L.B. Foster Company
Q1 2013 Earnings Call Transcript

Published: 30 Apr 2013

[Operator:]

Good day ladies and gentlemen and welcome to the First Quarter 2013 L.B. Foster Earnings Conference Call. My name is Dave. I’ll be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I’d now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed, sir.

[David J. Russo:]

Thank you, Dave. 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 2013 operating results. My name is David Russo, and I am the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster’s President and CEO. This morning, Bob will provide an overview of the Company’s first quarter performance, give an update on critical business issues and discuss market conditions. Afterward, I will review the Company’s first quarter financial results. Means to access this conference call via webcast were disclosed in our earnings press release and were posted on the L.B. Foster Company website under the Investor Relations page. This webcast will be archived and available for seven days. During today’s call, our commentary and responses to your questions may contain forward-looking statements including items such as the Company’s outlook for our markets in 2013, cash flows, margins and capital expenditures. These statements involve the 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 publically released the results of any revisions to these statements in light of new information or future events. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year ended, December 31, 2012, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the Risk Factors that may affect our results. With that, we will commence our discussion. And I will turn it over to Bob Bauer.

[Robert P. Bauer:]

Thank you Dave and good morning everyone. Thanks for joining us. As I reflected on the first quarter results, my first reaction was, this was a good way to start the year. We wanted to get out of the start engage strong, particularly in light of the continued speculation on whether budget cuts and tax policy could have an unfavorable impact on economy and more specifically lot of these actions impact investment and transportation systems and would have delayed projects in government budgets, even though recent reports on the status of U.S. transportation infrastructure would indicate the need for continued spending. At this point, I don’t hear customer talk much anymore about concern over the economy and everyone seems to be getting their head around spending changes for government projects, although the real impact from cuts is hard to predict. So at this point, I’m pleased to report that our first quarter results were inline with what we were targeting, and put us in a good position to make our plans for 2013. Our top line sales increase of 13%. Fall of the trend, we’ve been talking about for several quarters, what rail and tubular products leading the way and growing nicely. The rail business grew 22% over prior year quarter and that was better than we expected and had forecasts. And the tubular business reported 19% growth in the quarter, which was very solid. And as we expected, did moderate from prior quarter of growth rates. The Construction segment was down 4% year-over-year. It continues to move along as the low volume levels we saw on prior quarters, although the year-over-year comparisons don’t look quite as bad. So all-in-all, I was pleased to see continued strength in the Rail segments. I continue to believe that the agriculture and energy markets will be stable, but with fluctuating order input. And the construction market has an up uncertainty that is making a bit difficult to forecast the base of growth right now. Our orders in the first quarter were $163 million. They were down 4.5% from prior year. But this decline can be entirely attributed to concrete ties or timing of orders or planned volume changes, they were part of our plans and lower piling orders, which are fluctuating quite a bit in the unpredictable market environment were also anticipated. But these order input patterns have let us to change our future outlook in the following ways, first, we expect to see the upturn in construction and by that really what I mean is the piling product business. We expect that to take longer than we first bought. It’s appears this is going to be more of a drawn out upturn that will be more gradual and may struggle to reach the double-digit growth increase we expected for the year, although it looks to still be positive. In addition, our concrete buildings business is now expected to see fewer orders from the state and federal sectors as the projected spending is being cut particularly at the federal level. It is difficult to put our finger on exactly how significant this will be and many of the lead departments that we talk to are struggling to figure out what exactly is going to take place there. On the positive side, we are off to a good start in rail, which is now 63% of our business, credit products is well over plan in Q1 and although concrete buildings will be the challenging going forward, we finished the first quarter at 34% of our plan and our backlog is building in the bridge business. We booked a new bridge business order in Q1 valued at $14 million for a project in New York State. And it comes at a time when we have worked off some backlog through 2012 and so we are in a good position to begin shipments for this project in the second half of 2013. That puts us in a