NWPX Infrastructure Inc (NWPX) 2006 Q4 法說會逐字稿

Good morning and thank you for standing by and welcome to the Fourth Quarter 2006 Earnings Release Conference Call. All participants will be able to listen only until the Q&A portion of today's conference.

[OPERATOR INSTRUCTIONS]

All parties will once again be in listen-only until the Q&A portion and this call is being recorded at the request of the Northwest Pipe Company. If anyone has any objections, you may disconnect at this time. I would like to turn today's conference call over to Mr. Brian Dunham. Sir, you may begin.

Thank you, Crystal. Welcome to Northwest Pipe's Conference Call and Announcement of Earnings for the year ended 2006. My name is Brian Dunham. I am the President and CEO of the company. Before I begin, I'd 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 fourth quarter, we recorded revenues of $97.5 million. This is a new record for the company. Our net income was $6 million, this is also a new record excluding the quarter in which we recorded the sale of the Riverside property and this equates to $0.72 per share for earnings for the quarter. For the full year, our revenues were $346.6 million and net income was $20 million, which equates to $2.69 per share and these are all new record highs for Northwest Pipe Company.

Looking at the fourth quarter in more detail starting first with the Water Transmission Group, our sales increased 32.5% to $72 million for the quarter. Sales increased as we ramped up our production to address the strong market opportunities we see in water infrastructure. I was pleased to see the consistently high level of production we maintained over the past six months. Continuing to operate at these levels will be the key to our future prospects.

Gross profit increased to $13.9 million compared to $11.3 million for the fourth quarter last year. The gross profit margin as a percent of sales was down slightly from last year. We expect this to improve as we look ahead. We continue to expect to see a strengthening in pricing as we move further into this strong market period. Even after record quarterly revenues in the fourth quarter, we were able to increase our backlog to $198.2 million compared to $125.6 million a year ago. This is the highest backlog we have ever reported.

In the Tubular products group, our sales increased 18.4% to $21 million. The increase resulted primarily from increased sales of energy products. Gross profit during the quarter increased to $2.1 million from $1.7 million last year. Gross profit as a percent of sales increased to 10.1% from 9.5% for the fourth quarter of 2005. The improvement was the result of our strategic shift away from products that compete directly with imports.

In the Fabricated products group, our sales were $4.5 million for the quarter compared to $5 million for the fourth quarter of 2005. The decrease is a result of lower demand for propane tanks because of the warmer than normal weather experienced this winter in much of the country. Gross profit for this group was $220,000. Gross profit as a percent of sales also decreased. The decrease resulted primarily from lower demand, increased competition and higher steel costs that could not be passed on to our customers.

Selling, general and administrative costs for the company as a whole remained steady at approximately $7.1 million. SG&A as a percent of sales was 7.3% compared to 9.3% last year. As we look ahead, we expect SG&A costs to increase probably to around 7.2 to $7.5 million per quarter. Our interest expense decreased to $1.4 million from $1.9 million last year. The decrease resulted from lower average borrowings during the quarter as the proceeds from the follow on offering lowered our average credit line borrowings until the funds were subsequently used to pay off operating leases. Since these funds have been utilized, we expect to see interest increase again in the first quarter of 2007 and be more consistent with the previous quarters.

In the fourth quarter of 2006, our income tax rate was significantly lower than usual primarily due to R&D tax credits the company filed for during the quarter. We do not expect this low rate to continue into 2007. And after adjusting for taxes, our net income was $6 million for the fourth quarter of 2006 compared to $3.4 million for the same quarter a year ago and this equates to $0.72 per share on 8,349,000 shares outstanding compared to $0.48 per share last year on 7,101,000 shares outstanding. This significant difference in shares outstanding is due to the follow on offering which was completed in November.

Looking now at the full year results, again starting with the Water Transmission group, our sales increased 5.5% to $244.8 million for the year. Our gross profit was down slightly at $46.6 million. As we've discussed previously, the water transmission market improved significantly beginning in the second quarter.

This can be clearly seen by comparing the two halves of the year. In the first half of 2006, we recorded sales of $107 million and gross profit of approximately $20 million. In the second half of the year, our sales were approximately $138 million and gross profit was approximately $27 million. In the second half of 2006, we set records in bookings, backlog, and production and we are also entering 2007 with the highest backlog we have ever had.

In the Tubular products group, our sales were $84.8 million for the year, compared to $80.7 million in 2005. The increase in sales primarily resulted from improved demand for our energy products. Gross profit increased to $8.9 million from $5.6 million last year. The increase resulted from our shift from products competing directly with imports to products where we believe we have a sustainable competitive advantage. Gross profit as a percent of sales increased from 7% in 2005 to 10.5% in 2006. This margin is consistent with our stated target in this group.

