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L.B. Foster Company (NASDAQ:FSTR)

Q4 2013 Earnings Conference Call

February 28, 2014 11:00 AM ET

Executives

David J. Russo – Senior Vice President, Chief Financial Officer and Treasurer

Robert P. Bauer – President and Chief Executive Officer

Analysts

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Robert Kosowsky – Sidoti & Company

Brent Thielman – D.A. Davidson & Co.

Brian Rafn – Morgan Dempsey Capital ManagementPresentation

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2013 L.B. Foster Earnings Conference Call. My name is Sheila and I will 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 call is being recorded for replay purposes.

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

David J. Russo

Thank you, Sheila. Good morning ladies and gentlemen. Thank you for joining us for L.B. Foster Company’s earnings conference call to review the company’s fourth quarter 2013 operating results. My name is David Russo, and I’m the Chief Financial Officer of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster’s President and CEO.

This morning, Bob will provide an overview of the company’s fourth quarter performance and an update on pertinent business issues and discuss market conditions. Afterward I will review the company’s fourth quarter financial performance and then turn it back to Bob, so that he can discuss our Q1 outlook 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.

During today’s call, our commentary and responses to your questions may contain forward-looking statements including items such as the company’s outlook for our business and markets in 2014, 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 publicly release the results of any revisions to these statements in light of new information or future events. All participants are encouraged to refer to L.B. Foster’s Annual Report on Form 10-K for the year-ended December 31, 2013, as well as to other documents filed with the Securities and Exchange Commission for additional information about L.B. Foster and to learn more about the Risk Factors that may affect our results.

With that, we will commence our discussion, and I will turn it over to Bob Bauer.

Robert P. Bauer

Thank you, Dave, and good morning, everyone. We appreciate you joining us today. This year we scheduled our fourth quarter announcement later in February than we did last year, because we wanted to wait for our Board of Directors’ meeting to conclude the before holding a conference call.

We held that meeting earlier this week, we focus a lot on our growth programs which has been a top priority for the company here, as I think you know in recent years and we’re grateful for the support that our directors have given us to grow the company.

So with today’s release, we reported diluted earnings per share of $0.71 for the fourth quarter bringing our full year earnings from continuing operations to $2.85, the highlight for the quarter was our EPS up 9.2% over prior year on sales that were up 11.2%.

The fourth quarter made for strong finish to the year reflecting the improvement in sales from the construction market picking up. Last quarter we mentioned the improving order entry patterns for our piling business which led to a very strong fourth quarter in Construction segment sales.

So we ended the quarter and year also with $183 million in backlog and while that is down from prior year, it’s a very healthy level given the project backlog we knew we would work off during 2013.

In the quarter gross profit margins were up in rail and construction, they did decline in the tubular products segment as expected due to lower sales volume from products during the quarter which we’ve been talking about here in recent quarters.

Overall I feel like we’ve performed fairly well holding gross margins flat year-over-year particularly given the lower tubular product volume, so as we summarize the financial results, we will describe full year sales results that includes modest growth for the year that is 1.6% and that’s reflecting an environment where solid growth in several product areas was offset by our businesses that saw a declining sales due to largely specific customer dynamics.

More specifically our rail distribution sales declined this year as a result of lower project activity, concrete ties sales was down as a result of planned activity from Union Pacific which we expected and planned on, our bridge sales were down year-over-year as backlog declined going into 2013 and as expected but I continue to believe that the diversification of our product lines is an asset to the company, it creates multiple platforms from which we can build good organic growth programs, but we know from time to time it does bring cycles and specific customer dynamics that can offset growth in other areas.

Turning to profitability results, our income from continuing operations for the fourth quarter was up 9.5%, net profit full year net income to $29 million which is 4.9% of sales and that’s 20 basis points better than last year so adjusted non-GAAP result and with significantly unfavorable sales mix this year.

Turning to cash flow, our operating cash flow for the year did not perform up to our expectations. We ran into significant issues in the second half of the year, particularly in the area of receivables, which did not in the year close to our forecast. It was a result of significant payments that did not come in as we have forecast, it’s not an issue of increasing bad debts.

It is an issue of project management, customer changes and change orders we received, delays, and customer pressure, frankly, at the end of the year that resulted in slow pay as the year came to close. But many of the payments we were looking for in December have not been received, but it really hurt our DSOs and year-end receivable balances.

Inventory well and up more favorable and forecast, but not enough to offset the impact of the receivable short fall. So our operating cash flow $13.9 million was low for the year but still in excess of capital spending and other debt dividend payments that we address. So I expect that the cash shortfall will add to our 2014 results and as we talk about the 2014 outlook will expand more on that.

