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Edited Transcript of FSTR earnings conference call or presentation 9-May-19 9:00pm GMT

Q1 2019 L.B. Foster Co Earnings Call

PITTSBURGH Jul 7, 2019 (Thomson StreetEvents) -- Edited Transcript of L.B. Foster Co earnings conference call or presentation Thursday, May 9, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James P. Maloney

L.B. Foster Company - Senior VP & CFO

* Judith Balog

L.B. Foster Company - Manager of IR

* Robert P. Bauer

L.B. Foster Company - President, CEO & Director

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Conference Call Participants

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* Brett Kearney

G. Research, LLC - Research Analyst

* Christopher Ralph Van Horn

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to the L.B. Foster Company First Quarter 2019 Results Conference Call. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Judy Balog, Investor Relations Manager. Thank you. You may begin.

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Judith Balog, L.B. Foster Company - Manager of IR [2]

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Thank you. Good evening, ladies and gentlemen. Thank you for joining us for L.B. Foster Company's earnings conference call to review the company's first quarter 2019 operating results. My name is Judy Balog, and I am the Investor Relations Manager of L.B. Foster. Hosting the call today is Mr. Robert Bauer, L.B. Foster's President and CEO. Also on the call is Mr. James Maloney, L.B. Foster's CFO and Treasurer.

In addition to our press release, we have a first quarter presentation on our website under the Investor Relations tab for those who have online access. This evening, Jim will review the company's first quarter financial results. Afterwards, Bob will review the company's first quarter performance and provide an update on significant business issues and market developments. We will then open the session for questions.

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 businesses and markets, cash flows, margins, operating costs, capital expenditures and other key business metrics, issues and projections. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from statements we make today. 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, except as required by securities laws. All participants are encouraged to refer to L.B. Foster's annual report on Form 10-K for the year ended December 31, 2018, as updated by subsequent items filed with the Securities and Exchange Commission for additional information regarding risk factors that may affect our results.

In addition to the results provided in accordance with United States generally accepted accounting principles, our commentary includes non-GAAP earnings before interest, tax, depreciation and amortization, or EBITDA statements. A reconciliation of net income or loss to non-GAAP EBITDA has been included within the company's 8K filing. Statements referring to EBITDA are considered non-GAAP measures. And while they are not intended to replace the presentation of our financial results in accordance with GAAP, the company believes that the presentation of this measure provides additional meaningful information for investors to facilitate the comparison of past, present and forecasted operating results. Our accompanying earning's presentation reconciles these non-GAAP measures to the corresponding GAAP measure.

With that, we'll commence our financial review discussion, and I'll turn it over to Jim.

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James P. Maloney, L.B. Foster Company - Senior VP & CFO [3]

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Thank you, Judy. Thank you, everyone, for joining us today.

Our net sales for the 2019 first quarter were $150 million compared to $122 million in the prior year quarter, an increase of $28 million or 22.9%. The sales increase was due to improvements within each of our 3 reporting segments.

Starting with the Construction segment. Sales increased from the prior year quarter by $8 million or 29.2%. The increase was supported by each division within the segment led by Fabricated Bridge with an increase of 39.6%, Precast Concrete Products with an increase of 35.6% and Piling Products with an increase of 20.4%. The increase was driven by the strong backlog the segment accumulated entering 2019.

The Rail sales improvement of $14 million or 21.8% was driven by both the Rail Products and Rail Technologies business units. Our Rail Products business saw a sales increase of 28.2% mainly due to demand in new rail products and expanding transit projects. Our Rail Technologies sales increased 12.8% as European transit market activity remained strong during the quarter, and friction management sales in North America remained strong.

The Tubular and Energy Services sales increase of $6 million or 19.3% was driven by growth in each of our business units within the segment with Protective Coatings and Measurement Systems increasing 32.2% and Test and Inspection and threaded services increasing 3.6%. As a percentage of first quarter 2019 consolidated sales, Rail accounted for 50.3%, Tubular and Energy Services was 24.9% and Construction was 24.8%.

