NWPX Infrastructure Inc (NWPX) 2006 Q3 法說會逐字稿

Good morning and welcome to the Northwest Pipe Company third-quarter conference call. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time. Thank you. Now I will turn the meaning over to Mr. Brian Dunham, President and CEO. Sir, you may begin.

Good morning. A little technical problems to start the day. Welcome to Northwest Pipe's conference call and the announcement of earnings for the third quarter of 2006. My name is Brian Dunham. I am the President and CEO of Northwest Pipe 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 the factors that could cause actual results to differ materially.

For the third quarter of 2006, we generated revenues of $92.4 million and net income of $4.1 million, which equates to $0.57 per share. This is a new record for revenue for the Company. For the year-to-date, our revenues are $249.1 million with net income of $14 million and earnings per share of $1.97.

We are going to look at the third-quarter results by group, starting first with the Water Transmission group. Our sales increased 6% to $65.5 million in this group from $61.7 million last year. This is a new record for this group and met our expectations as production at the majority of our facilities increased to support the record backlog we had at the beginning of the quarter. Bidding activity improved in the second quarter this year and continued at a high-level through the third quarter. Our bookings has a resulted in another backlog record of $195 million at the end of the third quarter 2006.

Gross profit for the quarter was $12.7 million or 19.4% of sales, which is consistent with the results in the third quarter of last year. We continue to track a significant number of projects that are scheduled to bid in the fourth quarter. If they bid as planned, we should begin 2007 with the strongest backlog we have ever had entering a new year.

In the Tubular Products group, our sales were $22.3 million during the quarter, up from $20.5 million in the third quarter last year. Energy products in particular were much stronger this year as we continue to develop this product line. We expect strong energy sales to continue through the fourth quarter, offsetting products whose sales typically slow in the fourth quarter because of seasonality. This should result in relatively steady sales overall.

Gross profit doubled to $2.2 million in the third quarter of 2006 from $1.1 million last year. Gross profit as a percent of sales increased from 5.3% in the third quarter of 2005 to 10.1% for the third quarter of 2006. We continue to see gross profit improve over comparable periods as a result of the strategy to refocus our product line offerings away from products that compete directly with low-priced imports.

The upgrade of our Atchison facility is proceeding and should be completed by the end of the year. This will allow us to further expand our energy product line.

In the Fabricated Products group, our sales increased to $4.7 million from $4.5 million last year. Demand for our propane tanks has remained steady. Historically the third and fourth quarters of a year have the highest demand in this industry. We expect this to continue with higher sales in the fourth quarter of this year. Our new product sales in this group are lagging behind expectations. Sales are slightly higher than last year, but we continue to wait for approvals and orders on prototypes that were provided earlier in the year. We now expect to receive the first significant order by the end of October.

Gross profit was $243,000 compared to $454,000 for the third quarter of last year. The decrease in gross profit resulted from increased price competition in the propane tank industry.

Selling, general and administrative costs for the Company as a whole was $7 million in the third quarter of 2006 compared to $6.6 million for the third quarter of 2005. SG&A increased due to settling outstanding customer claims, higher advertising and promotion expenses and the expensing of stock options, which was required beginning in 2006. SG&A as a percent of sales was steady at 7.6%, both this year and last year. SG&A is expected to be approximately $7.2 million for the fourth quarter of 2006.

Interest expense for the quarter was approximately $1.8 million, very consistent with $1.9 million from last year, and our pretax earnings for the current quarter were $6.4 million, a 12% increase over the third quarter of last year. Our tax rate for the current quarter, however, is estimated at approximately 36% compared to about 30% last year. Our tax rate last year was reduced by the onetime effect of some state and federal tax law changes recorded that were in that quarter. After adjusting for taxes, we reported net income of $4.1 million in the third quarter of this year compared to $4 million in the third quarter of 2005. We are currently projecting our effective tax rate at approximately 38% for the year.

Our $4.1 million in net income equates to $0.57 earnings per share based on 7,162,000 shares outstanding compared to $0.56 per share last year based on 7,112,000 shares outstanding.

For the year-to-date, sales in our water transmission group were $172.8 million, down slightly from the sales number from last year of $177.7 million. We expect strong sales in the fourth quarter of 2006, which should allow us to exceed last year's record sales in this group of $232.1 million. Gross profit was $32.7 million compared to $35.5 million for the first nine months of last year. Gross profit is somewhat lower due to the mix of projects produced, competitive pressures in the earlier part of the year and certain production inefficiencies as a result of the Adelanto and Riverside facility consolidation, which was completed earlier this year.

