L.B. Foster Company
Q1 2009 Earnings Call Transcript

Published: 23 Apr 2009

[Operator:]

Good day ladies and gentlemen and welcome to the first quarter 2009 L.B. Foster earnings conference call. My name is Chanelle and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the call over to your host for today’s call Mr. David Russo, Chief Financial Officer. Please proceed.

[David Russo:]

Thank you, Chanelle. 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 2009 operating results. My name is David Russo and I am the Chief Financial Officer of L.B. Foster. Also on the call today is Mr. Stan Hasselbusch, L.B. Foster’s President and CEO. This morning, Stan will provide an overview of the company’s first quarter performance, give an update on critical business issues and discuss market conditions. Afterward, I will review the earnings press release issued earlier this morning 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. Today’s call includes forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and include known and unknown risks and uncertainties. Future actual results may differ greatly from these statements and expectations that are expressed today. All participants are encouraged to refer to L.B. Foster’s annual report on Form 10-K for the year ended December 31, 2008, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster. I should also reiterate at the beginning of this call that while forward-looking statements will be made, it is the policy of the company to not provide specific earnings guidance. With that we will commence our discussion and I will turn it over to Stan Hasselbusch.

[Stan Hasselbusch:]

Thank you David and thanks to all of you for attending our first quarter 2009 earnings call and webcast. This morning we announced results for the first quarter. Sales were $97.7 million, up 4.6% compared to the prior year sales and net income was $3 million compared to $6.3 million in the first quarter of 2008. Last year’s first quarter income included a $2 million gain related to the company’s investment in the DM&E Railroad, as well as $1.5 million pretax gain on the sale and lease-back of our Houston, Texas, pipe trading facility. This year’s quarter results were negatively impacted by $1.6 million warranty charge related to concrete ties. While we are still investigating the root cause of this issue, we believe a large part of the problem is isolated to production on one tie bed from February to August 2004 at our Grand Island, Nebraska facility. This bed was removed and scraped when we retrofitted our facilities with new upgraded equipment and improved manufacturing processes in 2005. In the quarter, overall booking activity was down significantly compared to last year. Order entry for the company was $97.2 million, off 26.8% from last year; corresponding backlog was a $130.9 million down 24.6%. Now, I’ll review the individual products, and I’d like to start with Tubular, where sales totaled $7.3 million, which was flat with 2008. Income for pipe products was up 33% due to increased volume at our Birmingham coated plant and higher margins micropile work at our threading facility in Houston Texas. The problem we have in tubular is similar to a number of our other products in this difficult economic period, a severe drop off in booking, negatively impacting backlog. Tubular order entry was down 19% and the backlog was off 20%. The impact on our plants is obvious. In coating for example, current workloads run only through the second quarter. In piling, sales were down 18.2% from last year and booking were down even more, as our cut construction related markets were in a steep decline in the first quarter. Following heavy construction growth of 12% in 2008, read construction data a forecasted a decline of 6.6% in 2009. Total North America shipments of steel piling, which include both sheet piling and each bearing pile dropped dramatically in the fourth quarter of 2008 and is continued to be weak in the first quarter of this year. Nationwide, the current annual consumption rate is only 500,000 tons, which is down significantly from the run rate of 700,000 plus tons we were seeing just 18 months ago. Because of reduced spending at the state levels and a continued tight credit market in the non-residential sector, we expect this extremely weak construction market to continue throughout the year. A bright spot in piling could develop from the stimulus package, in which $4.6 billion was allocated to the United States core of engineer and in addition $5.4 billion was included in the 2009 Omnibus spending bill, which was passed several weeks ago. This infusion of cash should jump start a number of waterway projects throughout the United States, including construction of the new levy systems in New Orleans over the next two years. Another product line positively affected by this stimulus package is at precast buildings group. Booking in the quarter were $11.7 million, up 55%, largely as a result of infrastructure spending for the national park system. From a billing standpoint we’ll begin to see the benefit of this activity in the second half of the year. The third area impacted by this stimulus package is rail; particularly on the transit side, where we’re seeing significantly higher bidding activity across the country. Though bookings were up only 3% at $7.1 million in transit for the quarter, we feel confident we will win increased business throughout the year. We expect transits business will be soft in the first half and much improved in the second half. Overall, rail performance was solid in the first quarter; $54.4 million, up 17.7% over the last year. New rail led the way with sales of $32.9 million, which was up 123.5%. During the quarter we complemented supply from our domestic manufactures, Rocky Mountain Steel and Arcelor, with additional material from Steel Dynamics. Our main concerns in the rail markets are relay rail, where depressed scrap prices have severely reduced both revenues and profit numbers. We expect this pricing level will continue into the foreseeable future. In addition in CXT ties, we expect demand at all three of our manufacturing facilities to be down from 2008 levels. To recap our products; in rail we’ll be challenged in both CXT Concrete ties in relay rail. In pipe, both product lines are managed well and we will be profitable despite a weak year. In construction, buildings will benefit nicely from the stimulus package with products coming off of a record year in 2008 and I expect with the strong backlog and active biding, we will improve on that in 2009. The real wild card is piling. Though activity was down in the first quarter, opportunities on the horizon could turn the year around very quickly. I’ll match our product and sales group against any of our competitors as we aggressively pursue these prospects. Finally across all of our businesses we are being challenged to maintain our margins, particularly with our distribution businesses, as we have seen declining prices and intense competitive pressure. Looking forward, we feel that we have much more clarity about the balance of this year than we did at our fourth quarter webcast in late January; in part, because of the benefit we’ll be receiving in the second half from the previously discussed stimulus package. Regardless of the state of these markets and our economy; as a 107 year old company, whose foundations centers on integrity, safety, quality and continuous improvement, we remain committed to the ongoing creation of growth and value of our business, for all of our shareholders. Now I’d like to turn this back to David for the financial review.

