L.B. Foster Company
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good ladies and gentlemen and welcome to Q2, 2013 L.B. Foster earnings conference call. My name is [Dalue] and I will be your operator 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 would now like to turn the call over to Mr. Robert Russo. Please proceed sir.

[David Russo:]

Thank you, Dalue. Good morning ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the company’s second 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, I will review the company’s second quarter financial results, and then Bob Bauer will provide an overview of the company’s performance and give an update on business issues and market conditions. 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 such items 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 release the results of any revisions to these statements in light of new information or future events. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year ended, December 31, 2012, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the Risk Factors that may affect our results. With that, we will commence our discussion. And in order to frame up our discussion today it is important to note that L.B. Foster’s second quarter 2012 results contained the $19 million warranty charge which was included in cost of goods sold. Due to the resulting lower profitability, we also reduced incentive expenses in the prior year second quarter by $1.2 million which was included in SG&A expense. Well, my discussion will focus primarily on our GAAP results when its feel beneficial to the audience, I will refer to adjusted results which assume the exclusion of these adjustments in order to present another look at quarter-to-quarter and six month-to-six month compared results. So I will begin with sales for the second quarter of 2012, which were $149.9 million compared to a $163.2 million in the prior year and 8.1% decreased. The sales reduction was due to a 10.3% decline in real segment sales and an 8.7% decrease in construction segment sales, partially offset by 10% increase in tubular segment sales. The rail segment sales decline was due principally to a reduction in concrete tie sales and reduction in rail technologies partially offset by an improvement in transit product sales. The construction sales decline was due to a reduction in sales of fabricated bridge products and to a lesser extends a decline in piling product sales. The tubular segment sales increase was due to volume related increases in our coated products division. Year-to-date, sales were up slightly as tubular sales increase 13.8% and rail sales improve by 2.6%, while construction segment sales trail 2013 by 6.6%. As mentioned in our earnings release, backlogs stood at $220.3 million at the end of the second quarter of 2013, down $31.8 million or 12.6% from the second quarter of last year and 11% lower than March of 2013. The year-over-year reduction was due to a 17% decrease in our rail segment backlog and a 79% decline in our tubular segment backlog partially offset by a 14% improvement in our construction segment backlog. Second quarter bookings were down 43.2% compared to the second quarter of last year. Bookings declined from last year's second quarter in our tubular segment by 47% and by 61% in our rail segment, but increased in the construction segment by almost 22%. As a reminder, last year second quarter was a record quarter for orders booked and included the $60 million Honolulu Transit project order. Heavy civil construction which is a key end used market for our construction product segment has experienced erratic performance throughout this year. This widely disperse sector was up overall by 8.2% in 2012, the decrease 2.3% in the first half of 2013, mostly due to highways and bridges and conservation and development markets, while the transportation segment increased 10%. Regarding our rail business, second quarter capital spending among the Class I of rail roads was down 5% compared to last year and declined by 7% for the first six months of 2013, which is trending lower than the original Class I projections, which ranged from flat to a 3% increase in 2013 compared to a very strong 2012 spend. It should be noted that Class I forecasted full year spend is still strong. North American Class I railroad commodity car loads were flat in Q2 compared to the prior year quarter. However, intermodal traffic increased by 2.3% and Class I railroad results were generally higher than the prior year. During the second quarter, our Tucson type facility operated between 60% to 65% of capacity. As announced in December, we've reached a multiyear extension of the Tucson concrete types supply agreement with the Union Pacific Railroad. This year in Tucson, we're producing 200,000 ties to sell to the UPRR and a 100,000 ties for warranty replacements which is one of the primary factors causing the decrease in concrete tie sales referred to earlier. In Spokane, we're producing Concrete Ties for transit authorities, Class I railroads, contractors and industrial customers. We continue to see robust inquiry in bidding activity and the Spokane facility has been highly utilized. Our Spokane Concrete Tie facility experienced a record year in 2012 and while we expect another strong performance this year, it will not return to the 2012 levels. As a percentage of this quarter’s consolidated sales, tubular accounted for 10% of sales, construction was 29% and rail was 61% of sales. We do expect this mix to change in the second half of 2013 as we anticipate tubular sales to fall to 4% of consolidated sales, construction to remain at 29% of sales and rail sales to increase to 67% of consolidated sales. Gross profit margins were 19.5% in the second quarter of 2013, compared to 7.6% in the prior year quarter. Excluding the prior year $19 million warranty charge prior year gross profit margins would have been 19.2%, resulting in a favorable of 2013 to 2012 comparison of 26 basis points. Selling and administrative expenses increased by $1.3 million or 8% to $18 million in the second quarter of 2013, due to higher headcount related costs. SG&A expense represent a 12% of sales in the second quarter of this year, as compared to 10.2% of sales in the second quarter of 2012. For the six month period SG&A expense increased by $1.5 million or 4.5% and represented 12.6% of sales in 2013, compared to 12.1% of sales in 2012. Second quarter pretax income was $11.1 million or 7.4% of sales compared to $4.6 million loss in the prior year period. Excluding the warranty related adjustments in the prior year, pretax income would have been $13.3 million or 8.1% of sales. Pretax income for the six month period of this year was $18.5 million or 6.6% of sales. Excluding the prior period adjustments again last year the comparable prior year period of pretax income would have been $17.7 million or 6.4% of sales. As mentioned in our earnings press release, the effective tax rate for the second quarter of this year was 34.6% compared to 27.6% in 2012. Of course, since the prior year quarter results were a small loss, the tax rate was significantly impacted by certain discreet items. Second quarter earnings per share from continuing operations were $0.71 per diluted share this year compared to a 33% loss in the prior year. Excluding the warranty related adjustments as we’ve described, earnings per share in the second quarter of 2012 would have been $0.86 per diluted share. Six months earnings per share from continuing operations was a $1.19 per diluted share in 2013 compared to a $0.03 loss in the prior year. Once again excluding the warranty adjustments, earnings per diluted share for the compared of six month period would have been a $1.19 and 2013 compared to a $1.15 in 2012. Turning to the balance sheet, working capital net of cash decreased by $7.4 million in the current year quarter. Accounts receivable increased by $6.6 million or 9.2% due mostly to a 15.9% increase in sales from Q1 to Q2, but also due to an increase in DSO. Our DSO at June 30, 2013 increased to 44 days from 38 days at the end of March 2013 due mostly to large projects ramping up, paying a little slower than our normal accounts as well as some customer prepayments being worked down by product shipments. DSO at June 30, 2012 was 41 days. We believe that our [AR] portfolio is in very good condition. Inventory decreased by $8.5 million and accounts payable and deferred revenue increased by $9.4 million for the quarter having a nice impact on our cash flows this year’s quarter. In fact our primary working capital components were significant factors resulting in cash flow generated from operations of $16.7 million in the second quarter of 2013 as compared to $6.5 million of cash generated in the second quarter of last year. Capital expenditures were $2.1 million for the second quarter of ‘13, compared to $2.3 million in the prior year quarter. This spend was principally for items such as plant production equipment and inventory handling equipment. We anticipate that the company's 2013 capital expenditures will range between $7 million and $8 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 June 30, 2013 was $94.7 million, up $13.2 million from March 31, 2013 and down $6.8 million from year end 2012. Cash was invested principally in AAA rated money market funds and other short-term instruments where preservation of principal and quick access to funds has been the priority. Looking forward, we believe that second half of this year, we'll see a change in mix that will have a negative impact on margins as we anticipate our tubular segment sales were weaken and our construction segment sales begin to improve compared to the prior year and to the first half of 2013. That concludes my comments on the second quarter of 2013. I will now turn it over to Bob Bauer. Bob?

