NWPX Infrastructure Inc (NWPX) 2006 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time all participants will be on a listen-only mode until the question and answer session of today's conference. Today's conference will be recorded. If you have any objection, you may disconnect at this time.

I'd now like to turn the conference over to Mr. Brian Dunham. Thank you, sir. You may begin.

Thank you. Good morning. Welcome to to Northwest Pipe's conference call and the announcement of earnings for the second quarter of 2006. My name is Brian Dunham. I'm the President and CEO of the Company.

Before I begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our press release for cautionary information about forward-looking statements and a description of factors that could cause actual results to differ materially.

For the second quarter of 2006 we generated revenues of $77.9 million and net income of $7.3 million, which equates to $1.03 per share. These results include the sale of the Riverside property during the quarter, which I'll discuss in a moment.

For the year-to-date, we have recorded revenues of $156.7 million and net income of $10 million, which equates to $1.40 per share.

Looking at these results by group, starting first with the Water Transmission group, our sales were $51.3 million for the quarter compared to $60 million last year. Sales were below expectations as a result of lower production from our Adelanto facility, which continued to be impacted by the project to consolidate the former Riverside operations as well as various timing issues at other divisions. Sales are expected to improve in the second half as a result of the record bookings in the second quarter of 2006. Our backlog at the end of June set a record for the Company at $163 million, compared to $129 million at the beginning of the quarter.

Gross profit was $9.8 million or 19.1% of sales compared to $12.5 million or 20.8% of sales for the second quarter of 2005. Gross profit decreased primarily due to lower sales. While the margin as of percent of sales was lower than last year, it improved from the first quarter of this year as the pricing on the projects produced during the quarter improved.

In the Tubular Products group, our sales were $22.6 million during the quarter compared to $22.9 million in the second quarter of last year. Over the last several quarters, we've been refocusing this group on markets to provide long range profitability and avoid direct competition with aggressively priced imports. To accomplish this, we have reduced our production in certain product lines and our overall volume has declined. Strong demand in our ongoing markets, however, have allowed us to nearly reach last year's revenue this quarter. This sales improvement is slightly faster than expected. We now expect revenues in the third and fourth quarters to exceed the comparable quarters from 2005.

Gross profit for Tubular Products increased to $2.7 million in the second quarter of 2006 compared to only $1.1 million last year. Gross profit as a percent of sales increased from 4.9% last year to 11.7% this year. We've seen steady improvement in gross profit as a percent of sales since the second quarter of 2005, reflecting the change we have made in product mix.

We are in the process of upgrading our Atchison division to provide additional products for the energy market. This project is on schedule and is expected to be operational early in the fourth quarter of this year and should lead to additional sales.

In the Fabricated Products group, our sales increased to $3.9 million from $3.6 million last year. The increase is a result of improved demand for our propane tank products. The second half of the year is normally the strongest period for propane tank sales.

Gross profit increased to $334,000 from $133,000 last year. Gross profit as a percent of sales increased from 3.7% to 8.5%. The improvement in gross profit is a result of increased pricing for our propane tank products. We've been working to add new products to this group, but so far we're behind schedule. We do expect sales of these two products to improve as we begin to receive customer approval and production orders following the prototypes and trial orders that were produced in the first half of this year.

Selling, general, and administrative costs were $6.9 million in the second quarter of 2006 compared to $6.4 million for the second quarter of 2005. SG&A increased due to some dilution, higher rent expense related to the system upgrade completed in the third quarter of 2005, and the expensing of stock options required beginning in 2006. SG&A is expected to be approximately $6.9 million to $7.2 million for the third and fourth quarters of 2006, due to the above reasons plus some additional incentive compensation accruals.

In the second quarter of 2006, we completed the previously announced sale of the Riverside property. The sale price was approximately $12 million, selling costs were approximately $700,000, and the book value of the assets were approximately $3 million. In addition, we incurred some final moving and cleanup costs as we vacated the site. The net result was a gain on sale of approximately $7.7 million before taxes, all of which was recorded in the second quarter.

Interest expense for the quarter was $1.7 million, consistent with what it was last year. Lower average borrowings helped offset the higher interest rates in the second quarter of 2006 compared to the same period last year. And after adjusting for taxes, we reported net income of $7.3 million compared to $3.4 million in the second quarter of 2005. We are currently projecting our effective tax rate at approximately 38.6% for the year.

Our net income per share increased to $1.03 per share on 7,131,000 shares outstanding compared to $0.49 per share last year on 7,010,000 shares outstanding.

Looking now at the results for the first half of the year, in the Water Transmission group our sales were $107.3 million compared to $116 million a year ago. Gross profit was $20 million or 18.6% of sales, down some from the 19.6% of sales we recorded in 2005.

