L.B. Foster Company (FSTR) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the L.B. Foster Earnings Conference Call. My name is Erica and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now like to turn the call over to David Russo. Please proceed.

Thank you, Erica. Good morning, ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the company’s fourth quarter 2012 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Hosting 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 fourth quarter performance, give an update on critical business issues, and discuss market conditions. Afterward, I will review the company’s fourth quarter financial results and in certain cases, our annual financial performance, and then Bob will close the review by discussing our 2013 outlook, and then we’ll open the session up for questions. Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the Investor Relations page. This webcast will be archived and available for 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 2013 and beyond, our thoughts regarding these outlook items on our markets, cash flows, margins and capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revisions to these statements in light of new information or future events. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year ended December 31, 2011 as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the risk factors that may affect our results. With that, we will commence our discussion and I will turn it over to Bob Bauer.

Thank you, Dave. Good morning, everyone. Thank you for joining us. We’ll report on 2 periods with our announcement this quarter. First, our results for the fourth quarter, and second, our results for the 2012 year. And in this section we’ll speak mostly to the year’s results adjusted for the costs related to concrete tie warranty claims we have discussed in prior quarters. The fourth quarter was a nice finish to the year. Sales increased 5.2% over last year driven by continued success in the Rail and Tubular businesses. Rail business sales were up 23% over prior year, while Tubular sales were up almost 49% in Q4. And the strong performance helped us overcome the continuing difficult environment we faced in the Construction business with sales down almost 28% in the quarter. The construction market has continued to suffer from lack of new investment and transportation infrastructure as well as improvements that usually rely on state and federal funding. However, throughout the quarter we did see improving order trends in Construction. Our Buildings business has leveled off and is no longer declining. Our Bridge business has worked off quite a bit of backlog in the last 12 months, which will make for tougher comparisons over the next year, but we do have some encouraging projects we are bidding right now. And so we are getting more upbeat on the future of Construction, particularly in light of the low spending levels we are at and I’ll say more about that in our future outlook later in my remarks. So, we are exiting the year with a total company backlog of $211 million, that’s 50% above the level we exited 2011. So, while the bookings number for the quarter is below last year’s Q4, we have really had a pretty good order activity throughout the year. It’s not uncommon for us to have wide swings from one quarter to the next, which is why we avoid too much focus on any one quarter. So, turning to profitability before I comment on profit margins in that area, I want to remind everyone that we divested 2 businesses this year, our Shipping Systems division in June and our Precise Bridge business in August. So, you will hear us focus on continuing operations numbers to better reflect the future company. For the quarter, we reported EPS of $0.65 on a continuing operations basis, up 14% over the prior year. Our net income on this basis for the quarter was $6.6 million that was up 14% as well. And our before tax income was up 19% to 7.7% of sales, which is 90 basis points above last year. I was really pleased that our Rail and Tubular businesses could so well and make up for the challenging environment we had in the Construction market. We are seeing some favorable profit impact from the fact that Rail and Tubular are growing, while Construction is not. This has been a benefit this year which I expect to see reverse next year as Construction rebounds. Achieving 7.7% pre-tax margins for the quarter, those put us in a much improved position versus last year, where we were at 6.8%, and that’s left me feeling pretty good about the current operational performance of the company and our ability to fund growth programs going forward. From a cash standpoint, as we ended the year, we recognized several items in the fourth quarter that had a substantial impact on Q4 cash flow, a number of project schedule delays affected inventory as customers wouldn’t take possession of product we were able to ship. Second, we booked a few nice construction orders in which we had to bring material in for early first quarter shipments. And third, we reconciled a large portion of the concrete tie replacements in the field for which we booked charges during the year. So, we’ll talk more about the details of that as some of our comments unfold here. I do have to say that inventory did not improve this year. This has already become a focus area for 2013. We did do a nice job on receivables through the year and payables will become another area of increased focus going forward. We have a lot of opportunity in this area, but the net result is we did finish the year with an additional $27 million in our cash position over last year. So, let me turn my attention and comments toward each of the 3 segments of our business. I thought I would combine my fourth quarter and full year comments regarding the business segment as there is quite a bit of overlap in the 2. And one of the consistent overlaps is the benefit we are seeing from energy investors in the U.S. As gas production increases across