[David Russo:]

Thank you, Stan. Before I begin the discussion on operating results, I’d like to remind everyone that in the first quarter of 2008 there were two special items that had a one time positive impact on our financial results. The first item was $2 million of proceeds received late in the first quarter of last year, related to a favorable working capital adjustment, pursuant to the prior year sale of our investment in DM&E. The estimated EPS impact of those proceeds was approximately $0.12 per diluted share. The second item was the sale and leaseback of our threaded products facility in Houston, Texas. We received approximately $6.5 million for this facility, which encompass 63 acres and simultaneously leased back 20 acres. The gain on the sale was approximately $1.5 million. The estimated EPS impact of that sale was approximately $0.09 per diluted share. So, both items positively impacted last years first quarter by $3.5 million on a pretax basis, and approximately $2.2 million after tax or $0.21 per diluted share. As in prior periods and an effort to discuss meaningful comparative results, my discussion will exclude these items from the year-to-year comparisons unless otherwise indicated. So, with that in mind I’ll begin the review. Sales for the first quarter of 2009 as Stan mentioned were $97.7 million, compared to $93.4 million in the prior year, a 4.6% increase. The sales increase was due to a 17.7 increase in the rail products sales, partially offset by a 9.8% decrease in construction product sales. Tubular product sales were flat compared to last year’s first quarter. The construction product sales decline was due entirely to a decrease in piling sales, partially offset by increases in precast buildings and fabricated products. First quarter tubular sales as we mentioned were flat in the first quarter, as coated sales increased, but was offset by a decrease in threaded product sales. After both tubular divisions had strong years in 2008, we anticipate they will both deliver reduced profitability in 2009. The energy market served by our coated division have been robust for the past several years and while we still anticipate continued longer term strength, there will definitely be a negative impact in the short term. Our threaded pipe division is experiencing slow activity and the underlying pipe pricing has moved downward with scarp prices. The rail sales increase of 17.7% was driven by new rail distribution, while all other product lines experience declines. New rail volumes increased 51% and pricing was also up substantially. This quarter, concrete tie sales declined at all facilities in 2009 compared to last year. Our Grand Island and Tucson facilities were approximately 40% utilized for the Union Pacific Railroad and we are actively marketing both heavy hull ties, as well as an industrial concrete tie from Grand Island. The newer industrial ties is currently being produced and sold. As Stan mentioned earlier, we became aware of a significant number of concrete ties failing in track and have recorded a $1.6 million warranty charge to accommodate the estimated cost of fulfilling our obligations related to this issue. In Spokane, we continue to produce concrete ties for other Class I railroads, transit authorities and contractors and we continue to experience reasonable, but reduced inquiry in bidding activity. As a percentage of consolidated sales, tubular accounted for 7% of sales, construction was 37% and rail was 56%. As mentioned in our earnings release, backlog stood at $130.9 million at the end of the first quarter, down 24.6% from March 2008. Bookings for the quarter decreased 26.8% to $97.2 million. As Stan mentioned, we continue to see weakness in all segments, but our markets are not without a few areas of upside opportunity, primarily as a result of basic infrastructure needs and of course the stimulus legislation. Gross profit margins were 14.0% in the first quarter, a decrease of 270 basis points from last year’s first quarter. The reduction in margin was due to the $1.6 million warranty charge discussed earlier by Stan and the decrease in selling margins before manufacturing and other variances, as well as increased unfavorable manufacturing variances. These negatives were partially offset by decreased scrap and obsolescence costs, as well as decreased LIFO cost. First quarter LIFO expense was actually a credit of $250,000 compared to an expense last year of $293,000. SG&A expenses decreased by 3.6% to $9 million in the first quarter of 2009, due primarily to reduced travel and entertainment and outside service costs, offset by increased salary expense. SG&A represented 9.2% of sales in the first quarter of 2009 as compared to 10% of sales in the last years first quarter, an 80 basis point decrease. As a result of the foregoing, first quarter operating income was $4.8 million compared to $6.1 million in the last years first quarter, a 21.4% reduction. As a percentage of sales, operating income was 4.9% in this year’s quarter versus 6.5% last year. Interest expense was $328,000 in the first quarter of ‘09, $227,000 or 40.9% less than the first quarter of 2008. The decrease was due principally to a decrease in borrowings and to lower interest rates on certain debt instruments. Interest income was $300,000 compared to $800,000 last year, a decrease of $0.5 million or 64%, due primarily to a decline in interest rates. First quarter pretax income was $4.8 million compared to $6.4 million in last years first quarter and $1.6 million or a 25% decrease. As a percentage of sales, first quarter 2009 pretax income was 4.9% versus 6.8% in last years first quarter. Excluding the $1.6 million warranty charge in this quarter, pretax income would have been even with last years results. First quarter 2008 income tax rate was 36.6%, compared to 36.1% last year. Net income decreased 25.7% to $3 million or $0.29 per diluted share, compared to an adjusted $4.1 million or $0.36 per diluted share last year. Turning to the balance sheet, debt at the end of the first quarter was $26.0 million compared to $27.5 million at the end of 2008. Capital expenditures were $600,000 for the first quarter, compared to $2.1 million in the prior year quarter. The 2009 spend was principally for plant and equipment improvements, as well as technology infrastructure and application software. We expect capital expenditures to be approximately $4 million in 2009 and we also expect to generate positive cash flow from operating activities this year in excess of our capital expenditures, debt service cost and share repurchases. The most notable use of cash in the first quarter was the $21.9 million reduction in accounts payable and the $1.9 million repurchase of the company’s common stock, pursuant to its share repurchase authorizations that were announced in May and again in October of 2008. As noted in our earnings release, in the first quarter we purchased 86,141 shares at an average price of 21/63 per share. Program to-date, totals reflect that we purchased 951,673 shares for a little more than $28.3 million. So, the second board authorization is approximately 22% spend. We do not believe that this program conflicts with our stated acquisition strategy. On the contrary we believe that the combination of the two will help provide a balanced approach to providing long term value for our shareholders. Debt as a percent of capitalization was 10.6% at the end of March 2009, compared to 11.2% at the end of 2008 and 12.8% at March 2008. Our leverage ratio is just under 0.6

