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L. B. Foster Company (NASDAQ:FSTR)

Q3 2008 Earnings Call Transcript

October 24, 2008, 1:00 pm ET

Executives

David Russo – SVP, CFO & Treasurer

Stan Hasselbusch – President & CEO

Analysts

James Bank

Mark Kuzinski

Liam Burke

Scott Blumenthal

Tom Spiro

Brian Riesman

Operator

Good day, ladies and gentlemen, and welcome to the third quarter L. B. Foster earnings conference call. My name is Emanuel and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. David Russo, Chief Financial Officer. Please proceed sir.

David Russo

Thank you, Emanuel. Good afternoon, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's third quarter 2008 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 afternoon, Stan will provide an overview of the company's third 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 before we 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, 2007 as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster.

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 third quarter 2008 earnings call and webcast. This morning, we announced increased sales and increased adjusted operating results for the third quarter 2008.

Sales were $145.6 million for the quarter, compared to $135.8 million in the third quarter of 2007. Income from continuing operations was $8.1 million or $0.76 per diluted share. This compares favorably to adjusted income of $7 million, or $0.64 per diluted share in the third quarter of 2007, after excluding incremental dividend income related to the sale of our investment in the DM&E railroad.

David will discuss the financials in detail later. But first, I would like to talk about operational performance. Let us begin with Rail products. Overall revenues were up 7%, led by new rail, in which revenues were up 50%. This increase was a result of both higher transaction pricing and a 26% increase in tonnage shipped. Concrete tie sales were down 25% in the quarter. Comparisons for the year in concrete ties remain unfavorable, almost exclusively because of the volume drop-off at the Union Pacific railroad. We currently expect production between Grand Island and Tucson for the Union Pacific to be approximately 400,000 ties this year, which is down from 775,000 produced at those two facilities in 2007. Our expectations are that consumption levels by the UP will increase in 2009.

While the number of carloads shipped remain flat, Class-I railroads continue to report record earnings, benefitting from improved operating efficiencies, strong revenue per unit growth, and increased fuel cost recoveries. Capital expenditure gross will again exceed double digits with the Class-Is this year. This is a paradigm shift, because a leveling or drop-off carload shipments has historically led to a corresponding drop in the level of spending. This clearly has not been the case in 2008.

Next year’s outlook for rail spending is mixed. Initial forecasts are leaning towards a modest 2% to 5% growth in CapEx spending from the Class-I’s. However, we are encouraged by expected transit spending in 2009. Record (inaudible) levels are leading to increased funding. We are tracking 12 separate transit bills on the November balance, and the recent passage of the Rail Safety Improvement Act of 2008 included provisions to increase and track spending by 100% over the next 5 years.

In Tubular, sales were lead by our threaded products group in Houston. Revenues in the quarter were 44% ahead of 2007. This was our best quarter since the first quarter of 1988, when we were still in the oil country tubular business. Tubular products results in the quarter were a combination of solid performances by both micro-pile and pump column.

Construction sales were $69.8 million, 12% over third quarter 2007, thanks to Precast buildings. This division manufactures concrete restrooms for the parks and recreation industry. Precast was acquired as part of the CXT acquisition in 1999. The third quarter 2008 revenues were $11.7 million, 46% ahead of the third quarter last year. Piling sales for the quarter were 5% ahead of last year, led by two flat sheet pile contracts sold by Paul Whitworth in his piling sales group in our Hayward, California office.

We expect the heavy construction market to be flat for the balance of 2008 into 2009. With the rapid run up of prices for various construction materials, this year as well as ongoing turmoil in our financial markets, many projects have been delayed or postponed. Additionally, funding at the state and local levels has been negatively impacted by budget shortfalls due to reduced overall tax receipts.

Funding will remain a concern in 2009. At the Federal level, the highway trust fund was re-established for fiscal 2009 and one wildcard for next year is the possibility that a second stimulus package, currently being discussed on Capitol Hill. Two key components of this proposal, Federal money for infrastructure spending and funds to shore up state budgets will positively impact the heavy civil construction market.