So overall, I would assess the year in the quarter this way, first, we needed the construction business to turn upward and while it was later than expected it did make the turn helping our top line for the year. The profit margins and construction however are not what we see in the tubular space and consequently, we did suffer from unfavorable mix that created profit margin headwinds.

I feel like we held in there pretty well given the loss of tubular volume and we did well enough in the Rail segment the gross margin improvements allowed us to proceed with investments in [indiscernible]. And some of the other highlights that I think are notable or that our transit products business had a record year and sales and continued to enjoy a high win rate on key projects across North America. We’ve ramped up new product development in our core Rail business in 2013 and we got four key product launches that are planned in 2014.

We started up the corrugated bridge form business in 2013 and we want over $2 million in projects and our first partial year of operation. And in year to start with a lot of uncertainty around government spending our concrete buildings business finished the year with nearly double-digit sales growth. And then our friction management products led the way for our Rail Technologies business growth and it continues to drive global expansion for the company what sales outside the U.S. now for L.B. Foster accounting for 17% of the company sales.

And then finally we achieved another year of improvement and safety measures as measured by the recordable injuries that we look out so carefully. I feel that our performance in this area would arrival anyone in the industry and it’s speaks to the continued success in culture of the company around safety.

Before I turn it back to Dave, I want to say something about the acquisition that we closed on the 2013 in November we closed on the Ball Winch acquisition which will bring L.B. Foster custom coding capability for items such as especially fittings connections and large diameter line pipe that are used in the same pipeline applications where our current coated pipe is often found. It will expand our footprint across the country establishing in operation and one of the most important markets at Houston, Texas.

And we expect annual sales it will be in the area $15 million in 2014, which will have a nice impact on our Tubular segment business. As I mentioned in the past the Tubular segment for L.B. Foster is the smallest, but it represents some of the most attractive growth opportunities for us. Our focus is on businesses that serve the energy industry with unique skills and service levels that would differentiate us and bring value to end users.

And the new company as excellent skills in the engineering and design of pipe coating operations, , and possesses a business model that brings very quick delivery of custom coated fittings, elbows and joints to the pipeline market. We think its very unique, and we’re excited about the new growth initiatives that we plan to start immediately as a result of the capability and the talent that Ball Winch brings to L.B. Foster and we’re also extremely delighted at the management team at Ball Winch is staying to be part of this exciting future. So I am sure you will hear a lot more about us talking about that in the Tubular segments based as result of it going forward.

So with that let me turn it back to Dave, he will make comment about the quarter and the year, and then I’ll come back and we’ll talk about a little bit about 2014 outlook. Dave.

David J. Russo

Okay. Thank you, Bob. This morning I will discuss our fourth quarter operating results and at times we will highlight certain annual financial results as well, when that occurs, I would remind our audience that the full year of 2012, included concrete high warranty charges of approximately $22 million, which was included in cost of goods sold. The $19 million was recorded in the second quarter and at additional $3 million in the third quarter of 2012. These charges were related to a product warranty claim regarding concrete ties manufactured at our Grand Island Nebraska facility, which was closed in the first quarter of 2011.

Well my discussion will focus primarily on our GAAP results, when we feel it beneficial to the audience I will refer to 2012 adjusted results, which assumes the exclusion of these adjustments in order to present another look at 12 months to 12-month normalized comparative results.

Reconciliations between these non-GAAP results and our GAAP results are included in our earnings press release. So I will begin with sales for the fourth quarter of 2013, which were $136.5 million compared to $140.7 million in the prior year and a 11.2% increase. The sales improvement was due to a 67% increase in Construction segment sales partially offset by 29.3% decline in Tubular segment sales and a 6% decrease in Rail segment sales.

The Construction segment sales improvement was due to across-the-board increases in all businesses with the most significant increase reported by our piling products division, and to a lesser extent, concrete buildings and sales of fabricated bridge products.

The Rail segment sales decline was due principally to a reduction in rail distribution sales and to a lesser extent concrete ties sales. These were partially offset by increased sales turned in by our transit products division and our rail technologies business.

The Tubular segment sales decrease was due principally to volume related declines in our coated products division. We ended 2013 with full year consolidated sales up 1.6% to $598 million due to a 13.3% increase in construction partially offset by a 13.1% decline in tubular and a 1.8% reduction in rail sales. As a percentage of total year 2013 sales, tubular accounted for 7%, construction was 32%, and rail totaled 61% of sales.

As mentioned in our earnings release and as Bob touched on, backlog stood at $183.1 million at the end of the fourth quarter of 2013, down $27.8 million, or 13.2% from last year’s fourth quarter. The year-over-year reduction was due to a 13.3% decrease in Rail segment backlog, a 29.9% decline in our Tubular segment backlog, and a 9.7% reduction in our Construction segment backlog.