In the Fabricated products group, our sales were $17 million for 2006 compared to $16.2 million last year. While this is a new annual sales record, as mentioned earlier we saw sales and demand for propane tanks decrease in the fourth quarter of 2006. Our gross profit was $1.2 million for the year compared to $1.4 million last year. The lower demand in the fourth quarter of 2006 did not allow this group to increase prices to cover the higher steel costs we incurred in the second half of the year. Accordingly, our margin suffered.

Selling, general and administrative costs for the year increased to $27.4 million while SG&A as a percent of sales decreased slightly from 8% in 2005 to 7.9% in 2006. The change in SG&A resulted primarily from increased dilution expense and the expensing of stock options which was required beginning in 2006. In the second quarter of 2006, we completed the previously announced sale of the Riverside property. The sale price was $12.3 million and it resulted in a gain on the sale of $7.7 million before taxes.

Our interest expense for 2006 was $6.7 million compared to $7.4 million for the prior year. This is a result of lower average borrowings that resulted first from the proceeds of the sale of the Riverside facility in the second quarter and then secondly from the completion of the follow on offering in the fourth quarter of 2006. Our effective tax rate for 2006 is 33.9%. As mentioned a moment ago, this is a result of the R&D tax credit which we applied for in the fourth quarter and some other miscellaneous adjustments.

And after adjusting for taxes, our net income was $2.69 per share on 7,446,000 shares outstanding compared to $1.90 per share last year on 7,063,000 shares outstanding. The shares outstanding at the end of the fourth quarter of 2006 reflects the weighted average impact of completing the follow on offering in November.

Turning to the balance sheet, just a few key points here. First of all, working capital is about $167 million as of December 31, 2006 compared to about $150 million at 12/31/05. Our current ratio is 3.36 compared to 4.28 a year ago and debt as a percent of total capitalization is down to 29.5% compared to 39.5% at December 31 of 2005. Total assets are approximately $424 million and equity has increased from approximately $160 million to almost $231 million.

We completed a secondary offering in November selling 1,955,000 shares at $29 a share. The net proceeds of $53.1 million were applied primarily to repurchasing equipment that had been leased. These transactions have been completed. There is a significant increase in property, plant and equipment as of December 31, 2006, because of adding this equipment back on our books. As we go forward, we will see additional depreciation expense because of this transaction but rent expense on these leases, which had been included in cost of sales, will be eliminated.

In September of 2006, the SEC issued Staff Accounting Bulletin 108. This requires companies to evaluate materiality under the dual approach and in certain cases, to review items from prior years that were previously correctly identified as immaterial and not adjusted. We adopted this statement as of December 31, 2006 and it did require us to review and reassess some previously identified issues.

We had three primary issues to evaluate. The first was an accrued liability for workers' compensation costs. We have always assessed this liability by reviewing specific claims and estimating potential future costs with the help of a third part administrator. This year we looked back several years and added an actuarial review to this process. As a result, we increased our liability for worker's compensation. There was no effect on previously reported earnings.

Our second issue was a reduction in an inventory balance that was previously reviewed and determined to be immaterial. This balance dates back several years. Again, there was no effect on previously reported earnings. The third issue was a reassessment of capitalized costs on self constructed assets, properly identifying and supporting these costs requires a significant amount of judgment and we determined it was more proper to write off these costs. Once again, there was no effect on previously reported earnings. The only impact of these items is to the opening balance sheet where there is a decrease to January 1, 2006 equity of $3.4 million.

As we look ahead to 2007, we expect the market for the Water Transmission group to be at least as strong as the 2006 market. Based on our assessment of market conditions combined with the record backlog we have in hand, we are positioned to set new revenue and earnings records in 2007. In spite of this positive view, the first quarter results will clearly be affected negatively by the adverse weather conditions we experienced in Denver earlier this year.

In addition, as mentioned in our press release, one of our Denver mills was down for nearly a month as we went through a major rebuild. Consequently, we do not expect our revenues in the first quarter to be as high as they are this quarter. This may result in slightly lower margin percentages for this group as well during the first quarter of this year. We also expect to see the backlog decline temporarily from its record levels here in the first quarter. While bidding activity has been generally as expected so far in 2007, we expect much stronger activity in the rest of the year and a corresponding increase in our bookings and backlog as we move into the second and third quarters.

In 2006, the Tubular products group completed the refocusing of its sales resources to more profitable products and completed the upgrade of our Atchison facility to produce a broad range of energy products. This upgrade also eliminated some bottlenecks and increased our effective capacity in this division which will give us the opportunity for additional growth in 2007.

We also met our target to return this group to low double digit gross margins for all of the quarters in 2006. At this time, we expect that the energy market will continue to be strong and sales should increase. We also expect small increases in our traffic business and in our non-residential construction products as well. And we believe we will maintain or slightly improve on our margins.