situation where we exit the quarter with a total company backlog of $248 million, up 26% over Q1 of last year and all of that increases in the rail business, our transit product business alone is up $42 million from 2012 where the significant amount of that from our Honolulu project, which is yet to ship. Turning our attention to profitability for the quarter, we reported EPS of $0.48 on a continuing basis up 65% for the year, pre-tax income look very similar at $7.4 million, up 65% also and that was a great improvement over prior year. Growth in the more profitable Rail and Tubular business segments is having a favorable profit impact and will likely be depending on this for the balance of the year to make up for some shortfalls and sales in piling products. Our gross margin performance, I think is largely good story, the unfavorable year-over-year change in rail was impacted by a faster growing and lower margin distribution business and some of our lower price transit backlog that we are shipping, but again we have planned on, but the balance of our product lines are meeting their targets, the increase in gross margins and construction was driven by our precast concrete buildings as I said they had a great quarter and while there has been some increased pressure around pricing for piling products, it hasn’t been enough to unfavorably impact gross margins on this product line. I do expect to see some increase competitive price pressure on these piling products going forward especially with the excess capacity that exists in the steel industry, but we have always successfully managed these sorts of dynamics in the past. From a cash standpoint, we used cash in the quarter to fund growth and receivables, we also maintained a relatively high level of inventory to support projects that are underway, it’s not uncommon for us to use cash in the first quarter for working capital. And I expect that working capital will contribute to cash generation in the coming quarters. Before I turn this back to Dave, I thought let me go back to these three different business segments here and just say a couple more things about where I think the business is headed in some of the underlying market dynamics. I’ll start with Rail. And as I said earlier, the strong first quarter in the current market is a good way to start the year. Our positive outlook for rail and its impact on us is really being driven by two primary factors, first, the growth in earnings coming from both the Class I’s and shorter lines is allowing for continued spending, despite the volume growth that there having been somewhat low in certain areas. These companies are reporting solid performance and numerous trends in transportation are in their favor. So that looks very positive. And second, the continued focus that they have on both operating ratios and uptime, require track infrastructure to be performing at high levels. And that’s right where our focus is and in fact you like to think of it as the sweet spot for our business. So we’re going to continue to invest in programs that can bring operating ratio benefits to these companies, and we’re going to beef up customers support in selling resources to keep our service levels high for these customers. With regard to the Tubular segment, we’ve been reporting solid performance in both our Coated Products and Threaded Products business over the past year. And Q1 has much the same story, both categories fueled growth in the quarter, Threaded Products made excellent gains in gross margin and it’s clear that our new facility in Magnolia, Texas is really improving efficiency. Our joint venture in the Threaded business is also helping with synergies and serving the oil country tubular good market, and we’ve been able to secure business for high levels of service are needed as a result. This is bringing more opportunities to our Threaded Products business which as I said earlier is running well ahead of plan after the first quarter. We are still looking at expansion plans for our Coated Products facility in Birmingham, which will bring need this capacity increases, spending on this expansion will begin some time later this year, and we remain bullish on the long-term prospects for gas pipeline investment, which has been and we’ll continue to fuel our growth. Finally, looking at construction the areas we’ll watch closely are the precast concrete buildings and our piling products. Our bridge business works fine going forward and the recent order win that I spoke up will put us in good shape for 2013. But we need more of time to understand how the precast buildings business will be impacted by government spending cuts, we’ll have to watch this development provide updates in the future as we learn more about what’s going to take place going forward. Piling will grow this year as I mentioned, we’re now thinking improving conditions are likely to be in the second half though of 2013 versus the first half, a brief survey of other companies that serve the same markets is indicating a similar view and that projects remain on the drawing board, they’re just not starting at the pace we though they want. So, hopefully that give you an idea of how we’re seeing things. I think overall, I think its pretty positive or just making a few changes in current areas in our three business segments. So, with that I’ll turn it back to Dave and he will go through some more details on the financial performance and numbers for the quarter. Dave?

