management area. We are making investments in engineering. We have got some opportunities to come out with both next-generation products, as well as products that we don't have today. They are on our product roadmap to be launched over the course of the next 12 to 24 months in some cases.

So we are making some investments in those areas. There's just -- I just wouldn't be able to point to something specific for you that might come out in the next quarter.

Sure. Would you say, Bob, that the run rate of the new product development would be about the same as kind of legacy L.B. Foster? Would you say it's accelerating? Give me a sense as to how much you've kind of focused on that?

Yes, it's accelerating. We are clearly trying to put more emphasis in this area. We clearly have more spending going on in this area these days. And I would say that we also have an opportunity to utilize some additional technologies that we want to develop as well.

Now, in terms of impacting sales, it always takes a little bit of time to get this engine revved up and get some momentum building, but we are attempting to change the rate at which we introduce new products. Now, the bulk of them are product line extensions and largely things, even where we don't have something, that still stay in the market that we are in today. But to the extent we can, we are trying to look at opportunities in adjacent markets and that will help us over time, but that's a little bit more of a long run.

Okay, good. Bob, anything on high-speed rail relative to the track? We haven't seen as much chatter in the press about that.

Yes, that's because I don't think there is much chatter, and if there is chatter, it seems to be more bad news than good news. I know one of the projects out west, some of the funding just fell through for -- I think it's a line from California to Nevada. So now, that one looks like it might be in a little bit of trouble. But other than that, there isn't anything real positive to comment on in that space.

Okay, okay. Going over on the Construction side, you guys were talking about the heavy civil and that wheel and granite construction. There's been -- it seems to be in the heavy civil side the large design/build orders, they have been fairly robust. The problem has been in some of the state highway and some of the smaller DOTs, the county, those type of things.

Do you guys have -- do you have penetration in some of those huge -- you are talking about 3, 4, 5, sometimes over $1 billion in these big design/build projects -- do you have exposure to that area?

Yes, when you talk about the order of magnitude you're talking about, if I imagine what you are describing correctly, I would say yes. But keep in mind in that area, we do function like a distributor. One of our strong niches is midsized projects, for sure, quick delivery, you need inventory, those sorts of things.

We are booking orders for us that are in the millions of dollars, but we don't book orders that are in the tens of millions of dollars. So when you talk about megaprojects, if they are really big, they will wind up finding a different way to buy to buy direct, if you're talking in the tens of millions of dollars.

Right, okay, okay. When you look at the Army Corps of Engineers, they do their annual survey of infrastructure, and everything is always a C or a D or an F. You guys, I think, do some bridge decking. That is something where you are seeing -- you look at the 700,000 bridges across the US, a lot of obsolete, and we saw the collapse in Minneapolis. How is that specifically just that bridge business for you guys? Is that episodic?

It is choppy from quarter to quarter. We booked a great order last quarter, the Newburgh Beacon Bridge, which was a $14 million order for us. We don't do that every quarter. I wish we did.

We are seeing some pretty nice activity here lately. But despite the fact that they are always putting out a lot of data on the number of deficient or obsolete bridges, it doesn't pick up measurably. So I saw recently that we were gaining some ground in that area, we being the United States infrastructure market, but that's not turning into massive projects for us that are coming in at a measurably faster rate.

Okay, okay. You guys also alluded a little bit to I think the California comment on ports and marinas; you do a lot of certainly the product in that area, in the harbors and stuff like that. Are you seeing any strength other than California? Because we have certainly had -- we've had the international trade has been modestly good. Anything in other ports other than California around the country?

Oh, yes. I think we will continue to see that in the Southeast and the East Coast. The anticipation of routes changing with what will happen with the Panama Canal, I think the ports are getting more and more competitive with one another around the country. So I think we will continue to see some nice projects on the drawing board here in the coming year.

Okay, you also -- Bob, you spoke a little bit about taking a pause on some CapEx maintenance in one of your plants. I thought you said Tubular. What specific plant is that and how much spending and what are you spending on it?

It is in our Tubular products area, the plant where we coat pipe. The fact that the order input rate is -- was low here and production in the third quarter is going to be lower than normal, we're going to update some machinery. We're going to put in some more modern technology.

We are spending a fair amount of money on it. It's a few million dollars. And it's going to wind up giving us efficiency in the plant as well as cost reduction. So overall, it's a great productivity improvement and it's technology we want in place. It's safer. It's better quality. Everything about is just a lot of good reasons to do it. And so we are going to pull the trigger on it now while we are running a little lower in volume and have some of that hourly workforce help us put those improvements in place.

Okay. And then you mentioned (multiple speakers) -- how would you guys be looking at kind of headcount as far as hiring question? You mentioned a little bit of engineering in the railroad area. What is --?