the shale gas regions, both our Tubular and Rail businesses are benefiting. It’s more obvious with our pipe products in the Tubular business of the impact, but the rail companies are making up for shortfalls and coal carloads with carloads of petroleum products, liquified gas, frac sand, other materials needed for fracturing. This development is really affecting transportation as well as the energy space and that is good for us. So, specifically with the Rail business while there has been a lot of talk about coal transport being off, the increases in automotive, industrial, intermodal and energy commodities are all making up for the unexpected decline in coal traffic. We turned in another excellent year of results in this business, wrapping up the year with 23% growth in Q4 to finish the year with $370 million in sales, which is 17.5% over 2011, clearly exceeding our expectations when we started the year and it was a year which started with a fair amount of uncertainty. Class 1 capital spending by the rail companies was up 8% for the full year. I think all of those companies still have a generally bullish view of the market although I expected them to report more conservative spending plans for 2013 as they sometimes typically do. We have also benefited from winning some key projects at short line railroads and transit projects. In fact, a large part of our growth is from the new Rail Distribution business and concrete ties, both of which had a good quarter and a good year with a lot of help from transit projects. In fact transit ridership continues to grow having reported increases in each of the last 10 quarters. This was also a year in which our strengths really helped us succeed. Our Rail Distribution business led the way with over 34% growth for the year further illustrating our strong position in serving the smaller markets and transit agencies. Our sizable projects drove double-digit growth in most all of our core rail products for the year. Our Concrete Tie business was up almost 20% this year, and Transit product was up over 25%, and maybe as important as any of those, we’ve demonstrated that we can have success at total solutions and bringing multiple products and services to a project by being the single source for core track components on the Honolulu transit project, I think this was demonstrated by the fact that the prime contractor saw this as a key benefit to managing the project and running a more efficient supply chain process. And of course we earlier reported that we had booked the largest order for the history of the company with that so, I feel pretty good about that. We did see some of our strongest growth in product lines with lower gross margins and subsequently realized lower gross margins in Rail in Q4. Our new Rail business has a significant unfavorable margin mix and when growing 73% for the quarter and 35% for the year, it’s made a significant impact on reported gross margin for that business segment. And the Transit products business is also affecting these results as product began shipping in Q4 for the Honolulu project, but there is also a significant impact from inventory costs and the year-over-year comparison and Dave’s going to cover that as he makes his comments. For the Tubular products business had another great quarter and a great year. Tubular product sales were up 48% in the quarter and 51% for the year. We thought growth would moderate somewhat as the year progressed, but it remain pretty strong and the real driver behind this robust growth is the Coated products business, it’s primarily serving the midstream gas pipeline markets, that just continue to invest. Despite the current low price for gas, I believe there is a long-term bullish view of the role of -- that this commodity will play and investment continues to follow that trend. Our Threaded products division also had another very good year considering the normally slower growing agriculture market we serve, it seems that the drought conditions lately are actually helping us. We first started with depressed spending since the users are seeing tough times, but instead is driving the need for more irrigation to compensate for those conditions. So we continue to benefit from the sales growth and leverage of volume in this segment. We also had a favorable mix of product with our high end abrasion resistant coatings. I believe margin, it’s in this business though, have peaked as we dial back the growth rate somewhat in the coming year and won’t see as much leverage benefits from volume growth. Also, we must make some investments in capacity in the coming year to keep up with demand and we’ll see capital spending increase and other assets increase over the next 24 months, but finally, we are exiting the year with $11 million in Tubular products backlog and that’s really good for this business segment. So, looking then finally at Construction, the Construction business finished the quarter with sales down 28%, and the year was down 26%. Our Buildings business has leveled off and was flat in Q4, but our Bridge business and piling were well off last year’s volumes. We began seeing an upturn though in piling orders in the last part of the year before the normal seasonal impact took place and for us, this is one of the best indicators of improving conditions, supporting our belief that the overall construction market will improve in 2013 once the normal seasonal low period is behind us. We maintained a pretty healthy GP in this business and Q4 is only down 70 basis points from last year and the full year gross margin was 14.8% also down 70 basis points in what was a pretty tough market. The sales decline though was too significant to overcome to deleverage from our fixed cost so, our pre-tax margins fell 250 basis points as a result of that, but we should regain this once volume returns to prior levels. So with that, I’m going to turn it back over to Dave, he will make some further comments on these results and then we’ll talk a bit about 2013.