Now looking at gross profits. There were a number of encouraging results in gross profit performance. Consolidated gross profit increased $7 million over the prior year quarter to $29 million with each of the reporting segments contributing to the increase, resulting in gross profit margin of 19.4%, an increase of 130 basis points from the prior year quarter. The Tubular and Energy Services gross profit margin increased 510 basis points with each of the segments' divisions contributing to the improvement. Our Protective Coatings and Test and Inspection Service divisions were the primary contributors, both of which were helped by market conditions that increased demand for our services.

Construction segment gross profit margin increased 90 basis points. This increase was mainly driven by our Precast Concrete Products and, to a lesser extent, our Fabricated Bridge Division. These increases were partially offset by a reduction within our Piling division. The Rail segment gross profit margin decreased 40 basis points due to higher-volume contributions from our lower-margin Rail Products offerings.

Moving on to our expenses. Our consolidated selling and administrative expenses increased by $1 million or 7.1% to $22 million in the first quarter mainly due to increases in our personnel-related expenses. As a percentage of sales, this led to a decline of 210 basis points compared to the prior year quarter. We are pleased to see our cost-containment efforts continue as sales increase over the prior year.

Interest expense decreased $532,000 due to the overall reduction in our outstanding debts compared to the prior year. As we were pleased to announce last week, we have entered into a new amended credit agreement, which I will discuss in further detail later on.

The company's income tax expense for the first quarter 2019 was $638,000 or an effective tax rate of 14.7%. Our effective tax rate was reduced by 10% as we realized a portion of our U.S. deferred tax assets previously offset by a valuation allowance. First quarter 2019 net income was $4 million or $0.35 per diluted share compared to a loss of $2 million or a loss of $0.18 per diluted share last year. EBITDA totaled $10 million in the first quarter, an increase of $5 million compared to last year.

Turning to the balance sheet. Working capital net of cash and current debt increased $20 million compared to December 31, 2018. This was primarily driven by increases in accounts receivable and inventory. Accounts receivable increased by approximately $13 million when compared to December 31, 2018, due to the timing of billings as approximately 40% of our first quarter sales was billed in March. Our DSO remained flat at 50 days. So I feel good about our collections efforts, further emphasizing the receivables increase is all driven by growth. Inventory increased by $18 million compared to December 31, 2018, as we prepare for increased sales from our outstanding backlog. Bob will provide further details later on on this matter.

Accounts payable and deferred revenue increased $20 million during the first quarter of 2019 as compared to December 31, 2018. Our total outstanding debt increased by $15 million or 20.3% in the current quarter. Cash provided by debt was utilized to fund trade working capital needs I just spoke about during the current quarter as well as to support the strong $250 million backlog we had at the end of March. As I mentioned earlier, we recently announced an amendment to our credit facility to provide for a term of 5 years, maturing in April 2024, with a maximum borrowing capacity of $140 million and an additional term loan borrowing up to $25 million. We are pleased with the terms of the amendment, including a lower interest rate grid than our former agreement. As of March 31, 2019, we remain compliant with all our covenants.

Now moving to our cash flow activities. Our cash used in operating activities in the first quarter of 2019 was $14 million compared to cash provided of $3 million in 2018. The $16 million decrease in operating cash flow was primarily related to the need to support increased trade working capital as we prepare for increased sales due to strong backlog as I discussed earlier.

During the first quarter of 2019, our investing activities included capital expenditures of $3 million, a $2 million increase over the prior year quarter. The current year expenditures mainly relate to plan expansion and automation integration programs within our Tubular and Energy Services segment. We anticipate 2019 capital expenditures to range between $7 million and $11 million, and we'll continue to focus on programs that are targeted at developing new business opportunities and improving operational efficiencies. I will provide some commentary on new orders and backlog activity next.

