L.B. Foster Company (FSTR) Q1 2012 Earnings Report, Transcript and Summary

Good day ladies, and gentlemen, and welcome to the Q1 2012 L. B. Foster Earnings Conference Call. My name is Tracey and I’ll be your operator for today. [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed, sir.

Thank you, Christie. 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 2012 operating results. My name is David Russo and I am the Chief Financial Officer of L. B. Foster. Hosting the call today is Mr. Robert Bauer, L. B. Foster’s President and CEO. This morning Bob will provide an overview of the company’s first quarter performance, give an update on critical business issues and discuss marketing conditions. Afterward I will review the company’s first quarter financial performance and then we’ll 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 7 days. During today’s call our commentary and responses to your questions may contain forward-looking statements, including items such as the company’s outlook for 2012 and beyond, our thoughts regarding the concrete type product claim, 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 do undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information or future events. All participants are encouraged to referred L. B. Foster’s Annual Report on Form 10-K for the year ended December 31, 2011 as well as to other documents filed with securities and exchange commission for additional information about L. B. Foster and to learn more about the risk factors that may affect our results. Additionally, while forward-looking statements will be made today, L. B. Foster does not provide the specific earnings guidance. With that we will commence our discussion, and I will turn it over to Bob Bauer.

Thank you, Dave, and then thank you, everyone, for joining us this point. I’m happy to report that overall it was a very good quarter for the company and I’m very pleased to announce our earnings per share of $0.33 for the quarter. I want to begin by thanking our employees for their efforts delivering another solid quarter with numerous programs underway that ended up improving operations and customer focus in the company and I’m happy to report that our customers satisfaction ratings remain very high, which I think is indicative of the order input that we’ve also had in the first quarter. We reported sales of $180 million on bookings of $175 million. I was particularly happy with the bookings number, which is up around 7% over the prior year, which helped us increased backlog $56 million in the quarter. And as Will did discuss, together the rail and tubular products businesses are doing very well. They helped us make up for a weaker than expected construction market and are really the drivers in this quarter’s operating results. I'll go through each of those 3 businesses briefly here before Dave covers more information on the financials. The rail business sales were up 7.2% and we continue to benefit from continuing strength in the capital projects and maintenance programs with the class one railroads. Spending was strong for them in the first quarter, which we think was helped by mild weather and the fact that they could pull some of these projects forward and get started on them a little bit earlier. Activity with our core rail distribution business and our insulated joint products was very good, our backlog in the concrete ties product line for 2 facilities is very strong, in some cases with backlog that goes out into the last quarter of the year. The pipeline for projects continues to look good; even in the transit market it's showing signs of modest improvement over the months ahead. The only real negative sign that I saw was the drop in coal shipments in the quarter, which was down almost 10% in the U. S., although Canada was up around 13%. We did see some impact from this in our production management products, which rely heavily on the coal routes. At the same time, though, we saw increases in other commodities that run over the rail lines, vehicles included, other metals, petroleum products, including oil, all of which were helping to make up for the shortfall in coal. So the revenue ton miles and the other measures that the rail lines used all look pretty strong. And our sales outside of North American and U. K. were also strong in the quarter despite the fact that most of the news that you see out of the U. K. isn’t very optimistic. We had a good quarter there. We have great products to launch in the coming quarters in this particular market segment. We’re making some progress with OEMs around the world in putting some of our friction management products on cars that will help us serve the aftermarket with friction modifiers. So all of that I expect will help us going forward into the rest of the year and then the coming years ahead. You’ll get a detailed report on margins, but as reported, our margin improvement was helped by some costs last year, but operationally we had at least 200 basis points of margin improvement from real operational programs in our