[Robert Russo:]

Thank you Dave. Good morning everyone thanks for joining us. As I share my thoughts with you regarding the company's performance through the second quarter and I'll comment on how I see the balance at the year unfolding. Generally speaking, my comments are going to be focused on the adjusted earnings without the charges for 2012 so that you have a better basis for comparison operationally with the company without that charge included. So let me start with our earnings press release this morning because we intended to say four things with that message. First, revenue in the second quarter wasn’t quite as good as we were hoping it would be, but it did follow a good first quarter and we're very pleased about getting off to a good start last quarter in light of the uncertain environment driven by all the sequestration talk at the time. We missed the prediction on when the construction business would begin to see improvement which was a key component of our first half sales forecast. The second point, our year-over-year orders changed looks like a big negative number but it's not an indication that there is any big problem. The backlog stands at $220 million, which is about what we expected it to be. Yes, it is down $32 million from June of last year, but that was following an off the chart’s booking period in the first half of 2012 in which we booked $382 million in new orders. The $60 million Honolulu transit project was the most notable of the size of orders, but it was also an extraordinary period for concrete ties and new rail orders as well. We expect the backlog to decline further this year as we move in to the seasonally lower fourth quarter. The third point, I wanted to point out the changing order patterns in the second quarter which has left us in a position to reforecast the second half. This is particularly important as the mix of what we expect to shift in the second half has changed and will have an impact on profit margins. I’ll cover the exact order changes in detail in a moment that will give you more insight on those details. Fourth, and finally, our operating cash flow in the quarter was strong at $16.7 million. Our net cash improved by over $17 million. Our inventory is declined from the beginning of the year by $8.5 million. So I feel good about making some progress in working capital and we will continue to get even better in this area. With that backdrop in mind, let me make some remarks about all of these four points. With regard to sales revenue rail finished the first half with sales up 2.6% over prior year and tubular finished the half of 13.8% over prior year. Tubular products had a very good first half. This is where the order patterns changed a lot when fewer orders from gas pipeline customers. Construction sales finished the first half down a little over 6.5%. This area too had a change in order only showing increasing trends for the first time in several quarters. About the sales levels after six months would have been a bit stronger, I also thought the construction market was going to turn up sooner. This is really the bulk of a shortfall from where I thought we would be at this time. It looks like I was off by about four months. When this market would make the turn this resulted in first half sales just above prior year first half levels as a result. With regard to our operating performance ending the second quarter with $150 million in sales and $11.1 million in pre-tax profit or 7.4% on pre-tax margins did put us in a position to finish the first half with margins up 24 basis points to 6.6%. I do feel good about the margins being better than prior year and what I’d describe as competitive and difficult pricing environment for steel based products. And on top of that our rail business was experiencing headwinds from the lower margin and our trends at backlog and did not have any growth in the more profitable product lines. I also thought our performance in managing price at the time when the steel market is under pressure and very competitive help to keep our gross margin levels up. Our productivity programs and factory investments are also helping to keep cost in line and contribute to GP improvements so this looks pretty solid to me. Year-to-date basis gross profit margins were up 25 basis points to 19.3%, so we finished the half with after-tax income from continuing operations up 4.3% over the prior year first half and EPS of $1.19 for the first two quarters that was up $0.04 over last year’s rate. So all in all, the half was better than the prior year half. Cash was very good in the quarter. Our balance sheet still looks great. We are running little heavier on expenses and I expect that will happen during the year as we realize expenses for growth programs being starting as well as expenses related to driving our acquisitions strategy. So overall like order team did a good job in the quarter and now we have to focus on the second half and adapt to the changing backlog as a result of the order patterns in the second quarter that I spoke about. So let me shift gears into this discussion and transition to orders. The rail business had the most difficult of comparisons in the second quarter because of the booking levels last year. However, I would not describe the order activity for the rail market for that matter as strong at the moment, while many of the rails that report performance had good news this quarter and the industry is healthy. The good results are not being driven by strong unit volume growth as we continue to see a market in which petroleum products replace coal volume. Our business with Class I customers doesn't benefit