While backlog is lower in all segments, the December period-to-period comparisons have improved across all segments when compared to the September period-to-period comparisons and we feel pretty good about the activity levels thus far in 2014.

Fourth quarter bookings increased 21.5% compared to the fourth quarter of 2012, bookings improved over last year’s fourth quarter in our Tubular segment by 114% and by 41% in our Rail segment, the decline in the construction segment by 23.5%, year-to-date bookings declined by 12.8% from the prior year, however excluding the $60 million Honolulu Transit project order that we received in the second quarter of 2012, new orders decreased by 3.7%.

Our gross margin was 19.6% in the fourth quarter of 2013 flat compared to the prior year quarter. Gross profit margin increases in the Rail and Construction segments were largely offset by decline in the Tubular segment.

Gross profit margin in the Rail product segment was 22% in the fourth quarter compared to 18.9% in the prior year quarter. The increase was primarily attributable to favorable product mix and lower manufacturing overhead cost.

The gross profit margin in our construction product segment was 16.1% in the fourth quarter of this year compared to 16.8% in the prior year quarter. That increase was principally to improve product mix and manufacturing efficiency in our concrete buildings business.

Gross profit margin in our Tubular products segment was 25.5% in the fourth quarter of 2013 compared to 32.9% in the prior year quarter. The decline was due to unfavorable volume related manufacturing variances and unfavorable product sales mix.

2013 full year gross profit margin was 19.4% compared to 15.7% last year. Excluding the prior year warranty related charges that we discussed, the 2012 gross profit margin would have also been 19.4%, a 40 basis point improvement in the Construction segment which was driven by our concrete buildings business and a 50 basis point increase in the Rail segment on an adjusted basis were offset by 220 basis points decline in the Tubular segment.

Turning to cost and expenses, our selling and administrative expenses increased by $2.1 million or 12.8% to $18.6 million in the fourth quarter of 2013 due to increases related to salary headcount partially offset by reduction in concrete tie testing costs.

SG&A expense represented 11.9% of sales in the fourth quarter of this year as compared to a 11.7% of sales in the fourth quarter of 2012. For the 12 months period, SG&A expense increased by $4.6 million or 6.9% to $71.3 million and represented 11.9% of sales in 2013, compared to 11.35% of sales in 2012.

Our fourth quarter pre-tax income was $11.6 million or 7.4% of sales compared to $10.8 million or 7.7% of sales in the prior year. Pre-tax income for the entire 12 months period in 2013 was $44.1 million or 7.4% of sales. Excluding last year's warranty adjustments that are comparable prior year pre-tax income would have been $45 million or 7.6% of sales.

As mentioned in our earning release the effective tax rate in the third quarter of 2013 was 37% compared to 38.6% in 2012. The prior year rate was negatively impacted by certain discrete items recorded last year’s fourth quarter.

Our fourth quarter EPS from continuing operations was $0.71 per diluted share in 2013, compared to $0.65 in the prior year quarter. Our full year 2013 earnings per share from continuing operations was $2.85 per diluted share, compared to a $1.44 per diluted share last year. Excluding the same warranty related adjustments earnings per diluted share for 2012 would have been $2.72 per share.

Turning to the balance sheet, working capital net of cash decreased by $2.1 million in the current year quarter; but increased by $24.3 million for year. Accounts receivable increased by $10 million or $11.3%, due principally due to large projects that encounter difficulties, as Bob has mentioned, in the fourth quarter – were mostly administrative in nature, as well as our mix of sales favoring businesses with higher DSOs. We expect significant improvement in collection in the first quarter of 2014.

Our DSO at December 31, 2013 increased 52 days from 46 days at September 30, 2013, due mostly to the items mentioned above. While the timing of collections did deteriorate, we do not believe there is a collectability issue. In fact 2014, collections nice progress in catching up on past-due accounts thus far in 2014 first quarter.

Inventory decreased during the quarter by $16.5 million, our accounts payable and deferred revenue declined by $8.5 million. Cash generated by continuing operating activities in Q4 was $11.4 million, compared to $1.7 million in the prior year, for the entire year 2013 cash generated from continuing operating activities was $13.9 million, compared to $27 million in the prior year.

The year-to-year reduction in cash from operations was caused by changes in working capital, including reductions in deferred revenue and increased accounts receivable as we discussed. Also adding to the unfavorable comparison were increased tax payments and lower depreciation and amortization in 2013.

We expect to see improvement in operating cash flows in 2014. That should cover some increased growth-related capital expenditures that Bob will cover later. So we anticipate that our cash generation from operating activities will exceed capital expenditures, debt service payments, dividends, and share repurchases.