Thank you, Bob. Sales for the fourth quarter of 2012 were $140.7 million compared to a $133.7 million last year, a 5.2% increase. Sales improvement was due to a 23.2% increase in Rail segment sales and a 48.6% increase in Tubular segment sales which were partially offset by a 27.8% decline in Construction segment activity. The Rail segment sales improvement was principally due to a 73% increase in Rail Distribution sales and a 129% increase in Transit product sales. The aforementioned sales increases were largely due to unit sales increases. The Tubular segment sales increases were also principally volume related. The Construction sales decline was due to reduction in sales of piling products and fabricated bridge products. Full year 2012 sales came in at $588.5 million, up $13.2 million or 2.3%. This increase was driven by a 17.5% increase in Rail sales, 50.8% increase in Tubular, partially offset by 25.7% decline in Construction segment sales. The 2012 Rail sales increase was again due to Rail Distribution, Transit products as well as concrete ties, all of which again principally volume related. The Tubular increase was due principally to our Coated division and to a lesser extent increases at our Threaded products division. The Construction decline was due principally to across the board double-digit reductions in piling, fabricated bridge products, as well as concrete buildings. As mentioned in our earnings release backlog stood at $210.9 million at the end of the fourth quarter of 2012 up $70.6 million from the fourth quarter of 2011 and down 6.5% from Q3 of 2012. The year-over-year improvement is due to a 109% increase in our Rail segment backlog and a 3% increase in Tubular segment backlog which was partially offset by a 6% decline in Construction segment backlog. Fourth quarter bookings were down 6.7% compared to fourth quarter of last year. Both the Construction and Tubular segment bookings declined compared to last year’s fourth quarter, while Rail bookings increased somewhat. While we are disappointed that this decline breaks the streak of 7 quarterly year-over-year increases in overall bookings, we also recognize that our quarter to quarter booking activity tends to be rather lumpy given the nature and magnitude of the types of projects that are being bid. Heavy civil construction, which is a key end used market for our Construction product segment, has experienced erratic performance throughout this year. This widely dispersed sector was up overall by 7.3% at the end of the 2012 mostly due to the power generation market. Spending in highways and bridges were flat but the conservation and development sector where our piling products have significant exposure was off by 17%. Regarding our Rail business, capital spending amongst Class 1 railroads increased by 8.1% in 2012 as compared to 2011. During the fourth quarter our Tucson tie facility operated at between 85% to 90% of capacity. As we announced in December we did reach a multi-year extension of the Tucson concrete tie supply agreement with the Union Pacific Railroad. In Spokane, we are producing concrete ties for transit authorities, Class 1 railroads, contractors, and industrial customers. We continued to see robust inquiry and bidding activity and the Spokane facility is highly utilized as well. Our Spokane concrete tie facility did turn in another very strong performance in the fourth quarter and we anticipate a comparable 2013 performance from that division. As a percentage of this quarter’s consolidated sales, Tubular accounted for 9%, Construction was 26% of sales and Rail 65% of sales. Gross profit margins were 19.6% in the fourth quarter of 2012, a decrease of 20 basis points from last year's fourth quarter. The decrease in margin was due to the sales of lower cost inventory in the fourth quarter of 2011 that resulted in higher margins which was partially offset by a $1.8 warranty charge taken in last year’s fourth quarter as well as a favorable fourth quarter year-over-year swing in LIFO adjustments in 2012. Gross profit margin for the full year 2012 was 15.7% compared to 17.1% in 2011, a decline of 140 basis points. Excluding the concrete tie charges incurred in both years, gross profit margins would be 19.4% in 2012 compared to 18.3% in 2011, an increase of approximately 110 basis points. Selling and administrative expenses for the quarter decreased by $0.4 million or 2.4% to $16.5 million, the decrease was due to a reduction in concrete tie testing expenses and favorable bad debt expense partially offset by increased salaries and incentive costs. S&A represented 11.7% of sales in the fourth quarter of 2012 as compared to 12.6% of sales in last year’s fourth quarter. For the full year, selling and admin expenses increased by $1.8 million or 2.8% due principally to concrete tie testing cost increases as well as increased salaries and incentives, which were partially offset by a favorable bad debt expense. As a percentage of sales, full year selling and admin expense was flat at 11.3%. Fourth quarter pre-tax income was $10.8 million or 7.7% of sales compared to $9.1 million or 6.8% of sales, an increase of $1.7 million or 19%. For the full year, pre-tax income was $23.8 million compared to $32.7 million, excluding the impact of charges related to the Grand Island manufactured concrete ties for both periods, pre-tax income would have been $45 million or 7.6% of sales compared to $39.6 million or 6.9% of sales. As mentioned in our earnings press release, the effective tax rate for 2012, the full year was 38% compared to 32.4% in 2011. The difference in rate between the years is due principally to the mix of earnings weighted heavier towards higher rate jurisdictions in 2012, certain discrete items recorded in 2012 that increased the provision and the receipt of state tax refunds in 2011 which brought that rate down below the statutory rate. Going forward, our rate should be in the 35.5% to 36% range. Full year EPS from continuing operations was $1.44 per diluted share in 2012 compared to $2.14 per diluted share in 2011. Excluding the impact of charges related to the Grand Island manufacturing concrete ties for both periods, diluted EPS would have been $2.72 in 2012 versus $2.59 in 2011, an increase of 5%. Turing to the balance sheet, debt at the end of the fourth quarter was $62,000 compared to $2.4 million at the end of 2011 a $2.3 million reduction. And I believe this will be the last quarter that we even mention debt for a while. Cash generated by continuing operating activities in the fourth quarter of 2012 was $1.6 million compared to $20.8 million in the prior year, a $19.2 million unfavorable comparison. This is a result of a number of items that transpired in the quarter and I’ll take a little time to review those. The first and most significant was inventory, we saw an uncharacteristic increase in fourth quarter inventory of approximately $16.3 million and this increase relates to a few key items. The first relates to our elevated transit project in Honolulu that Bob mentioned a little while ago. We basically had to have inventory delivered in Q4 for fabrication before shipment to Honolulu. This amounted to approximately $8 million and this will gradually reverse itself during 2013. Second is that we had several projects both in the Rail and Piling Distribution businesses that were supposed to ship in Q4 but did not. These projects caused inventory to be approximately $10 million over our expectations. The other large item was a cash payment that was made related to our Grand Island concrete tie warranty claim. We made a cash payment for certain ties that were already replaced by the Union Pacific over the last 2 years that were a part of their original claim. And since they had purchased the ties to use in their replacement program they did not have the need for as much replacement product. So we paid cash to recognize a portion of the replacements that had already occurred. This in no way changes our estimate of the liability required to fulfill the warranty claim over the next several years and the cash payment that was made in Q4 was $12 million. Capital expenditures were $800,000 for the fourth quarter of 2012 compared to $3.8 million in the prior year quarter. Our year-to-date capital expenditures in 2012 totaled $6.3 million compared to $11 million in the prior year. Our CapEx for 2012 was for items such as our new friction management facility in Vancouver, British Columbia, our new threaded pipe facility in Magnolia, Texas, and various new plant and yard improvements and equipment, also computer network and telecom equipment and mobile equipment. We anticipate that the company’s 2013 capital expenditures will range between $10 million and $12 million. As in prior years, we anticipate that our 2013 cash generation from operating activities will exceed capital expenditures, debt service payments, dividends, and share repurchases. Cash at December 31, 2012 was $101.5 million, which was invested principally in AAA rated money market funds and other short-term instruments where preservation of principle and quick access to funds has been the priority. Our working capital net of cash increased by $10 million during the quarter and increased about $1.4 million for the year. Accounts receivable decreased by $6.8 million compared to December of last year. And our DSO decreased by 6 days to 41 days from 47 at the end of last year. We believe our AR portfolio continues to be in very good condition. Inventory increased by $17.6 million during 2012 with $16 million of that increase occurring during the fourth quarter as I noted a short time ago. Accounts payable and deferred revenue increased by $1.9 million during that same period. So, while our working capital efficiency fell off a bit in the fourth quarter, we end 2012 with a very strong financial position and with the opportunity to still make significant improvement in 2013. That concludes my comments on the fourth quarter and annual results of 2012. I will now turn it over back to Bob who will discuss our expectations for 2013.