that much as the wear and tear related to heavy coal traffic declines. That's not all bad news as the change in mix is good for the industry and long term investment in rail certainly has a great outlook. There is still good spending levels at the short lines and transit companies on the outlook for these sectors is good. In fact the number of transit agencies in the U.S. with expansion or refurbishment plants looks solid and short lines are clearly benefiting from their ability to reaching of the developing gas territories as well. One exception to the solid rail outlook is the European market. Our orders in our U.K. operation have been soft throughout the first half of the year and now I don't expect to see any substantial upturn in the second half. The economic climate necessary it's been discussed a lot in the news and these conditions have a spillover effect in the rail industry. In our press release, we decided to highlight orders for Tubular products and Construction products, because these segments are really driving the change in the outlook for the second half. The tubular product segment which has been very strong for several quarters saw weakness from pipeline customers in the second quarter. The weakness was experienced through the entire supply chain for pipe products that serve the gas pipeline market in our coated product business were certainly impacted. Speculation about customers waiting to place orders to take advantage of falling pipe prices was among the top reasons cited. We did see declining cost in powder coating raw materials and also saw our net price to customers move below prior year levels. However, we have not lost gross profit during this time as we've covered all of the price impact with lower raw material cost. The net impact of the order environment is that we've taken a significant amount of sales out of our second half for tubular products and as one of our better operating margin products, it will have an unfavorable impact on the company’s operating margins in the second half of the year. This has not changed our outlook for the industry or the growth opportunity that exist in the gas market we serve and there will be investment for many years to come resulting from the development of new resources in the U.S. I want to emphasize that point. So I see this as short term, but it will negatively impact this year. Gross margins and pre-tax margins in Tubular will be down in the second half compared to the first half because of the volume decline. We also made a decision to work on capital improvement projects during the second half that will bring efficiency improvements to the coated products plant. This factory has been operating at peak levels with little time for maintenance over the past two years. So we're going to take time during this slower than planned production period and make some improvements to that facility. On the other hand, the Construction segment has realized an improving order trend in the quarter with orders that were up 21%. I think it’s safe to say now that the market is showing signs of improvement that we were looking for this year, with first half quarters up 9.7% over prior year. We expect our second half Construction segment performance to be better than the first half. It is possible that the second half could be even better than we’re forecasting right now, but this is I think the last market that I go out on a (inaudible) with an optimistic forecast at this point, but it is nice to see the improving trends that we were experiencing here in this latest quarter. Last quarter we were concerned that our concrete buildings business would be weak as we saw orders from federal, some state agencies stop immediately after the sequestration went into effect, but the pause looks like it was short-lived in this division should do fine this year; although it’s not likely to grow. So turning my attention now to the full year forecast as a result of what we have experienced here in the latest order trend is resulting in the change to our full year forecast in revenue and profit for 2013. We revised our revenue projection to come in somewhere around $600 million to $610 million and earnings per share between $2.70 and $2.80. These projections due take in to account the lower sales from the high margin Tubular segment as well as deleverage from the loss volume and our desire to make improvements in the plant during an opportune time. It also takes into account an improving construction market and one where the second half will reflect continue stability in those order trends. So in the meantime keep in mind that there is a lot of good news as well, our credit products business is experiencing steady growth and improving margins from new plant efficiency. Our transit business will have a record year this year. Our rail distribution division is continued to see solid order activity and our bridge business backlog is now on another upswing with some very solid quarters ahead including backlog that is in place for 2014. So I hope that gives you some additional insight on how the business looks, current business conditions, how it’s going to impact the balance of the year. I will conclude my remarks with that. The only other item I wanted to add is to thank the management team across the entire business here as we have experienced these changing conditions in orders. We’re doing a lot to try to make sure that it doesn’t impact margins in an adverse way and we will be working hard here in the second half as we go into the back half of 2013. So with that, I will return the call back to the operator and we will open the line for questions.