Last quarter, we talked about the escalation of steel prices and their impact on our performances. Since then, we have seen a downturn in scrap prices, a key component in the production of new rail and piling by our strategic supply partners. We know this will eventually have an effect on our purchasing and selling prices, but we also believe that because the primary steel products we sell are uniquely rolled and sold into specialized markets, that remains solid and are not commoditized as other types of steel, we will not be as significantly impacted.

So far, 2008 has proven to be a great year for L. B. Foster Company. We have maintained our consecutive run of quarter year-over-year increases in earnings per share and our profit margins have never been better. As we consider our potential performance for the balance of the year and into 2009, like any other companies operating in this chaotic economic and financial environment, we certainly have our concerns. In our lifetimes, we have never experienced the types of challenges that we are currently facing. While I feel our strong balance sheet and excellent returns provide us with measure of confidence, as I look ahead, we are still subject to the ramifications of the upheaval in global financial markets. As I had mentioned, steel prices are and will continue to be under pressure for the foreseeable future. But I also believe that our key end markets rail, construction and energy remain solid. The long term fundamental need, especially in the United States to maintain and grow our infrastructure and the leadership role that L. B. Foster has as a key supplier to these markets suggest to me that we are well positioned for future success.

Now I would 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 would like to remind everyone about the impact that the sale of our investment in the DM&E railroad had on last year’s third quarter results. As most of you are aware, the DM&E sale closed in October of last year, and the resulting gain of approximately $122.9 million was reflected in our fourth quarter results. We did however report incremental dividend income in the third quarter of $8.5 million that had previously been deferred. This amount was in addition to the normal recurring $247,000 of dividend income that we had been reporting on a quarterly basis. In an effort to discuss meaningful comparative results, my discussion will exclude this incremental income all the way down the income statement. Again, the amount was just under $8.5 million, the tax provided on that dividend was approximately $900,000, so that the net amount was approximately $7.6 million, with a corresponding diluted EPS of approximately $0.69 per share.

Okay, so with that long-winded introduction, I will begin. Sales for the third quarter of 2008 were $145.6 million compared to $135.8 million in the prior year, a 7.2% increase, which we leveraged into a 22% increase in pretax income. The sales increase was due to a 6.8% increase in rail product sales, and a 12% increase in construction product sales, partially offset by a 15.8% decrease in tubular product sales, compared to last year’s third quarter. The construction product sales increase was due to increases in our pre-cast buildings, fabricated products, and piling divisions.

Third quarter tubular sales decreased due to a decline in coated product sales; partially offset by an increase in threaded product sales. Coated product sales decline was due more to the record performance turned in by this division last year. we noted during the first quarter call that the first quarter sales increase compared to the prior year would not continue into the remainder of the year, as our coated division went into a third shift throughout the summer and into September of 2007.

The energy market served by our coated division has been robust for the past two years, and subject to any significant impact resulting from the recent credit crisis, we would expect that strength to continue throughout 2009 and beyond. Our threaded pipe division continues to successfully address its poor water well market and pursues additional opportunities in the OCTG and micro-pile markets to expand its customer base and fully load its facility.

The rail sales increase of 6.8% was driven by rail distribution. While concrete tie sales declined in the third quarter compared to last year, our Spokane facility generated a nice increase. Tie production was up 3% compared to the second quarter of 2008, but was down approximately 25% compared to the prior year third quarter, due principally to reductions at the facilities that serve the Union Pacific railroad.

Our Grand Island and Tucson facilities were approximately 50% utilized for the Union Pacific railroad, and we are actively marketing both heavy haul ties as well as a newly developed industrial concrete tie from Grand Island. The new industrial tie is currently being produced and sold. We also continued to review cost reduction opportunities at these operations. In Spokane, we continue to produce concrete ties for other Class-I railroads, transit authorities, contractors, and industrial customers, and we continue to experience solid enquiry in bidding activity. As a percentage of consolidated sales, tubular accounted for 7% of sales, construction was 48% and rail was 45%.