Thanks, Dave. I wanted to provide some insight for 2013 and I’ll start by saying that there are 3 major themes in 2013 that are in our plans. One, we expect to see some improvement in the Construction market, therefore, our Construction business segment sales. Second, we have some headwinds in GP from business mix and as well capacity cost and startup costs for some new products that are going to affect the cost of the business. And third, the profitability and cash position of the company is good and we’ll turn our attention to investing this year since we believe we should be clear of disruptive economic conditions that would concern us otherwise. We are currently projecting top line growth for the year to be between 5% and 6.5%. We should see a rebound in the Construction segment and are depending on this business to achieve at least 10% growth in 2013. We are still very dependent on heavy civil construction projects, most of which are government funded to some extent and often geared toward transportation infrastructure. While there will be continued pressure on government budgets, the state of the U.S. infrastructure coupled with the current low levels of spending lead us to believe that our forecast for 2013 is reasonable. Also we are coming off of 2 incredibly strong years in Rail and Tubular products, and we think it would be wise to suggest these markets will moderate. As the Class 1 rail companies report expected capital spending for 2013, there are mixed results in the direction we see. Some will keep capital spending as a percent of sales at the same levels. Some have more aggressive plans. And some are actually reducing the amount of capital project. There is no question that the industry is healthy and capable of investing more. However, each of them has their own objectives and priorities. In our Tubular products business, we will face expanding capacity in the market and our need to expand production capacity ourselves, both coated products and threaded products should be in good shape, but we will create lower growth plans this year in coated in order to prepare for the capacity changes that we need to make. From a standpoint of profitability, when excluding the warranty charge, achieving $2.72 a share and $45 million of pre-tax income for 2012 in my view was quite an accomplishment. We have lifted the profitability of the business levels now to 7.6% pre-tax margins. We expect the inflationary environment to remain low and pricing to remain stable throughout 2013 at this point. But there are a number of reasons for margin improvement to be modest in the coming year, not the least of which is our desire to invest in our growth programs. In addition, we are planning for lower margin business coming from our Honolulu backlog, as well a lower percentage of higher end over-coated pipeline products, and also the higher mix of construction sales growth, which will essentially be driven by our piling sales. I don’t see any of this as a bad picture, but it will put some pressure on margins. We will also start some new long-term cost reduction and productivity programs aimed at helping us offset headwinds in the future while we plan to invest in growth and make sure we can boost profit margins for our shareholders. I want to emphasize we are still driving a long-term strategy with attractive EPS growth that will be good for our investors. To that end, we are focusing on investments we want to make in 2013. We have some timing issues in front of us that are creating good windows of opportunity and we want to take advantage of them. We are planning to get into a new line of bridge products. This will take some costs in 2013 and won’t produce results until later in the year and into 2014. We want to invest in selling and new product development programs in the Rail business. We see the need for more advanced technology that will help rail companies run more efficiently and improve uptime. And the sooner we can put some of these products into the market the better off we will be. And we want to make some investments in company infrastructure to support a more complex business with tools that will eventually bring operational benefits to us, especially in working capital efficiency. So, as you look at this, this will result in an increase in SG&A as a percent of sales, but not more than we are planning to cover with GP improvement, so it shouldn’t dilute pre-tax margins, but we are not forecasting much expansion in pre-tax margins this year. So the target we are looking at is around 7.6% to 7.8% pre-tax margins for the year. So, hopefully this helps you understand and plan better what our business will look like in the coming year. I do want to emphasize that we are focusing on our 5-year plan and we want to make decisions for the long-term. Some of these decisions require more long-term view and we are confident that the plans we’ve drawn up will lead us in a very good direction, which will benefit our shareholders in the long run. So, with that, we’ll conclude our comments and we can open up the lines for any questions.