Our first quarter 2019 new orders were $180 million, an increase of 2.5% compared to last year's first quarter, which was primarily driven by our Tubular and Rail segments. For the trailing 12 months ended March 31, 2019, new orders were $693 million, a 22.5% increase over the prior trailing 12-month period. We were very pleased with the continued strength in new orders.

Tubular segment orders increased 16.2% over the prior year quarter. Both our Measurement Systems and Test and Inspection divisions saw increased order activity, which was offset by a reduction in Protective Coatings Services compared to the prior year. First quarter orders for the Rail segment increased 2.6% compared to the prior year quarter. Global transit projects have contributed to the growth within the segment as we continue to see expansion within those markets we serve. North American friction management demand has also supported the increase in order activity.

Construction segment new orders decreased 8.1% as our Piling division saw a 32.1% decrease in orders compared to the prior year quarter. Partially offsetting the decrease were increases in Precast Concrete and Fabricated Bridge products. Backlog stood at $250 million at the end of the first quarter, up $30 million or 13.5% from the prior year backlog of $220 million. Increases of 17.8% in Construction segment and 15.8% in the Rail segment supported the growth over the prior year, while the Tubular segment declined 7% to prior year.

In closing, our focus remains on increasing sales and profitability. We will also continue to focus on maximizing our working capital and free cash flow.

That concludes my comments on the first quarter of 2019. With that, I will now turn it over to Bob.

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [4]

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Thank you, Jim, and hello, everyone. I'm going to begin today with comments on operational performance for the quarter and provide more background on what was a great start to the year. Then I'll comment on the market and specific actions that have been helping fuel our growth.

The year-over-year profit improvement in Q1 finished above our expectations on volume that was stronger than any first quarter on record. Our gross margin performance and operating expenses finished better than we projected on $150 million of sales, which was close to expectations given our starting backlog. In addition to benefitting from the sales volume, we saw a contribution from operational efficiency programs in a number of areas as well. Our operational execution was excellent, and it was particularly encouraging to see all 3 reporting segments increase profit as well as segment profit margins that help drive significant profit margin improvement for the total company.

The year-over-year segment profit improvement for the Tubular and Energy segment continues to be driven by strength in midstream energy projects that include protective coatings for pipelines and increasing demand for measurement systems for those pipelines. We're benefitting from market investment going into pipeline capacity as needed for continued oil and gas production growth in the U.S. shale territories. In addition, our Test Inspection and threading services for energy tubulars has improved profit margins despite the pressure that still exists on suppliers serving the upstream market.

The 70% segment profit growth in the Rail segment was excellent being driven by very strong sales growth in Rail products. The backlog for transit projects has remained strong. New Rail sales are well above prior year, and steel prices remain steady at levels above last year. The Construction segment made a much smaller contribution to the quarter's results, but the improvement was still significant. The segment's 29% increase in sales was driven by Bridge Decking and Precast Concrete Products, which together helped drive the profit margin expansion. Gross profit increases in these 2 divisions helped offset some dilution from Piling Products which suffered from price pressure on projects shipped this quarter.

Overall, a 130 basis point increase in consolidated gross profit, in addition to the 23% total company sales growth, helped drive a big increase in net income from prior year. And it's also worth noting that at the same time, interest costs are down, and SG&A expense as a percent of sales was 210 basis points better than prior year. We feel this is really strong performance for our first quarter which is typically a challenge due to low seasonal sales volume. However, this year, the significant rise in backlog for 2018 and into the year-end really helped keep operations at productive levels.

While there was a lot to be encouraged by, we did use cash to deal with rising sales volume and the expected volume for the quarters ahead. The use of cash in the first quarter is not uncommon. However, we have been intensely focused on cash and keeping working capital at very efficient levels in an effort to minimize and reduce debt. The $13.5 million of cash used in Q1 was greatly affected by receivables growth for sales recognized in March as Jim pointed out. But while receivables grew, our collections are being well managed. In fact, our DSOs have declined in this period versus last year. Inventory was up, but the increase from the beginning of the year was only 15% with the increase almost entirely coming from Piling and Rail Services in Europe.