As mentioned in our earnings release, backlog stood at $178.9 million at the end of the third quarter, up 8% over the third quarter of 2007. Bookings for the third quarter decreased by 3% to $115.8 million. Year to date bookings were $412.8 million, flat with the prior year. Gross profit margins were 15.6% in the third quarter, an increase of 14 basis points over last year’s third quarter. While the increase was slight overall, it was comprised of an increase in gross profit for manufacturing and other variances, as well as decreased unfavorable manufacturing variances. These were partially offset by a significant increase in LIFO expense.

Third quarter LIFO expense was approximately $5.1 million compared to $600,000 million last year. The businesses that drove the margin improvement in the third quarter were Allegheny rail products due principally to plant processes improvements as well as product mix, threaded products due primarily to product mix and increased volumes in piling products.

SG&A expense increased 2% to $10.1 million in the third quarter of 2008, due primarily to salaries and advertising expenses. SG&A represented 6.9% of sales in the third quarter of 2008, as compared to 7.3% of sales in last year's third quarter, a 35 basis point decrease. On a year to date basis, SG&A was 8% of sales compared to 7.1% of sales last year.

As a result of the foregoing, third quarter operating income was $12.6 million, compared to $11 million in last year's third quarter, a $1.5 million or 13.8% improvement. As a percentage of sales, operating income was 8.6% in this year's quarter, versus 8.1% last year.

Interest expense was $500,000 in the third quarter of 2008, $426,000 or 46% less than the third quarter of last year. The decrease was due principally to a decrease in average borrowings during the third quarter of 2008 as compared to 2007, and to a lesser extent, to lower interest rates on certain debt instruments. The lower borrowings are a result of the strong cash flow generated from operations in the second half of 2007.

As I mentioned during previous calls, none of the DM&E proceeds have been used to pay down debt. Since June of 2007, we have paid down approximately $25.7 million of debt with internally generated cash flows.

Third quarter pretax income from continuing operations was $12.7 million, compared to $10.4 million in last year's third quarter, a $2.3 million or 22% increase. As a percentage of sales, third quarter 2008 pretax was 8.7% versus 7.6% in last year's quarter. The third quarter 2008 income tax provision was 35.9%, compared to 32.6% in last year's third quarter. Once again, as a reminder, this tax rate excludes the dividend income as a discreet item.

Income from continuing operations increased 16.6% to $8.1 million or $0.76 per diluted share compared to $7 million or $0.64 per diluted share last year.

Turning to the balance sheet. Debt at the end of the third quarter was $29.3 million, compared to $34.2 million at the end of 2007 and $35.5 million last September. As I previously mentioned, the $25.7 million decrease in debt during the past 15 months was due to cash generated from operations.

Capital expenditures were $900,000 for the third quarter, compared to $1.1 million in the prior year quarter. On a year-to-date basis, capital expenditures were $4 million compared to $3.8 million in 2007. We expect capital expenditures to be less than $6 million for all of 2008. We also expect to generate strong cash flow from operating activities in the fourth quarter.

The most notable use of cash in the third quarter was the repurchase of the company's common stock pursuant to its share repurchase program that was announced on May 12th of this year. As noted in our earnings release, since the second quarter, we purchased an additional 380,947 shares for approximately $10.9 million. Program to date totals reflect that we purchased 794,309 shares for a little less than $24.8 million. So the current Board authorization is substantially complete. While we believe the amounts and the timeframe authorized by our Board to accomplish this share purchase program is prudent, we also believe that the recent downturn in the markets provided us an opportunity to accelerate the program and we did so. This program does not conflict with our stated acquisition strategy. On the contrary, we believe that the combination of the two will help provide balanced, long-term value for our shareholders.

Debt as a percentage of capitalization was 12% at the end of September, compared to 22% at the end of September last year. Our leverage ratio is just under 0.6 to 1, down from 0.8 to 1 at the end of September 2007. And our interest coverage strengthened to almost 23 to 1.

Cash at 9/30, 2008 was $111.8 million, and we had over $107 million invested, principally in AAA-rated money market funds, all of which today are guaranteed by the US Treasury. With regard to working capital, accounts receivable and inventory, net of accounts payable, declined by $400,000 compared to the second quarter of 2008, and increased $10.5 million from year-end.

