L B Foster Co (FSTR) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 L.B. Foster earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn our call over to Mr. David Russo, Chief Financial Officer. You may begin.

Thank you, Frances. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the Company's third-quarter 2013 operating results. My name is David Russo, and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO.

This morning, Bob will provide an overview of the Company's third-quarter performance, give an update on business issues, and discuss market conditions. Afterward, I will review the Company's third-quarter financial performance, and then we will open up the session for questions.

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

During today's call, our commentary and responses to your questions may contain forward-looking statements, including items such as the Company's outlook for our markets in 2013 and beyond; 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. Good morning, everyone. Thank you for joining us.

We reported earnings of $0.95 per share today, bringing our year-to-date earnings to $2.15. As we run through the financial summary, you'll see that our Company continues to perform well. Gross profit margins are holding up, and our balance sheet remains strong. On a positive note, construction piling orders are now running well above last year's level, following the changing order patterns that we discussed last quarter when, at the same time, we also described delays in spending for coated pipe that would unfavorably affect our Tubular segment business.

I'll begin by summarizing the key results from Q3. The way I will do this is I think is really three key takeaways from our operating results. First, construction orders have been positive now for two quarters and are well ahead of prior-year levels. The upturn had arrived two quarters later than we originally thought, but it's finally improved, and it's helping contribute to Company profits.

The second point -- lower-than-expected order input for coated products from pipeline customers that started in the second quarter resulted in much lower sales volume for Tubular Products, which has an unfavorable impact on profit margins. So Tubular segment margins, which were better than the Company average, and losing volume in this segment is difficult for us to offset.

Third and finally, our Rail business continues to perform well. Profit margins remained solid. In the third quarter, gross profit margins were 60 basis points better than prior-year adjusted results -- that's adjusted for the concrete tie charges -- although we aren't really seeing growth in capital spending that is strong enough to offset the big declines we expected this year in the concrete tie sales and our track components products.

Those are kind of the three key takeaways. If I were to mention a fourth, it would be about cash flow. Dave will speak to cash flow results in some detail, which on the surface will look low for the quarter and low on a year-to-date basis. But keep in mind that our receivables were among the most significant contributor to using cash, which usually increases during this time, as the third quarter is our largest volume quarter.

Our collections are not losing ground, nor is there a problem with bad debts; and both inventory and payables contributed to cash in the quarter and on a year-to-date basis. And, of course, for the year there is also an impact from the warranty tie replacement. So I think the details are important to understand there, and we are not having a problem with cash flow from an operational standpoint.

With that backdrop in mind, let me expand on some of these remarks to help you think about our business. I'll start with the Tubular segment because of its unfavorable impact on margin.

So sales for Tubular were down $6 million in the third quarter. That's 45% down from prior-year. Our gross profit fell just about $2.8 million on that decline, and we reported gross profit margins of 21.8%. This was a result of deleverage from the volume decline and the fact that we decided during the downturn to keep the experienced workforce on board and then conduct maintenance in the plant, which has been operating around the clock in many months over the past year.

On a year-to-date basis, this business does not look as bad. The nine-month results show sales down by $2.8 million or 7.7% from prior year-to-date sales. And on a year-to-date basis, the gross profit margin is only 70 basis points below prior year-to-date levels.

I expect this business segment to be impacted in the same way in the upcoming fourth quarter, which we had factored into the forecast we discussed last quarter, when we identified the changing market conditions that were kind of our headline there in our last-quarter call. As for why the changing conditions -- it's not uncommon to see energy market customers make rapid changes in project priorities and take actions that have a favorable impact on their costs, which is why we commented several times when the sales were up 50% year over year; and then how we didn't see this rate actually continuing for a year to two, when things were going really good last year. It was just too steep of an increase.

I do see us returning to those sales volume levels at some point. It's very hard to predict exactly when, but we remain bullish on the oil and gas markets, particularly the segment serving the shale area production, which is driving demand for coated pipe and OCTG products.

Switching gears to our Rail business, our Rail business segment sales were down 4.9% in the third quarter. This time last year we had very strong sales in rail distribution and concrete ties. We are getting the benefit of shipping backlog for the Honolulu transit project, which was $4.7 million in sales in the third quarter. We have approximately $10 million scheduled to ship from that project in Q4.

And the transit market remains very active, with projects across the country, but there's nothing really the size of the Honolulu project out there on the drawing board. But it does look like a very healthy market that will continue into 2014, and I think even 2015.

