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L. B. Foster Company. (NASDAQ:FSTR)

Q2 2008 Earnings Call

July 24 2008 11:00 am ET

Executives

David Russo - CFO

Stan Hasselbusch - President and CEO.

Analysts

Rob Damron - 21st Century Equity

Scott Blumenthal - Emerald Advisers

Liam Burke - Ferris Baker Watts

James Bank - Sidoti & Co

Tom Spiro - Spiro Capital

Operator

Good day, ladies and gentlemen. And welcome to the second quarter 2008, L.B. Foster Earnings Call. My name is Jasmine and I'll be the operator for today. At this time all attendants will be in a listen-only mode. We will conduct a question and answer session towards the end of this conference.

(Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. David Russo, Chief Financial Officer. You may proceed, sir.

David Russo

Thank you, Jasmine. Good afternoon, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's second 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 second 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 second quarter 2008 earnings call on webcast. This morning, we announced record earnings for the second quarter. It was also the 14th consecutive quarter our company has recorded an earnings increase over the previous year.

Sales were $129.8 million, compared to $148.5 million in the second quarter 2007. Income from continuing operations was $7.7 million, or $0.69 per diluted share, compared to income of $6.8 million, or $0.63 per diluted share in the second quarter of 2007.

Of particular significance in the quarter was margin expansion. Gross profit margin was 16.9%, up 255 basis points from last year, the result of increased billing margins and improved plant performances.

David will discuss the financials in detail later. But first, I'd like to talk about operational performance. To begin with, let me address overall activity as it relates to order entry. Order entry for the company in the second quarter was $164 million, 34% ahead of the same period last year. What we particularly like about this activity is that we saw growth in all three sectors.

Tubular bookings were up 25%. Construction order entry was up 20%. And rail bookings were up 52%. The corresponding backlog from this is $192 million at quarter-end, compared to $179 million in 2007. We think this will bode very well for continued strong performance for the balance of this year.

Okay, let's take a look at the products. And let's start with rail, where overall revenues were down 23%, largely due to a drop off in sales of new rail and concrete ties. While new rail sales were down 27% in the quarter, profits were equal due to increased margins. However, an active market and higher steel prices led to bookings in new rail of $50 million in the quarter, 139% ahead of 2007.

This is probably a good time to discuss rising steel prices and the impact this is having on our business. We've seen steel increases of 20% to 30% in the first half of this year, reminiscent of the sharp run-up in 2004. There's a good-news/bad-news effect of this. The good news, of course, is that our prices and corresponding margins will expand. We saw some of that in bookings of new rail and piling in the second quarter.

The downside is primarily two-fold, the impact that it has on fixed-cost contracts. We are much better positioned for this than we were in 2004 run-up. And two, the trickle-down effect where owners have predetermined budgets, and the products we furnish could be reduced in quantity, redesigned or eliminated completely.

The other side of our business, manufacturing, is challenged differently by raw material increases. I'll share with you part of an impact analysis we did at one of our facilities. In the past year, we have seen the following increase in our costs.

Natural gas is up 21%. Electricity is up 18%. Diesel fuel is up 213%. Steel banding is up 14%. The list continues. The overall increase in production costs, including labor have been in double digits. However, through [LEAN] and other process improvement programs, we've already mitigated 50% of the increase and strive to take out more.

Getting back to rail. Revenue for concrete ties was down 30%, largely as a result of reduced purchases from The Union Pacific. For the year, we expect to produce between 420,000 and 450,000 ties for the UP, down significantly from the 830,000 ties we produced in 2007. Though a relatively amount of certainty exists, preliminary estimates indicate much stronger demand for ties by the Union Pacific in 2009.

In tubular products, despite an overall decline in revenue of 14%, we experienced an excellent quarter in threaded, where sales totaled $4.5 million, 16% ahead of last year. Our coded pipe continues to be challenged by the high comps of 2007.