In the Tubular Products group, our sales increased to $63.8 million for the first nine months of 2006 from $62.9 million for the first nine months of 2005. Gross profit improved to $6.8 million or 10.7% of sales from $4 million or 6.3% of sales last year. This again is the result of the refocus of this group to a more limited and more profitable product mix.

In the Fabricated Products group, our sales for the year-to-date are $12.6 million, up from $11.3 million last year. The majority of this increase is in propane tanks, which resulted from improved overall demand. Gross profit for the first nine months of this year is $960,000 compared to $700,000 for the same period last year. Gross profit began to improve beginning in the third quarter of 2005 and continue through the first half of 2006.

As noted earlier, recently we have seen margins under pressure due to increased price competition in this industry. Our selling, general and administrative costs for the year-to-date were $20.3 million, approximately 8.2% of sales compared to $19.2 million or 7.6% of sales last year. The increased again the result of customer claims, higher advertising and promotion expenses and the expensing of stock options, as well as some rent expense that was related to a systems upgrade earlier in this year.

Included in our nine-month results is the onetime effect of selling our Riverside property. We completed the sale of this property in the second quarter after moving substantially all of the manufacturing equipment to our Adelanto facility. The sales price was $12.3 million, which resulted in the gain on the sale of $7.7 million. Interest expense for the current year is approximately $5.3 million, down slightly from the $5.5 million we recorded last year. And after adjusting for taxes, our net income is $14 million for the first nine months of 2006 compared to $10 million during the same period last year. This equates to net income of $1.97 per share based on 7,139,000 shares outstanding compared to $1.42 per share last year on 7,050,000 shares outstanding.

We have included a balance sheet with our press release for your review that is comparative with December 31, 2005. I will point out a few highlights compared to one year ago. Working capital currently is approximately $138 million. At September 30, 2005, it was about $113 million. Our current ratio is up to 3.05 compared to 2.21 a year ago, and that as a percent of total capitalization is at 35.8%, down from 40.4% at September 30, 2005.

As we look ahead to the fourth quarter of 2006 and into 2007, market conditions are very positive. Our backlog is at an all-time high of $195 million, nearly all of this is expected to be produced in the next four quarters. Bidding activity as scheduled for the fourth quarter is also expected to be strong, and we expect to maintain our leading market share. Accordingly, we expect a strong performance in our fourth quarter, resulting in record revenues and earnings for 2006, and we expect to begin 2007 at similar levels.

Water Transmission gross margins are expected to remain steady in the fourth quarter of 2006 and the first quarter of 2007. The margins in our backlog suggests consistent or slightly better performance, but historically the holidays in the fourth quarter combined with possible weather issues generally result in a little lower efficiency in our plants during this part of the year. We expect to see margins improve in the second quarter of 2007 due to the savings generated from the Riverside and Adelanto consolidation and higher capacity utilization throughout our facilities.

In our Tubular Products group, we're seeing the benefits of our strategy to refocus on a more limited, more profitable product mix. In addition, our energy product sales continue to grow rapidly. The increased demand in this product line should offset normal seasonal declines we see in other products. Consequently we expect sales to be flat or a little stronger in the fourth quarter than they were this quarter. We continue to expect to see margins in the low double digits as they have been in the past few quarters.

Our Fabricated Products group has seen steady demand for its propane tank products and a steady backlog. We expect our first large order for our new products by the end of October. This should result in some new sales before the end of the year. In addition, we have begun to produce some pipe fittings in this facility to supplement our Water Transmission group.

In closing, we generated record sales, a record backlog and very strong earnings in this quarter. We are optimistic as we look towards the fourth quarter and on into 2007. If the market develops as we anticipate, we look forward to continuing to generating very positive results.

At this time, I will be happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS). John Rogers, D.A. Davidson.

Brian, could you give us a sense of what levels of capacity utilization your at, especially on the Water Transmission side?

Yes. And as we have talked before, it is a little bit of a tough question because each project, of course, is different. So it is not really a standard product flowing through the plant. But we are estimating capacity -- probably our best estimate at this point in time is somewhere around 340 million in our plants.

Okay. It is essentially current steel price levels on that?

Yes. So if you look at this quarter, we would be about almost 80% -- 76%, 77% of capacity.

Okay. Going into the fourth quarter, you talked about your backlog and bidding activity, but you should be able to, I would suspect, sustain current run-rates, except for holiday and/or weather disruptions. Is that fair?