On a year-to-date basis, the Rail business sales are flat with prior year. This is running very close to the actual unit volume demand in the industry. While the reported results by the Class 1 carriers has been excellent, it has really been driven by price increases and mix of commodities, along with the productivity improvements that are impacting their operating ratios.

The unit volume increases are not among the headlines that are favorably impacting the results. In fact, if I were to go through a few statistics that I think support that in the third quarter, capital spending among the six Class 1 rails that report was up 1.8%. And commodity carloads in the quarter were up only 0.6%.

Now without coal, that increase is 2.5%, due to motor vehicles and petroleum strength. But if you include the positive 0.6% in the quarter, that really only brings the year-to-date change for commodity carloads after nine months to a negative 1%.

Now, if you are in intermodal, that looks pretty good. It's a good place to be, with 4% growth. But in our case, it really doesn't have a favorable weighted impact on our business.

So as I sum this up, I don't really see unit volume growth in the industry. Even though the industry certainly remains healthy, I think those numbers are not going to be quite as strong. As I see the market going forward, the best results will come from companies that have solutions that will positively impact the operating efficiency and throughput of the rail operators. That's where our focus is. That's where we started investing more this year. We did add some spending to support this initiative in 2013. And while we still have predominantly maintenance and new traffic infrastructure products, our new R&D initiatives will be focused on this efficiency and throughput -- and anything that can also impact safety, which is obviously important to the rail operators.

Turning to the Construction segment, orders in the third quarter were up 59%, bringing the nine-month year-to-date orders to $154 million. That's up 25% over prior year. This is really the best indication of the strengthening that is taking place in the markets that we serve.

Now, the construction segment sales in Q3 were just over $49 million, up 7% from prior-year. And on a year-to-date basis, you'll see that our sales still show a decline of 1.8% versus the prior year as a result of the first-half weakness. So there's a very different picture when looking at the incoming orders versus our published sales results.

So our backlog at the end of September stood just over $83 million in this business segment, up from $54 million last September. That's an increase of almost $30 million. Our piling backlog is up $15 million to $44 million. Our bridge backlog is up $13 million to $24 million. So this segment of our business is really looking different here in the latest quarter.

With regard to our operating performance, ending the third quarter with EPS of $0.95 a share and net income of 6% of sales -- while that's below where we wanted to be, I think it was as good as last year operationally, but on slightly lower sales, and with a big reduction in Tubular segment profits, which are a bit of a headwind. Our SG&A spending did increase as a percent of sales as a result of the investments we decided to make for growth. These are long-term decisions, and ones that we feel strongly about that will pay off for our shareholders. We did throttle the spending back after changing our forecast last quarter, but we kept the highest-priority growth investments intact.

Before I conclude and wrap up here, I wanted to say something about capital spending. Capital spending after nine months is well below our planned levels. We have spent $5.6 million so far this year, which has mostly been aimed at plant improvements and cost reductions.

The shortfall to plan is expected, really, to move in the next year, when capital spending will certainly increase. We have plans to invest in our existing coating plant, which I've discussed. We are moving into the corrugated Bridge Form market, opening up new opportunities in a much larger bridge market space than we currently serve.

We are planning on expanding capacity in Rail distribution operations. And there are a number of service operations we are starting up that require vehicles and equipment to operate. These are all programs that in my opinion will build a stronger business with greater capability than we currently have. And that will, in turn, build value for our shareholders.

So with that overview, I hope that gives you some good insight into the current business conditions. Let me end by just thanking the team at L.B. Foster for everything that they have contributed here in the quarter. And in 2013, as we head down the backstretch here of this year, I think we'll be pretty happy with what the Company has accomplished this year.

So with that, I'm going to turn it back over to Dave Russo, and he'll go through his remarks.

Thank you, Bob. In order to frame up our discussion today, I would note that L.B. Foster's third-quarter 2012 results contained a $3 million warranty charge, which was included in our cost of sales. This charge was in addition to a $19 million charge recorded in the second quarter of 2012. And as I'm sure everyone knows, these charges were related to a product warranty claim regarding concrete ties manufactured at our Grand Island, Nebraska facility, which was closed in the first quarter of 2011.

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 nine-month to nine-month comparative results.