The energy market as it relates to natural gas transmission, still remains very strong. Earlier this month, the Energy Industry's Administration, which is an agency of the United States Department of Energy, released a report that stated miles of natural gas pipeline installed in both 2008 and 2009 would exceed any of the previous 10 years. We effectively booked at Birmingham for the balance of 2008 and are aggressively booking business into the first quarter of 2009.

In construction products for the quarter, sales were $60 million, a modest 2% improvement over the second quarter last year. But bookings were exceptional. $72 million, up 20% over 2007 of the reporting segments in construction, piling led the way with bookings of $53 million, up 25% over last year.

I'd like to mention that a large part of our success in piling this year has been due to the achievement of engineered projects in the form of open sale and Combi-Wall applications, a long-term strategic initiative led by Phil Wright. A couple of major projects that are worth mentioning today that we've been able to book in the first half of this year.

A job in Port of Alaska with QAP Construction booked by Paul Litworth out of our Hayword office, which was a $17 million book. A job in Fox River, Wisconsin, which was booked by [Rich Pischleritas] out of our Chicago office for JF Brennan, which is $6.5 million. And a job in New York City with NYCTA for Tully Construction that was booked for [Bill Cagney] out of our Allentown office for $5 million.

These projects form a large part of our piling backlog, which stood at $75 million at quarter-end, up 78% from last year. These jobs are also indicative of a pattern we see in piling design. Heavier sections, which provide higher section modulus and higher moment of inertia. The continued production of PZC-26 fits very well with this trend.

A few comments on the economy and the markets we serve. The U.S. economy has seen overall economic growth just slightly above recession levels over the past three quarters due to financial market concerns, the slumping housing market and the escalating price of crude oil. A weak U.S. dollar has expanded export opportunities while limiting domestic imports.

The impact on key L.B. Foster markets to-date has been mixed. In construction products, there's significant need for infrastructure improvements and expansion to our nation's highways, bridges and ports.

However, with a combination of tight state and local budgets, limiting monies of infrastructure spending and the uncertainty of available funds from the Highway Trust Fund at the Federal level to support safety lieu initiatives, some projects have been delayed or put on indefinite hold. While we expect long-term growth in spending to continue, there'll be little real growth in the near-term due to rising material costs.

On the rail side of L.B. Foster, domestic Class I railroads continue to experience record revenues and operating earnings, despite only minimal growth in revenue ton mileage and high fuel costs. Capital spending remains at record levels and continues to grow.

But the double-digit percentage increases that have been seen over the last few years has slowed to mid- single-digit pace. And again, with the rising prices for most materials used in maintenance [away] and capacity expansions, there's little or no real growth in spending.

However, railroads still possess a significant advantage over trucking. And the need for continued expansion of current rail capacity in the United States remains a critical issue. Transit lines are experiencing a resurgence in growth and record ridership levels due to high fuel costs.

A number of new projects are on the books for future expansion. And in November, many value initiatives will be brought forth-to-fund even more projects.

In conclusion, we remain very positive about the balance of this year, despite some of the challenges we have discussed today and earlier this year. But as we all know, with challenges come opportunities. And we are fully committed and prepared to meet them head-on and exceed our pre-tax income of 2007. With that said, I'd like to turn this back to Dave for our financial review.

David Russo

Thank you, Stan. Sales for the second quarter of 2008 were $129.8 million compared to $148.5 million in the prior year, a 12.6% decrease, which we converted into a 14.6% increase in pre-tax income. This represents a record second quarter for L.B. Foster.

The sales decrease was due to a 23% decline in rail product sales and a 14% reduction in tubular sales, partially offset by a 2% increase in construction product sales compared to last year's second quarter. The construction product sales increase was due to increases in our Fabricated Products and Pre-cast Buildings divisions, offset by a slight decline in piling sales.