[Operator:]

(Operator Instructions) Your first question comes from the line of Liam Burke, Janney Montgomery Scott.

[Liam Burke:]

Thank you. Good morning Stan and good morning David.

[Stan Hasselbusch:]

Good morning Liam.

[Liam Burke:]

Stan, if I look at piling, in two major businesses, you’ve got commercial construction and then you’ve got the public construction as the bulk of your business. The commercial is obviously, things are very tough in that environment, how about the public side, are you showing any signs of life today or is it something in the future that you’re looking for in the stimulus side.

[Stan Hasselbusch:]

It’s something that we’re really looking for. There has been a drop off in bidding at the state level. As our Senior Vice President, Don Foster has told me on a couple of occasions over the past couple of months; our business is very lumpy. I mean we’ve been kind of dragging along and maybe go a week without really seeing a lot of activity and some big job might come up and we’re at it very aggressively. One of things that was still and we’ve seen this now for two quarter, is the day-in and day-out business and we’re not seeing the two truckload business. While we’re working, we continue to get the jobs and we expect that that’s pretty much going to be the way business is going to be at least through the next couple of quarters.

[Liam Burke:]

Okay and then on the release you talked that the Allegany business was up this year, what was drive in that business?

[Stan Hasselbusch:]

I think that we’re doing a very good job and continue to do a good job. I know that our bookings with one of the western roads we’re building to northern has been much higher than what we’ve had in the past and while keeping our Pueblo facility, it’s been running pretty much full throttle through the first quarter and we expect that to continue into the second quarter and we’re starting to get some business from the eastern roads also. We put a facility and Niles, Ohio and really spent some money and upgraded that location last year and we’re starting to see the benefits there also. So we’re seeing work in both areas and we continue to see that go. I mean one of the areas that railroad will not cutback on, and that’s in maintenance. I mean, across the Board we would expect CapEx numbers to be down somewhere in the neighborhood of 10% this year. They may cutback in capacity and they might cutback in equipment, but they’re not going to cutback in maintenance and this product is used quite a bit now.

[Liam Burke:]

Great thank you.

[Stan Hasselbusch:]

You’re welcome

[Operator:]

Your next question comes from the line of Tom Spiro with Spiro Capital.

[Tom Spiro:]

Good morning.

[Stan Hasselbusch:]

Hey Tom, how are you doing?

[Tom Spiro:]

I’m fine. A couple of questions; number one, did I understand that we’re now taking a rail from Steel Dynamics?

[Stan Hasselbusch:]

Yes, we’re…

[Tom Spiro:]

When did that begin and help us understand what that means going forward?

[Stan Hasselbusch:]

Well, I think that they’ve been working and rolling rail for the last couple of years. I believe with the downturn in the structure market, they put more emphasis on that in the last quarter. They are producing certain rail and there’s not been a lot of tonnage Tom, but we have taken some rail and initially, most of the rail coming off has been what we call IQ rail and we’ve been out of that market for a last couple of years. So, that’s really helped fill the gap for us. We expect them to continue making rail, reamer grate rail in the future, but we’ve got some IQ rail of them in the first quarter.