[Operator:]

(Operator Instructions) Your first question from the line of Mr. Robert Kosowsky from Sidoti & Company.

[Robert Kosowsky:]

I just had a quick question on the rail business and I might have missed it. How much was the Honolulu contract in revenue in the quarter?

[David Russo:]

In the quarter Rob it was not that significant, it was $1.8 million

[Robert Kosowsky:]

$1.8 million and then how much do you expect that to in 2013?

[David Russo:]

For the entire year, it's going to be upwards of the $35 million to $40 million. It actually is the project for us with regard to revenue recognition. It’s going to be ramping up second half of August and through the rest of the year.

[Robert Kosowsky:]

Okay. And then although I guess on the Construction side, it's good you're starting to see some life, I was wondering if you could say over next few years if this is kind of like a slow recovery in construction. How do you see it playing out in volume versus pricing? I mean would you expect a greater profit impact over the next few years to be just on margins being elevated by a 100, 200 basis points or is it going to be more similar competitive pricing and just volume coming back and then any comments do you have in new course expansion as well?

[Robert Bauer:]

Well, let me take the first part of that. I think at this point in time, it's probably too early to predict what might happen with price in 2014. I think the environment is going to continue to stay competitive because the pricing out in the steel market is still relatively weak. Although if you're looking around the landscape, you'll see all sorts of signs of price increases that steel manufacturers are trying to get through, but I think the absorption of the capacity that needs to take place is going to take a while before that will stick. To your point of 100 to 200 basis points, I think that would be a long shot for next year. I don't think it will be that good but I think we will wait until the end of the year to see what capacity it looks like and what some of these price increases are doing before we make the call on that. And on the new quarter expansion, I am not close enough to that to say exactly what it is. They are going to put in the capacity that they are adding into their facilities. From our standpoint, we really compete in the piling business with them and whether or not they will devote a lot of it to that and/or intend on putting any new products in there at this point is unclear to us.

[Operator:]

Thank you. Next question is from Brent Thielman of D.A. Davidson. Please proceed sir.

[Brent Thielman:]

Dave you mentioned, Honolulu is 35 to 40 in [reps] I think for the second half for the year. Let’s just talk about your expectations for the rest of the rail business that you get into second half of the year?

[David Russo:]

There is a backlog to shift of course from that Honolulu project. Our new rail distribution business continues to look pretty strong. That business has been up double-digits now for the last few years and so we're continuing to see pretty solid activity from the short lines and the transits where we get along that work. Our other core product lines are doing well; I think there will be fine in the second half. I don’t think there will be an increase in concrete ties, I think that business will be somewhat level from first half to second half because what we’ll see in these transit projects is we will probably remain pretty steady and there is not forecast to be an increase in the business that we do with Union Pacific. And then the balance is in our rail technologies area, we can use a little bit more coal traffic to help our friction management, consumable product line, but that’s probably not going to happen in the second half either. So I think that business will just be steady throughout the remainder of the year as well.

[Brent Thielman:]

Okay. And then on the tubular side, I guess with the segment, like we lowered here in the second half, do you still think you can kind of sustain those margins in the high 20s or low 30s range?

[David Russo:]

You are talking pretax?

[Brent Thielman:]

I’m sorry gross margin tubular products.

[David Russo:]

Well, you said high 20s, low 30s.