Speaking of capital expenditures, 2013 CapEx was $9.7 million compared to $7.2 million in the prior year. This spend was principally for items such as plant, production equipment, and inventory handling equipment, including some initial outlays for some of our growth initiatives that we’re planning for 2014.

As Bob will discuss, we anticipate that the company’s 2014 capital expenditures will range between $18 million and $22 million. Our cash at December 31, 2013, was $64.6 million and that was down $31.4 million from September of 2013, and down $36.8 million from last year. While there were many moving pieces in 2013, the primary reason for the decline was the fourth quarter acquisition of Ball Winch that Bob touched on.

Our cash was invested principally in AAA rated money market funds and other short-term instruments where preservation of principle and quick access to funds has been the priority.

Looking forward, we believe that the trend in sales mix that commenced in the third quarter should actually improve as we progress into 2014. But we also intend to continue to spend on programs that we believe will benefit the company and add shareholder value on a longer-term basis. We feel pretty good about recent activity levels as we look for opportunities to offset some of the difficult comparisons we will face in the coming year.

That concludes my comments on the fourth quarter of 2013. And I will now turn it back over to Bob for his comments regarding our first quarter outlook.

Robert P. Bauer

Thanks, Dave. I’m going to start by talking generally about the full-year ahead and then I will make some more specific comments about the first quarter. Generally speaking, our markets are in pretty good shape. The freight rail market is being driven by an improving economy, shipments in oil and gas commodities, and a very strong intermodal environment.

The freight railroads have been passing price increases on to end customers, and with solid financial performance. We’ll continue to boost capital spending for their network performance according to everything we hear them say. Transit is also in pretty good shape as the number of projects around North America and the UK remain at high levels.

There isn’t anything the size of the Honolulu transit project we worked on over the last two year. But all other agencies we typically watch have a solid pipeline of expansion or refurbishment projects that are on the Board.

Construction, specifically piling has greatly improved from this time last year. Throughout 2013, the market became more positive. I expect to see our continued positive environment for that in 2014. And our Concrete Buildings business grew nicely in 2013 and we have every reason to believe that this market should remain healthy in the year ahead.

And our Bridge business will certainly grow this year after having a year in which the 2012 record backlog shipped made 2013 comparisons difficult. But we ended 2013 with a very nice backlog for 2014 having already booked some significant projects that are expected to ship this year.

Capital spending will really look different in 2014. It is anticipated to approximately $18 million to $22 million as we ramp up growth programs across several business areas. The spending is aimed at supporting new product development, expanding into new markets, as well as improvements in our cost position. We’re making significant investments in coated products facilities that will boost capacity and bring new technology in to improve cost.

We have plans to open a new service center to support construction sales. We’re consolidating rail product lines into fewer operations that will help cut costs. And we are acquiring equipment to expand into field service businesses in both the Rail and the Tubular business segments.

So these programs are all aimed at taking significant steps to fuel organic growth and make the company more competitive. I think it’s important to mention that this should not be viewed as a new level of annual spending, but that we started a number of new initiatives in the last year, and we have several programs that are coinciding with investment needs as a result of that.

Obviously, we believe these plans will ultimately reward our shareholders. Some will yield return faster than others. But in our view all of them are attractive enough to warranty investments that we are making.

Let me turn now to more specifically the first quarter, we thought it would be best to provide an outlook for the first quarter only at this time and comment more on the full year next quarter as we have some more visibility from project activity.

We’re estimating the sales for Q1 were $123 million and $128 million, the high versus the low end of the range will be affected most by how much piling product we can ship as sales have increased in this area over the last two quarters, we are attempting to keep up with the increase.

Net income for the quarter, first quarter is projected to be between $5.5 million and $5.9 million, I expect to see a pretty steady pricing environment in the quarter and really as well for the year and as with 2013 we are currently expecting a low inflationary environment as well.

So I hope that gives you some insight into the current business conditions and we think the first quarter is going to shape up here. Before I conclude my comments, I thought I would comment on paragraph in the press release regarding our concrete tied warranty claims, we included a more thorough report on the status of our concrete tie warranty claims specifically as it relates to the progress of replacing Grand Island manufactured ties for Union Pacific Railroad and that is in our 10-K filing.

In 2013 a significant number of ties were replaced by Union Pacific Railroad, they were accompanied by an L.B. Foster team that is skilled in the manufacturing of concrete ties during the majority of the replacement activity. We furnished ties at no charge to Union Pacific in advance of the field replacement work as part of the process to work in an efficient manner.

And in a few particularly concentrated areas there were a large number of replacements made among them are ties that we would not consider eligible for warranty as defined by an agreement we have for the criteria for defective tie, we are currently working with Union Pacific Railroad to reconcile the number of replacements that are eligible for warranty.