[Tom Spiro:]

Thank you; number two, the defective ties, are we pretty comfortable now that we’ve identified and we’ve determined the size of the problem or is the investigation still ongoing?

[David Russo:]

We’re actually pretty early into this, so these are ties that actually as we mentioned were manufacture in 2004. So from time-to-time we’re notified that there’s some ties failing here and there, and until we go and investigate along with the customer, in this case it’s EUP and jointly determined. There are other reasons for ties to fail and track off than them being defective, but these ties we went and walked track in late march and agreed with EUP that that was our issue and we are dealing with them. We are aware of a couple of other spots. The ties that we walked the track was in Colorado. So, we are aware of a couple of areas where these ties that were manufacture in ’04 went to. We are actually still investigating. As Stan mentioned earlier, we believe we know what the route cause was, but we are still working it, so we don’t know for sure. To Stan’s point earlier, the plant that we think or the equipment that we believe produced these ties and was part of the route cause of the problem is no longer inexistence. So it becomes a little more difficult to investigate, but we are still working. The other thing is, these ties, they’re right at their five year life and we provide a five year warranty to EUP. So we along with EUP are going to be going over a lot of their lines where these ties went and it’s a fluid situation; we’ve recorded our best estimate for everything that we’re aware of today.

[Stan Hasselbusch:]

Let me add on that a little bit Tom also. We take this extremely seriously. Quality is one of our key core values. We are throwing everything at this. We think we know the route cause. We’ve formed a cast force internally working with the UP; it’s headed by our corporate head of quality Neal Dow, and Neal’s directions for the next, for the indefinite future is fulltime on this problem. We are going to get our arms around it. We’re gaining on it everyday. It’s an unfortunate situation. We feel very strongly and we believe concrete ties are a large part of our future and with this in mind we’re going forward. We’ll get this behind us and we’ll go on.

[Tom Spiro:]

Now that’s helpful, thank you; and lastly on Tubular, I recall perhaps two years ago business was so strong. I think we ran two shifts for a number of months and then it was strong enough. I think a full shift all year, are we now at a stage where we’re coming down from a full shift to some lesser level of utilization?

[Stan Hasselbusch:]

As I said Tom, our backlog right now will carry us through the second quarter on one shift. The bad debt activity level is really low; a lot of its tied in with credit, a lot of it’s tied in with fuel pricing, but we’re on top of it. It’s a very well managed group. I may note to this meeting that the Vice President in charge of that group Merry Brumbaugh was named President of NAPCA, which is a an international organization for coating pipe of all kinds oil, gas, water and Merry was elected President of that just last Saturday. So we’re very happy about that. She’ll do a very good job for the association. We feel that we’re very well managed. We feel that it is a tough time, that’s on the coating side Tom. On the threaded side we’re seeing some depressed pricing and we’re working through that, but it’s going to be a tough year in Tubular, but as I said in my comments, we will be profitable and that this business will come back. We’re still bullish on the gas transmission markets also.

[Tom Spiro:]

Thank you.

[Stan Hasselbusch:]

Thank you.

[Operator:]

Your next question comes from the line of James Bank with Sidoti & Company

[James Bank:]

Hi good morning.

[Stan Hasselbusch:]

Hi James, how are you?

[James Bank:]

Good. I just wanted to quickly circle back to the warranty expenses. I’m sorry you isolated this to one plant, just for the year of 2004?

[David Russo:]

One plant, really one line as well, yes.

[Stan Hasselbusch:]

That’s where we’re seeing.

[James Bank:]

Okay, so it could really only be maybe a couple of 1000 ties; the worst case senario would be defective right?

[Stan Hasselbusch:]

No, it’s more than that. We know right now that there’s at least 16,000 in Colorado and we know that there is three or four other location that we are aware of, that we are continuing to check with; it’ll be more than a couple of thousand.

[James Bank:]

Okay and then the $1.6 million, is that sort of a pretty conservative expense charge on your part?

[Stan Hasselbusch:]

What it represents James, basically what we know today is our best estimate. As I mentioned, we’ve walk this tracks in Colorado, we agree with the customer that it’s over 16,000 ties and we’ve recorded that 100%. There’s two other areas; one in Ohio and one in I believe New Mexico that we’re aware of. We actually have not walked that track yet, but we’ve recorded a substantial amount related to that as well. We are going to be walk in that track this month and then we also have some excess reserve if you will for some areas where we could have an occurrence, but it’s just not been reported yet, so our best estimate.

[James Bank:]

In operating expense point of view, what’s sort of your normal warranty expense I guess in the quarter?

[David Russo:]

What we do; unless there is a specific issue James, we typically are booking around $0.25 per tie produced; per tie sold I should say.