We expect our Fabricated products group to maintain its position in propane tanks. Growth is expected to come only if we are successful in developing additional volume from some of the new products we have been working on. We do expect to use a certain amount of the high quality fabrication capabilities of this group to support our Water Transmission business. As mentioned in our press release, we have started this project and the preliminary results are very positive. This opportunity may provide the best long term strategic direction for this group.

Steel is our major raw material and the steel market has certainly fluctuated in recent years. We watch steel prices carefully and adjust on an ongoing basis for our expectation and changes in steel costs. Currently, steel costs are forecasted to increase. We believe we have adequate visibility on future prices and are adequately dealing with these proposed increases. We believe we will be able to pass increases on to our customers successfully as long as the market demand continues to be strong and steel costs do not move very suddenly and dramatically.

In closing, we are very pleased to report record sales and earnings for the company. This has been a very eventful year beginning with consolidating two of our water transmission facilities, selling the Riverside property, transitioning our strategy in Tubular products, completing a public offering and repurchasing all the equipment that was under operating leases.

The sum of all these events positions us very well to be successful in the future and to capitalize on the opportunities ahead, particularly in the water infrastructure markets. As I said earlier, we expect to build on our current positions and set new revenue and earnings records again in 2007. At this time, I will be happy to answer your questions. Crystal?

[OPERATOR INSTRUCTIONS]

Our first question comes from [Elliot Blond], RBC Dain Rauscher.

Good morning, Brian. Great quarter. Nice job.

Thank you.

Two quick questions if I may. With the water side of it doing so well, is there going to be any capacity issues if it picks up as you were seeing going forward?

We currently estimate our capacity and I am going to use the word estimate because it obviously depends on the mix of projects. These are all individual projects. But we estimate our capacity at about $340 million per year and at our current run rate, we are somewhere in the mid to low 80s I think in terms of capacity utilization. So we are getting relatively close. We do have the capability to go over 100% of capacity because we measure it on a full two-shift basis, not on a three-shift basis. So we do have some cushion there.

But we are also in the midst of a project to try to increase our overall capacity and our target is to get it to about $400 million. The objective there is to be able to maintain our market share in roughly a $1 billion market which we are not projecting that for this year, but that's kind of what we are aiming at strategically.

Okay and the second question was more bookkeeping. You said in the fourth quarter with some credits that we had an unusually low tax rate. What would we -- should we use to model going forward next year?

We have generally used about 38% as the tax rate unless there is something extraordinary that happens, for example the R&D credits.

Again, congratulations.

Thank you.

Our next question comes from Steve Raneri with Franklin Advisory Services.

Good morning.

Good morning.

A couple of things here. You mentioned that sales and earnings should reach a record in 2007. Are you including the gain in sale that you had from 2006 or are you excluding that when you compare?

I am including it.

Okay. So you are saying you should do better than $2.69?

Well, that is -- I am sorry. Let me go back. I am thinking about earnings in terms of dollars and obviously the earnings per share number is going to change and I haven't calculated that out Steve, but--

Okay. Well, $20 million of net income, you expect to earn more than $20 million of net income?

That is our perspective at this time, yes.

Okay, just wanted to be clear about that. Thank you. CapEx for the year?

CapEx is going to show very high because of -- you mean, I am sorry, looking backwards or looking--?

Well, '06 and '07.

Yes, CapEx will show very high in '06 because all those leases that we repurchased show up as capital expenditures. So it is a little bit of a misleading number. I think we are somewhere -- without that, I think we are somewhere right around 15 million and that is our expectation for '07 as well.

And how much -- can you -- is there a way you can give me a number in '06 without the lease buybacks?

Yes, the 15 is without the lease buybacks. The number is going to be like 45, 50, something like that is what is going to end up showing up going through the financial statements because of the buybacks.

Okay, okay. So basically CapEx is going to be roughly flat.

Yes.

Okay. And D&A, '06 and I guess '07 you said it was going to go up so what was it in '06 and--?

Yes, depreciation and amortization are roughly $4 million for '06 and we believe will go up $1 million or so because of putting these assets back on our books.

Okay. You -- looking at the margins in the Water Transmission group, the incremental margin was actually substantially lower than what you have booked for the year. And I am curious if you can explain to me why and sort of can we get the incremental margin back up?

Well, we are expecting to see increases in the margin as we go through 2007 for a variety of different reasons. One is just simply volume. That should start showing up. Two is because the consolidation of Riverside and [Adelanto] together is going to take some costs out. So we should see some increase there as well. And finally and what we are really looking for that is a little bit external is some improved pricing in the marketplace. And we have seen a little bit of that so far, Steve, but for the most part it is sitting in the backlog. It has not yet -- it is not on jobs that have started to flow through the income statement yet. But we haven't seen that happen quite as fast or as much as we'd like so far but we are continuing to think that we are going to see further improvement in pricing.