Second quarter tubular sales decreased due to a decline in coated product sales, offset by an increase in threaded product sales. The coated product sales decline is due more to the difficult comparison to record prior year results than anything else.

During last quarter's webcast, we noted that the first quarter increase compared to the prior year would not continue into the second quarter, as our coated division went into a second shift throughout the summer and into September of 2007. After having said all of the above, this division is still having an excellent year.

The energy market served by our coated division has been robust for the past two years and we expect that strength to continue throughout 2008 and beyond. Our threaded pipe division continues to address its core water well market and pursues additional opportunities in the OCTG and micro-power markets to expand its customer base and fully loaded facility.

For the second straight quarter, the rail sales decline was driven by a meaningful reduction in rail distribution sales and, to a lesser extent, decreased CXT tie sales. Tie production was down slightly from the first quarter of 2008, but was down 20% from last year's second quarter, primarily at our Grand Island and Tucson facilities that serve the Union Pacific railroad.

Our Grand Island and Tucson facilities were a little more than 50% utilized for the UP and we are actively marketing both heavy haul ties as well as a newly developed industrial concrete tie from Grand Island. We also continue to review cost reduction opportunities at these facilities.

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 inquiry and bidding activity. There are some sizable projects that we hope will move forward with RFQ's, yet this year. As a percentage of consolidated sales, tubular accounted for 7% of sales, construction was 46% and rail was 47%.

As mentioned in our earnings release and as Stan talked about, backlog stood at $192.2 million at the end of the second quarter, up 11% over the first quarter of 2008 and up 7% over last year. Bookings for the second quarter increased by 34% to $164.1 million and included improved margins.

Gross profit margins were 16.9% in the second quarter, an increase of approximately 255 basis points over last year's second quarter. Positive margin expansion this quarter compared to the prior year was due to an increase in gross profit before manufacturing and other variances, decreased unfavorable manufacturing variances, decreased warranty costs, partially offset by increased LIFO expense.

Second quarter LIFO expense was approximately $2.5 million compared to $0.7 million last year and is obviously caused by the significant increases in steel over the last several quarters.

The businesses that drove the margin improvement in the second quarter were Allegheny rail products due primarily to plant processes improvements as well as volume increases, Tucson ties due primarily to significant improvements made in plant processes and concrete mix and fabricated products due to increased volumes in selling margins.

SG&A expense increased 1.7% to $10 million in the second quarter of 2008, due primarily to personnel related costs including salaries and benefits. SG&A represented 7.8% of sales in the second quarter of 2008, as compared to 6.6% of sales in last year's second quarter, a 120 basis point increase.

As a result of the foregoing, second quarter operating income was $12 million, compared to $11.5 million in last year's second quarter, a $0.5 million or 4% improvement. As a percentage of sales, operating income was 9.3% in this year's quarter, versus 7.8% last year.

Interest expense was $488,000 in the second quarter, $695,000 or 59% less than the second quarter of 2007. The decrease was due principally to a decrease in average borrowings during the second quarter of 2008 as compared to 2007, and to a lesser extent, 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 our first quarter call, none of the DM&E proceeds have been used to pay down debt. Since June 30th of 2007, we have paid down $24.1 million of debt with internally generated cash flows.

Second quarter pretax income from continuing operations was $12.2 million, compared to $10.6 million in last year's second quarter, a $1.5 million or 15% increase. As a percentage of sales, second quarter pretax income was 9.4% versus 7.1% in last year's quarter. The second quarter 2008 income tax provision was 37%, compared to 35.5% in last year's second quarter.

The difference in the rate is primarily due to more income being taxed at higher marginal rates and no changes in permanent differences. We anticipate the rate for the remainder of the year to be approximately 36.6% to 36.8%. Income from continuing operations increased 12% to $7.7 million or $0.69 per diluted share, compared to $6.8 million or $0.63 per diluted share last year.