[James Bank:]

Alright that’s helpful

[Stan Hasselbusch:]

We take a reserve on all of our products. I mean I don’t care whether it’s coated pipe or Allegheny rail, that’s just part of. I will say this, EUP we expect this year to be better than from a quantity standpoint than what was last year, but it’s actually going to be probably very similar. We’re probably looking at 200,000 ties at Tucson and 200,000 ties in Grand Island, as I think David mentioned, running at about 40% capacity. The quality of the ties that we’re getting out of the new retrofitted plants, with the Greenberg in equipment, I know that this month for example in Grand Island, I mean we’re running considerably less than 1% reject at the plant level and we’re really watching them very closely. We’re getting the traction that we expected from them. We just need the commodity; we need the products, the volume. We’re down in that side of it. The other things that’s been hurting us; we’ve talked the last year about setting up an additional line in Grand Island for industrial applications and that’s being impacted big time from the credit crunch and that business is down also. So as I said, this is going to be a very challenging year in the CXT side of our business.

[James Bank:]

Okay, alright, thank you for that. Just moving onto the billing margins, could you just split out what the decrease from the billing margins was on a basis point?

[David Russo:]

I’m sorry James, I’m not sure I understand.

[James Bank:]

On the gross profit that you’ve recorded, 14%, that was down 270 points from the quarter year-over-year and you attributed to a number of things, I was just trying to isolate the billing margin piece, the variance.

[David Russo:]

The billing margin piece was about a 170 basis points.

[James Bank:]

Great. The transit stuff; assuming you guys gave a pretty positive outlook going forward on it, any particular reason why it was down in the first quarter or just normally?

[Stan Hasselbusch:]

Well, we had a record year last year. We burned a lot of backlog which I talked about in January in the fourth quarter. We knew in the first quarter, in fact the second quarter is going to be off also, but there’s been a lot of activity and with the stimulus release of money, some of that money is spraying up and keep in mind also, with the transit products, I talk specifically about transit products, but will go hand-in-hand with that is some of our other rail products such as new rail and insulated bonded joins, power rails and some of this. So, I mean there’s a number of things that will go hand-in-hand, that will complement our transit sales, but that’s been a real nice surprise this year. Activity level is at a point that we haven’t seen maybe ever and we expect to really participate in the strong booking year this year. As I said we’ll start to see the pick up of that in the second half of year, but Greg Lipert and Hawken and their groups have really been on top of it till we’ve got some really good things going in that area.

[James Bank:]

Okay great, and Stan you also mentioned two separate packages…

[Stan Hasselbusch:]

By the way, also as along as we’re talking about that, we are also excited about some of the information that we’re hearing about high speed rail. There is some programs going on there as we’ve talked about it as a part of the stimulus package. $8 billion was directly associated with the high speed rails, we’re watching some of that and that’s going to be a beneficiary of everything going forward. We didn’t talk about it in either our press release or our comments that were made by David and myself as far as the renewal of the transportation bill which is up for late this year and we certainly won’t benefit from that this year, but we expect really to participate in that in 2010 going forward.

[James Bank:]

Right, well on the two stimulus package you’d mentioned in your comments, $4.6 billion and I’m sorry, I quickly picked up on civil engineers, but I couldn’t quite get.

[Stan Hasselbusch:]

There is $5.4 billion that also came from the Omnibus package which was passed just a couple of weeks ago.

[James Bank:]

Okay, what actually is that?

[Stan Hasselbusch:]

Yes, its current year spending in transportation. It’s separate from the stimulus package.

[James Bank:]

Okay, so that was just sort of an ongoing act, but just part of the safety lieu transportation act from 2003.

[Stan Hasselbusch:]

No, it’s in addition to it.

[James Bank:]

Okay and you’d expect that to sort of kick in and benefit you in the third quarter?

[Stan Hasselbusch:]

It should start benefiting us in the second quarter, it’s for this year. I think this year is the $4.6 billion going to the quarter. Engineer I think is over the next couple of years. One thing that we’re looking at, that we expect to really kick-in is down in New Orleans. I think that’s really a lot of work that’s going to be coming up down there. It’s going to be bid probably over the next six month and will be constructed over the next two years which could be huge for piling.

[James Bank:]

Right, okay terrific and sorry to take so much time; the operating income Stan, you mentioned in Tubular, it was about 33% year-over-year and then I didn’t get construction in rail. If I could get just the increase or decreases in that margin or excuse me, in the income that will be great.

[Stan Hasselbusch:]

That was the one we chose to discuss Mark, we really don’t give that information out.

[James Bank:]

Okay, I’ll get it from the Q. I’ll just jump back in line.

[Stan Hasselbusch:]

Thank you.

[James Bank:]

Thank you.

[Operator:]

Your next question comes from the line of Mark Zinski, 21st Century Equity.

[Mark Zinski:]

Good morning.

[David Russo:]

Good morning, how are you?

[Mark Zinski:]

Good thanks. My sense at least on the last call was, at that point you seem to have more concern about margin pressure. You alluded to margin pressure again in this call, but my sense is your tone seemed more optimistic now. Is that a fair assessment, are you less concerned than you were?