[Brent Thielman:]

Yeah.

[David Russo:]

You are probably pushing it. We are going to wind up seeing deleverage in that business from the volume that’s coming out, those gross profit margins are going to fall as a result of that, I wasn’t prepared to put an exact number on that for the tubular business, but it’s going to wind up being at least a few full points, I would imagine.

[Brent Thielman:]

Sure, and then I guess thinking about the back half expectations, are you kind of assuming quarters in tubular remain under pressure throughout the period or kind of thinking maybe we see some late improvement in the year?

[David Russo:]

No, I don’t think they will remain under pressure. I think this thing is going to turnaround. We were frankly surprised at the hole that we were staring at in the second quarter, the one part, the coated products business had been wide hot for the many quarters now, we were growing 50%, so it was really moving along rapidly and so with growth like that it doesn’t surprise me that the end users weren’t able to pause when they wanted to. They might be managing some inventory out there from what we hear, we know that we are trying to time purchase orders what the best price they can get in the market for pipe things like that, but as far as I am concerned, I think this is temporary. I think this market has a lot of lives to it. It is for us going into a lot of the shale gas territories and the forecast for that remain solid. So I think it’s going to just windup coming back its little hard to say exactly when it will be at the first quarter level but I don’t think it will long.

[Operator:]

Thank you. The next question is from the line of Beth Lilly, Gamco Investors. Please go ahead.

[Beth Lilly:]

I wanted to just drill down a little bit more into the construction business and you made a comment in your remarks about the heavy civil business is erratic. Can you just drill down a little bit more on a qualitative basis and talk about what you are seeing on the construction side?

[David Russo:]

Well, part of the problem with that Beth, our business unfortunately doesn't know always move along with, we somewhat compare ourselves to that conservation and development segment within the heavy civil construction market. But at the end of the day we're such a niche player, that we won't necessarily move in the same direction as non-resi construction certainly and sometimes even the heavy civil markets. So, it's with us it's certainly that the piling business, the foundation retention business and we'll play in the conservation and development and a little bit in the power in the highways and bridges. But the markets was up last year and then it was down for the first half of this year, we've got continued even though it's not as bad as it was, continued pressure at the state level with the budgets. So we are seeing an uptick, we are seeing some strength in orders and we are enthusiast about that. But we're not looking for anything or shattering over the next 12 months.

[Robert Russo:]

The other thing that we usually point to when we talk about some of the erratic nature of orders is that, that marketplace for us a lot of the projects have some sort of government funding behind it, both federal and state. And that has caused a little bit of on again, off again nature to a number of things that we see out there. And so with the way these budgets and the planning for them have struggled in the course of the last year, that’s caused a lot of uncertainty with some of these large projects.

[Beth Lilly:]

So it sounds like you are not forecasting that dramatic recovery that we're all waiting for?

[Robert Bauer:]

I would not do that at this point. I think when you look at the volume of our business, how far down it is from where it used to be, you would think that there are to be some sort of a spring back effect, but I think the debt overhang in federal and state areas is going to put pressure on that. We also do look to the commercial construction market to help us as well. Even though that makes up a smaller percentage of our business, but that’s not on the tare either, even though residential is improving and you hear non-res numbers are getting better. I would just think that every project has approached with caution in the marketplace because people have been kind of burned here recently.

[Beth Lilly:]

Okay. And then of course I wanted to ask, you have $100 million in cash on the balance sheet, and can you comment on what you are thinking in terms of the priorities of the use of that, share buyback one of the options that you are looking to make acquisitions. What can you say?

[Robert Bauer:]

The primary use for is intended for acquisitions. We have a fairly developed pipeline of targets that we have these days. We are anxious to move some of those through our funnel and the process of developing them into a business of ours. It is a key part of our growth strategy and so we are working on that more aggressively than we are working on anything else. We may only be very opportunistic on share buyback into very small amounts, but I wouldn’t anticipate too much of that. It will be focused on acquisitions and I can’t provide any further detail beyond that, except to say that that will be a key component of our growth strategy going forward. So we’ll I am sure be reporting something on that over the coming quarters.

[Operator:]

The next question comes from the line of Mike Baudendistel of Stifel.

[Mike Baudendistel:]

I wanted to compare to one of the more recently questions on the Construction segments, we think about government spending at the state level, is there any geographic concentration there because some states are better financials health than others?

[Robert Bauer:]

I think for our business, not really. One of the things we do fair amount of work on is sports, but there is as much federal. I think money behind that is any kind of state money, but that’s usually an important category for us. We’ve seen quite a bit of activity in California Mike which you would think would be counterintuitive, but projects were there and they needed to be done. So we’ve gotten some decent activity out there, but we haven’t seen any major concentration, I don’t think. And over the years we’re on tied to one area more than other. The only thing that I would say beyond that is that the concrete buildings portion of our business does have a regional focus to what it is in the area where you as well as like the west and southwest, it’s in the areas where you see more the national parks and the concentration of outdoor activity, but other than that’s about it.