Accounts receivable decreased by $4.4 million during the quarter, primarily due to the $6.9 million sales decrease in September as compared to June of 2008, while DSO increased 45 days from 41 days at the end of the second quarter. We believe our accounts receivable portfolio continues to be in excellent condition. L.B. Foster's bad debt expense has been consistently been below 0.1% of sales.

Inventory increased $14.9 million during the third quarter of 2008, primarily due to commodity price increases in 2008 that have impacted the price we pay for most items, especially steel. This has certainly impacted our piling and rail divisions and we have partially mitigated the impact on inventory by carrying lower quantities in several areas. Additionally, in the third quarter, we had several customer delays of shipments that had a negative impact on our inventory balances.

As far as 2009 is concerned, we have seen recent anecdotal evidence of both strength and weakness, with more evidence of weakness, but we cannot determine today the extent nor the duration of any effects of the credit crisis and volatility we have witnessed over the past several weeks, nor are we willing at this early stage to predict the period of time that these effects may last. What we can do is to continue to run our business with the balance of opportunism, while managing risk in an uncertain environment.

Having said that, we enter this period of uncertainty in an extremely strong financial position with the ability to take advantage of opportunities and weather the storm if need be, as future circumstances dictate.

In summary, the first three quarters of 2008 has been challenging in many ways, but also rewarding as we have aggressively pursued a number of opportunities and continue to do so. We believe the fourth quarter will contain similar challenges and opportunities, and we are continually impressed with the efforts and resourcefulness of our 660 employees.

That concludes my comments on the third quarter. We will now open up the session up to questions. Emanuel?

Question-and-Answer Session

Operator

Ladies and gentlemen, (Operator instructions) And your first question comes from the line of James Bank. Please proceed.

James Bank

Hi, good afternoon.

David Russo

Hi, James.

James Bank

I understand LIBOR has come down a little bit, but the majority of the debt you guys have outstanding is going to be based on that. Is there any risk at all there to consider going forward?

David Russo

Well, we obviously don’t have much debt change. I think the variable based on LIBOR is about $16 million, and so no, I mean, we always look for a little bit of a mix between fixed and floating and with the low amount of debt we have, we really don’t view that as any kind of a risk at all.

James Bank

Could you split the billing margin improvement with the positive variance from manufacturing improvement in the quarter?

David Russo

Manufacturing was a little more than 50 basis points.

James Bank

Okay. And the balance was billing margins?

David Russo

Billing margins and price variances.

James Bank

Okay, great. And the LIFO expense in the third quarter, that $5 million, is that run rate maybe for the fourth quarter?

David Russo

The fourth quarter is not going to be as – we don’t expect at least at this point in time for the fourth quarter to be as high as the third. We have really recorded LIFO year to date to reflect our full year forecast. So the nine months is expected to be three-fourths of the full year.

James Bank

Okay. And how much on your inventory with regard to piling and rail are you hanging on to that has been older than August let us say, the month of August.

Stan Hasselbusch

Let me just say this, James, our inventory at the end of the quarter was $120 million, which was about $25 million compared to last quarter last year. 77% of that inventory is in new rail and piling, and of that inventory, which totals a little over $90 million, we feel that 75% of the new rail inventory, which is $27 million is committed, it has been sold or it is either work in process or waiting to be released. We also think that in the piling side of our business, which has got approximately $65 million in new piling, that over half of that is either committed, it is work in process, part of our rental pool, or has actually shipped and we have not been able to recognize the revenue. So, those two products, where we have got $93 million in inventory, for the most $55 million of that inventory is committed and we probably have $38 million of risk, which is really quite low overall. I think that when we talk about inventory and there is no doubt about it, inventory is a concern as we go forward, we do have a little risk in there. I think we have got a little risk in relay rail, which is driven exclusively by scrap pricing and scrap pricing, as we have talked about and we have seen in the last two months has dropped considerably. We have about $3 million in relay rails and there is some risk there. We have known that bearing pile, which we don’t carry a lot of inventory; announcements have come out as far as an $80 a ton drop in there. We don’t feel we have got much exposure, but there is a little bit there. And the other side of it where we are doing very good is in threaded pipe and we have seen some of the pipe prices, which are driven by flat rule, are down approximately $100 a ton and so we have got a little bit of risk there. So, we have got $120 million on the balance sheet, and I think that overall, there is risk out there; and don’t get me wrong. I mean, it is something that we are on the product mix about everyday, and they are really watching what we buy and really watching how we go forward and our cost that we are paying, but $120 million with the bulk of it probably committed.