In the Tubular Products group, our sales were slightly below the first half of 2006 at $41.5 million, but gross profit improved from 2.9 million last year to $4.6 million or 11% of sales. Again, this reflects the changes we've made in this group.

In the Fabricated Products group, our sales are also up at $7.9 million for the year to date from $6.7 million in 2005, and gross profit is $717,000 compared to 246 for the first half of 2005.

SG&A was about $13.3 million this year compared to about 12.5 last year. Interest expense was very consistent at $3.5 million, and after adjusting for taxes, our net income for the first half of 2006 is $10 million compared to 6 million for the same period last year. This equates to $1.40 per share on 7,128,000 shares outstanding, compared to $0.86 per share last year on 7,012,000 shares outstanding.

Looking briefly at the balance sheet, working capital was approximately $137 million at June 30th of 2006, compared to about $106 million a year ago. The current ratio is up to 3.52 compared to 2.14 twelve months ago, and debt as a percent of total capitalization is 35.6% compared to 42.8% at June 30th of 2005. This is the lowest debt as a percent of total capitalization that we have had in nine years.

Total assets have increased from $342 million to $346.7 million and equity has increased from $151.8 million a year ago to $170 million as of the end of the quarter. In the past 12 months our debt outstanding has been reduced by nearly $20 million. Our debt to EBITDA ratio is currently standing at 2.44, and this is the lowest debt to EBITDA ratio we have had since 2001.

As we look to the second half of 2006, the record bookings in the second quarter have resulted in record backlog at the end of the quarter. This should lead to significantly better results in the second half of 2006 over the first half of the year. The bidding activity currently scheduled for the second half of the year continues near the level experienced in the second quarter of 2006. This should allow us to operate at record levels and still maintain a very strong backlog going into 2007.

The majority of our Water Transmission plants have begun ramping up production in July. We should see improvement in gross margins as the facilities see the benefit of leveraging higher volume against fixed costs. In addition, if, as we expect, the market continues at this level, we expect to see gross margins on new projects improve as capacity scheduling and delivery requirements become more critical factors in pricing decisions. This is typical of a strong market and, in fact, pricing in the last several weeks shows an improving trend.

Gross margins will likely remain steady or slightly up in the third quarter for Water Transmission and should improve in the fourth quarter as our production moves towards projects booked late in the second quarter that have better pricing. We also expect to begin to see savings from consolidation of the Riverside and Adelanto plants, which will positively affect margins.

In our Tubular Products group, we are seeing the benefits of refocusing our efforts. Strong demand in our markets has allowed us to increase sales a little more rapidly than we had expected. We have seen gross margins improve steadily since the second quarter of 2005. Demand is expected to continue at good levels through the third quarter, but decrease slightly in the fourth quarter as a result of normal seasonality.

As mentioned earlier, we will complete the upgrade at our Atchison facility to support the increased demand for Energy products early in the fourth quarter this year. When completed, we will be able to increase the production rates and the product range of our Energy product line.

Our Fabricated Products group has seen improved demand for its propane tank products. The plant is operating at near capacity levels on this production line and orders continue to be strong. The sales of our new Fabricated Products have been slower than expected. We have provided a number of prototypes and trial orders to potential customers, but we are still awaiting approval and production orders from them. In the mean time, we are completing the new production lines that have been added to the Monterrey facility. We expect to receive production orders and begin production during the third quarter and see steady improvements on this line through the end of the year.

As you know, steel is our primary raw material and steel prices have risen in 2006. We expect further increases in the third quarter. We have generally been successful in passing these increases on to our customers and we do not expect any negative impacts from steel costs through the rest of the year.

Fuel increases are also an issue and have impacted our margins to a degree. We believe we are making appropriate allowances for future increases and do not expect any significant impact from rising fuel costs either.

In closing, the second quarter results generally met our expectations. As we look ahead, we are very optimistic about the rest of the year. We are entering the second half of the year with our strongest backlog ever and we expect bidding activity in the Water Transmission market to continue at a high level into 2007. Our facilities are increasing production right now and will be working at higher production levels over the balance of the year.

We expect revenues and margins to improve in the second half of the year in Water Transmission and our other groups, as well. With the current backlog, the anticipated bidding activity, and production levels in Water Transmission and good markets and new products in our other groups, we have all the pieces in place to generate record sales and earnings this year.

At this time, I'll be happy to answer any questions you may have. Carol?

[OPERATOR INSTRUCTIONS] Rick D'Auteuil, your line is open.

-- ask a question?

Yes.

Hi, Brian.

Hi.

It's Rick D'Auteuil with Columbia Management.

Hi, Rick, how are you?

Good. Just, on your last comment there, record sales and earnings, are the earnings with the gain or without the gain? Are you adjusting for that when you make that comment?

I can virtually guarantee we will have record sales with the gains -- or record earnings with the gain, Rick. But I expect we'll get there without it.

Okay. Thank you.