We are also working on a proposal we have that would improve the process going forward to avoid or minimize discrepancies as the replacement process progresses and because we are working with Union Pacific to resolve the issue, probably a lot of things I can’t say a lot more about in the way of details. So I may not be able to respond to many of your questions we will do our best. So that is a bit on that subject.

So as I conclude I just want to thank our team throughout all of L.B. Foster that I think turned in a pretty good year, despite some of the challenges that we faced during the year. We continue to have a lot of ambition and set the bar high, we’re looking forward to a good year here in 2014. And I know everybody is excited about all of these investments that we’re making in the company. We’re doing more today than I think we ever have in the past.

So I want to thank our team for that. And as I turn this back to the operator for questions I would just may be remind everyone that if you have several questions, you might get a few of them out and you can always jump back in the queue, to address some additional questions. So with that we’ll turn it back to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Please stand by for your first question. And the first question comes from the line of Mike Baudendistel of Stifel. Please proceed.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Thank you. Just wanted to maybe if you could, get for some numbers around the Union Pacific tie situation. We think about 170,000 ties that are being disputed. What is the value of one of those ties?

Robert P. Bauer

Yes, Mike that’s the first question we anticipated would come in and unfortunately the firs one that we really can’t disclose. We’re not going to report right now on per tie cost or the actual order of magnitude on that, that’s something that we feel like we shouldn’t be discussing.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Okay. And I guess when do you feel like you could have an agreement in place with Union Pacific as to not damage the relationship with that large customer? Did you think you can have that by the end of the first quarter, the second quarter, somewhere in there?

Robert P. Bauer

Well I think the better way to look at it is that this is a process that we knew would unfold over a long period of time. It was something that you just don’t go out and fix over night, there were a number of areas on track that needed to be addressed. And so having some issues like this arise I would say would not necessarily be unexpected. The time to sort through it it’s really hard to pin down at this point. We are both working diligently to get all of these reconciliations behind us and I hope that we can do it certainly and in amicable way, but I think it’s too difficult to really nail it down specifically in the way you’re asking.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Okay, thanks for that. And then just shifting gears to the Ball Winch acquisition, you said it was slightly accretive. Can we think of that business as being as high a margin as we typically think of your tubular products segment, which was certainly a little bit higher margin than the rest of the businesses?

Robert P. Bauer

It would be fair to put it in that ball park. Yes.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Okay, that is helpful. And I guess anything on the Class I rail CapEx discussions? When they talked about their 2014 outlook, that surprise you to the upside?

Robert P. Bauer

I think the big surprise for everyone was BNSF, who said they’re going to take spending from $4 billion to $5 billion that was real surprise, but then on the other hand, I think everybody recognizes the fact that these guys are right in the sweet spot of both the Bakken and all of the crude by rail.

Renaissance there that is going on, so I don’t think that is surprising, I can’t really comment on exactly how much of that is tank cars and things like that that they might already have on order, I expect a lot it has to do with that, but I think their visit also run in a whole lot this year and they use to in that one region, Other than that, I think everybody else was pretty much in line with expectations and that is that a lot them like to say that they are going to spend 16% to 18% of sales on CapEx spending and I think they’re going to kind of run drag along with that, so it will they always say it is going to notch up a few percent in the coming years, never really bullish and that’s what we have been seeing year-after-year, even though it doesn’t always hit exactly that.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Okay, and then just one last one on the working capital discussion if I think about your receivables balance down sort of seeing normalized – by the end of the first quarter, that likely to give you an extra say $10 million of net cash balance often speaking – about that right.

Robert P. Bauer

That’s a fair estimate Mike, yes.

Michael James Baudendistel – Stifel, Nicolaus & Company, Inc.

Okay, that’s all from me. Thank you.

Robert P. Bauer

Thank Mike.

Operator

Thank you. And your next question comes from the line of Robert Kosowsky of Sidoti. Please proceed.

Robert Kosowsky – Sidoti & Company

Hi good morning Dave and Bob, how are you doing?

David J. Russo

Good how are you Robert.

Robert P. Bauer

Pretty good.

Robert Kosowsky – Sidoti & Company

I was wondering the growth investment, I wonder if you could discuss the framework you looked at for some of these investments, are these margin accretive initiatives are low hanging fruit in some markets where you think you can out compete just kind of how are you thinking about allocating some of the growth spending?

Robert P. Bauer

Well, I guess I will frame it up first into the three segments that we talk about the most, new product development, expanding our served market, and moving into some adjacent areas that we don’t serve today. We have activity going on in all three of them. And depending on what business segment you are looking at or product division, the opportunities can be more or less attractive in either of those three segments. So in the core rail business, for example, we pretty much serve the broad market fairly well.