[Stan Hasselbusch:]

Not necessarily, I’m sorry if you got that impression. I think that at our last earnings call in January there was just no visibility on the year. I mean that was something that I’d never experienced looking out. I mean there was a lot of question, there was a lot of uncertainty. I think things are coming together. We still got some pressure on particularly margins on our distribution side. I mean, we’re seeing drop-off in pricing, the scrap price continues to drop, competition is as intense as we’ve seen it and so that’s going to put pressure on the margin in and of itself. I think that from an inventory position, our two main areas are in new rail and piling that we don’t have a lot of at risk inventory that we’re sitting on, but that’s not to say that we won’t see reduced margins on some of that as we move that through. So I still think there’s going to be a lot of pressure on margins, particularly in the distribution side of our business.

[Mark Zinski:]

Okay, very good, and you did a nice job with SG&A this quarter. Are you pretty comfortable with your current cost structure?

[David Russo:]

Well, we’re watching it all the time. I mean we will talk with our Board about it at our May meeting again. Just to kind of reiterate what we talked about in January, we’ve frozen salaries, we have cutback on CapEx which David discussed; travel and entertainment, I mean it’s very important to spend the money, but I’m just telling all of our people to spend it wisely. I think the results in the first quarter were down about 24% T&E. So, some of that’s being driven by that; we’re watching it all the time and we’re going keep our eye on the ball.

[Mark Zinski:]

Okay. Then it seems that generally the rail outlook is more positive than originally, particularly with some of the $8 billion in the stimulus package, but then also be additional $5 billion that’s been proposed. In terms of like high speed/light rail, what are the nuances of that versus freight rail as it pertains to your business.

[Stan Hasselbusch:]

Well, both of them we use concrete ties, which we’re excited about, both of them are going to use new rail and they’re going to use transit. I mean there’s going to be a carry over between both sides of it, between transit and freight, but I think we do have a little more clarity about rail for the rest of the year and going forward, but the free railroads have got some huge challenges. I mean car-loadings in the first quarter, it’s pretty much across; I mean average we’re down 15%. I mean automobiles are down 50; I think coal was only down for 4% or 5%, but they are going to be struggling. I had read something earlier this week, that one of the lines is sitting on 60,000 empty cars and they’re going on fill them up. So we’re expecting CapEx spending to be down and that’s going directly impact our concrete tie business for one and they might slowdown construction of major lines, but we feel a little better, particularly on the transit side of our business, but we’re watching this very closely. We feel a little better about the year than we did, but we don’t feel as good as we like to.

[Mark Zinski:]

Okay and then just last question, in terms of acquisition activity. Are you looking more at potential acquisition in rail versus construction or can you comment at all about specifically what your goals might be in terms of an acquisition in the future?

[Stan Hasselbusch:]

Mark, most of the targeting process has been started with rail and continues to be rail related. We’ve actually talked to some companies on the Tubular side and construction is certainly not out of the question as well. So I would say most of the effort has been in the rail marketplace so far, but stuff does pop-up from time-to-time, so you’d never no, but I’d tell you, most of the effort that we’ve initiated things has been on the rail side.

[Mark Zinski:]

Okay great. Thank you very much, that’s it.

[Operator:]

Your next question comes from the line of Scott Blumenthal of Emerald Advisers.

[Scott Blumenthal:]

Good morning Dave, good morning Stan.

[Stan Hasselbusch:]

Hi, Scott

[David Russo:]

Good morning Scott.

[Scott Blumenthal:]

Thank you for taking my question. Has your experience, I guess coming into this month been pretty much the same as in Q1 with regard to the booking and orders. Have you seen the same softness or are there any indications that might give you some increased hope here.

[David Russo:]

Our bookings like for April.

[Scott Blumenthal:]

Yes

[Stan Hasselbusch:]

I think that they’re pretty much the same. I don’t think that there’s been a big change. We’ve had a couple of things that where booked in the first of the month, which were actually carryovers, but there seems to be a sense of increased activity and we expect as I said, that to fold in the bookings throughout the quarter, into the third quarter, but there’s not been any radical change.

[David Russo:]

Yes, as Stan mentioned in his section, there has been some additional biding and some activity, but those as of yet haven’t really translated into bookings and so far, April bookings are still lower than 2008, from April to April comparison.

[Scott Blumenthal:]

Okay, thank you, that’s’ helpful. One of our businesses that’s foster have the potential to be impacted positively by stimulus and it looks like a lot of that’s coming through at different times and we’ve already, and correct me if I’m wrong here seen some impact in the precast buildings business. Stan, what do you think about that business? Why did that money come through so quickly and what are the type of things that might hold up some of the other things?

[Stan Hasselbusch:]

They were shovel ready. They were ready to go. I mean we’ve heard so much about the national park system and being in its repair and they had some projects that were on the books and when the money became available they grabbed it. I think it was $2 billion between four agencies that they actually got and they’ve done a pretty good job of advertising in our group and Hillsboro and Spokane have done a great job of jumping on it. So it really it did benefit the first quarter; it was right out of the box. I mean that package, the stimulus was announced and they were up and running and that should continue from an activity stand, from a booking activity and order entry for the next couple of quarters and it really will have a good impact on the second half of the year.