manufactured products, where material costs were favorable, cost reductions were helping us in this area, productivity programs and our operations are also contributing to that. And I feel pretty comfortable about our ability to maintain price above inflation, which also looks like it's in pretty good shape as well. Turning to the construction business, this quarter remains soft as we had expected, down around 14% year-over-year largely driven by the core piling business. The internal non-residential construction market still seems to be struggling to get some momentum particularly in the heavy civil projects that require government spending, which is where we participate the most. However, the non-residential construction for industrial manufacturing, that outlook is improving. Some are even forecasting around 17% growth in 2012. We're beginning to see some success in that market here in the last quarter, where we were getting some business from energy companies that are actually building new industrial facilities and we picked up some business there. So I look forward to continuing to try to focus on that market, to try to make up some of these other heavy civil projects. Our year-over-year comparison, though it’s not all market related in terms of being softness in the market, we did suffer from some supply chain issues with the availability of product from a strategic partner that did cause some loss in business. We estimate that it cost us around 2 million sales in the quarter. We think we’ll have that problem behind us in another quarter, but that caused us more than a few points of growth year-over-year. So despite the challenges in the market, we were able to keep our gross margins up. They're up 30 basis points over the prior year and, once again, and I think with that indication of gross margins, we’ve been able to make sure that our pricing is covering inflation and we’re not getting any compression there between price and material costs. Finally, in the Tubular Products business, we had a great quarter. Sales up 61% and the demand in the oil and gas markets for our Coated Products is extremely strong. We’ve been able to respond to this-- with this increase with our existing capacity. We still have more capacity to handle growth, latter part of the year and in to next year. I believe this market will have some strength in the foreseeable future, everything you hear about both exploration and the transport of products through our Coated pipe looks good. I’m not going to project that that growth rate will be the same as what we saw in Q1, but we’re certainly bullish about what that market can produce for our Tubular Products business. The Threaded Products business, which mainly serves the agricultural industry, is also strong. We completed the start-up of our new facility in Magnolia, Texas. We have all of our operations now under one roof, that’s going to bring greater efficiency in our operations. And our joint-venture facility which is next door to that one, for coupling products, is also making a nice contribution to that business. And our ability to perform well for our customers with these 2 facilities side-by-side has become obvious to us. And needless us to say from a margin standpoint, the sales increase brought some nice margin leverage with it in the quarter. Dave will talk a little bit more about cash flow in the quarter. I'll just say, inventories were up in the quarter, we used cash in the quarter, around $2 million, and the bulk of that or good part of that was with inventory. It’s not unusual to build some inventory in the quarter as we get ready for the increase in seasonal business. We’re still holding a little more than I’d like to see us have and there is more opportunity for us to reduce this going forward. And I’m sure that will be a contribution to cash flow in future quarters. I didn’t really have any comments that I thought I would add today on the legislation subject, there is really been no activity to report on whether it’s tax legislation or the surface transportation bill. So really no news to update you on there. I’ll close with a comment on Union Pacific. We, in our press release, included the status reported in there which essentially looked the same as the report last quarter. That’s because of South Union Pacific claim is essentially the same as the last quarter. It's mentioned in that press release, we will complete the analysis and evaluation in the quarter that we’re in now. I expect to report on the resolution of this matter in the next quarter. And I will look forward to getting that behind us and reaching a successful conclusion with Union Pacific. So that dialogue continues, but it would be premature for us to say anything about it at this point until we reach 100% conclusion on the matter. So I’ll ask for your patience on that subject for another quarter and hopefully my report next time around we’ll satisfy your concerns with that. So with that, I’ll go ahead and turn it back over to Dave and he’ll cover a few more details in the financial reporting.