David Russo

In addition to that, James, one other thing I would tell you is, even though, to Stan’s point, we do have $120 million on the balance sheet, about $15 million has already been paid for, it just hasn’t shipped.

James Bank

Okay, Stan, thank you for that detailed explanation, very helpful. What is your outlook on steel? I mean, what would be your position if you guys had to –

Stan Hasselbusch

You know, (inaudible) I mean, it has been up and down this year, we really don’t know where it is going. I mean, it would be unfair for anybody to speculate, and you will hear that pretty much across the board in the industry.

James Bank

Okay, and then one last one and then I'll jump back in line. If you are able to, can you split your piling sales in the construction segment? Are you able to split that between Federal work and state work?

Stan Hasselbusch

No. But I'll tell you this much, that most of it is state work or private work. I mean, we don’t do a lot of direct Federal work. Federal monies are used in the state projects, but they are mostly bid through the states and they are federally supported is how that works.

James Bank

Okay.

Stan Hasselbusch

Highways (inaudible) fund the state governments and almost all of that exclusively goes to the state and it is bit to the state.

James Bank

Okay, I understand. Okay, so the next Highway Act, should there be one coming out in 2009; that is really pivotal then to the piling.

Stan Hasselbusch

(inaudible) is the only area that really is really direct with the Federal government as we do a lot, we have a lot of work in the last couple of years (inaudible).

James Bank

Okay. Great, thank you.

Stan Hasselbusch

Thanks, James.

Operator

And your next question comes from the line of Mark Kuzinski. Please proceed sir.

Mark Kuzinski

Good afternoon, gentlemen. (inaudible) equities. Continuing in this same vein of state versus Federal, are you seeing a large (inaudible) in terms of regional activity in your construction segment?

Stan Hasselbusch

Not anything in particular, no. I mean, the popular states get the money and that is how that pretty much goes, Mark. But I think that what we talked about a little earlier, what we are seeing some because of the drop-off in tax received that state-only bids that had dropped off. You know, there are some jobs that are out there that we are very much aware of because of the economic and financial situation, which have been delayed, postponed. We haven’t seen a lot of cancellations, but you know, there is that concern that we have out there about the future.

Mark Kuzinski

And, do your products, do they have applications to high speed rail?

Stan Hasselbusch

Absolutely.

Mark Kuzinski

Okay.

Stan Hasselbusch

As a products unit, Mark.

Mark Kuzinski

So, would that, assuming – well, I thought it is sort of a pipe dream, but you know California is kind of contemplating high-speed rail again. Would the existing infrastructure there need to be upgraded significantly or how exactly might that potentially play into your hands?

Stan Hasselbusch

It would have to be upgraded. I believe that they could use some of the existing lines, but they would significantly have to be upgraded as far as the type of rail, the application, the connectors, and how that is installed, that would all be new.

Mark Kuzinski

Okay. And then in terms of the tubular –

Stan Hasselbusch

You know that is one of the many projects, I think that is a status on the budget. I think when I talked about 12 trends of projects, they have a – of the state budget in Rhode Island in California along with 10 individual cities and that California program I believe is around $10 billion. So –

Mark Kuzinski

I believe you termed the upcoming referendum?

Stan Hasselbusch

It is on the November ballot.

Mark Kuzinski

In terms of the tubular products division, do you guys compete at all with fiberglass piping products?

Stan Hasselbusch

No.

Mark Kuzinski

No? Okay.