Inventory in Europe Rail Services is largely being driven by growth as well as delays in transit projects the U.K. where integration services for new underground platforms are running behind due to general contractor complications. I'm encouraged that the demand for our services has stayed at elevated levels beyond our forecasted time frame. But we would, of course, like to complete the portions of our work that are being held up by the timing of other scheduled work.

Increases in Piling inventory are the result of a very large project for expansion of cruise ship docking in Florida and planned downtime from our steel mill partner that is undergoing routine maintenance. Both of these conditions are resolving themselves as the cruise ship project is expected to ship in Q2 and our mill partner operations are scheduled to resume in June.

Despite the use of cash in the quarter, our balance sheet continues to look strong. Our trailing 12-month net debt to EBITDA ratio was 1.8, a slight increase from the year-end ratio of 1.6. Capital spending in Q1 was $2.6 million, as Jim said, a spending level that has risen above prior quarter levels, as we have been expecting and have been describing on prior calls.

So I'm going to turn to bookings backlog and some of the sales performance. As Jim commented on, orders were strong in the quarter, at $180 million. The year-over-year growth of 2.5% may appear low at first. But $180 million of new orders by our measure is an indication of continued strength. And it pushed backlog up further to $250 million. New Rail and Piling orders were higher last year, while the balance of other product lines combined had significant growth this year.

The trailing 12-month orders are 22% above prior period. And the $250 million in backlog has significant increases in both the Rail and Construction segments with both up better than 15%, and our backlog has stayed above $200 million since February of 2018, all of which has provided confidence in our positive outlook on market conditions.

I'll conclude with a couple market outlook topics that appear to be on the minds of investors recently. First off, forecasts from some major oil and gas developers for capital spending have been revised downward during Q1, reflecting a more cautious approach to 2019. The revisions accompanied weak pricing in the oil markets along with concerns over whether the economy was slowing down. This is more likely to affect the upstream market strength, where we provide Test Inspection and other services for energy tubulars in drilling applications. Yet our Q1 sales that serve this market increased by almost 4% over prior year.

More recently, the price of WTI has had good support, above $60 per barrel, and I expect upstream developers to project better cash flow in Q2 and possibly renew CapEx plans that take advantage of the higher prices. In addition, we have growth programs to expand our served market. We're expanding in locations that we previously underserved, such as the Bakken region where our new service center just opened. Capabilities in our existing Permian service center are expanding, and volume in our South Central Texas service center in the Eagle Ford has been rising.

With the rising strength in oil prices, I'm more optimistic that we'll have a solid demand in the coming quarters even as we manage the headwinds from reduced demand for services on foreign pipe due to tariffs and quotas that are affecting import volume to our service centers. As a reminder, our Tubular and Energy segment is more midstream dependent. And Q1 sales for Test Inspection and threading services, divisions that are upstream market focused, were 39% of sales. Of the 19.3% growth in sales of our Tubular and Energy segment, 91% of the increase came from the divisions that largely serve the midstream markets.

The second topic is the volume of traffic for freight rail operators in the U.S., which was lower than expected in Q1, raising concerns about the economy and the overall outlook for the industry.

North American freight rail traffic reported by the public Class 1 railroads was down 1.2% with commodity carloads down 2.2% and intermodal traffic down 0.5%. At the same time, reported revenues were up, operating income was up, and capital spending was up 6.6%. That spending is made up of some companies with increases in spending and some with decreases.

We have not heard comments surrounding reductions in planned projects that are maintenance related or related to improving operating efficiency. Keep in mind that our sales do not necessarily correlate to Class 1 rail capital spending, although it does provide a barometer for the direction of the market from time to time. Our priorities for offsetting any weakness that could occur is to continue promoting our friction management products and services which are providing savings for freight rail operators by reducing wear and tear in heavy traffic areas. Our on-track services programs have been growing, and we are also seeing greater interest in these services from transit operators globally which helped our Rail Technologies sales grow 13% in the first quarter. So I'm going to wrap up there. I'll hope you'll notice from those comments our outlook remains upbeat. We expect to have a good quarter in Q2.