[David J. Russo:]

Thank you, Bob. Sales for the first quarter of 2013 were $129.3 million compared to $114.3 million in the prior year or 13.2% increase. The sales improvement was due to a 22% increase in Rail segment sales and 19.5% increase in Tubular segment sales, partially offset by 4% decline in Construction segment sales. The Rail segment sales improvement was principally due to increase in rail distribution as well as a significant increase in transport product sales. Both of these sales increases were volume driven. The Tubular segment sales increases were also due to volume increases. The construction sales decline was due to a reduction in sales of fabricated bridge products, partially offset by an increase in concrete building sales. As mentioned in our earnings release and as Bob mentioned, backlog stood at $248.1 million at the end of the first quarter, up $51.7 million or 26.3% from the first quarter of 2012 and also up $37.2 million or 17.6% from December of 2012. The year-over-year improvement is due to 47% increase in Rail segments backlog, partially offset by 15.7% decrease in our Tubular segment backlog and a 4% decline in the Construction segment backlog. First quarter bookings were down 4.5% compared to the first quarter of 2012. And this was pretty much shared across all three segments tubular, rail and construction. As we have mentioned in the past, our quarter-to-quarter booking activity does tend to be a rather lumpy given the nature and magnitude of some of the types of projects that we’re bidding. Heavy civil construction the key end use market for our construction product segment experienced erratic performance last year. This widely dispersed sector was up almost 10% in 2012, but increased less than 3% in the first couple of months of 2013, mostly due to the transportation and power generation markets. Spending in highways and bridges was up approximately 2.5% but the conservation and development sector were our piling products have significant exposure increased only 1% to 2%. Regarding our rail business, capital spending amongst the Class I railroads was in line with their previous projections, which basically amounted to 0% to 3% increase for 2013 compared to a very strong spending year last year in 2012. Our railroad commodity carloads declined by 3% during the first quarter, however intermodal traffic increased by 5.3% and Class I railroad results were generally higher than the prior year. During the first quarter of this year, our Tucson type facility operated between 60% and 65% of capacity. As we announced in December, we did reach a multi-year extension of the Tucson concrete supply contract with the Union Pacific Railroad and we are proceeding with that. In Spokane, we are producing Concrete Ties for transport authorities, Class I railroads, contractors as well as industrial customers. We continue to see robust inquiry and bidding activity from that facility and it’s highly utilized at this point. Our Spokane Concrete Ties facility experienced a good quarter, a strong year in 2012, and we expect another robust performance this year. As a percentage of this quarter’s consolidated sales, tubular accounted for 9% of sales, construction was 28%, and rail was 63%. Gross profit margins were 19.2% in the first quarter an increase of 30 basis points from last year’s first quarter. This increase in margin was due to increase selling margins, including inventory cost variances that were partially offset by unfavorable manufacturing variances, and increased LIFO adjustments. Our selling and administrative expenses increased by $0.2 million, or 1.2% to $17.1 million in the first quarter of 2013. SG&A expense represented 13.2% of sales in the quarter, as compared to 14.8% of sales in the first quarter of 2012. First quarter pretax income was $7.4 million, or 5.8% of sales, compared to $4.5 million or 3.9% of sales, an increase of $2.9 million or 65.7%. As mentioned in our earnings press release, the effective tax rate for the first quarter was 33.5%, compared to 33.7% last year. So relatively flat. The difference in rate between the years is due principally to additional domestic manufacturing deductions expected in 2013. First quarter EPS from continuing operations was $0.48 per diluted share, this year compared to $0.29 per diluted share in 2012, a 65% increase. Turning to the balance sheet, as Bob mentioned earlier working capital, net of cash increased by $24.3 million in the current year quarter; accounts receivable increased by $12.4 million due to a significant ramp in sales towards the second half of the quarter, most of which moved into April before they are recollected. Our DSO actually improved to 38 days at March 31, 2013 from 41 days at year-end 2012 and compared to 45 days at March 31 of last year. We believe that our accounts receivable portfolio is in very good condition. Inventory remains flat, however some of the accounts payable related to the $16 million increase in our fourth quarter inventory balance was paid for in the first quarter this year resulting in $9.5 million reduction in payables. These items with the primarily cargo factors resulting in cash flow from operations using $17.6 million with cash in the first quarter 2013 as compared to use of $2.9 million of cash in the first quarter of last year. Our capital expenditures were $1 million for the first quarter of 2013, compared to $2.5 million in the prior year quarter. This spend was principally for items, such as yard improvements and production equipment. We anticipate that the companies 2013 capital expenditures will range between $9 million and $10 million. As in prior years, we also anticipate that our 2013 cash generation from operating activities will exceed capital expenditures, debt service payments, dividends and share repurchases. Cash at the end of March 2013 was $81.4 million down $20 million from December 31, 2012 and was invested principally in AAA money market funds and other short-term instruments for preservation of principal and quick access to funds has been the priority. Looking forward, we believe that our Tubular and Rail markets will continue to be favorable in 2013, but will also be competitive. We’re also [monitoring] as Bob mentioned our Construction segment businesses as they struggle to improve over the prior year in a market where state and local budgets are improving, but slowing. Their markets remain competitive and the impact of governmental action or inaction continues to provide some uncertainty. That concludes my comments on the first quarter. We’ll now open up the session for questions. Dave?