[Operator Instructions]. And our first question comes from the line of Robert Kosowsky.

Yes. I was just wondering if you could mention why you think the spending in the real market really slowed down materially in the fourth quarter?

I think generally most of the times we are looking at capital spending by the Class 1 rail companies. And when they publish their numbers, we largely use that as guidance. For the most part, our view of that is it’s like seasonality, it’s project implementation plans on their side, it’s more about scheduling in our view than anything else, which is why we do tend to like to focus on the year-over-year changes rather than any given quarter, because there was no news out there, that would be an indication that any of them or all of them together are changing their view of their business. So, we watch these things quarter-over-quarter, but we tend to focus more on the year, because there is nothing that should suggest that they are making any key changes in their outlook.

Okay. And then could you talk about what your expectations are for the Honolulu project contribution in 2013?

Well, I don’t have the actual gross margin numbers if that’s what you’re looking at.

Just the revenue side.

Oh, we did have the number for what we have shipped already. It is nearly the balance of the order.

Was it good, Dave?

Yes, it probably in 2013, Rob, is going to be probably little over $40 million, $45 million, really most of it will go this year that didn’t already bill. There might be a little bit that flows into ‘14, but we think the preponderance go this year.

Okay, so about $40 million and then on the Construction side of the equation, where are you seeing some of the bids that you are putting out for? Where are you seeing that activity? Is it basically on the heavy civil side? Is it a geographic region you can point to and are you seeing a pickup on the industrial side? Because we keep hearing more about the petcham plants and whatnot being planned for construction.

Yes it is, let me say, no to the regional part of that. It’s really kind of wide spread more than anything else, but it is both in the normal market that we serve, which is more of the heavy civil market in the public areas, but it does include some industrial business. There is a lot of spending around utility companies and other industrials as you've suggested. We do see some of those on our quotation pipeline, but we also just see a general pickup in some of the commercial area as well, which was really very depressed throughout 2012.

Okay and then just kind of -- can you help me kind of frame how you are looking at the growth spending you are putting in place? Is this a multi-year initiative and what do you see that doing for the growth rate of the company in excess of what you would see from a cycle or just the market standpoint? Kind of how do you see it shaping out longer term as you’re putting some of these growth initiatives in place?