Stan Hasselbusch

We have got two products, we have got a threaded steel product, which is in the pump column for well drilling and then we also are in the micropile smaller diameter threaded pile application, and then we coat pipe for the gas transmission industry at Birmingham, the coated pipe industry. We don’t compete with fiberglass, no.

Mark Kuzinski

Okay. And then, I'm just curious, in terms of the mindset people have regarding rail freight and oil prices and the compelling economics of rail freight, are you seeing any sort of significant paradigm shift, where people are saying ‘Gee, oil prices are kind of – although they have come down recently, there is going to be pricing pressure there going forward and investing in the rail system at this point in time makes more prudent sense’?

Stan Hasselbusch

I'm not sure that I totally understand what you are saying, but as we discussed in my earlier remarks, I mean, this is times that you have not seen before in the rail industry. I mean I note that the rail industry are coming out in the last couple of days with again, record profits, and they are spending record levels. They have got really an opportunity to really to continue to leverage their position against the truck transportation. You know, the profits are being driven – a big part of is being driven because of oil pricing that they are passing on to the customers.

Mark Kuzinski

Right. And then, this is the last question. In terms of the – what kind of acquisition environment are you seeing out there in terms of the pricing of companies and just the general environment?

David Russo

Mark, I think the amount of activity has certainly slowed down, and we have seen valuations fall to a certain extent. We would like to see them fall a little further at least in some of the areas we are looking at. But, I think there is certainly to our buyers out there today than what there was 8 or 9 months ago, or even quite honestly, 3 or 4 months ago, but the folks that are out there selling have fewer opportunities, there is a lot of private equity firms that really just running what they have and they are not in the market today. So, we don’t view that a long term scenario certainly, but if you are asking recently within the last couple of months, it has slowed substantially and you see mostly strategics in the marketplace on the buy side.

Mark Kuzinski

Okay, great. Thanks a lot.

Operator

And your next question will come from the line of Liam Burke. Please proceed.

Liam Burke

Thank you. David, how are you?

David Russo

Good, Liam, how are you doing?

Liam Burke

Fine, thank you. Could you give me a free cash flow number for the first nine months of the year?

David Russo

Yes. Free cash flow was a little over $8 million – $8.5 million.

Liam Burke

Okay, and then you had expected to be strong in the third quarter, fourth quarter as well?

David Russo

We do expect a good fourth quarter from cash flow, yes.

Liam Burke

Okay, great. Thank you. And in terms of the Alleghany insulated bonded joints, is that business just chugging along?

David Russo

We have had a good year. We are having, really getting some benefits out of the efficiencies of the move that we could (inaudible) and it is – we are having a good year.

Liam Burke

Great. Thank you.

Operator

And your next question will come from the line of Scott Blumenthal. Please proceed.

Scott Blumenthal

Good afternoon, Stan and Dave.

Stan Hasselbusch

Hi, Scott.

Scott Blumenthal

Does the backlog number contain October 1 announce for the L. A. County Metro?

David Russo

No it doesn’t. No, that is in the October numbers.

Scott Blumenthal

Okay. And have you disclosed the revenue impact of that order to us?

Stan Hasselbusch

I thought there was a press release on that.

David Russo

Yes, we have.

Scott Blumenthal

Yes, there was a tonnage number there, but I don’t think that it had any financial figures, maybe I might have missed it.

Stan Hasselbusch

I think it was a tonnage disclosure. We don’t have it in front of us.

David Russo

Whatever was in the release, Scott, we don’t have it in front of us, but that is all we have announced about it and that is probably how we will announce about it.

Scott Blumenthal

Okay, fair enough Dave. Then, if there is anything that we should read into the bookings, is Q3 usually a quarter in which we have a kind of a book to bill of less than 1 or was this particularly weak?

David Russo

No, that actually is fairly typical if you take a look at last year, it was fairly close to what we did last year, and if you take a look, you know typically backlog comes down. If you take a look at how backlog came down this year from Q2 to Q3, it came down to just about the same percentage rate last year.

Stan Hasselbusch

As you go through the year, our best booking quarter is normally first quarter and it kind of drops off. I think that our bookings are more flat in the third quarter and they would drop – are expected to be dropped off in the fourth quarter, which is typically our slowest month from a bookings standpoint.