Turning to the balance sheet. Debt at the end of the second quarter was $30.9 million, compared to $34.2 million at the end of 2007 and $55 million last June. As I previously mentioned, the $24.1 million decrease in debt during the past 12 months was due to cash generated from operations.

Capital expenditures for the second quarter were $1 million, compared to $1.3 million for the prior year quarter. On a year-to-date basis, capital expenditures were $3.1 million compared to $2.8 million last year. We continue to expect capital expenditures to be less than $8 million this year. We also expect to generate positive cash flow from operating activities in excess of that capital estimate.

Most notable use of cash in the second quarter was the repurchase of the company's common stock pursuant to its share repurchase program that was announced on May 12th. As noted in our earnings release, we purchased just over 413,000 shares in the open market for approximately $13.8 million.

We believe the amount and the timeframe authorized by our Board to accomplish this share purchase is prudent and in no way conflicts 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 13% at the end of June 2008, compared to 34% at the end of June of last year. Our leverage ratio is approximately 0.6 to 1, down from 0.7 to 1 at the end of March. And our interest coverage strengthened to 18 to 1.

Cash at June 30, 2008 was $107.6 million, and we had over $100 million invested, principally in AAA-rated money market funds, the majority of which were tax exempt. With regard to working capital, accounts receivable and inventory, net of accounts payable, increased by approximately $7 million in the second quarter of 2008, and increase by $11 million from year-end.

Accounts receivable increased by $28.2 million during the quarter, primarily due to a significant increase in sales from March of '08 to June of '08 of $26.4 million or 90%. Additionally, DSO improved to 41 days from 46 days at the end of the first quarter. We believe our AR portfolio continues to be in excellent condition. L.B. Foster's bad debt expense over the past four years has been consistently below 0.1% of sales.

Inventory increased $4.7 million during the second quarter of 2008. This was 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.

In summary, the first half of 2008 has been challenging in many ways, but also rewarding as we have aggressively pursued a number of opportunities as Stan has discussed. We believe the second half will contain similar challenges and opportunities, and we are continually pleased and impressed with the efforts, resourcefulness and results from our 671 employees. That concludes my comments on the second quarter of 2008. We will now open up the session up to questions. Jasmine?

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question comes from Rob Damron. You may proceed.

Rob Damron - 21st Century Equity

Well, hi, Stan. Hi, Dave. Excellent quarter.

Stan Hasselbusch

Hi, Rob.

David Russo

Thanks, Rob.

Rob Damron - 21st Century Equity

I wanted to, let's see, just start with the bookings and the backlog, both up nicely over last year. Could you talk a little bit about how much of that is volume and how much of that is price? And then give us also some color in terms of, when you get supplier price increases, how quickly are you able to pass those along?

Stan Hasselbusch

Well, I've talked about the pricing. There is a certain amount of that and that is inflation due to the rising pricing. I think that if you take a look at, for example, in the rail products, where we talked about $50 million booking in the first quarter, to roughly 25% increases in the first half of the year. But you still discount that by the 25%, Rob, and you're still substantially ahead of where they were last year, which I believe was $21 million, $22 million in the second quarter.

So, it's really real increases -- most of it is -- driven by increased activities. It's really a good booking month. A lot of activity, a lot of books, a lot of stuff came together. But most of it is real and we're seeing somewhat some of the same information coming out of piling for the increases we have there.

As far as passing the increases along, we're doing a much better job in this than we did back in 2004. I believe our distribution groups are getting out in front of it. As soon as the pricing increases are announced, we're trying to take it to the business, to our customers. Inventories that we have, we are giving customers less time to move that. I think we're doing a much better job. But for the most part, we're able to pass most of those increases along pretty quickly.

And I also alluded to fixed contracts which really hurt us significantly back in '04. I think that we're doing a better job with heavy price, and effective time of shipment. I think that some of the owners are giving that to the suppliers of contracts. We're starting to see that on some projects. We've actually seen it for the last couple of years.