[Operator:]

Thank you very much. (Operator Instructions) Please standby for your first question, which comes from the line of Brent Thielman at D.A. Davidson. Go ahead please.

[Brent Thielman:]

Hey good morning guys. Congratulations on the quarter.

[Robert P. Bauer:]

Good morning.

[David J. Russo:]

Good morning Brent and thank you.

[Brent Thielman:]

Bob, you provided an outlook for sales and pretax margins in the previous quarter, I guess I didn’t hear you allude to, but are you still assuming the 5% to 6.5% growth in pretax margins of 7.5% to 7.8% here?

[Robert P. Bauer:]

Yeah we haven’t had any reason to change what we forecasted before the year started at this point. As I said earlier, getting out of the gate strong with the good first quarter, we think helps us make that plan, because as you heard me say earlier we’re tweak to forecast a little bit, so few areas in filing and concrete buildings that probably aren’t going to get to where we thought, but then it looks like where we’ll probably do better than we thought. So as we look at it overall there wasn’t any real motivation for us to change what we said in the prior quarter.

[Brent Thielman:]

Understood. And any impact, I guess, in this first quarter, particularly in the construction business from weather or was it not very relevant?

[Robert P. Bauer:]

Not that we could put our finger on, it just seems to continue to struggle to get some real traction and momentum built. And everybody else we talk to out there seems to say the same thing. So I can’t put my finger on any weather-related issues.

[Brent Thielman:]

Okay. And then on the bridge side, you seem to be a little bit more optimistic about may be some prospects there. You’ve seen a decent level of quotation activity, may be we are just getting some confidence in that side?

[Robert P. Bauer:]

Well, the fact that we booked this $14 million order for bridge in the State of New York is one of those shots in the arm that we always look for. And I was happy to see that it came in the first quarter and wasn’t something that we have to chase down during the year. But the regular book and bill business, which are orders that are below $1 million, actually rehab projects that can be in the hundreds of thousands. That actually looks pretty decent at this point given what we normally see out there. So that coupled with the fact that we’ll start shipping some of that New York project in 2013 means that we’ll have a decent year in the bridge business, and we’ll carry some backlog even into 2014.

[Brent Thielman:]

Okay. Just one more if I could on the tubular side, you mentioned the expansion of the coated facilitate, are you still potentially looking at opportunities to set up a new facility in that segment?

[Robert P. Bauer:]

I would say that we’re always looking for opportunities to expand our footprint in that particular segment. My outlook on the market for coated products is very positive. I think the investment in gas pipeline infrastructure, which is where we’re getting a lot of this business is going to be around for a while, so we’re always looking at that opportunity this particular investment that I’m speaking of, I think it will take place in our existing facility in Birmingham, in fact, I know some of that will, but there is some possibility that it could go beyond that facility.