And with that, we will open the line and be happy to address any questions anyone has.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Chris Van Horn with B. Riley.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [2]

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Congrats on the quarter. You continue to see really impressive top line growth across the -- all 3 segments. I'm just wondering. Can you give us some perspective on how you see 2019 and maybe some of the out years playing out? Do you see this growth continuing? And what's kind of your outlook there?

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [3]

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Well, I like to usually take that on by commenting on the market outlook as an indicator for our -- what we think our business activity will look like. As I mentioned in some of my comments, I think our markets continued to remain strong. There are a few areas where we've got a couple of headwinds out there along the lines of my comments on foreign pipe, for example, but largely speaking, our markets are in good shape. Exactly how strong they'll be and how much they'll drive sales growth, I'm going to stop short of quoting a number on exactly where we're going to -- we think orders or sales will come in this year and how strong that growth will be. But that's one of the reasons we provided the trailing 12-month order rate as well. Because from 1 quarter to the next, that might give you the wrong impression of what things look like out there.

But I'd just wrap up by saying this. The quarter was strong. Our orders at $180 million reflect a really good Q1. We've got still great backlog. So we have every reason to believe this is going to turn out to be a good year.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [4]

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Okay. Got it. And then if I try to think -- I try to qualitatively think about your growth, is it -- are you taking share? Are you seeing just an expansion in the right products that you're in? Any sort of color around that?

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [5]

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Yes. I think that there are pockets of the market where we're winning more than our fair share. I think some of these new programs that we have started are helping us. I would tell you -- maybe I'll start in the international areas. The growth programs that we established in Europe that relate to some of our automation solutions over there in our Transit Rail Services business, that's absolutely growing faster than the market.

So we are -- if we want to call it picking up share or the fact that we're entering markets that we hadn't been in before, I mean that kind of goes hand in hand, but that has absolutely fueled some of our growth. I think we're gaining more than our fair share in on-track Rail Services in North America, a business model we established a little more than a year ago. I believe that's helping us.

I feel like we are growing faster than everyone else in the markets we serve for Precast Concrete Products, our -- both our buildings business as well as other Precast Products. I just don't see anybody out there, I think, doing what we're doing there which has, kind of in the last couple of years, been a good, sustainable, high single-digit number. And I don't think our competitors are picking up maybe that much business.

And finally, this midstream area where we put Protective Coating on pipelines tubulars as well as our Measurement Systems, it's kind of hard to put a figure on that right now because we don't get actual market share data on that but sure seems like our business is -- feels like it's doing maybe better than others. So there's a -- there's, what, 4 or 5 areas that I would say have better than market growth.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [6]

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Okay. Okay. Just moving to margins, very impressive expansion here. Can I -- is there a way to kind of think about it in terms of -- is product mix helping? Is it a volume getting your leveraging that fixed-cost line? Are there other things? Maybe there's some things on the efficiency side. Any further color on what's driving the expansion?

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [7]

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Well, when we get sales growth that's in the order of 23%, 24%, we are definitely going to leverage some of our overhead costs, both facility overhead as well as just our general SG&A expenses, corporate expenses, that sort of thing. There's some areas where mix actually was a bit of a headwind this quarter. And in fact, Jim was commenting on that, that we had really strong growth in Rail Products. And that margin has been lower than other products in the Rail segment such as Rail Technologies. But there are margin cost-reduction programs that helped this quarter. We're constantly working on continuous improvement programs that help deliver better margin. And we've got some good customer mix, I would say, going on where we have some customers that we're just able to see some better margins on than others that helped us in a few areas of our business.