We've got indexes, which are on some of our long-term orders, which are really helping us out. And I think at some of our plants, we're doing a much better job of getting ahead and buying for material because we're getting paid for material and storage on some of our contracts also, Rob.

So, all in all, I guess that the increases that we have, to summarize your questions, that we've seen in bookings, there's a lot of real increase. Yes, we've had some price increases. But the increases that we've had in the second quarter in bookings were more actual than what they were inflation from a costing.

And as far as being able to pass increases to the customers, we're doing it much quicker. We're doing it as quickly as we hear from the mills, except sometimes, in fixed contracts that we have in our plants. But we're doing a much better job utilizing and handling those also.

Rob Damron - 21st Century Equity

So if we look at the bookings and the backlog and then being up on a year-over-year basis, so we start out the year showing a decline in revenue the first half of this year. Should we anticipate the revenue to actually should begin growing again, on a year-over-year basis, as we look into Q3 and Q4?

Stan Hasselbusch

I think in the core Q3, we're seeing that. Yes, Rob, we are.

David Russo

Yes.

Rob Damron - 21st Century Equity

Okay. And then, obviously, with the [DM&E] sale, you have all that cash on the balance sheet. Maybe you could just talk a little bit about the acquisition environment and maybe what we could anticipate in external growth going forward.

David Russo

That, actually, is still a top priority of ours, Rob. We continue to look primarily in the rail and construction segments. But, really, most of the focus has been in rail at potential targets. There's certainly nothing imminent that we could discuss with a group today. But, it is definitely a priority of the company.

And we actually had a session this past week and looking at a list of potential candidates and actually re-grading that list out based on some minor changes in the company's strategy. So, we're looking at it and we're contacting potential targets.

You know, it's still a pretty good business in the rail segment, especially. So, there's a lot of companies that are out there that whether we compete with some of their complementary business, that are also doing well and many of them aren't interested in selling right now.

Rob Damron - 21st Century Equity

Okay, and then just lastly, with regards to the stock buyback, it looks like you've, I guess, bought back about half of what you have authorized. I mean is the plan to complete that program over the next three to six months?

David Russo

You know, we're going to be -- I think when we first announced this, Rob, we mentioned the -- it's really up to the discretion of management. We're not under any predetermined conditions to buy X amount. It's based on how we feel about what's going on in the marketplace and what our stock's priced at.

And we feel that we're going to take the opportunity when we can and be opportunistic about the buys. But, I would not be surprised if we complete the entire authorization before the timeframe that the Board allowed.

Rob Damron - 21st Century Equity

Okay, that's helpful. Thanks, again.

Stan Hasselbusch

Thanks, Rob.

Operator

Your next question comes from Scott Blumenthal. You may proceed.

Scott Blumenthal - Emerald Advisers

Good afternoon, gentlemen. Nice quarter.

David Russo

Hi, Scott.

Stan Hasselbusch

Hi, Scott. How are you? Thank you.

Scott Blumenthal - Emerald Advisers

Fine. Thank you. Stan, can you give us an idea how much of the backlog you traditionally deliver within the next six to 12 months?

Stan Hasselbusch

Yes, we typically will deliver within that timeframe, over 90% of our backlog. I think it's a safe assumption to me.

Scott Blumenthal - Emerald Advisers

Okay. And I know that Rob, the previous caller, talked about acquisitions. And you've been mentioning over the last couple of calls that that's been a priority. When do you get to the point where you say okay, we really can't or we really haven't been able to find anything? Do we take a different tact and maybe start to discuss some other alternative things to do with this cash?

David Russo

You know, Scott, I would tell you we're not even close to that level yet. There's still a number of companies out there that fit into our core competencies and the strategies that we have moving forward. And I know we're a public company and we've got a lot of cash, so there's sort of a spotlight on it.