Yes, well what we have been talking about in our long-term plans is it we would like the company to grow at rates higher than the market. The target that we have set on that is 5% to 7% for the base company growth rate. We think that through the cycle when you look at the markets that we serve that, that would be a couple of points better than what the market might grow and then we are attempting to layer on top of that a few more points from acquisitions. So, our goal is that we want to try to be in that double-digit EPS growth or as we will talk more about pre-tax margins as we issue more guidance in the future that we'll be in that double-digit range when we can add acquisitions on top of it. But the spending some of it will be shorter term, some of it will be longer term, it really depends on the kind of programs that we have, but we have an enormous number of opportunities in the markets we serve as well as in markets that are adjacent to those and we want to take advantage of them and it does require some hiring. Those are probably the commitments that are more significant when you bring some people into the company and we don’t want to take that number up and down dramatically from one quarter then next year to the next so, we got to hang in there with those while we potentially see a little bit of fluctuation in the market from year-to-year.

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

I don’t see what I would call a number of small deals with that you might think of as product lines that we want to go acquire as much as more strategic initiatives that just help improve our overall competitive position in the market as well as potentially bring us greater reach into markets that I would call are underserved today by us and some of that has a geographic spin to it in markets we just don’t access. Some are right in own backyard, but others are certainly outside of the North American territory where we’re currently strong. So, we will look for technologies that we don’t have today. I particularly like the condition monitoring space that we’re beginning to get into these days that provide a greater degree of value we think to the end marketplace from we can help them understand and monitor what’s actually happening with track conditions. If we can fill that out that may be nice and then to the extent we can just be a total solutions provider and go out there in a unique way with more to offer than our competitors have who are much more oriented towards 1 or 2 product lines. We think those things will be an advantage to us.

Your next question comes from the line of Brent Thielman with D. A. Davidson.

Yes. I was just kind of curious what’s embedded in your view for Rail in terms of transit projects for 2013?

Well I think the Transit market will continue to remain in pretty good shape. We’re working on and see in the pipeline a number of still renovation projects and expansion projects, especially throughout the U.S. We are bidding on some outside the U.S. in fact we are a very notable project for bidding on in Asia. I think it will be a -- if I were to look at orders in the year -- when you look at the size and magnitude of that Hawaii project that’s probably going to be tough to beat the orders maybe from what we booked there in 2012. But -- so that's sort of that one-time huge project and we’ll see how it goes but in general in the marketplace, I think it’ll continue to be a pretty decent market.

Okay. And then just on that kind of that new investments in the capital spending side, as far as Tubular goes is that expanding on the existing site you have in terms of capacity or are you looking for the potential of a new location there as well for the Coating business, I’m assuming the Coating business?

Yes. The answers are yes and yes. Certainly expanding the existing facility that we have is something that needs to be done. But we do continually talk about our footprint and the fact that we may need to improve our footprint in some other parts of the country, it may help us from both the logistics and a cost standpoint. I will refer to that as a secondary discussion to the primary conversation which is really about expanding total output capacity meaning physical space and equipment in our primary facility in Birmingham.

Okay. And then some of the bridge opportunities that could be out there anyway to quantify would that could be for you?

I think that’s difficult to do at this point because, you never know until you are down to the final throws of these things how the bids are going to go. So, I think I’d have trouble characterizing that for you right now or might be just a little bit too risky to do. I am happy that there is projects out there and we got an opportunity to go after them. So we’ve got enough opportunity but I think we got to wait until we see how these projects shape up before we could comment more on that.

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

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

Your next question comes from the line of Mike Baudendistel with Stifel.

You mentioned that Rail CapEx for Class 1 is up 8% 2012, do you have assumption for 2013 that’s better than you rail revenue guidance?

Well, yes, we do. We are going off for the numbers that they publish out there when you put all of the different mix of the companies together it looks like that number is going to be somewhere in the low single digits, I’m going to call it at around 3%, some will say 2% to 3% in that area. But it’s roughly in that 3% plus or minus some range. And that’s what they basically publish or report those numbers on what their intentions are, that’s where we get that from.

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

Well, they don’t do the same thing in terms of putting out a capital plan in advance of the year but we do sit down. We are very close to those customers and we have a terrific position in that market. I would think at this point in time that normally they kind of follow that Class 1 level which essentially mimics the amount of volume in the marketplace. And I think the short lines are seeing volume that probably is roughly similar to the Class 1s. There is a good piece of news with regard to the short lines and that is the fact that among the many, many, many things buried in the tax bills in Washington these days, that one of the things that got in there was the renewal of the 45G tax credit that the short lines get which expired more than 1 year ago and so they actually renewed that. So that is -- it’s possible that, that will give the short lines a bit of a bump in the coming year.

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

Well, I think I probably have to answer that over the long run. Over the long run it is relatively consistent and so in any given year, we tend to like to plan that way. In the last year, they clearly went over that number and in fact I think in 2012, they even went a bit over that number as well. So, conditions were pretty good here in the last couple of years. I think part of what drove them over those numbers is they’re surprised at how much they’ve gotten into these petroleum and gas and liquefied gas products which has to have exceeded their expectations and the fact that we don’t have pipelines carrying some of that. So, that’s been an upside surprise for them and you can see them leasing new tank cars and there is a lot of news on that out in the marketplace here lately. So, they went a little above here in the last couple of years but if you -- we like to take the long run approach of that because you can’t say that that will happen again in 2013.