[Brent Thielman:]

Okay, great. Thanks guys.

[Robert P. Bauer:]

Yep.

[Operator:]

Thank you. Your next question comes from the line of Mike Baudendistel at Stifel. Please go ahead.

[Michael Baudendistel:]

Thank you. One question I had was, I think you said the rail capital spending guidance is sort of what you had expected earlier based on what the rail said, during the quarter, I was wondering the Canadian National Announcement where they talked about rating their CapEx and maybe building in some redundancy in the Western further network is – bring back that can benefit you?

[Robert P. Bauer:]

Yes it can, Mike by the way, yeah it can benefit us, I wouldn’t say that it’s to the point, where it’s going to move the needle a lot, when you take a look at the collection of all of these companies that are in that category, but I’d go as far as to say that they are good customer of ours, I think we are incredibly strong in Canada, what’s happened to come with the acquisition of Portec back in 2010, we greatly improved our position with customers in that market. So we’ll have looking on a good position to get some incremental business from added spending plans that they have.

[Michael Baudendistel:]

Great. That’s helpful. And then thinking in the press release, you talked about improvements in efficiency, particularly looking at manufacturing operations or where is that coming from?

[Robert P. Bauer:]

Yes it is in the manufacturing operations. Our Threads Products business is a great example of that. Having pulled that operation into a single facility has really improved our gross margins in that business. It just streamlined our cost and has made us operate a whole lot more efficient. So, that volume has helped us just from a leverage standpoint of leveraging, what’s going on in our facilities, but I think generally speaking, our cost structure and our facilities continues to improve and provided our volumes stays up, they run and fairly efficient.

[Michael Baudendistel:]

Okay. Good. And I wanted to ask on the Honolulu project. I don’t think I heard how much in the first quarter, because that project it sounds like it’s in the early innings. Could you talk about how you expect that to ramp up this year and next?

[David J. Russo:]

For the first quarter, Mike, it was $3.5 million.

[Michael Baudendistel:]

Okay.

[David J. Russo:]

It was the Honolulu impact. We do expect that to ramp rather significantly in the next three quarters. As far as in the next year, I believe probably 90% of it’s going to go obviously, it started last year. I think 90% of it for us will be complete by the end of this year.

[Michael Baudendistel:]

Okay.

[Robert P. Bauer:]

It is running on schedule on the job side. So, there have been any delays with it.

[Michael Baudendistel:]

That’s always good. And then on the cost side, I mean obviously a lot of growth in SG&A, pretty minimal there. Is there also the expectation for the rest of this year even if you do have sort of a normal seasonal improvement in some of the businesses like you typically do?

[Robert P. Bauer:]

Well, I think we’ll take it up a bit. In fact, I am sure that when we started the year, as Dave and I looked at this thing, we were a little bit nervous I think like everybody else out there that was unsure about whether or not all the sequestration news and other things how much that would impact us and whether or not it would cause especially our Rail customers to hold back on spending. So we thought, we would proceed cautiously on the SG&A side than we did and so when you look at growth that’s just around 1%, there is not much there but we are hiring for some key positions and particularly where we need some talent to go after some of these growth opportunities. We are bringing a few new people into the company to support that and other important programs and so we’re loosening up a bit on that at this point.

[Michael Baudendistel:]

Well that makes lot of sense. Just one more from me, maybe for Dave. Under the working capital side, you need to talk about debt starting to improve and help push your cash flow, continuing operations back in deposits category. Do you have a target for which quarter you expect cash flow from continuing operations to be positive?

[David J. Russo:]

Yeah, by the end of Q3, Mike we expect that year-to-date number to turn positive.

[Michael Baudendistel:]

Okay great, thank you.

[Robert P. Bauer:]

Thanks Mike.

[Operator:]

Thank you and your next question comes from the line of Scott Blumenthal at Emerald Advisers. Please go ahead.

[Scott Blumenthal:]

Good morning Bob, good morning Dave.