Scott Blumenthal

Okay, that is very helpful.

Stan Hasselbusch

That could be the other question that the previous question about the overall year-to-year comp for Alleghany billings, we are at about $17 million overall for the first three quarters, which is about 15% ahead of last year.

Scott Blumenthal

Okay, and Stan, if you would, and I apologize for this, could you go through the rail side of the inventory again?

Stan Hasselbusch

I was talking about new rail, and we have got $27 million in new rail, of which about 75% of that is committed. In relay rail, we are sitting on about $3 million, which part of that is committed.

David Russo

The other significant inventory is really in our tie division, Scott.

Scott Blumenthal

Okay. Alright, great, thank you.

Operator

And your next question will come from the line of Tom Spiro. Please proceed.

Tom Spiro

Hello, everybody.

Stan Hasselbusch

Hey, Tom, how are you doing today?

Tom Spiro

I'm okay, nice quarter.

Stan Hasselbusch

Thank you.

Tom Spiro

I had a couple of questions. One, I'm not sure whether Stan or Dave mentioned anecdotally signs of strength and signs of weakness. I wonder if you might share with us a couple of those anecdotes.

David Russo

You know what, Tom; they relate to customer and vendor situations and we really don’t want to disclose specific to the customers or vendors, but let us say that we have heard some news here and there that there is some mills that are turning product away because they don’t want to sit on a whole lot of scrap rate now given the environment in the scrap. We have got some customers that are more upbeat when I say that we expected for next year. So it is a variety that we really don’t want to get into specific names or even product lines.

Tom Spiro

And the customer delays at the end of Q3, which segment were they in, construction or tubular?

Stan Hasselbusch

Piling.

Tom Spiro

I'm sorry?

Stan Hasselbusch

Piling.

Tom Spiro

Did those orders get shipped early in this quarter or are they still being delayed?

Stan Hasselbusch

They will ship this quarter, they have not as of yet.

Tom Spiro

I see. Certainly, there is a potential for business for Foster and for lots of folks to slow over the next few quarters. Have you folks begun contingency planning as to SG&A and those kinds of things if business does slow?

Stan Hasselbusch

We are in the middle of our AOP right now. Our Annual Operating Plan is in the process right now and that is a point of discussion.

Tom Spiro

Lastly, lots have changed in the last couple of months. The financial environment, obviously is radically different and Foster’s stock has come down a long way as well, and I was curious whether these developments have caused you folks to think differently about acquisitions, more aggressive, less aggressive about acquisitions versus stock repurchase? How do these major changes inform your own thinking?

David Russo

Tom, I will tell you, they had an impact in that – you know, our stock price has certainly come down along with most other companies. So, in general, valuations have come down, and we would expect to – on the buy side, be able to take advantage of that when we are looking at acquisitions, but that is certainly not scaring us away from looking at acquisitions. You know, this significant reduction we have seen in market values, we don’t know whether it is going to continue or it is going to reverse itself soon or what the future really holds. But, you know, if you look at longer term points of view, there are some attractive multiples out there today that for the right company, we would take advantage of. So it hasn’t stopped us, but we certainly do look at value and risk is certainly ever present on our minds as we look at some of these things.

Tom Spiro

Does that cause you to reduce the size of the targets you might consider, (inaudible) for such a big one?

David Russo

No, because that is not really how we target to begin with. If it is a larger company that we are looking at, obviously, we are cognizant of the higher amount of risk and we take that into consideration when we value and when we perform due diligence.

Tom Spiro

And when you are trying to decide what is best use of the cash, stock repurchase versus acquisition, has your thinking there changed?

David Russo

Not substantially, because it is sort of an ongoing process, there is a balance to it. we look at share repurchases sort of in light of what kind of operating cash flow we are putting down. We want to provide a nice balance of value to the shareholder, and when we see significant reductions in our share prices like we did this most recent period, we took advantage of it. Having said all that, during my little chat, I mentioned that our current authorization is principally full, so right now, we are not really authorized to buy back more than a couple of hundred thousand dollars worth of stock at this point of time.