Yes, I do think that is fair. I sort of apologize for pulling out the weather card before it happens. But it is common that we have weather disruptions in our business. Much of it is done out of doors. Much of it is temperature sensitive. So that is fairly common in the fourth quarter or the first quarter of the years. But outside of that, we do expect to be running at these levels, yes.

Okay. And then you talked a little bit about the pricing in your backlog being better. I realize that a big part of your margins are related to capacity utilization rates. But, on a percentage basis, is pricing continuing to get better as you book subsequent orders?

Yes, and as you know, the pattern typically is the busier the market is, the more opportunities you have. More projects that are out there, the better pricing gets. That is kind of a rule of thumb that generally holds true. Bidding activity has clearly picked up here, really beginning in the second quarter and continuing forward into the third, and we do expect it to be strong in the fourth. We do see that type of pattern developing as expected, although it is not a very significant change in terms of the overall pricing.

Okay. And what about on the Tubular Products side?

On the Tubular Products side, pricing at this point we think is going to stay fairly consistent. We are anticipating margins roughly in the same level as we are currently generating them going forward.

Okay. And then the last thing is just in terms of your Houston and Bossier City plants, with Adelanto being beefed up and upgraded and more product there, what is the plan with those facilities?

At the moment, as you know, we consolidated most of the operating capabilities of Bossier City into Houston as well. So Houston is now producing traffic products and signpost products that were formally made in Bossier City for the most part. There is still a couple of operations that we can do in Bossier City. So, at the moment, we have consolidated all of that into Houston.

Okay. And so does Bossier City then become excess property?

Bossier City at the moment is idled property. I'm not sure it is excess yet, but temporarily idled.

Okay. And in Houston you will continue to do the signpost there and all the other round product up in Kansas?

Yes.

Rick D'Auteuil, Columbia Management.

Just to follow-up on John's comments or questions related to the backlog and margins, I would have expected as utilization increases obviously you get some benefit on margin there. You talked about that really starting to kick in in I think in Q2 of '07. But you also referenced this facility consolidation that was sort of a self-inflicted wound in '06 that impacted margins negatively. With better pricing in the backlog and that, as I think you said, should continue to improve as the utilization increases and the backlog grows, why should we not see a little better than just marginal pricing benefit going forward?

I do think we are going to see some benefit. I think the Riverside/Adelanto consolidation obviously offers us some savings, and in the first part of this year, it offered us some costs. So, as we work through those issues and put that to bed, I think we are going to see some benefits there overall no matter what happens with the -- let's say, assuming that pricing stays flat, we should still see some benefits in terms of our overall margin. So that is absolutely correct.

If pricing continues to get better, obviously that will flow through as well. And what we're seeing right now is the margin and the backlog is a little bit better than the margins we're reporting, but it's not a significant difference as of yet.

Is that -- I mean what are you seeing on the competitive front? Do you think you are gaining any share? Are you needing to bid at that level to win business? Give me a sense of what are your -- do you have any sense of where your competitors are with their utilization?

Yes, I think overall it is a pretty good market this year. I think the whole industry is starting to get a little healthier, a little bit busier right about now. But up until the last couple of months, it was a little bit light. If you go back and look at our second quarter, for example, it was significantly lighter than we would have liked to have been.

So it is a year that is developing pretty well, but it had somewhat of a slow start. And jobs bid and they have a relatively long tail before you start seeing the revenue run through your system. So we're still working through that. So it is still fairly early days in what I think is going to be a very strong market for some time to come, and hopefully we will see those numbers continue to move up.

And then just to remind me, what are you doing on locking in -- you're announcing business, pretty large incremental business on the water transmission side, and some of this is six, nine months out. What are you doing on locking in some of the raw material so that we are not exposed there?

Well, for the most part, we are not locking in. We are making our own estimates of what we think the steel price is, which is what the key issue obviously will be. And moving forward, we do have on some of our longer leadtime jobs we do have the ability to lock those prices in in some cases, and we are doing that. But for the most part, we are getting bids from steel companies as usual, and then we're making our own estimates what we think that price is really going to be at the time of the job -- at the time we actually have to purchase the steel and working off those estimates, and we have been successful at doing that.

Okay. So there have been times in the past where we have been hurt by those bets going against us. So I guess I'm --

I think we were hurt primarily in the first part of 2004, and steel at that time went from about $280 a ton in December of '03 to about $780 a ton in August of '04, which is a pretty unprecedented move. I think it very unlikely that we will see something like that again. But obviously that is still -- that is a key component of our raw material costs, a key component of our overall costs, so it is something we watch very very carefully.