[Mike Baudendistel:]

Great, that’s helpful. And the comments on the volatility and the fuel prices impacting the Tubular segment, can you give a sense of order of magnitude of how much the fuel prices would have to retrans in order to that in fact reverses, if you have a sense for that?

[Robert Bauer:]

Well, when I was making that comment and you are talking about productivity of a business.

[Mike Baudendistel:]

Yeah.

[Robert Bauer:]

Yeah, what we saw was, we saw an opportunity in the marketplace where prices were going down anywhere in the neighborhood of say 5% to 10%, you could get reductions on your speed in the marketplace. That is enough for customers with the big pipelines projects to wait or to time those projects. So when we saw prices changed that much it didn’t surprise us that there could have been a pause in the orders that came in as a result of that. So right now they are not declining any further. I think everything in this steel industry right now looks like it has leveled off and we are monitoring markets that we don’t compete in as well, we're monitoring scrap prices and all of those sorts of things. So the environment right now is not a declining environment, it's going to wind up, moving up. So now you are in that situation of when the people place orders before prices start to increase measurably. Now that's the hard one to predict exactly how much they might inch up and at what rate they will go up. They would like to get some traction in the steel industry around that, but that's always the hard thing to do. I don't think there will be any kind of rapid increase here over the coming quarter or two.

[Mike Baudendistel:]

Okay, that's helpful. And then in the rail group, it sounds like some of the revenue if you want to close shortfall and have the same seasonal increase from the first quarter and revenue to the second quarter, concentrate on a concrete ties and the friction products, were there other areas to that sort of [illustrative] your initial expectations and how was rail revenue in the quarter versus expectations a quarter or two ago?

[Robert Bauer:]

Well, we were -- we thought it would be stronger in the quarter. We thought both incoming orders and we would return that into shipments in the quarter, both would have been higher. And then I’d tell you that it was really across the board, there wasn't any other area that I would point to from a product line standpoint that was more disappointing or more troubling than the other. So, I think I’d just to have say generally speaking it was just across all of our different product lines and I wouldn't point any other one as being a significant contributor to our shortfall.

[Operator:]

Your next question is from Brian Rafn of Morgan Dempsey Capital Management. Please proceed.

[Brian Rafn:]

You talk a little bit; you had such a robust last few years. I think you highlighted on the railroad, the Class I North American. As you look at, you said from the industry that, they are, through to the balance of the year that you are still going to be up CapEx wise, fairly solid. What you guys look through to the end of the year for demand in product? Are you seeing? Is it ties, is it track, is it some of your technology component? What do you see and then maybe even in the next year, what do you see demand for L.B. Foster product?

[Robert Russo:]

Well, I wouldn't call out any one of them as being dramatically different from the other. We think the demand and balance of this year will be related to track refurbishment, maintenance programs. The CapEx that the Class Is you are talking about, they still have a pretty strong maintenance program. For us, that calls for just about all of our track component products. They continue to work on operating ratios to the extent we can sell both products as in track as well as friction management. That helps in all of those categories. So we don’t see them shifting capital spending in a way that it would help one of our areas more than another and I think that will carry into next year and they typically forecast modest increases in capital spending. They are keeping them all tied pretty close to a percent of sales. They are not forecasting huge sales increases I think the one into 2014 is more steady growth and they continue to do a pretty good job at operating their businesses. So we think that the capital spending should still be fine even going into 2014.

[Brian Rafn:]

Okay. So would you say that from a margin standpoint or margin accretion that’s the mix of products in rail shouldn’t change that much throughout the balance of the year?

[Robert Russo:]

Yeah. I think that’s probably, yeah a pretty safe estimate on it. Yes.

[Brian Rafn:]

Okay. What that, the rail areas are one area where you can kind of develop new products anything on new products technologies, new designs, line extensions?

[Robert Russo:]

Well, I don’t know that I can mention anything that whether they would be coming in the next quarter or two, what I can say is that we are working on a number of things in both the track components and the friction management area. We are making investments in engineering. We’ve got some opportunities to come out with both next generation products as well as products that we don’t have today. They are on our product roadmap to be launched over the course of the next 12 months to 24 months in some cases. So we are making some investments in those areas. There is just, I just couldn’t be able to point to something specific for you that might come out in the next quarter.

[Brian Rafn:]

Yeah. Sure would you say Bob that the run rate of those new product development would be about the same as kind of legacy L.B. Foster or would you say it’s accelerating give me a sense is to how much you kind of focused on that?