So we’re focused on new product development. But in a couple of other areas like in this bridge area, we’re moving into an adjacent market in the bridge form business, because there – we’re serving the entire grid decking market, so we are moving into an adjacent market there.

Generally speaking, I would also say that one of our goals is to move into the more profitable segments. Just as it is with acquisitions, we’re attempting to look at acquisitions that have profitability margins that are better than L.B. Foster’s average margins.

So we would like all of these things to provide a favorable impact to profit margin mix. But business by business, the opportunities are really kind of different. And in the construction area some of that’s sort of moving into expanding our served market. So it’s a little bit of everything.

Robert Kosowsky – Sidoti & Company

Okay. But it seems like as a general rule these are margin accretive relative to the segments at which they play in.

Robert P. Bauer

Yes, that’s a – I would say it’s a fair statement, because in some areas, we just don’t want to go lower than certainly than we already are. And I think that’s a fair statement.

Robert Kosowsky – Sidoti & Company

Okay. And is there a growth market above the market that you think L.B. Foster can generate over, say, a 5-year, 10-year time horizon, understanding that it’s going to take a little while to get these new products out and penetrate some of these new markets. But how do you think about that growth potential?

Robert P. Bauer

Yes. Well, we have presented that in fact at some of the investor conferences that we’ve been at lately. And what we talk about is that, we think that the marketplace is probably going to grow somewhere in the area of 3% to 4%. And that we would put a couple points of additional growth on top of that, setting the bar for ourselves at about 6%, that would allow us to grow at a faster pace than the market.

Robert Kosowsky – Sidoti & Company

Okay. So that’s pretty much intact?

Robert P. Bauer

Yes, right now that’s kind of the plan and then add some acquisitions on top of that, and that’s really the basis for our value creation model.

Robert Kosowsky – Sidoti & Company

Okay, and then finally on the tubular business, where was there any particular region or type of end market that saw particular strength and I’m just wondering how are you seeing that so far in 2014?

Robert P. Bauer

In tubular?

Robert Kosowsky – Sidoti & Company

I mean on piling sorry. On piling?

Robert P. Bauer

Okay, yes.

Robert Kosowsky – Sidoti & Company

Sorry for that.

Robert P. Bauer

So, yes. No I don’t think I can really point to any one specific market, we largely are aimed at the heavy civil construction market with a large degree of our projects in the transportation segment. So transportation is bridges, highways, roads, ports, ports as always been a strength of ours. So we saw activity going on in all of those and I guess I would say that I think we saw a little bit of wins from commercial construction which is not where we get the majority of our market, commercial buildings and those sorts of things. But that’s been on the rebound as well and I think that has helped for some broad market improvement that we have participated in.

Robert Kosowsky – Sidoti & Company

All right, thank you very much and good luck.

Robert P. Bauer

Thank you.

Operator

And your next question comes from the line of Brent Thielman of D.A. Davidson. Please proceed.

Brent Thielman – D.A. Davidson & Co.

Good morning, guys.

Robert P. Bauer

Hi, Brent.

Brent Thielman – D.A. Davidson & Co.

Yes Bob or Dave maybe I can ask that Union Pacific question another way, if we think about the $22 million charge you’ve already taken, can you remind us how many ties are associated with that and I guess from our perspective look at that and think about the 170,000 ties and make some guesses about that potential cost?

Robert P. Bauer

Yes, Brent that’s creative I guess that is a different way I am asking about the cost is, when we took that $22 million charge last year, we did not furnished the number of ties that we thought that we would have to update, as a result of that we did say that we’ve thought it was the appropriate charge to take at the time based on a lot of analytical and scientific data that would project what we would have to replace over time. And that’s but still our position at this point, but the actual number of ties is something we can’t disclose.

Brent Thielman – D.A. Davidson & Co.

Okay, I tried, but I guess in other notes the decline in ties that you impede that you are expecting for next year or I guess this year. Is that simply assumption where capital spending initiatives, are they sourcing ties elsewhere, maybe just a little more color there would be helpful? And then is there still in your mind the opportunity you can sell that capacity elsewhere?

Robert P. Bauer

I think all I could say on that is that we really don’t participate in any discussions with them about any other supplier, we’re purely focused on our own replacement program for the Grand Island product and we do sell them ties that are on a revenue basis that are for projects that they deem appropriate to use our product on as well.

But you know they’re not by any means do they have to come to us for everything that they do, we don’t have some agreement that says that we are the sole supplier, and they could make a decision to buy product from another supplier at anytime and I really can’t comment on exactly how much of that they do these days.