So I'll begin with sales for the third quarter of 2013, which were $162.2 million compared to $170.3 million in the prior year, a 4.8% decrease. The sales reduction was due to a 45% decline in Tubular segment sales and a 4.9% decrease in Rail segment sales, partially offset by a 7.3% increase in Construction segment sales.

The Real segment sales decline, as Bob mentioned, was due principally to a reduction in concrete tie sales and reduced rail distribution sales, partially offset by a nice improvement in our transit product sales and a strong performance by our Allegheny Rail Products division. The Tubular segment sales decrease was due to volume-related declines in our coated products division.

The construction segment sales improvements was due principally to stronger piling sales, and to a lesser extent, concrete buildings; partially offset by a reduction in sales of our Fabricated Bridge Products. On a year-to-date basis, consolidated sales were down slightly, as Tubular sales declined 7.7%. Rail decreased only slightly, by 0.4%; and construction sales trailed 2013 by 1.8%.

As mentioned in our earnings release, backlog stood at $197.5 million at the end of Q3, down $28.2 million or 12.5% from the third quarter of 2012 and 10.3% lower than June of this year. The year-over-year reduction was due to a 28% decrease in our Rail segment backlog and a 79.7% decline in our Tubular segment backlog, partially offset by a 52.7% improvement in our Construction segment backlog.

Third-quarter bookings were down 5.5% compared to the third quarter of 2012. Bookings declined from last year's third quarter in our Tubular segment by about 54% and by 24% in our Rail segment, but increased in the Construction segment by 59%. Year-to-date bookings declined 20.3% from the prior year. Excluding the $60 million Honolulu transit project order that we received in the second quarter of 2012, new orders decreased by 10%.

Looking into our market activity this quarter, heavy civil construction, which is a key end-use market for our Construction products segment, has experienced somewhat inconsistent performance during this year. This widely dispersed sector was up overall by 8.2% last year but is essentially flat through August of 2013, due to the increases in the transportation and power sectors, offset by weakness in the conservation and development as well as highway and bridges sector. The weakest has been the conservation and development sector, which is the primary driver in many quarters of our piling business -- although, as we have mentioned, our piling business has hit a trough; and we have seen nice increases in their order entry for the last two quarters.

Regarding our rail business, as Bob mentioned, North American Class 1 railroad commodity carloads increased by 0.6% in Q3 as compared with the prior year; and intermodal increased by 4.1%. Additionally, Class 1 railroads reported strong results overall in the third quarter, with two railroads reporting record profits and two additional roads reporting record revenues.

During the third quarter of this year, our Tucson tie facility operated between 65% and 70% of capacity, principally for the UP railroad. This year in Tucson we are producing 200,000 ties to be sold and 100,000 ties for warranty replacements, which is one of the primary factors causing the decrease in concrete tie sales referred to earlier for the quarter.

In Spokane we are producing concrete ties for transit authorities, other Class 1 railroads, contractors, and industrial customers. We continue to see robust inquiry and bidding activity. And the Spokane facility has been highly utilized. Our Spokane facility experienced a record year last year; and while we expect another strong performance in 2013, we do not expect it to match the 2012 results.

As a percentage of this quarter's consolidated sales, Tubular accounted for 5% of sales; Construction was 30%; and Rail was 65%. As we projected last quarter, based on changing order patterns and backlog, this mix of business changed in favor of Rail and Construction and away from Tubular.

Gross profit margins were 19.3% in the third quarter of 2013 compared to 18% in the prior year. This increase was due principally to the $3 million warranty charge taken in the third quarter of last year. Excluding that charge, prior-year gross margin would have been 19.8%. The reduction in gross margins, then, from 2012 to 2013 was due to the lower volume of Tubular segment sales as compared to the prior-year quarter, as well as the lower gross margins achieved by the Tubular segment from volume-related deleveraging in the current year.

Moving on to costs and expenses, selling and administrative expenses increased by $1 million or 5.8% to $17.5 million in the third quarter of 2013, due to increases related to salary headcount, partially offset by a reduction in concrete tie testing costs. SG&A expense represented 10.8% of sales in the third quarter of 2013 as compared to 9.7% of sales last year.

For the nine-month period, SG&A expense increased by $2.5 million or 5% to $52.6 million and represented 11.9% of sales in 2013 compared to 11.2% of sales last year. Our third-quarter pretax income was $14 million or 8.6% of sales compared to $13.1 million in the prior year.