[Peter Udo], Praesidium Investment Management.

I had a question regarding the offering of shares. Can you walk us through the math and talk to us about why it makes sense to issue shares to buy the equipment rather than keep it on lease?

No, I actually have been advised that I cannot due to the SEC regulations. But there is a -- we have filed a registration statement with the SEC. It is available on their website, and if you work through -- I cannot remember what page number it is -- I think it is page 18 or something, it does lay out that information for you there.

Steve Raineri, Franklin Advisory Services.

When can you expect to deliver the backlog that you have now?

Most of that will be delivered in the next four quarters. There are a couple of jobs in there that will be longer than that. But for the most part, it is a very near-term backlog, as it almost always is.

And so it certainly seems like it accelerated in the last few months.

Absolutely.

Because, while I like to see the backlog rise, I also like to see profitability rise as well. And so it is sort of we have not seen it filter through yet, so I would hope that we would start to see that, that increased level of activity.

As do I.

At what point do you think that the backlog becomes a hindrance?

That is a good question. We have multiple plans throughout the country. We think we're in better position really in a strong market than any of our competitors to capitalize on that market because we can bring more assets to bear to meet specific deadlines. But clearly the market is not -- maybe it is not clear because we have not really talked about this -- but the market is not even across the country. It is busier in some parts of the country than in others, and so there are issues with that even as we speak now. What is our backlog, what is our delivery requirements on the next job that is bidding, and how are we going to adjust to it?

So it does become an issue more on a selected basis than it does on an overall basis because it depends on where the jobs are and what the deadlines are on the next projects that are bidding. But I do think we are in a better position to prosper in that kind of environment than our competitors are because of multiple facilities and overlapping capabilities that we have.

So you are saying that you don't think you're at a point right now where a customer getting price on the backlog will sort of not be happy about the delivery times and then cancel. You still think you have --?

Absolutely not.

Could you address the issue of cancelability of some of the products in the backlog and how the housing environment now sort of dovetails with that, and as you mentioned, you have different varying activities among the varying plants that you have, the various plants that you have. So I would like you to address that if you could.

Yes, we don't really see much issue in terms of jobs canceled. I have been here about 15 years I think, and we have seen that happen once or twice over that period of time. And if it does happen and we are in the middle of it, we are protected. So it is very very uncommon. Jobs get delayed frequently before they bid, but once they bid and once we put it into backlog, we are highly confident that job is going to go. If there are any issues with a job that we see, we won't put it in the backlog until those issues are resolved. So we have not seen much of an impact there.

In terms of the housing market portion of your question, the end of the pipeline that we are in, if you will, is kind of at the upper end, and so these projects are often planned and built long in advance of the housing developments. So it does not tie quite as closely to that as the other end of the pipeline does. If you're down in the real small diameter pipe that is running through subdivisions, I think that is more of an effect down there. But for the most part, the agencies that we are dealing with are still dealing with very long-term demographic projections, and that continues to look very positive.

Okay. You mentioned CapEx year-to-date and what you plan for this year and next?

We are estimating next year -- we don't have a full plan done yet -- but estimate for next year is probably between $13 and 15 million.

And this year you think it will wind up --

This year the number has got a couple of those leases in it already that we bought back, but CapEx is probably 15 to 18.

Inclusive of some of the leases that you --?

No, that is without those leases. Because we tend to look at that more as a financing transaction.

So you're not really -- from what I gather, I guess you're not expecting any significant capacity expansions at this point?

No, we're working through some refinements. We do see near-term within the next few years need to have higher capacity than we have now. But we think there is a lot of things that we can do that are process-oriented and not really very capital intensive.

John Rogers, D.A. Davidson.

Just to follow-up on I think it was Steve's question, the CapEx spending for this year, did you say $15 million?

Yes, the number that is on there has some sale leaseback repurchases that we did already earlier in the year, and so that number is heavy because of that.

Okay. So the 20 million or $20.6 million that you show in the release, the actual CapEx there is what, closer to 12?

No, no.

At nine months year-to-date?

No, closer to 15.

Closer to 15 and in the fourth quarter you expect --

We don't expect a lot in the fourth quarter.

Got it. Thank you.

(OPERATOR INSTRUCTIONS). Sir, we have no questions at this time.

Okay. Well, thank you very much. That will conclude our conference call.