But I'd say one other thing. I think our execution was really, really clean this quarter. You look up last year, there were a few things we were wrestling with operationally. We got those behind us. And so with this backlog that we have, we're able to operate very efficiently. It allows us to really be efficient at what we schedule. So those sorts of things help us as well.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [8]

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Okay. Great. And then any update on Union Pacific and the conversations you're having with them about becoming a customer again and any update there?

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [9]

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Well, as we talked about last time we were on the phone call, we of course resolved that matter. And at the same time, we put together an agreement with Union Pacific to begin doing business with us again starting this year. There's a number of things that we have to work through to make that happen which include some testing and other kind of supplier approval processes that we need to go through. So a number of things are under way to restore the business activity between the 2 companies, but they're in various stages of progress with regard to restoring the supplier approval and doing the sort of testing that needs to be done and other things they need to be assured that our products are still meeting their specification.

So activity has started. Think of it as very, very early stages. There's really nothing of significance to report yet, but I certainly hope that by the time we get to the second half this year, we can give you a little bit more of a report that would talk about order activity and where some of that's coming from.

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Christopher Ralph Van Horn, B. Riley FBR, Inc., Research Division - Analyst [10]

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Okay. Congrats again on the quarter.

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Operator [11]

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(Operator Instructions) Our next question is from Brett Kearney with GAMCO Investors.

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Brett Kearney, G. Research, LLC - Research Analyst [12]

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Just wanted to ask, I know you mentioned it in your prepared remarks, if you could talk a little bit more about the new Rail Products that are driving some of the growth in that part of the business and then also the services that you're providing on the London cross-rail project, if you see opportunities for that solution in other parts of the transit market in Europe and North America.

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [13]

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Yes. Well, maybe I'll start with the latter there. That cross-rail project is one of the largest projects that's going on anywhere in the European area. We are working on multiple-platform stations simultaneously where we're doing a lot of integration work with regard to things such as security, access control, video/audio, PA systems, all of those kinds of things. There are solutions that are in the area that help passengers as well as interfaces into the signaling systems and such. We're really busy with that. We're largely focused right now on that program, which is, of course, in the greater London area. So we have not stepped into other parts of Europe at this time. We feel like there is enough opportunity just in the U.K. for those kinds of services. And even in markets that are parallel to the rail market where automation solutions for people that are moving about are things that we can help with.

Whether -- at this point in time, I think we're going to continue to focus just on the U.K., although we do have products that we sell into other European markets and offices outside of the U.K. But I think from as -- our service -- as far as the service initiative goes, at least near term, it's going to be focused more on the U.K. market.

In the new products area, one of the things we've been talking about now for a number of quarters is the strength in the transit area. We've got a number of large projects that we booked in that area. Our fastening systems and some of the things that we're doing with those transit fastening systems is one of our core products in that space. We continue to innovate in the area of our insulated joint products which are products that manage the interface to the signaling systems at crossings. And one of the things that we're really excited about going forward, and we're really just getting started with this one, is obstacle detection in level crossing areas. We also have some systems out there that are working with avalanche detection where you have a rock fell -- rock fall detection that's a more accurate one where we've got some systems now being tested, where -- in a lot of areas, where you can find debris on a freight rail line. We're working on detection of those sorts of things, and those are in the early stages. But they're going well.

And then in the on-track services that you asked about, that's really all about bringing services on track to managing friction management solutions. So we're dealing with maintenance and repair of all of the electronics and mechanical systems for those. We are dealing with refilling the consumables for those. And we're managing hundreds of miles of track these days for mostly large freight rail operators who are now using us to deal with those kinds of services to keep the uptime going from our friction management product.

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Operator [14]

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We have reached the end of the question-and-answer session, and I will now turn the call back to Bob Bauer for closing remarks.

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Robert P. Bauer, L.B. Foster Company - President, CEO & Director [15]

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All right. Thank you, operator. Thank you, everyone, for joining us. We're really pleased with how things turned out as you can probably tell by the enthusiasm in the comments. Appreciate the questions, and we'll look forward to catching up with you next quarter. Thank you.

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Operator [16]

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This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.