Okay. Thank you, Bob. Sales for the first quarter of 2012 were $118.5 million compared to $117.1 million in the prior year, a 1.2% increase. The sales increase was due to a 7.2% increase in rail product sales, a 61.7% increase in tubular product sales that was partially offset by 14.4% decline in construction product sales. The rail sales improvement was principally due to increases in rail distribution and our Allegheny Rail Products line. Concrete tie sales were essentially flat as the decline caused by the closure of CXT’s Grand Island facility was offset by increases at our Spokane and Tucson facilities. The tubular product sales increase was due to sales increases in both tubular divisions, Coated Products as well as Threaded Products, which were driven principally by volume increases. The construction product sales decrease was principally due to a decline in sales of piling products as well as a decline in sales of our fabricated products businesses, partially offset by small sales increase in our concrete buildings division in the first quarter of this year. As mentioned in our earnings release, backlog stood at $201.7 million at the end of the first quarter, up $56.3 million from December of ‘11, but down $35.4 million or 15% from March of 2011. This year-over-year decline was due principally to the construction products backlog decline, which was down by about 38%, partially offset by increases in tubular products and the slight increase in our rail products backlog. The trend on bookings has been positive, as new orders received during the first quarter of ‘12 increased by 7.1%, as Bob mentioned, compared to last year. This increase was due to strong bookings in our rail products group, which increased by about 30% over the prior year quarter. Construction segment bookings declined by about 24% and Tubular segment bookings declined by a little bit as well. The construction markets in which we participate ended the first quarter mixed with heavy civil construction down about 1%, and other non-residential construction up almost 5%. Our visibility through the remainder of this year is still a little bit cloudy with regard to construction due to a lack of a new transportation bill and an uncertain rebound in non-residential construction, which we believe is bottoming or already may have bottomed. Regarding our rail business, capital spending among the Class 1 railroads was stronger than expected during the first quarter of 2012, as it was well above 2011’s first quarter spend. We anticipate continued year-over-year spending increases, although probably at a more subdued rate than quarter one. We are also seeing some projects come forward in transit and industrial markets, although we are not sure that they will be actually built, given the uncertainty and various funding sources. Our Tucson tie facility is operating between 90% to 95% of capacity for the Union Pacific Railroad. The Tucson’s supply contract with the UPRR expires at the end of the 2012, and we are working to extend that agreement in the coming months. 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 in bidding activity and we’re close to capacity at that facility as well. Our Spokane facility reported very strong sales and profitability in the first quarter, and we expect that strength to continue throughout the remainder of this year. Our Union Pacific Railroad product claim disclosure in the earning release, as Bob mentioned, contain no changes from our fourth quarter earnings release in February. Our numerous tests and analyses, and overall testing process has been very purposeful and thorough. While many tests are still ongoing, we believe the majority of them will be completed during the second quarter, and we will have adequate results from which to conduct meaningful discussions with the UPRR. Thus far, our test results have not indicated any appreciable defects and workmanship or significant deviations from specification. As mentioned in our earnings press release, much of the testing is not complete and therefore the results of those tests have not yet been analyzed and conclude since not drawn. As a result, we have not recorded any charges in the first quarter for this claim as it is impossible to reasonably estimate the liability if any we might have. As a percentage of this quarter’s consolidated sales, tubular accounted for 8% of sales, construction was 34% of sales and rail 58%. Now, Bob gave me an update on gross profit margins. Gross margins were 19.3% in the first quarter of 2012, an increase of 440 basis points from last year. That increase was due principally to increase selling margins across all 3 of our segments and amounted to about 200 basis points. $2.5 million expense in 2011 first quarter related to the sales inventory, that was written up to fair market value as a result of the Portec Rail Products acquisition and lower manufacturing costs. Turning to costs and expenses, selling and administrative expense increased by $1.8 million in the first quarter of 2012 or 11.7% compared to $217.5 million. This was -- this increase was primarily due to concrete tie testing expenses and increased salaries and benefit costs. Selling and administrative expenses represented 14.8% of sales in the first quarter of 2012, compared to 13.4% of sales in the first quarter of last year. Amortization expense in the first quarter was $0.7 million, flat with the prior-year. This expense is principally related to definitive live intangible assets, originating from the Portec acquisition, which closed in December of 2010. As provided in our earnings release, we did disclose a calculation of adjusted EBITDA which we believe has been meaningful and is meaningful for company which has made a significant acquisition, as it compares results of operations excluding certain non-cash items to provide yet another measure that reflects how a business is performing. For the first quarter of 2012, adjusted EBITDA was $8.2 million compared to $6.5 million in the prior year, a 26.8% increase. As a percentage of sales, adjusted EBITDA was 6.9% of sales in the current quarter versus 5.5% in the prior-year quarter. First quarter 2012 pre-tax income was $5.1 million, compared to $1 million in last year’s first quarter, an increase of $4.1 million or more than 400%. The first quarter 2012 effective income tax rate was 33.9%, compared to 31% in the first quarter of last year. The increase in the rate was principally attributable to UK rate changes that lowered the prior-year quarter rate by about 300 basis points. Net income was $3.4 million or $0.33 per diluted share, compared to $0.7 million or $0.7 per diluted share last year. Turning to the balance sheet. Data at the end of the first quarter was $1.1 million, compared to $2.4 million at the end of 2011, a $1.3 million decrease. Cash used in operating activities in the first quarter of 2012 was $2.4 million, compared to cash used in the prior-year of $3.4 million, a $1 million improvement. Capital expenditures were $2.5 million in the first quarter of this year compared to $2.9 million last year. CapEx for the first quarter of this year or for items such as our new threaded pipe facility in Magnolia, Texas, new plant and yard improvements, as well as equipment in a couple of our facilities that we have been improving, our Niles and our Columbia city facility in Indiana, and our new friction management facility in Vancouver, British Columbia. As in prior years, we anticipate that our 2012 cash generation from operating activities will exceed capital expenditures, schedule debt service payments and share repurchases and dividends. Cash at the end of March 2012 was $67.8 million, which was invested principally in AAA rated money market funds and other short-term instruments for preservation of principle, and quick access to funds has been the priority. Working capital net of cash increased by $10.2 million compared to December of 2011, and increased by $8.3 million compared to March of last year. Accounts receivable decreased by $6.6 million compared to December 2011, while DSO was at 45 days. We believe our AR portfolio remains in very strong condition. Inventory increased by $3.9 million during the first quarter of ‘12, while accounts payable and deferred revenue declined by $8 million. Looking forward, we believe that we will continue to experience a continued competitive environment in construction markets that we participate in, as only slowly improving state and local budgets and no reauthorization of the transportation bill provide headwinds in an already weak market. While we hold out hope that Congress remove a new transportation bill ahead, many unresolved issues remain that continue to make passage this year problematic. However, reasonable Class I railroad volumes, robust financial results and announced strong plans for capital expending in 2012 bode well for our rail segment. Finally, we expect our Tubular segment to continue the upward trend we saw in 2011 and the first quarter of 2012, as we move into our new threading facility and work closely with our joint-venture partner, and as new natural gas demand continues to grow. That concludes my comments on the first quarter of 2012 and we’ll now open up the section for questions. Christie?