Now but we saw -- we saw a huge bump in revenue in the quarter. But yet we didn't -- first of all, I am curious to know what -- how we got the big bump in revenue here and what exactly -- I mean, the incremental margin was 14.9% versus 19% for the year. So I am curious if you could just discuss those two things for me.

Well, I am not sure. I would have to go back and try and determine the incremental margin.

On a gross profit basis.

But these are all individual projects that have individual pricing and we are still working off projects that were booked earlier in 2005 and did not have as attractive a margins as some of the work that has been booked later in the year. So we are seeing that change. It will get better as we go forward.

Okay. So any indication of what the gross margin will be on stuff you have in backlogs now?

I would just say it is a little bit higher than what we have been reporting. We are not going to quantify the number at this point.

Okay. Because I mean we are running at about 19% on a gross profit basis in the quarter, on an incremental basis it was 14.9%. So you are saying that the number should go up from the 19, 20% that we have been kind of running at the last year or two? Is that fair?

Yes, our expectation is as I have said before is we expect to see between two and three points of margin improvement as we go through 2007.

And is there any special reason why we had the big bump in the quarter?

We are -- the business is good. Our backlog has been building and we are ramping up our production to work at these levels.

Okay. The last one, how exactly can Fabricated product help the Water group?

Good question. The Fabricated products group is a really a group of very well-qualified welders and fabricators that we have down in Monterrey, Mexico and they have been making historically propane tanks, which is a business we are still continuing in but don't see much in the way of growth opportunities. And we have been looking for other ways to kind of apply the skills that they have, basically forming, welding, painting metal. And we started in looking at some new products and we are continuing to work on that.

But also we started with the idea of having them make some of the fitting -- what is called the water transmission fittings and a fitting, Steve, is kind of any piece of pipe that's not a straight piece of pipe. It is an elbow or it has got a manhole in it or something like that, that requires some custom fabrication and some specialty welding and so on. So we have been starting down a path of having them make some of those pieces down in Monterrey, Mexico.

And that is what we think is very positive looking at this time and we are going to continue to add to that mix. That is going to help in a couple different ways. Obviously we believe it will lower our costs somewhat on the fittings and secondly, it eliminates some bottlenecks that are otherwise in sort of our full-service water transmission facilities. So it should help us in a couple different ways.

Are these small-diameter products?

No, no.

So the elbows that you are talking about are a large diameter?

A 60-inch elbow or something like that, yes.

But manhole covers aren't really -- that's more of a -- I mean, you compete more with Mueller Water on stuff like that.

No, we are just talking about making the pieces of pipe and in a pipeline, every so many pieces of pipe you are going to have a manhole or something like that. And that has to be built into the pipeline. So we are not making the manhole cover. But we are making the pipe to the access point for it.

Got it. Great. Thanks a lot for your time.

You bet.

Our next question comes from John Rogers with D.A. Davidson.

Hi. Brian, just going back to the margins for a second, in the quarter, how much of that margin improvement was related to the elimination of operating leases?

Very little.

Okay. So the two 100 basis point improvement that you are looking for in '07, does that include the elimination of the leases too? Or is that in addition to that?

That will be in addition to that.

Okay. So I mean, the actual margin improvement should be a lot more than that.

Correct.

Okay. And then on in terms of bookings, you mentioned that you expect to book at least as much as you did in '06 or the market to be as strong. But is that what you meant in terms of new work bookings?

What I referred--

Or orders, I guess?

What I referred to was we believe the market will be at least as strong in 2007 as it was in 2006.

Okay.

We certainly aren't expecting to give up market share.

Okay. But in that case, I mean at least your visibility or your backlog should continue to rise then through '07.

Yes, we think the backlog is going to decline here at the end of the first quarter and then go back up as we get into Q2 and Q3.

Okay, just because of the bid timing?

Timing on jobs, that's right.

Okay, okay. And on steel prices, just so I am clear, higher steel prices that you are seeing now you don't think will impact large diameter pipe margins in the near term?

Well, it is certainly -- obviously your cost changes but we anticipate those cost changes going forward and we bid accordingly to that.

Okay. But the stuff that you already have in terms of orders--?

We don't believe that we have any significant exposure if that is the question you are asking.

And that's right you either have the steel agreed upon or delivered or warehoused or something, right?

Correct.

Okay, all right. Thank you.

[OPERATOR INSTRUCTIONS]

Mr. Dunham, there are no further questions.

Okay. Well that will conclude our conference call. Thank you very much. Goodbye.

Thank you. All parties may disconnect at this time.