Okay. And in the Rail segment you mentioned that the mix was less favorable, could you just remind us, which were the higher margin products in your Rail segment and which are the lower or middle margin?

It is probably to answer that by just focusing on the lower margin because it’s our Rail Distribution business where our gross profit margins are down in that single-digit area. That’s the one where when we see a lot of growth with that as we did here in 2012, we can get unfavorable mix with it. The balance of our products which are our manufactured products, I like to think of those all in a similar range. They are much different from the single-digit margins and so they are better. So, that’s really the distinction that we like to make. It’s just the difference between distribution and the rest is our manufactured business.

Okay, good, I think that’s helpful. In the Tubular segment, I mean it looks like you are forecasting decline in at least the rate of growth, it looks like it needs to grow but maybe not in the double-digits in 2013. What’s driving the deceleration in growth? Is there more competition entering the marketplace or some other factor?

Two things. Yes, we are coming off of a year with 50% growth and I just think that, that is -- it’s been white-hot. There are a lot of people looking at that space and I think that it’s probably not the right level to think that it’s going to stay up there. The other thing I would add to it is purely capacity and our ability and our partner’s ability to just handle another year that’s that far above where we are currently running. On top of the fact that we’ve got to make some changes in that facility and it is going to put some constraints on us. When you make capacity changes in that kind of a product line there are times where you need to shutdown parts of what you do. And some of that could be occurring late in our 2013 year. If that’s the case we will provide some indication of that. But at this point I am suggesting that it’s possible but it will be late in 2013 because we are developing those plans right now.

The final question I have is as you mentioned that you’re talking about some new products in areas that are underserved. What areas do you think are the most underserved that you can address well?

I could give you things such as we don’t serve the East Coast market even for the U.S. and our concrete tie products very well. There are specific customers that I’d say are clearly underserved in the area of our friction management products where we do great in one space and not so great in another. So, we think we ought to be able to improve penetration in those particular areas. I -- we have business throughout the Latin America region that I have to say is clearly underserved. We could improve what we are doing across all of our product lines in that particular space. So, those would be some of the examples I might decide as the more obvious ones.

[Operator Instructions]. The next question comes from the line of Brian Rafn with Morgan Dempsey.

Give me a sense of -- we own Granite Construction so, we’ve been fighting this highway bill thing for the past 14 years. Now that you got a 2-year bill in, it looks like the design bill work is really starting to come around, certainly a lot of competitors. When you guys look specifically at your bridge products. Are you seeing specific isolated bridge products or are you seeing bridge products that are part of maybe a multi-mile sections of highway because you look at the Army Corps of Engineers, some 622,000 bridges, it gets a D or an F relative to rating and safety. I’m just kind of getting a sense of what you think going forward your bridge demand is going to be.

Well that bill upon its renewal basically kept the spending level roughly where it was at. We keep track of the deficiencies out there and as you are suggesting we know that there is pent-up demand from it because there’s lot that just don’t meet the requirements that they should. But also keep in mind that we’re just in a segment of the business with our grid decking type bridging and we are not doing all types of bridge construction around the country so, I would tell you that we don’t see the entire market out there. We see the ones where are grid decking makes the most sense. We are expanding into more corrugated bridge form type construction in the coming year to expand the amount of market that we see for where that is the best technology, but for so many of these other bridges, we are really not serving that particular market.

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

Well, we are -- I don’t know if I can comment on the percentage of that on your first part of your question, but we are in to some of the accessories as well if that’s the other part of your question. We are doing railings, we are into the aluminum-based products that are there, some of the other kind of safety barriers that go along with it so, we are doing more than just the grid decking on the floor. And we think that there is some opportunity to improve in some of those other areas, which are largely aluminum products. But I would say that they are not going to add lots -- millions of dollars to our top-line growth.

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

Right now, we are planning on a relatively flat market environment. We watch the scrap prices out there and the signals that come with that. There isn’t anything out there right now in the signals that suggested that’s going to move in some measurable way. I think that the steel industry would like to see a little bit more volume right now obviously so, given the current capacity situation in that industry, I certainly wouldn’t forecast any increases, not any substantial ones because I think they have lots of extra capacity at the moment.