But, quite honestly, I mean, when we got the cash in October, maybe it's a good thing, because valuations have actually come down rather substantially since then. And we've been frustrated in the past because there's a couple of, we thought to be, very good potential targets that didn't work out for us. But we're not going to rush it. And we aren't going to change course just because we don't have one within the first nine months.

Stan Hasselbusch

Just to follow-up on Dave's comments. I mean we have said all along that we're going to be very patient. We're going to be very disciplined. And we're not going to act, or react I should say, that we're going to continue to look.

And we're going to be very involved in this and we are. It's really a top priority for senior management in this company. But we're not going to jump at anything quick. I mean it will work out. And we're not in any position, at this point, Scott, to pull back at all.

David Russo

So, basically, Scott, we're staying the course.

Scott Blumenthal - Emerald Advisers

Okay, Dave, you mentioned that you've been primarily focusing on rail service-type companies. And then, I guess, after that in your last answer, you said that the acquisition multiples have come down.

Can you kind of reconcile the fact that the rails are, as Stan mentioned -- they're doing historically well with historically high profits. And you would imagine that the companies that are servicing them are experiencing the same type of thing. Do you think it's time to maybe switch gears and look more on the construction products area for possible acquisition candidates?

David Russo

We haven't actually really ignored the construction side of it, Scott. When you look at our construction segment, it's a little bit of a hodge-podge. Businesses are operating well. We've got our Foundation business with Piling group. We've got a Pre-cast Buildings business and then, certainly, our Fabricated products group.

So, we are looking, but it's a little more difficult in that group because we're looking some synergies out of our acquisitions and probably, more to complement with Piling and with the Fab group than any other. But we haven't really ignored it, but we've more potential opportunities in rail than we have construction.

Scott Blumenthal - Emerald Advisers

Okay. And with the historically weak dollar, have you had inquiries for materials from customers that traditionally you wouldn't have seen -- overseas customers, for example?

Stan Hasselbusch

You know, we have done fairly well, I think, in Mexico and Latin America this year. Starting to look at some work up in Canada. But, for the most part, that is, it's not been a big change from what we've done in the past, Scott.

Scott Blumenthal - Emerald Advisers

Okay. And I guess my last one is, Stan -- I guess, anecdotally, we're hearing or we see some kind of hangover in commercial construction from residential. Although, when you look at the Dodge data, that would suggest otherwise.

It would suggest that commercial construction is doing pretty well. Can you comment as to what you're seeing out there and if you've seen slowdown? And if so, how much in commercial construction activity, infrastructure activity, year-over-year?

Stan Hasselbusch

Well, again mostly we do not really cover the residential side of our business. Ours is non-residential or heavy civil. And that continues to be remaining strong. I believe that I looked at some data earlier this month about where we were in the first six months. And I really do, I think that, that starts and work-in-processes is actually up 10% over last year.

So, that business is still fairly strong. A lot of it's tied in. And all of the Combi-Wall and the Open Cell, or most of it that I discussed earlier, is all tied in with port work. So there's a lot of that that's still going on. And we still feel that that's a good market to be in, Scott.

Scott Blumenthal - Emerald Advisers

Okay. Great. Thank you.

Operator

Your next question comes from Liam Burke. You may proceed.

Liam Burke - Ferris, Baker Watts

Thank you. Stan, on the railroad products business, you talked about rail and tie. But how is the Allegheny product sector doing?

Stan Hasselbusch

Allegheny had a very good second quarter, if I recall. I believe that revenues for Allegheny were actually up 15% from last year. And profits continue to be more. We're getting very good production out of both our Nile facility and our Pueblo facilities. And profits are up significantly more.

Liam Burke - Ferris, Baker Watts

Good, thank you.

Stan Hasselbusch

You're welcome.

Operator

Your next question comes from James Bank. You may proceed.

James Bank - Sidoti & Co

Hi, how are you?

Stan Hasselbusch

James.