[Scott Blumenthal:]

Okay, great, that sounds good. With regard to the concrete ties business you talked about and operating at about 40%, at least in Grand Island and Tucson, I don’t know if that also applies to Spokane. You got two or three plans running at 40%, at what point do you say well we’re going to have to close this one for a while and maybe do everything at a one place?

[Stan Hasselbusch:]

Well, that’s surely something that we looked at the start of the year, but our operations people and engineering people really looked at this hard. We’ve cutback, we took some big cutbacks at the start of the year at both Tucson and Grand Island. We have lengthened; we’re cutting back; we’re increased the cure time; we’re doing it with less people; we’re not using the attitudes; we’re cutting from the cost back there, but it’s something that we considered and we continue to look at it if it’s getting any worst, but I think that what we’re looking at right now at each location is about the minimum we’d want to go at.

[David Russo:]

And we have other issues too Scott. We’re contractually obligated to provide ties for our customers in Grand Island and in Tucson. So, that can’t be a unilateral decision.

[Stan Hasselbusch:]

Down to a minimum number, which is below the 200,000. When we built them, we expected for sure that the bulk of the ties would be produced and would…

[Scott Blumenthal:]

Be consumed by those customers.

[Stan Hasselbusch:]

Yes, right. In one of the areas that we had thought we’d get some pickup which we haven’t experienced and we look forward to that happening also is in the transit side, particularly in Southern California and we haven’t seen that coming out of Tucson at all yet.

[Scott Blumenthal:]

Okay and Dave I understand that inventory is down from $102 million to right around $98 million, can you talk about the units there?

[David Russo:]

Yes Scott, as far as we typically would look at in terms of tons and right now for the most part, that reduction that we discussed is all tonnage. We haven’t had a little bit of decreased pricing with some of our purchases in the first quarter, but its tons and its piling and a little bit of rail.

[Stan Hasselbusch:]

If you take a look at last year to this year Scott, we’ve come down, our inventory levels have comedown in piling. We’re not nearly what we need to be. I think we expect to be down by end of the year. Our inventories by another $13 million to $15 million, but rail inventories are relatively flat from last year; piling inventories are down 14% to 15% and we’re up a little bit in concrete ties, where we ramped up at the end of last year. Last year expecting higher volumes from EUP, this year at both Grand Island and Tucson and we also had produced last year ties for industrial applications, which have been slow moving. So, I think that our inventory levels between those two plans are probably up $8 million to $10 million compared to where they were a year ago.

[Scott Blumenthal:]

Do you have an overall target for the business; Foster as the whole, because right now we’re looking at and I understand that not every unit or every second has very high inventories, but we’re got about $100 million in inventory and we’re selling about $100 million a quarter. So, we’re looking at overall about four times. Do you have an overall target of where you think you can get those?

[David Russo:]

You’re right and it does very substantially business-to-business. One of the issues Scott as Stan as mentioned on previous calls, not today, but we’ve got $15 million, maybe a little less, $13 million worth of rental piling and that rolls up in the inventory, but we’re getting rental income also, 50% to 60% of that and its high margin, but at the same time 40% to 50% of that rental piling sits in inventory until its needed. So there’s certain things that we certainly can do, we’re trying to book as much as we can to the rollings and with regard to a target, it obviously becomes little more difficult when things were flying off the shows over the past 18 months, until we get to the fourth quarter of last year and the slowdown was sudden, and I don’t know it was quick. So we are trying to work that down; each one of our businesses are. We certainly like to move that 20% or more during the course of this year and get our turns up to five.

[Scott Blumenthal:]

Okay, that’s better. Thanks Dave and I guess my last question is, you did say that the warranty charge isn’t cost of goods sold, correct?

[David Russo:]

That’s right.

[Scott Blumenthal:]

Okay. Well, thank you.

[Operator:]

Your next question comes from the line of Brian Rafn of Morgan Dempsey Capital.

[Brian Rafn:]

Good morning, guys.

[David Russo:]

Good morning, Brian.

[Stan Hasselbusch:]

Hey, Brian.

[Brian Rafn:]

Question for you Stan; you’ve talked a little bit about some of the stimulus for the bullet trains. Can you go from an engineering standpoint; if you talk to some of the Amtrak people, let’s say if you go over 75 miles an hour, the train will rock right off the tracks. If they put in new alliance, are you doing new rail construction, are you doing rehabs? Does bullet train require more concrete ties per linear run? Give us a sense from an engineering if you’re seeing that stimulus for high speed trains?