Tom Spiro

Okay. Well, thanks so much.

David Russo

Thank you.

Operator

And your next question will come from the line of James Bank. Please proceed.

James Bank

Hi, guys; just a quick follow up. Stan I don’t know if you had just run over this too quickly, but Dave, could you just give me the segment sales increase for the third quarter again?

David Russo

Be happy to. Tubular was down 15.8%. Rail was up 6.8%, and construction was up 12%.

James Bank

What was up 44% in the tubular space?

David Russo

That was threaded pipe, in operations we have done in Houston. It is one of the two pipe businesses we have.

James Bank

Right. Alright, perfect. That is all I have. Thank you.

Operator

And your next question will come from the line of Brian Riesman. Please proceed.

Brian Riesman

Good afternoon, guys. Question for you on your free cash flow allocation; can you talk one, what your budgets are maybe next year, I think you said $6 million for this year on property plant equipment CapEx, what are you looking for next year and what is your thoughts on deleveraging the balance sheet with internal cash flow?

David Russo

Well, Brian, the number one, we are actually right now just in the midst of budgeting for next year, we are trying to finalize some of those, but we are certainly going to be, as a company, looking at capital projects, obviously with some discrimination as far as the best projects will win and we certainly want to keep that number down in this environment. But as far as deleveraging with cash flow, that is not out of the question, but we – in this environment today with equity valuations as low as they are, we would probably air towards maybe looking towards another equity repurchase as opposed to a debt reduction, but it really depends on what the future holds. We do want to keep enough powder out there for acquisitions, should one really look very attractive.

Brian Riesman

Okay, can you give us kind of a ballpark as to what – historically, you have done a lot of questions as to the size of deals you would look at, given the current asset base for sales revenue size, what is your sweet spot per se?

David Russo

Well, as I mentioned, we typically don’t target by size, but I would say that our sweet spot would be in the $40 million to $120 million range.

Brian Riesman

Okay. Specifically, can you give us a sense of the dimensions of one of your plans? What kind of capacity utilization are you running across your different divisions?

David Russo

I would have to give you a report by division, because it varies rather – the variances are so large by division. We talked about our concrete tie divisions that serve the UP being at 50%, our Spokane facility is higher than 50% or probably closer to 70% and our tubular products divisions are in that same range. They are being utilized higher.

Stan Hasselbusch

We are for a gap, in coated, we think that we are – we have got about 50% total capacity available through the balance of this year and we are booked pretty much through the first quarter of next year on one shift. So there is really – there is the capacity availability there and that is pretty similar to the other thread and I think we have met capacity available at our fab plants, you know, I think that is not a challenge for us next year and we are looking and we continue to work on our process improvements at our plants, and we are really starting to get the traction this year of lean, which we have had in place now for close to five years and we are really starting to get the benefit of that across the board. We have had winning situations and we are getting it as we strive for operational excellence in our plants and our next move is to be a total lean enterprise and we have got that in place going forward also. So that is going to help with some of the capacity constraints that we thought we may have had a couple of years, we are getting the benefits of that across the board.

Brian Riesman

Okay. What are you guys seeing relative, and you mentioned in the SG&A line as far as kind of wage and salary inflation, what are you guys seeing relative to your healthcare costs?

David Russo

Actually, we have had very good experience on our healthcare costs. This year, they have been lower than they have been in the past couple of years.

Stan Hasselbusch

Actually, the last two years have been down I think, last year was down over the previous year and this year right now is – through September that I saw was trending down also, so –

Brian Riesman

Okay. (inaudible) wages and salary growth low single digits give us a sense payroll wise?

David Russo

Low single digits.

Brian Riesman

Okay, alright. Thanks, guys, appreciate it. Good job.

Stan Hasselbusch

Thank you.

Operator

And at this time, there are no more questions in the queue.

Stan Hasselbusch

Well, thank you all very much and hope you will have a good Thanksgiving holiday season coming and look forward to talking to you after the first of the year. Thanks again.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: L. B. Foster Company Q3 2008 Earnings Call Transcript
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