[Operator Instructions]. Your first question comes from the line of Liam Burke from Janney.

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

Yes. There is clearly more opportunity beyond just coal. What I was commenting on was the fact that-- and it wasn’t weather related, it was actually just based on the amount of coal that gets moved on the rail lines, which accounts for about 45% of the volume in the real business. So the fact that those shipments were down in the U. S. 10% while they’re up in Canada, what it means is if you are putting friction management product on the heavy coal lines, which is where we get a fair amount of our business, we weren't seeing as much traffic there. So the replenishment of some of the friction modifiers we put on the rail was lower than we thought we would normally see. So it was really related to the traffic on those lines more so than it was the weather. But we get friction management sales direct from OEMs as -- and we’re in both the lubricant products or the friction modifiers, as we call them -- as well as the equipment to lubricate the track. So it’s not all related to traffic.

And how did the Salient do this quarter?

Salient, their sales were still low. We haven’t seen the uptake in that business yet that we would like to see. There is a next generation product that we are working on that we would like to see finished by the completion of the end of the year. That will improve our cost position. There is a future generation of software that is included with that, that will take it to the more state of the art operating system, as well as improve the database management function of it. We think that’s going to give us a boost and is going to attract more people, but we also need to get some business outside at the U. S. on that product line because our penetration rate in the U. S. is up at a point where -- we’d really like to start looking outside the U. S. for additional growth opportunities. Our business leader with salient, in fact, was just in Brazil, and there is some optimistic news coming from customers that we're after in that particular market. So, we are beginning to turn our attention there for what we think will be good growth opportunities. But I would tell you that this business is-- the sales are still below where we would like to see them, we are still funding this business, but we believe it is the right kind of business for us to fund, it’s got great technology and it should be able to help the rail companies improve their operations in the long run.

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

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

Your next question comes from the line of Brent Thielman from DA Davidson.

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

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

And should we take that as a sign that sort of pricing isn't getting any worse for you guys. I know it’s been tough through this downturn, but is that a reasonable sign?

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

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

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

Okay. Okay, interesting. And then on the tubular segment, real nice contributions there as well, just curious how will that -- I guess the new threaded facility sort of impact margins and profitability as that plant ramps up?

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

Okay. Then just last one for me, and Dave, I’m sorry if you already said this, but on SG&A, were there significant costs associated with the claim that sort of inflated SG&A this quarter?

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

Your final question comes from Scott Blumenthal from Emerald Advisers.

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

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

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

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

Okay.

All of that still needs to be finalized.

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

That’s actually getting down probably a little too granular for the type of guidance we give, especially with regards to margins, Scott. It represents perhaps half of that segment. But what we can tell you is that Threaded margins have improved over the past couple of years and this is the next step to take that next leap and step-up as far as our margins in the tubular business goes. So, we just had a call where a caller asked about especially the move to Magnolia, and we expect that remainder of this year to be somewhat consistent with the first quarter results and any step-up in improvement really is going to probably come next year.

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

Maybe we ought to start by saying, we don’t really share customers between the coating and the threaded business. The bulk of our coated products go into the oil and gas and pipeline markets. And our threaded piping goes into largely water well applications in the agricultural market. So, we really serve those 2 markets with 2 different channels, so there really isn’t any overlap in terms of the go-to market with those 2 products.

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

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

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