Thank you. Sorry. We will move to the next question. It's from Brent Thielman of D.A. Davidson.

Just one more. You guys had talked about trying to get to kind of 5% to 7% organic growth annually. And it looks like this year we might be a little bit shy of that. It seems to be kind of some shorter-term order issues in Tubular. But Rail products growth has been kind of sideways. You're looking for backlog to decline further this year, right? I guess my question is, as you look beyond this year, are you confident about getting kind of back to that sort of organic growth range?

Well, I'll tell you, the latest conversation that we had in here was that it's possible that we might take that down a point and take that 7% down to 6%. I don't know if that's 5% to 6% or 4% to 6%.

But when you look at what's happening in the marketplace and the economic forecasts everywhere, it seems like all of them are shaving a point off of expectations in the market. So as we have been talking about that 5% to 7%, it was all based on the fact that we felt like we could grow faster than the market, and we were putting that market somewhere around 3% or so. And I'm not sure I would make it that strong going forward anymore. I think we are dialing our expectations back to maybe it's going to be a 2% to 3% market rather than a 3% to 4% market.

That is because of the -- just some of the economic headwinds, which is largely driven by debt. And in our case, we've got government spending behind a number of our projects. But even in the rail industry, I think while it's a good industry, it's healthy, there's a lot of good things happening, I think they are probably dialing things back a bit as well, as everyone thinks about the fact that the growth in the GDP rates are just not going to be quite what they used to be.

That's helpful. Thank you.

Robert Kosowsky, Sidoti & Company.

Just a quick follow-up question. If I look back to my initial notes from the fourth-quarter conference call, it looked like you were looking for $10 million to $12 million of CapEx. Now it's $7 million to $8 million. And I'm wondering what the major projects you pulled back on, the $4 million or $5 million you pulled back on.

And I know you mentioned in the beginning of this year you were thinking about being a little bit more cautious in the near term on bringing in technical staff, and I'm wondering if that has still remained cautious or if you are still adding some of the more technical workers.

Well, the bulk of that CapEx is us actually delaying the project I was just speaking about for our coated products plant. When we put our 2013 plan together, we thought that we would spend maybe a third of that capital -- or more than a third of that capital on that facility for the project I just spoke of.

As the year unfolded, since we didn't see as much demand come through this year as we thought, we pushed that project off a bit. So now the spending for what I just described is going to straddle 2013 and 2014. That's the bulk of the CapEx delay.

Okay, that's helpful. One other --

Second part of your question there? (multiple speakers)

I would say we have added some headcount in the business here. Because of the current order patterns, we've got a hold on that, but we did add both some technical and some selling resources here to fund growth programs early in the year.

Okay, then one final question. Do you see any other big contracts either to replace Honolulu or on the piloting side that are coming up for a bid down the pike? Obviously, you can't really give too many details, but just wondering what you see on the radar screen.

Well, I don't know of anything that is as big as Honolulu at this point. So we are looking for just the broad market help, replace that backlog that will go out on Honolulu.

In the Construction segment, orders don't come that large. Good orders for us there range from, say, $2 million to $4 million in size. There's a nice quote pipeline out there right now with it, but nothing I could point to that would be as -- really, really sizable.

Nothing like the Panama Canal or what was down in New Orleans or anything like that?

Nothing like that. Exactly.

We followed that Honolulu job for probably four years before it finally clicked for us. So those jobs typically take -- are a long time coming. And so there's nothing over the next 6-plus months that we see of that size.

Okay, thank you very much.

Brian Rafn, Morgan Dempsey Capital Management. Sir, we will allow you one question.

One question. Bob, on the M&A side, you talked about a fairly robust pipeline. What is kind of your sense in pricing multiples of EBITDA? Is it a buyers' market, a sellers' market? Kind of describe a little some of the detail.

I would say regarding buyers' and sellers' markets, it all depends on what market you are in, and it certainly has a lot to do with the quality of company you are looking at.

I would say at the moment, we are looking at attractive segments. We have said as we have been out in the marketplace before that our focus is largely in the Rail and the Tubular Products segments. Both of those are good market spaces. In the Tubular area, it's largely in those markets that are focused on energy. So I think those multiples from time to time will probably look like a sellers' market.

Okay. Thanks, guys.

Gentlemen, you have no further question in the queue. I will now hand the call back to the CEO for any closing remarks.

All right. Well, thank you for joining us today. I appreciate all the questions and I hope we have given you some good insight on what the balance of the year will look like.

So with that, we will go ahead and close our call for the day, and I am sure we will talk to many of you again as the third quarter comes to a close. Again, thanks for joining us. Bye bye.

Thank you, ladies and gentlemen, for your participation in today's conference call. You may now disconnect. Have a great day. Thank you.