[Robert P. Bauer:]

Hi Scott.

[David J. Russo:]

Good morning Scott

[Scott Blumenthal:]

Bob even with the strong quarter and relatively strong quarter in the precast concrete building, your are justifiably cautious on the business, do you expect that business to be up, down or flat year-over-year?

[Robert P. Bauer:]

I think that one is a difficult one for me to answer right now because the first quarter was up around – I think was over of 30% up year-over-year, so I was right around that number. But the orders right now that outlook is clearly not as good. And what we’re hearing is that the national parks, for example, is a big marketplace for us. We put these precast concrete buildings into parks and other recreation type facilities of Department of Forestry and Department of National Parks, those sorts of places we get good business from. It’s in those areas where we’re continuing to see the pipeline diminish some and as we make calls to try to find out what’s going on, we’re hearing the news that these budget cuts that are coming out of Washington are affecting those departments. And there’s nobody there they can actually put their finger on exactly what they think is going to happen. So I think we’re going to be wrestling with that one here for at least another quarter or so to put our finger on just how much.

[Scott Blumenthal:]

Got it. Okay. And Dave could you may be given us an idea, somehow to how much of the growth in tubular was organic versus may be what you were able to do add to the addition of the Magnolia facility, because I think that one opened in Q2 of last year, correct?

[David J. Russo:]

It’s really all organic Scott, because the Magnolia facility simply replaced our facility that was in Houston. So all we did was relocate our Houston facility to Magnolia, Texas and open up, certainly more modern facility, but day one manufacturing like-for-like products with really the same, the same workforce.

[Scott Blumenthal:]

Okay. And capacity at magnolia is greater than you think, could you remind me?

[David J. Russo:]

Yeah, actually greater than used in with probably I think 30% additional capacity with fewer heads because of the technology we put in there.

[Scott Blumenthal:]

Okay, very good and one more if I may. Bob, you mentioned about $10 million in CapEx. Imagine that much of that is going into your tubular expansion. Can you give us an idea maybe how much you need to invest ongoing development and what I guess most of this referred to as the legacy Portec business which is kind of has some technology driven products there?

[Robert P. Bauer:]

Well, I would say with regard to that business, which we refer to as our rail technologies business now, it’s not a very capital intensive business. So if I understand your question right and how much of our capital spending will be directed to that. The facilities that support that business are not highly capital intensive. Our friction modifiers do not require a lot of equipment and even our wayside dispensing systems in that, that is largely an assembly type operation, bench-top assembly, where typical tools for bench-top type assembly. So, it doesn’t require a lot, the one exception to that is that we have a track components business in that division and they make our spikes and anchors, and there is a part of that, that is not operating at a level of efficiency, we would like to see which means there is much more downtime then we would like, and that’s going to take some capital spending into the hundreds of thousands of dollars not into the millions of dollars though.

[Scott Blumenthal:]

Okay then may be, if I could ask Dave the R&D that goes into the Rail technologies business, where does that, where does that fall in the income statement?

[David J. Russo:]

It’s in SG&A Scott and actually that is something that when there was a question asked about whether we want to invest this year, what’s the SG&A going to look like, that is one area that we’re probably to going see some additional dollars into as we move forward and try to move the business towards more technology, technologically oriented product lines. So we will spend a little more on R&D but to Bob’s point, the Rail technologies business more R&D spent but not as capital intensive.

[Scott Blumenthal:]

Got it. Okay, thank you. That is really helpful. I appreciate it.

[Operator:]

Thank you very much. You have no further questions at this time gentlemen. So I would now like to turn the call over to Mr. Robert Bauer, for closing remarks.

[Robert P. Bauer:]

All right well thanks for joining us today. We appreciate your interest more happy if we could get off to a good start here in Q1 and we will look forward to catching up with you over the coming months and next quarter. I appreciate your timing, joining us today. Thank you.

[Operator:]

Thank you once again for your participation in today’s conference call. This concludes the presentation. You may now disconnect. Have a very good day.