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

I think it will be for us pretty much what we normally see there. A couple of percent is usually in the zone where we’re at. There is always continued salary increases out there. We’re not seeing anything substantial in the way of inflation in medical but we do take our own actions to try to contain costs in those areas and try to manage our rising costs in those areas with wellness programs and other programs that we have in the company. So I think we are going to be able to keep that number probably under 3% or near that number when I look at the total combined workforce, both hourly and salary across the company.

Okay. Any headcount hiring? You doing anything engineers, construction people anything on, as far as labor?

Yes definitely. Not as -- in the factories it’s a mix bag depending on which business that we are in, where we’re going up or going down. But clearly in the area of more highly skilled people in our salary workforce where absolutely looking for engineering and technical people. We’ve got a few of these growth programs that are going to require some selling and marketing folks. And even some back office types of support things based on the growth and volume of the company right now. So we actually are in the mode of bringing people into the company, not in any kind of super aggressive way. But, if I had my wish for 2013, I would say we will end the year with clearly more technical and engineering people that on one hand will be designing products and then on the other hand supporting customers.

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

Well, Birmingham will be a good chunk of that, because even if we don’t pull it all off or completed in 2013, I am certain we are going to start buying some machinery. So there is clearly some machinery capacity that will go in there. If -- on the amount that we’re going take Birmingham up, I think the -- think of it as north of probably 25%. Other than that, I don’t think I want to get into the specific details of everything that we’re doing there. But we have some other big capital projects as well even in our Rail Distribution area, we have some unique things that we think we can do with some of the logistics and delivery items that we have in terms of the trains that we kind of operate for that and we’re moving into some new products there and some things that I won’t announce on the phone today but when we’re ready to later in the year but there is some capital that will go in there. And there are some that are just need to go into the rest of the facilities that we have.

Okay. You guys talked a little bit about Class 1 rails what they have spent in CapEx in kind of 2011 and 2012. Would you kind of describe their spending as capacity growth or would it be just more maintenance and swapping track out? Give me a sense whether it's the track lines or railyards, where are their CapEx dollars going to?

Well, there is always a substantial apart that is maintenance and refurbishment of track. They are not putting in a lot of new lines, they are operating in the lines that they have. There are new extensions and spurs that are going into particularly some of these shale gas territories that I was talking about. And of course, there will be increased spending in the positive of train control area, they have to meet some mandates in the coming years and if you look at that you’ll see numbers that are in the tens and for some certainly hundreds of millions of dollars that have to go to this positive train control. And I know some of it is going to, as I mentioned earlier, some of this equipment in cars and things that they have to take on for volume, particularly the added volume that they are seeing in the petroleum products area. So, we would -- we like to look at the maintenance side of that the most or the refurbishment side of it most. That’s where we get the bulk of our business from, but there is always a large chunk from there.

Yes, okay, okay. Talk a little bit maybe about, we hear it episodically comes up, high-speed rail and the different types of rail you need versus your normal train passenger, I mean if you are running a high-speed rail, obviously it’s, as I understand, is the layman, it’s a different type of track. Is that over the next 5, 6 years, is that viable, or is that just a lot of wishful thinking out of watching it?

Well, I think you got to watch that unfold. We would like to think that it is, but when you take a look at the issues that are related to it, we just seem to struggle getting those projects funded. There is an interesting one I will say to keep your eye on in Florida, and that is going down the route of some private funding, where they think it’s going to be profitable and they are not going to rely on as much government funding. Now, the geographic situation there lends itself they think to be successful with that. So, we are anxious to see that go forward. We are bidding on some of what’s going on in California, but they are going step by step. This is not going to be the big bang project approach. They are going to put in some test lines in that and see how they all work out. Hopefully that will be successful, but from there, there is just, there is a lot of politics involved and it sometimes has a struggle to go through. You are correct in saying that it’s a different piece of track. It needs to be a more precision piece of track. One of the things that we like about it is the use of concrete ties, because you can put together a very precision piece of track using concrete ties as your foundation. So, we’d look forward to seeing that move forward. That would be to our benefit if it is picked up.

Yes, okay. Just one more final, what is your sense as you guys look across your businesses, what has been kind of the big quote activity and the forward activity that we don’t see maybe as visible as what order bookings are? What’s the big quote activity and maybe what’s your kind of closure rate? Are you seeing more competitors, less competitors? Is the closure rate increasing or decreasing? Give me a sense from just the kind of raw big quote activity.

Brian, I am not sure adding any color on that would be helpful. The closure activity for the company I will just say has always been good. I don’t think there is anything that I could comment on that would be helpful with regard to it improving or not. If we are certainly not having any trouble with it, we have share positions that are in some cases well in pretty high numbers. So, we have got good relationships with customers and we get to see lot of what goes on in the marketplace. And you know I am pretty happy with the way we are serving them and the rates at which we normally tend to win business.

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

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

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