[Stan Hasselbusch:]

The high speed rail is interesting just when you try to get definitionally what is high speed rail. You go to Europe and go on 100 and 200 miles an hour and in Japan, but it remains to be seen yet from an engineering standpoint, how it is going to play. One of the alliances they talk about is Chicago to Saint Louis and how is that going to play? Is it going to be new lines? Is it going to be built on existing lines? Is it going to be upgraded lines, a lot of that remains to be seem. Some of the lines that we see in the Untied States from a high speed transit speed, they are in excess of over 100 miles an hour, but there is a lot of design work that has to be. I think a lot of peoples are trying to cutoff guard by the $8 billion in the stimulus package for high speed rail, it’s a very good thing and this will really put the focus out and I think you’re going to see activity much sooner than what we would have thought, but there’s a lot that’s going to go into the design; whether its going to be retrofitted lines or whether its going to be new line, it’s just a lot to be done on that.

[Brian Rafn:]

Yes, could you see Stan as the MPH goes up that there will be more call for your products or would there be just a base call for your products, irregardless of how fast these trains go?

[Stan Hasselbusch:]

What was the question again, I’m sorry.

[Brian Rafn:]

If you see the U.S. model for high speed trains is more of the 125 mile an hour versus, say the trade that’s approaching 180. Is the higher the speed, the proto type of the U.S. model in high speed trains, is a higher MPH or higher speed calling for more of your products or about the same?

[Stan Hasselbusch:]

When you get up with the various speeds, conceptionally it could be all different. There’s a lot of engineering that has to go into planning.

[David Russo:]

There’s all kind of different applications out there for high speed rail. Some of which don’t even use concrete ties, a lot of which do. So it really depends on specification and application and a lot of the United States transit authorities are just dipping their toes right now. So there is going to be a lot to stands point, engineering and design work, and really my guess is they are going to be looking to Europe to see what a lot of the European counties do, because it’s certainly a new ball game for the Untied States.

[Stan Hasselbusch:]

Europe uses a lot of concrete ties.

[Brian Rafn:]

Yes okay, okay. Back to the issue with the defective ties that you’ve talked about Colorado; is there a sense that and I can remember back 20 years ago with Tylenol and Johnson and Johnson. They really went after that very quickly and at the end of that really developed an awful lot of cache to their response, to the quality of their product. With Union Pacific, is your aptitude in fixing this product; at the end of day do you come out on the other side with maybe a stronger relationship with them depending on how you mitigated this defective tie work?

[Stan Hasselbusch:]

We surely hope so. I mean that’s why we said that we’re throwing at it from the quality standpoint, from a engineering standpoint. We want to find out what’s wrong. We want to take it out and we want to make it right.

[David Russo:]

And if we can turn that into a strong tie in the future, we absolutely intend to do so.

[Brian Rafn:]

Okay and I jumped on late, so I apologize if this is duplicative, but what kind of U.S. roads from the standpoint of maintenance CapEx, what in annualized basis would the dollar amount be just for maintenance CapEx?

[Stan Hasselbusch:]

CapEx and maintenance are two different things. I did mention early on that CapEx we expect to be down 10% from last year and that’s preliminary right now, and maintenance should be fairly flat. We don’t want lose side of that. Then we talk about the CapEx, how they look at the capacity could drop off somewhat, equipment could drop off, the railroads give them so much credit, they do a great job of maintaining your way.

[Brian Rafn:]

Okay, and then I missed it, what your internal kind of your budgeted CapEx for the year?

[David Russo:]

We are targeting right around $4 million or maybe even a little less range Brian.

[Brian Rafn:]

Okay and Dave, maintenance for you guys would be?

[David Russo:]

Maintenance for us is about 2.5 to 3.

[Brian Rafn:]

Alright, good job, thanks guys.

[Stan Hasselbusch:]

Thank you.

[Operator:]

And your final question comes from the line of James Bank, Sidoti & Company.

[James Bank:]

Hi, guys just some quick follow ups. With your share repurchase what was the average price you guys are buying in the first quarter?

[Stan Hasselbusch:]

James it was around 21/63.

[James Bank:]

Okay and the long term debt that’s left, $12.6 million, what was the majority of that?

[David Russo:]

Most of it is a term loan we have with our bank group that’s due at maturity in 2011. We also have some mid term capital leases out there, probably about $4 million of that was long term.

[James Bank:]

Great and just sort of a macro picture, earlier in your comments when you said that the coating’s had done well, I understand Tubular could be difficult to share, but coatings tends to the natural gas markets and threaded tends to go to the water markets; is there any read through in regard to how well the coatings business did; maybe how poorly the threaded business did with those two markets?

[David Russo:]

We actually had a pretty good coated business in the first quarter James, but that’s working off prior year backlog. So when you take a look at what we’re booking today, they’re both pretty weak.

[James Bank:]

Okay, alright, very helpful. Alright thank you both.

[Stan Hasselbusch:]

Thank you.

[Operator:]

Ladies and gentlemen that concludes the Q-and-A process. I would now like to turn the call back over to management.

[Stan Hasselbusch:]

Thank you and have a good day.

[Operator:]

Ladies and gentlemen that concludes the presentation. Thank you for your participation. You may now disconnect. Have an excellent day.