Once again, excluding the warranty charge in the prior year, pretax income would have been approximately $6.1 million or 9.5% of sales. Pretax income for the nine-month period was $32.6 million this year or 7.4% of sales. Excluding the prior-year warranty adjustment, the comparable prior-year pretax income would have been $33.9 million or 7.6% of sales.

As mentioned in our earnings release, the effective tax rate for the third quarter of 2013 was 30.2% compared to 35.4% in 2012. The lower rate in 2013 was favorably impacted by discrete tax items related to certain state income tax matters.

Third-quarter EPS from continuing operations was $0.95, as Bob had mentioned, compared to $0.83 in the prior-year quarter. Once again, adjusting for warranty charges, EPS would have been $1.00 per diluted share last year.

Earnings per share from continuing operations was $2.15 per diluted share for the first nine months of last year compared to $0.80 in the prior year. Adjusting for warranty adjustments in the prior year, earnings per share would have been $2.14 compared to the $2.15 this year.

Turning to the balance sheet, working capital net of cash increased by $9.4 million in the current-year quarter. Accounts Receivable increased by $9.7 million or 12.3%, due principally to our mix of sales favoring businesses with higher DSOs, as well as certain large projects ramping up and paying a little slower than our normal accounts.

Our DSO at September 30, 2013, increased to 46 days from 44 days at June 30 of 2013, due mostly to the items mentioned above. DSO at September 30, 2012, was 42 days.

We do believe that our AR portfolio is in very good condition. Our inventory decreased by $5.1 million, and accounts payable and deferred revenue increased by $1.6 million in the third quarter.

Our cash generated from continuing operating activities was $3 million compared to $21.6 million in the prior year. And for the first nine months of 2013, cash generated by continuing operating activities was $2.5 million compared to $25.3 million in the prior year.

The year-to-date reduction in cash from operations was caused by changes in working capital, including reductions in deferred revenue, warranty liability, as well as increased accounts receivable. Also adding to the unfavorable comparison were increased tax payments and lower depreciation and amortization for the nine months of 2013.

We expect to see improvement in cash flows during the fourth quarter of this year and still expect our full-year cash flow from operating activities to exceed capital expenditures, debt service payments, dividends, and share repurchases. Our capital expenditures, as Bob mentioned, were $5.6 million for the first nine months of this year compared to $6.3 million last year. This spend was principally for items such as planned production equipment and inventory handling equipment. We anticipate that the Company's 2013 capital expenditures will range between $7 million and $8 million.

Cash at September 30 this year was $96 million, up $1.3 million from June of this year and down $5.5 million from December 31, 2012. Our 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 trend in sales mix that commenced in Q3 will continue into the fourth quarter, as we anticipate our Tubular segment sales will continue to weaken and our Construction segment sales improve compared to the prior year.

That concludes my comments on the third quarter of 2013. And we will now open up the session for questions. Frances?

(Operator Instructions) Robert Kosowsky, Sidoti.

I just had a quick question on the Construction backlog. I'm just wondering what the gross margin looks like in it. And any commentary on industry pricing -- particularly on the tiling side? And also just what kind of piling projects you're seeing now come up for bid?

Well, we normally do keep track closely of the gross margin that's in that business. It's not something that I would put in a forecast. I would tell you, though, that just generally, the conditions of that business aren't really changing. The margins going forward should be consistent with the way we've been performing.

Pricing has been stable in the marketplace. A number of people would predict that maybe going out into the future that steel prices might begin to move up. I think it's a bit difficult to speculate on that right now. There's certainly capacity out there in the industry, but for the coming quarter or so, I don't really think the conditions are going to change much.

Okay. And then what kind of projects are you seeing on the tiling side?

Well, they are the typical projects that we always see in the heavy civil construction market. There's projects in ports; there's projects in highways; there's a little bit more spending from some of these state governments and other government-funded projects that are out there. I can't point to anything that I would say to you is unique in any way from what we historically do.

Okay. And then, finally, I had some technical difficulties. I was wondering if you had mentioned how much revenue was from the Honolulu project, and what your thoughts are as far as the revenue cadence for the remaining -- what was it -- $40 million or so of that, $30 million of that?

Yes, I did make mention of the fact that it was $4.7 million in Q3, and that we have approximately $10 million scheduled to ship in Q4. And there will still be some shipments in 2014 before we conclude that project.

Mike Baudendistel, Stifel.