Brent Thielman – D.A. Davidson & Co.

Okay, that is fair. And, Bob, just following up on that, it sounds like you're going to have a little more capacity available. Do you think you can still get opportunity for you to fill that this year?

Robert P. Bauer

Well we have – we have capacity in our facilities that’s accurate, I think that the transit market is as strong as it could be, there is another platform customer that we sell product to that might potentially have some upside, I don’t think I can go into any details for them on that, that is their particular proprietary project information but you know we are dealing with the healthy market, I think at the moment and I don’t think there has been a time we have seen so many transit projects on the drawing board and that is certainly one of our sweet spots for concrete ties. So I’m certainly be pleased if we could see some upside from that. I think if you just gauge how much that is, we’re not talking several million.

Brent Thielman – D.A. Davidson & Co.

Sure, okay. And then I mean I guess on the transit side, I imagine this decline is around – the Honolulu project and tough compares. With the upcoming transportation bill, is there any uncertainty around that and how that is affecting these projects?

Robert P. Bauer

I don’t see any at this time. I think everybody would love to benefit from that deal and I would tell you, I do believe that the environment in Washington around transportation funding has actually been very positive likely with flurry of more positive activity then there has been. So while I don’t have a lot of confidence in what anybody does down there usually. I would currently say that news has been fairly positive of late but lot of the transit agencies I guess some money from there, but a lot of it is local, funding as well, the states to municipalities, bonds all of those sorts of things.

Brent Thielman - D.A. Davidson & Co.

Okay, that is encouraging. One more, just on Ball Winch, it wasn't clear to me. Was it accretive this quarter? And then again a clarification, as you look forward, do you think with the business you can still achieve those gross margins that you had done there in tubular? The upper 20s, lower 30s? The business isn't so structurally different that you can't get there? Is that fair?

Robert P. Bauer

Let met take the margin one in all, I’ll like Dave answer the accretive aspect of it which some things more 2014 in the quarter, but way on the margin one I think that the best way for me to answer that for you is that if you were use the tubular segment overall that we report on as it basis from gross margins and that as basis for which model Ball Winch and you would building a pretty good model. With that this in an answer what you were trying to get that.

Brent Thielman - D.A. Davidson & Co.

That helps.

Robert P. Bauer

On that part, okay. And Dave you want to comment about.

David J. Russo

Regarding accretion Brent we – we certainly expect Ball Winch to be accretive in 2014, Ball Winch was, that was November 6 or 7 acquisition, so we had at under our ownership less than two months and it was slightly accretive in 2013. There is a – there is a obviously a each an amount of amortization of definite life intangible, that go along with an asset do you like that, so that will certainly have an impact, but it was accretive slightly.

Brent Thielman - D.A. Davidson & Co.

Thanks you.

Robert P. Bauer

Thank you Brent.

David J. Russo

Thank you.

Operator

Thank you (Operator Instructions) And the next question comes from the line of Brian Rafn of Morgan Dempsey Capital Management. Please proceed.

Brian Rafn – Morgan Dempsey Capital Management

Good morning, guys.

Robert P. Bauer

Hello, Brian

David J. Russo

Hello, Brian

Brian Rafn – Morgan Dempsey Capital Management

Give me a sense – you talked a little bit, Bob, about kind of the construction pilings. You alluded a little bit about some of the end markets. You talked about the heavy civil, transit, and then commercial building construction. Can you put a numeric mix on that? Is it a 75%-25%, 90%-10%? How much of the pilings demand is in the transit, the infrastructure, heavy civil type, versus commercial building?

Robert P. Bauer

I can’t give you an exact number on that, but you ought to interpret it at it's far and away – the majority is heavy civil construction, and not so much, or very little commercial. We just don’t participate in a lot of commercial construction and that heavy civil segment, it’s just hard for us to break that out by highways, bridges, ports, and all of those particular segments. But it was across the board in all of those kinds of project activity, where far and away the majority came from.

Brian Rafn – Morgan Dempsey Capital Management

Okay. Does anything, Bob, stand out within the heavy civil transit side? You mentioned bridges versus ports, you talked a little bit about we have got a really strong niche in the port area. Within heavy civil transit, does anything stand out relative to a demand end market?

Robert P. Bauer

I would just say that the only thing that comes to my mind from time-to-time is, we continue winning projects due to the core infrastructure that exists in certain places across our country. There is things that are falling apart. Sometimes it’s a port, sometimes it’s a levy in low-lying areas and cities that flood. It’s a lot of things that just need to be replaced out there?