[Robert Russo:]

Well, it is accelerating. We are clearly attempting to put more emphasis in this area. We clearly have more spending going on in this area these days and I would say that we also have an opportunity to utilize some additional technologies that we want to develop as well. Now in terms of impact in sales, it always takes a little bit time to get engine revved up and get some momentum building, but we are attempting to change the rate at which we introduce new products, now but both of them, our product line extensions and largely thinks even where we don’t have some still staying in the market that we are in today. But to the extend we can’t, we are trying to look at opportunities in adjacent markets and that will help us overtime but that is a little bit more of a long run.

[Brian Rafn:]

Okay, good. Bob, anything on high speed rail relative to the track and we haven’t seen as much chatter in the press about that?

[Robert Russo:]

Yeah, that’s because I don’t think there is much chatter and if there is chatter it seems to be more bad news than good news. I know one of the projects south west, some of the funding just held through for, have been slow line from California to Nevada, and so now that one looks like it might be in a little bit of trouble but other than that there isn’t anything real positive to comment on in that space.

[Brian Rafn:]

Okay, going over in the construction side you guys are talking about the heavy civil on that, we own [Grana] Construction and there has been, it seems to be in the heavy civil side, the large design build orders, they have been fairly robust, the problem has been in some of the state highway, some of the smaller DOT, the county those type of things. Do you have penetrations in some of those huge, you are talking about 3, 4, 5 sometimes over a $1 billion in these big design build price. Do you have exposure to that area?

[Robert Russo:]

Yeah. Well when you talk about the order of magnitude, you are talking about, if I imagine what you're describing correctly, I would say, yes. But keep in mind in that area where we do function like a distributor, one of our strong niches is midsize projects for short, quick delivery you need inventory those sorts of things. We are booking orders for us that are in the millions of dollars. But we don't book orders that are in the tens of millions of dollars. So when you talk about mega projects, if they are really big, they'll wind up find in the different way to buy to buy direct, if you're talking in the tens of millions of dollars.

[Brian Rafn:]

Right, okay, okay. When you look at the Army Corp of Engineers they do their annual survey of infrastructure and everything is always a C or a D or a F, you guys I think do some bridge decking, that's something where you're seeing, you look at the 700,000 bridges across US, a lot of absolute and we saw the collapse in Minneapolis. How is that specifically just that bridge business for you guys is that episodic?

[Robert Russo:]

You know it is choppy from quarter-to-quarter. We've booked our great order last quarter, the new the Newburgh–Beacon Bridge which was a $14 million order for us. We don't do that every quarter, I wish we did. We're seeing some pretty nice activity here lately, but despite the fact that they are always putting out a lot of data on the number of deficient or obsolete bridges, it doesn’t pick up measurably. So I saw recently that we're gaining some ground in that area. We’re being the United States infrastructure market, but that’s not turning in to massive projects for us that are coming in at a measurably faster rate.

[Brian Rafn:]

You guys also eluded a little bit to I think the California comment on ports and marinas. You do a lot of certainly the product in that area in the harbors and stuff like that. Are you seeing any strength other than California because we certainly had, we've had the international trades been modestly good, anything in other ports other than California around the country?

[Robert Bauer:]

Yeah, I think we will continue to see that in the southeast and the east coast, the anticipation of routes changing with what will happen with the Panama Canal. I think the ports are getting more and more competitive with one another around the country. So I think we will continue to see some nice projects on the drawing board here in the coming year.

[Brian Rafn:]

Bob, you spoke a little bit about taking a pause in some CapEx maintenance in one of your plants. I thought you said, Tubular. What specific plant is that and how much spending, and what are you spending on?

[Robert Bauer:]

Yes, it is in our Tubular products area. The plant where we quote pipe, the fact that order input rate was low here and production in the third quarter is going to be lower than normal. We are going to update some machinery. We are going to put in some more modern technology. We are spending a fair amount of money on it. It’s a few million dollars and it’s going to wind up giving us efficiency in the plant as well as cost reduction. So overall it’s a great productivity improvement and its technology we want to play it safer, its better quality, everything about it is just lot of good reasons do it. And so we are going to pull material on it now, while we run in a little lower in volume and have some of that hourly workforce help us to put those improvements in place.

[Brian Rafn:]

Okay. And then you mentioned, how would you guys looking at kind of headcount as far as hiring, you mentioned a little bit of engineering in a railroad area, what's…?

[Operator:]

The next question is from Brent Thielman of D.A. Davidson.

[Brent Thielman:]

Hey, guys, just one more. You guys have talked about trying to get to kind of 5% to 7% organic growth annually and it looks like this year might be a little bit shy about since we’ve kind of some shorter term order issues in tubular, but rail products growth has been kind of sideways, I mean you are looking for backlog to decline sort of further this year. I guess my question is as you look beyond this year, are you confident about getting kind of back to that sort of organic growth range?