Just wondering on the backlog going down -- sort of looking for the Company overall going down sequentially from the second quarter to the third quarter, is that roughly in line with what you would expect seasonally?

Yes. As a matter of fact, if you take a look -- the decline from June to September is like 10%, 10.3% this year. And I think it was right around 10.5% last year.

Great, that makes sense. And then on the receivables, with the commentary there, is that something you'd expect to reverse in the coming quarters, or would you expect that to stay a little bit higher?

Well, it will stay a little bit higher for a while until some of these larger projects ramp down, Mike. But when you take a look at -- our discussion has been cash flow, so it compares to the change in receivables this year versus the change last year. And there's a lot of factors driving that negative comparison.

We started the year in much better shape, 2013, in AR and our DSO than we did a year ago. And things like that create that negative comparison. When we look at our sales in Q3 this year compared to Q3 of last year, I would tell you that I think our sales are probably -- I'm sorry, our AR is probably $3 million to $4 million too high.

But this year I think our AR was only $2.5 million higher than last year. So it's those changes that create some of that negative comparison. And we do need to generate more cash; you know, especially we expect to in Q4 from collection of receivables. But I think that will -- some of that negative comparison will hang around for another 3 to 6 months, but it will diminish.

Okay, that's helpful. And then the Tubular business on the coating side, is that business becoming any more competitive at all? Or is it just all the margin decline was due to the plant improvements that you talked about, and then maybe just lower volume overall?

I wouldn't describe it from our standpoint as really having any changes in the competitive landscape. You might hear something different if you were to talk to people in the pipe business, because there's some capacity coming on from people that are making the steel pipe. They might think it's a little more competitive. And in our case -- including, in fact, foreign pipe that comes into the market.

But in our case, we are coating the pipe. So we are in the converting end of it. And there's always enough competition; it keeps some pricing pressure on. But I wouldn't describe it as a changing competitive landscape compared to what we have seen out there now for the last few years.

Okay. And how much did the plant improvements cost you in the quarter? Did you give an estimate for that?

Oh, no. I really didn't put a summary of that together. But what we did is -- when we believed that this order input pattern would be short-lived, we wanted to hang on to our hourly workforce. We didn't want to lose the skill we had in that plant, and we just took the opportunity to perform a good deal of maintenance. We kept several heads on in the factory that you wouldn't otherwise keep if it was just volume-related.

So it's purely a volume issue. And if you want to think of it this way, we kept our headcount relatively flat in the plant while volume was off considerably. So we expect that volume to come back up to where the headcount levels are justified.

Good. And just one final one for me. I don't think I heard you comment on your 2013 guidance that you previously gave for revenue and EPS. Is that guidance still good, in light of today's report?

Yes. In this particular call we thought that there wasn't really a need to come back to that subject. In fact, we are thinking about just being on a routine where we'll give a midyear update, which we did last time; that with it -- that as we look at where we are today, we felt was accurate guidance for the balance of the year, and nothing new to cause us to change that.

(Operator Instructions) Ben Oveson, D.A. Davidson.

I was just wondering what your tax rate would be going forward?

We would expect it to be in the 34.5% to 35% range.

Okay, thank you. And then one last one on your oil and gas projects. What's causing those to be delayed?

Well, the best that we can put our finger on is these end users are making adjustments in their project schedules. And they do that for a variety of reasons. Sometimes it's gas prices; sometimes it's inventory; sometimes they are trying to time the market with regard to the cost of product, like the actual coated pipe that they are buying. We believe that there's -- all of those things are at play. Sometimes they are shifting resources between some of the areas where they do this work, and we are stronger in some areas than others.

So there's actually a number of things at play. I think from our standpoint, we don't feel like we can point to any one item that is really driving the delay but a variety of different things that they wrestle with all the time. And sometimes it goes down like this, and sometimes it rockets back up like it was last year. But they can move things around with sharp changes on us from time to time. It's not uncommon.

At this time, we have no other questions. I would like to turn the call back over to Mr. Robert Bauer for your closing remarks.

All right, well, that was a brief one. I hope that's because we were clear and everything is easy to understand. I appreciate you joining us this quarter. And it looks like the next time we'll be talking will be in 2014.

So we'll look forward to that, and we'll look forward to laying out some details about how we see 2014 unfolding at that point. So thanks again for joining us and have a good day.

And ladies and gentlemen, this concludes your presentation. You may now disconnect.