James Bank - Sidoti & Co

Let's see, the 255 basis point improvement in gross margin -- I was wondering, Dave, if you could split that between the productivity improvements, I guess, primarily in rail? And also the favorable billing margins you had in the quarter.

David Russo

For the quarter, James, most of it came on the billing side. And then the secondary, although not a far second, would be productivity. And then, thirdly, we had small favorable comp in warranty expense because we took a warranty charge in the second quarter of 2007 for $300,000.

Stan Hasselbusch

You know, I guess three areas from the productivity standpoint in the rail sector that have really contributed very nicely in the second quarter -- for the whole year. We've had very good performance out of Tucson. We have that plant up and running and we're cutting back, as David has indicated, we're running at about 50% capacity.

But we're really getting a, really good performance out of Mark Reilly and his group down there. And both the two Allegheny parts have really had much better improvement this year over the second quarter last year, that being Pueblo and Niles.

James Bank - Sidoti & Co

And which facility does UP pull from, primarily?

Stan Hasselbusch

UP pulls from both -- it's been fairly equal between Grand Island and Tucson.

David Russo

And from the joint side, they do a lot of business with our Pueblo facility.

Stan Hasselbusch

And they do take -- to a limited extent, they take ties from Spokane. But, roughly, I would say it's probably about -- between 45/45/10.

James Bank - Sidoti & Co

And is there any risk at all that would happen with the orders with them this year? I guess they had a problem on their Sunset line. Was that what it was called?

Stan Hasselbusch

They've had some problems with permitting some of the same problems that we had down in Tucson.

James Bank - Sidoti & Co

Now, is there any way that risk might carry over into '09 or maybe no?

David Russo

There's always risk, James.

James Bank - Sidoti & Co

Right

David Russo

But I guess our expectation is that there will be some strength compared to this year.

James Bank - Sidoti & Co

Okay. Very good. Do you think you would add another shift to that plant? Or no, it's not necessary? But then the leverage you should get from the productivity could be --

Stan Hasselbusch

We're running one shift, I think, in both plants. And I really think that we've got it pretty much narrowed down to that, running, I think, at Tucson, for sure -- we're running four days a week, ten hours a day. And really, that's optimizing the quantity. And we'll adjust to optimize the quantity. I mean that's the name of the game there.

James Bank - Sidoti & Co

Okay. And the SG&A, which I thought was pretty darn good, considering your sales came down 13%. Yet you only increased your SG&A by $1 million -- I guess 7.7% to sales, a 120 basis point increase. The question is, what's driving that, to me, improvement? Is it just tight selling controls? And is this something that we should expect, kind of, throughout the rest of this year?

David Russo

James, there's a number of factors. But really, with the exception of bringing some people in for sales roles and a few other spots to accommodate not only volume but working on improvement initiatives, we've pretty much done a pretty good job of holding the line in other SG&A costs.

So it's really been people motivated, but most everything else has been -- we've been holding the line pretty good across the board. And as far as expectations for the year, I think we were at 7.8% for the quarter. And for the entire year, we'd probably be looking in the 7.% to 8% range -- 8.1%, something like that.

James Bank - Sidoti & Co

Okay. And let's see, you answered my question on construction backdrop. That's all I have. Thank you very much.

Stan Hasselbusch

[You're welcome].

Operator

(Operator Instructions) Your next question comes from Tom Spiro. You may proceed.

Tom Spiro - Spiro Capital

Good afternoon.

Stan Hasselbusch

Hi, Tom.

David Russo

Hi, Tom.

Tom Spiro - Spiro Capital

Nice quarter. Congratulations.

Stan Hasselbusch

Thank you.

Tom Spiro - Spiro Capital

The 16.9% gross margin in the quarter -- very robust. Stan, do you think there are further opportunities to improve the company's gross margin? Or are we operating at pretty close to a peak?