[Robert Bauer:]

Well, I’ll tell you Brent, the latest conversation that we had in here was that it’s possible that we might take that down a point, and take that 7% down to 6%, 5% to 6%, or 4% to 6%, but when you look at what's happening in the marketplace and the economic forecast everywhere it seems like all of the (inaudible) and the point off of expectations in the market. So as we have been talking about that 5% to 7%, it was all based on the fact we still like we could grow faster than the market and we are putting that market somewhere around 3% or so. And I am not sure I’d make it that strong going forward anymore, I think we are down our expectations factor maybe it’s going to be a 2% to 3% market rather than 3% or 4% market and that is because of a just some of the economic headwinds which is largely driven by debt and in our case we have got government spending behind the number of our projects. But even in the rail industry I think while it’s a good industry, it’s healthy, there is lot of good things happening, I think they are probably down and things back a bit as well as everyone thinks about the fact that the growth and the GDP rates are just not going to be quite what they used to be.

[Brent Thielman:]

And that is helpful, thank you.

[Operator:]

The next question is from Robert Kosowsky of Sidoti & Company.

[Robert Kosowsky:]

Yeah, just a quick follow-up question. If I look back to my initial notes for the fourth quarter conference call, it looked like you are looking for $10 million to $12 million of CapEx, now it’s $7 million to $8 million and I am wondering what the major projects you have pulled back on $4 million, $5 million you pulled back on. And I know you mentioned at the beginning of this year you’re thinking about being a little bit more cautious in the near term bringing in technical staff. And I am wondering if that has still remained cautious or if you are still adding some of the more technical workers?

[David Russo:]

Well, the bulk of that CapEx is us to actually delaying the project that we are just speaking about for our Coated Products plant. When we put our 2013 plan together we thought that we would spend maybe a third of that capital or more than the third of that capital on that facility for the project I just spoke of. And as the year unfolded, since we didn't see as much demand come through this year as we thought, we pushed that project off a bit. So now the spending for what I just described is going to straddle 2013 and 2014. And that's the bulk of the CapEx delay.

[Robert Kosowsky:]

Okay, that's helpful.

[Robert Bauer:]

One of second part of question there.

[Robert Kosowsky:]

It was just about the…

[Robert Bauer:]

Yeah, I'd say we have added some headcount in the business here, because of the current order patterns. We've got a hold on that, but we did add both some technical and some selling resources to fund growth programs early in the year.

[Robert Kosowsky:]

Okay. And then one final question do you see any other big contracts either for place Honolulu or on the piling side that are coming up for a bit down the pike, obviously can't really give too many details, but just wondering what you see on the radar screen?

[Robert Bauer:]

Well, I don't know anything that's as big as Honolulu at this point. So we're looking for just the broad market that help replace that backlog that will go add on Honolulu. And in the Construction segment, orders don't come back that large, good orders for us, they range from say $2 million to $4 million in size. There is a nice pipeline out there right now with it, but nothing I could point to that would be as really, really sizable.

[Robert Kosowsky:]

It doesn’t like the Panama Canal or what was that, like that?

[Robert Bauer:]

Investments like that probably. We follow that Honolulu job for probably four years before it finally clicked for us. So those jobs typically take a long time coming. So there is nothing over the next six plus months that we see of that size.

[Operator:]

Thank you. Brian Rafn, Morgan Dempsey Capital Management Sir, we allow you one question.

[Brian Rafn:]

Bob, on the M&A side, you talked about fairly robust pipeline. What kind of your sense in pricing, you know, multiples of EBITDA. Is it a buyers’ market, a sellers’ market and kind of describe a little some of the detail?

[Robert Bauer:]

Well, I would say, regarding buyers and sellers’ market, it all depends on what markets you are in and certainly has a lot to do with the quality of the company that you are looking at. I would say, at the moment, we're looking at attractive segments. We have said as we've been out in the marketplace before that our focus is largely in the rail and the Tubular product segments, both of those are good markets basis and the tubular area is largely in those markets that are focused on energy. So I think those multiples from time to time will probably look like a sellers’ market.

[Operator:]

Thank you. Gentlemen, you have no further questions in the queue. I'll now hand the call back to CEO for any closing remarks.

[Robert Bauer:]

Well, thank you for joining us today. I appreciate all the questions and I hope, we’ve given you some good insight on what the balance of the year will look like. So with that we’ll go ahead and close our call for the day and I am sure we’ll talk to many of you again as the third quarter comes to a close. Again, thanks for joining us. Bye, bye.

[Operator:]

Thank you. Ladies and gentlemen for your participation in today’s conference call. You may now disconnect. Have a great day. Thank you.