Excuse me. John Rogers, your line is open.

Hi, good morning.

Good morning.

Brian, just on the SG&A levels, and I'm not sure I got this right, but you said going up to about $7.5 million a quarter?

No, I did not. I said we expect it to be between 6.9 and 7.2, which is a little higher than we had previously expected. One issue in there is stock options of course now have to be expensed. And while we have no new options that we're issuing, we still have expenses carrying over that added about roughly 100,000 to that number.

We also have -- we're being a little bit more aggressive with some dilution issues in terms of accruing for that.

And finally we expect to see a little bit higher incentive compensation roll through there, as well.

Okay. And on the backlog and booking activity that you're seeing right now, can you give us a sense -- I know it all applies to Water Transmission, but regionally, the markets, I mean, the bigger projects that you've announced, there's been a couple in Texas and I guess in Nebraska, going back. But are you seeing the market pick up in California?

We have -- let me try to take that a little bit differently and then come around to California.

I would say that we're seeing what has been typical here in the last couple of years, in that the market in the east is not very strong. And that continues to be the case. And one of our challenges, of course, to really run at high levels is to get some work book back into the east so we can get that facility running strong, as well.

The other facilities, Colorado, Texas, California, and Oregon, we're seeing reasonably good activity, I think, throughout those four -- around those four locations in their basic market areas. I would say that the overall market has not been as strong in southern California as we have been used to seeing in the past.

Okay. But -- in terms of bidding activity or in terms of production?

In terms of bidding activity.

Okay. But you expect that to pick up?

We expect it to be good, yes.

Okay. And in terms of kind of your pipeline of work, you've got a -- I guess now a record backlog, but you've also got revenue ramping up. Is there enough work out there to sustain the backlog, maybe not -- but at relatively high levels?

Yes, we believe that there is. There's a possibility that we'll see the backlog go up again within the volume of work that we see bidding. But even with the typical delays and so on that you see in this business, we think we're still going to have a pretty strong backlog going into 2007.

Okay. And that was really what I was getting to. So at this point, the first part of -- is 2007, which I guess is what you can really see, still looks like you'll be able to sustain pretty high production levels.

Yes.

Okay.

And on the Tubular Products side, with most of your product now out of Adelanto, you mentioned the double-digit margins as being a goal, but what about mid double-digit margins? Is that still obtainable?

You're pressing.

Yes.

We're doing a little bit better than I had expected us to be at the moment. As you know, I've a said low double digit for some time now has been the target. You can certainly argue, at where we are right now, we're kind of in the middle of the low double-digit range. I do think we're going to see it go up again in Q3, but probably level out in Q4. So I think we've got maybe one more step up to go here in the near future, and then we'll see where we go from there.

Is that going to get us up above 13%? That's getting a little bit too precise and a little bit too optimistic for me to call at this point. But I'm going to stick with our target is low double digits. We think we've got one more step up, here in the third quarter. We'll see what happens from there.

Okay. And again, though, looking out into '07, where I know it gets very fuzzy for everyone, but based on what you're seeing now with pricing, who knows, but is it your impression that you should be able to maintain at least sort of 10% or better margins for the --

Yes, that's certainly our objective. And obviously, this business does change around and will again, I'm sure, but we're trying to develop a business that we think can sustain those double-digit margins throughout a cycle.

Okay. And then just the last question, your debt level down to a nine-year low. Is it your intention, I mean, with the cash that will be building up here, to continue to push that lower?

We, at the moment, the best use that we have for the cash we're generating is to pay down debt.

And there aren't significant working capital requirements?

There are. And in fact, working capital built, this quarter, a fair amount. So debt did not come down as much as I thought it would in the second quarter, but it still came down a little bit.

Okay. Great. Thank you.

Thank you.

Steve, Raineri, your line is open.

Good morning.

Good morning, Steve.

I was wondering if -- I may have missed this, so excuse me. You mentioned two of your margins were better than you expected. I was wondering what you can attribute that to and how sustainable that is?

I think it's sustainable. As I said a moment ago, I do think we're going to see margins step up again in Q3. The product mix was just a little bit better than I'd expected in the second quarter and a little bit higher volume as well, late in the second quarter. So it wasn't a lot higher than we had thought it would be, but it was a little bit better.

Okay. And the product mix, is that related to new initiatives you guys are doing?

Yes, this is really a program we've been working on for a year, maybe a little bit more than a year, so really refining the product mix, Steve, so we feel like we're not butting heads with some really aggressive low priced imports that we saw in some product lines that we previously have been active in. That program, I believe, is working.

And how would you characterize the utilization at your facilities at this point?

We have a fair amount of room at this point. Our Atchison facility is now working, I think, three shifts five days a week, so it's getting a little bit busier there, but we still believe we have some additional room. And with -- the expansion that we're doing there is going to improve the capacity some, as well.