Stan Hasselbusch

You know, never say never. I mean, no, we'll continue to work on it. Continuous improvement is one of our core values. And we are continuing to look at margin expansion, inventory management, process control in our plants. And we will continue to work on that, Tom. I can assure you.

Tom Spiro - Spiro Capital

Are there any lines of business, any facilities that are operating at substantially below standard, you know, big negative variances?

Stan Hasselbusch

Not really. I think we've had a pretty good year in our Fab products group. We haven't had the load on Birmingham that we had last year, but we're still going to have a very good year there. Having a good year at the Langfield. The tie groups have adjusted. I mean we could really use more capacity.

I think one thing that's nice, that, really, I'd like to mention is what's going on at Spokane. I think that we are always concerned about that. It's kind of out there in the Northwest. And we do some transit work and we do some industrial work. Doing some work into Canada with the two lines up there.

But we've had a lot of success in the quarter, which probably is worth just mentioning. I believe we took five jobs from Los Angeles to California that really totaled about 75,000 ties, which we'll work in over the next three quarters.

And we're going to make an announcement probably later on this week. But we just received a commitment on a large job in Montana, which we've been tracking for about seven years. And it's about 90,000 ties that we'll be making at Spokane over the next three quarters, also.

So, there's nothing really out there that I think that's totally under -- we can always look for more business. And I think what we're getting from the operations group is that we will always find capacity. And so, we're always looking for more work.

Tom Spiro - Spiro Capital

The earlier caller inquired about the SG&A. I'll just pursue that for a moment. Actually, I thought it was running a little bit high. I was kind of curious, Dave. Are there some nonrecurring items running through it? Or are there significant expenses relating to the investigation of acquisitions, other kinds of things we should be thinking about?

David Russo

You know, Tom, we have some of those items. We've had some relocation costs this year. We've obviously, as we -- a deal that doesn't occur, we walk away from that, that goes straight to the P&L. And we've had some of that, as well, both in the first and second quarters.

But not to the point to where I'd call them extremely material. For the second quarter, we probably had $100,000 of deal costs flow through. So I'm not sure what you're definition of material is.

And for the year, $160,000, $170,000 of relocation costs that we'll see every now and then, but a little more this year than we've seen in other years. But nothing that -- no one thing other than those type of things that I'd point to and say are unusual.

Tom Spiro - Spiro Capital

I see. Over on the tubular side, is tubular going to run a second shift in Q3?

David Russo

We don't think so. No.

Tom Spiro - Spiro Capital

So I think, for Stan, or perhaps Dave, one of you guys mentioned that you're now beginning to book into '09 and you said '08 is fully booked. I gather you mean fully booked for the single shift?

Stan Hasselbusch

You are right. I mean we can take more business. If [Mr. Forrester and Mrs. Brumbaugh] can give us some more business, we'll find a place to put it. But we're booked at, I should have said, one shift.

Tom Spiro - Spiro Capital

Okay. And lastly, I think in the commentary, it was mentioned that the margins in the backlog, I think, were described as improved margins in the backlog. I wasn't sure whether that was improved with respect to this time last year or with respect to earlier in this year. Improved versus what?

David Russo

All right, Tom, the intention was to communicate improved compared to last year.

Tom Spiro - Spiro Capital

How do they stack up over the first few months? I mean are they sort of -- is margin staying fairly constant over the earlier part of this year? Are they changing much?

David Russo

No, there hasn't been any real significant change.

Tom Spiro - Spiro Capital

Okay. Thanks a lot. And again, great quarter.

David Russo

Thanks, Tom.

Operator

There are no further questions at this time. I'd like to turn the call back to Mr. David Russo. Please proceed, sir.

David Russo

I don't think we had anything else. Thank you all for joining us.

Stan Hasselbusch

We appreciate your time and have a good day.

Operator

Thank you for attending in today's conference. This concludes your presentation. You may now disconnect.

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Source: L. B. Foster Company Q2 2008 Earnings Call Transcript
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