Brian Rafn – Morgan Dempsey Capital Management

Okay. How much is your sense – there has been an issue; you'd mentioned it. We have seen it with the highway bills, and that has been kind of a problem relative to funding in Washington. How much of that infrastructure demand, and specifically if you're talking about flooding – if you have a collapsible levy, or that – it really is a mission-critical, emergency type repair versus something that you maybe doing as a maintenance type. How much of that business might be tripped based upon imminent collapse or a response to a disaster?

Robert P. Bauer

Yes, if your question, is the percent, I’ve just can’t put my finger on it, as a percent. I mean If the Army Corps of Engineers needs to go out and fix something like that, they get around to fixing it. But if FEMA needs to do something, they seem to be able to figure out, how to get money to do it. But I can – if we just – it’s hard to put our finger on exactly what percentage of that has been our business in the past, and of course I would never be able to predict that for the coming year.

Brian Rafn – Morgan Dempsey Capital Management

Fair enough, fair enough. Let me ask you about – you talked a little bit, Bob, about Ball Winch. As you add some of those extension lines – you talked about elbows and connectors and that type of thing to tubular products, can you sell that in a turnkey package and will that allow you, with your piping, to really grow Ball Winch organically? Or are they so strong on a standalone as they're own brand that being part of you, maybe of a larger order with piping, really is not something that would drive their organic sales?

Robert P. Bauer

I think from a turnkey package standpoint that will be an interesting area for us to explore going forward I would tell you that it’s not sitting out there as the top priority of something we know we can capitalize on and it’s obvious that we do better as a result of that. So that’s a little bit more opportunistic, I would – you should think a bit more as the company has on its own rate capabilities to do quick turnaround in custom projects for both new build construction as well as replacement activity.

And one of the need things about it I won’t call this turnkey, but related to synergies is that because we are in the line pipe business, we know the projects before Ball Winch ever knew about the projects, because you got to get the line pipe in all of that going before you get sometimes a lot of the other small localize pieces. So we now have a terrific project pipeline from which to see that company a lot sooner than we get selling on it before they ever did before.

Brian Rafn - Morgan Dempsey Capital Management

Okay. If you look at – your sense – you talked a little bit about bookings. I think Dave mentioned it. What is your sense – as you look across construction, tubular pipe, or railroad – what is your sense of big quote activity? And maybe if you look back over the last three or four years, of the conversion to sales of bidden quotes, or maybe the timing. Is it shorter? Is it longer? Just give us a sense from an actual quoting activity that you're seeing here in 2014.

David J. Russo

I think it sounds like you kind of describing it something changed with the length of time that it takes to close projects and our win rate. Brain I would say that, I don’t think I would describe the win rate in some of those things that something that’s that much of a meaningful change.

Project cycles and rail and tubular are probably not changing a lot. They are always very dynamic, especially in tubular and the energy market. So that’s always changing. And I would say in construction that could be the one where project cycles are probably getting a little bit quicker right now, because as the market gets little stronger, you do tend to have projects that people are trying to keep on schedule among the different things that they're doing. But I really can't point to a significant or meaningful change in that, that is dramatic.

Brian Rafn - Morgan Dempsey Capital Management

Okay. I will ask one more and get back in line. Can you give us a sense – very, very 50,000-foot view, macro I think your capacity utilization and maybe how many labor shifts you guys are running between construction, tubular pipe, and railroad?

David J. Russo

Brian, that is a tough one. In some places we have two shifts going. In some we don’t had probably have to get to that by plant by plant. I'm not sure that I can model that for you here right over the phone. We don't have any plants sitting around at very low capacity rates at the moment.

And we’re consolidating some, as I mentioned in some of our capital spending, we have great project underway right now at our Niles, Ohio facility where we are bringing product lines in from another state in the U.S., as well as our facility in Canada that will close.

So where we do have some nice capacity like that and synergies we can get, we’re taking advantage of those sorts of things. But shift capacity and all of that -- it really varies across the Company.

Brian Rafn - Morgan Dempsey Capital Management

Okay, okay. But if you look from a floor – on the shop floor, would you be in the 60%, 70%, 80s? A very wide range. I know you can't self shoot it but I'm just looking for broad range where you might be operating. 60% versus 80%; 70% versus 90%; 50% kind of a broad, broad brush stroke.

David J. Russo

I will tell you that we have the capacity to grow the company and we will, without having to build another facility meet our growth expectations over the next few years.

Brian Rafn - Morgan Dempsey Capital Management

Okay. I will get back in line. Thanks.

Operator

There are no more questions, at this time. There are no anymore questions at this time, I would like to turn the call back to Mr. Bauer for closing remarks.

Robert P. Bauer

All right. Well, great. I appreciate everyone joining us today. Thanks for all your interest in the Company, and we will look forward to catching up with you here after the close of the first quarter. Thanks again. So long.

Operator

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

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