And so, if you were to characterize it numerically, what would you say? It's 85% or something like that?

No, it's not that high, it's probably 75.

But that's up from what a few quarters ago? Could you hazard a guess?

Yes, I don't have that right in front of me, but I'd say it's up from maybe 65.

I was wondering if you could talk about the energy opportunity in terms of what your initial targets are in terms of revenue, perhaps, and if you've sent out prototypes and if they're being tested, and if you have orders at this point and -- whatever you --

The energy market, Steve, that we're addressing is primarily line pipe, or almost exclusively line pipe. And we signed an agreement with Lone Star Steel where we are producing for them and they are marketing the product. And that agreement is in its first year. To give you a run rate on how we're doing, two years ago we were about a million and a half in energy sales before this agreement. Last year we did about $7 million before this agreement, and this year I think we're targeting somewhere around 15 million.

And that's for '06?

For '06, yes. And we're not at that run rate quite yet, but we're getting closer to it here in the third quarter. And then as I mentioned earlier, the expansion we're doing in Atchison is really to increase that product line for Lone Star. And when that's done, we'll see that accelerate even more.

And is this line profitable at this point?

Yes.

Are the margins, are they above what the division reported at this point? Is that's what's helping to lift that?

I would say that those margins are kind of average for the Atchison group.

Okay, so not really above? And how much are you planning to spend on the expansion for this project? And maybe if you can elaborate as to what CapEx will be for this year and next, in total.

Yes, the expansion is -- most of the costs of the expansion are already in CapEx for this year and it's about a $4 million project --

For Atchison.

Yes.

Okay.

Total CapEx for this year is going to be probably in the 14, 15 million range, which is a little higher than we had expected, partially due to the consolidation of Riverside, which carried over quite a bit into 2006, and the Atchison expansion. For 2007, at this point I would expect that to drop back down. So probably somewhere around 10.

And depreciation?

Depreciation for the quarter was right around 1 million and for the year should be just about $4 million, 4 to 5 million.

Okay. If you could just indulge me a little bit. And historically you guys haven't put in balance sheets and cash flows, and being a CP, I'm sure you could appreciate the value of that stuff. And since you've been quoting the numbers off that, I was wondering if on future releases you could just add that.

Yes, and in fact I had meant to do that this time and I just forgot. So I apologize and we will put that in.

Great. Thanks so much, Brian.

You bet.

Excuse me. David Fondrie, your line is open.

Yes, good morning, Brian. So just to complete the questions regarding Atchison, how much are you expanding that capacity there to accommodate the -- or how much additional capacity are you putting on there to accommodate Lone Star?

What we're doing is upgrading our facility, first of all, so we can run essentially 7 days a week. And secondly, so we can handle higher strength steels, which is a part of the product line that we cannot currently provide Lone Star, that they're asking for.

So if you're going to a run rate of 15 million, is that -- that will be your capacity as we go into 2007?

No, no.

For --

No, the Atchison facility, that's just the energy products on the Atchison. The Atchison facility itself is running at substantially higher numbers than that.

No, I understand, but I'm saying the energy piece of it is like $15 million, that's the --

We expect that to continue to grow, yes.

And the capacity expansion you're putting in: What -- I guess -- let me rephrase it. Sorry about that. What is -- with the capacity that you're adding, what would your annual run rate in dollar revenues be for the energy piece?

Our target is 25.

25. Thanks. Long way around to get --

That's all right.

And then, can we talk about Mexico a little bit more? Specifically, you said, are you expanding your propane tank capacity down there?

No, we are just putting the finishing touches on adding some new production lines in Mexico that will not be for propane tanks. It's for other fabricated products, which is a very vague term. But basically, it's pressure vessels. We've done a variety of different trials, like air compressor tanks, air brake cylinders, a wide variety of different things, Dave, in that facility. But we've done them all kind of on a prototype, trial order basis. And at the same time we've been working to build out these production lines, and they are essentially ready to go at this point and we hope to soon have production size orders for that half of the facility.

And so as we go forward, we'd expect to see that business turn to about 50% propane tanks and 50% of these other fabricated products.

Did I hear you correctly, that you said you were running pretty much at capacity, though, on the propane side?

Yes, we're fairly close on the propane tank side.

And you still do not have any firm orders for the other products?

We have orders, but they are -- like I said, they're trial order size. We're waiting for the real production orders.

And when do you think you might get some of those? By the fourth quarter?

I think we'll be in production in the third quarter.

In the third quarter.

Yes.

So these are pretty short -- when they give you an order, it's a pretty short period of time to get going.

We think we're pretty close.

Okay, thank you very much.

You bet.

[OPERATOR INSTRUCTIONS] And I'm showing no audio questions at this time, sir.

Okay. If there are no further questions, that will conclude the conference call. Thank you for your interest.