NWPX Infrastructure Inc (NWPX) 2007 Q1 法說會逐字稿

Welcome and thank you for standing by.

[OPERATOR INSTRUCTIONS]

I will now turn the meeting over to Mr. Brian Dunham. Sir, you may begin.

Thank you, Blanche. Welcome to Northwest Pipe's Conference Call and the announcement of earnings for the first quarter of 2007. My name is Brian Dunham I'm 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 first quarter of 2007, we generated revenues of $90.7 million and net income of $4.5 million, which equates to $0.49 earnings per share. These results are significant improvements over last year's $78.9 million in revenues, $2.6 million in net income, and $0.37 earnings per share.

The improvement in earnings per share is after completing the follow-on offering late last year, which increased the number of shares outstanding from 7.1 million shares to 9.2 million shares.

I'll review the first quarter results by segment starting with the Water Transmission group. Sales in this group increased 15.4% from $55.9 million last year to $64.6 million for the first quarter 2007.

This level of revenues was expected, based on improved market conditions last year and the beginning of the year backlog of $198.2 million.

While sales were significantly above the same period last year, they were down from the $72 million we recorded in the fourth quarter 2006. This decrease resulted from weather and unplanned equipment overhauls as we have previously discussed.

Gross profit for the first quarter 2007 increased 35% to $13.7 million or 21.3% of sales, compared to $10.2 million or 18.2% of sales for the same period last year.

We expect some gross profit improvement in 2007 for a variety of reasons, including the elimination of rent expense, leverage against fixed costs and improved pricing. During this quarter, the margin also improved due to some non-recurring items that added a little more than a point to overall margins.

In the Tubular Products group, our sales increased 21.6% to $23 million in the first quarter of 2007 from $18.9 million for the same quarter last year. This is the highest quarterly sales by this group since the third quarter of 2004.

We are pleased by the increase we have seen thus far and expect sales to continue to improve as we ship additional energy projects through the next two quarters.

Gross profit increased 21.1% to $2.3 million for the first quarter of 2007 compared to $1.9 million last year. We have operated consistently at roughly 10% margins in this group for the past six quarters. We expect the margin to remain consistent or rise somewhat in the quarters ahead.

In the fabricated products group, our sales were $3.2 million in the first quarter of 2007, down from $4 million last year. The results from this group continue to be disappointing.

The market for our major product, propane tanks, continues to be slow and ramping up sales of other new products has been much more difficult than we originally anticipated. We expect sales to continue to be flat in the quarters ahead.

Gross profit decreased from $383,000 for this group to $58,000 in the first quarter of 2007. Gross profit as a percent of sales was 1.8% for the first quarter of this year.

The decrease resulted from the inability to pass on higher steel costs to our customers as a result of the poor market for propane tanks. We do not anticipate any significant improvement in margin for this group next quarter.

Beginning in the latter part of 2006, we manufactured some specialty pipe fittings in our Monterey facility for our Water Transmission group. Based on the initial results of this venture, we have scheduled additional work at this facility to support the Water Transmission business. We believe this may be the best utilization of this facility in the long-term and are making modifications to support this shift in emphasis.

Selling, general, and administrative costs for the company as a whole were $7.3 million in the first quarter of 2007. SG&A costs as a percent of sales was 8% in the first quarter of 2007, down slightly from 8.1% last year. We expect SG&A expense to remain close to this level through the rest of the year.

Interest expense decreased to $1.6 million this year from $1.8 million for the first quarter of last year. This is a result of lower average borrowings during the quarter. We expect interest expense to increase slightly from this level in the coming quarters.

And after adjusting for taxes, we reported net income of $4.5 million, an improvement of 72% over last year. This equates to earnings per share of $0.49 based on 9,213,000 shares outstanding compared to $0.37 per share last year on 7,125,000 shares outstanding.

As noted earlier, the increase in shares is a result of the follow-on offering we completed near the end of 2006.

Turning to the balance sheet, working capital at March 31, 2007 is approximately $165 million compared to $143 million a year ago.

Our current ratio is up to 3.86 compared to 3.56 last year and debt as a percent of total capitalization at March 31, 2007 is 28.8% compared to 37% at March 31, 2006.

Our total assets have increased from $345 million to about $415 million and equity has increased from $162 million to $237 million. The significant increase in total assets and equity is a result of operations and the follow-on offering completed at the end of 2006, using the proceeds to repurchase machinery and equipment previously under operating leases.

Steel is of course our primary raw material and steel prices are continuing to increase. These increases are in spite of reports that supply is improving and demand by automotive and other heavy users of steel is not that strong.

Availability and delivery lead times remained relatively steady. In spite of reasonably good availability, we expect additional price increases in the next few months.

We continue to monitor the steel market and we'll make the required changes in our purchasing and bidding practices to reflect our best estimates of the steel market going forward.

At this time, we expect to successfully pass steel cost increases through without a material impact on margins in either the Water Transmission group or the Tubular Products group.

As we look ahead, we expect the Water Transmission group revenue in the second quarter to improve over the first quarter of 2007, but not reach the record reported in the fourth quarter of 2006.

Even though we continue to have a strong backlog of $192 million, some of the work is not scheduled for delivery until late in 2007.

We continue to have some open production capacity at some of our plants late in the second quarter and into the third quarter. If [Dayton] activity improves as we expect, we should be able to increase our plant utilization in the coming quarters and continue to slowly increase volume through the end of the year.

As I have said before, we expect to see some margin improvement due to improved pricing. So far we have not seen the improvement we have expected. We continue to believe, however, that as bidding activity increases, pricing will improve.

Because of lead times however, we do not expect to see improved pricing have much of an impact on our results until at least the fourth quarter. We continue to believe that the overall water transmission market in 2007 will exceed the strong market of 2006.

In the Tubular Products group, we expect sales to improve gradually through the third quarter of 2007 and decrease in the fourth quarter due to normal seasonality. Margins are expected to remain steady or slowly improve. This is based on our belief that we will be able to pass steel cost increases through and increase pricing.

In the Fabricated Products group, sales are expected to remain flat or be slightly below last year's results. Demand for propane tanks, our primary product for this group, continues to be slow. We also do not expect to see any significant increase in sales in our other fabricated products in the coming quarters. Margins will continue to be depressed unless we are able to pass on the higher cost of steel.

On the positive side, we have been pleased by the results of producing fittings for our Water Transmission group at our Monterey facility. We have scheduled additional Water Transmission work in Monterey and we believe that this effort will grow throughout the year and be a valuable part of our Water Transmission business.

In closing, this was a strong quarter for both our main businesses. The Water Transmission market continues to show strength, while the market was a little slow in the first quarter of 2007, we expect bidding activity to improve for the remainder of the year.

As the market improves, we expect pricing to improve as well. We are very pleased with the market opportunities we see throughout 2007 and into 2008 and believe we are well positioned to capitalize on it.

The Tubular Products group should also generate improving results in the coming quarters. We continue to believe that the Water Transmission and Tubular Products group's results in 2007 will surpass last year's results and set new records for the company in both revenue and earnings.

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

Thank you. [OPERATOR INSTRUCTIONS]

James Gentile with BB&T Capital Markets, you may ask your question.

Good morning, how are you doing?

Good morning.

Just kind of hoping that you can characterize the margins on the Water Transmission orders booked during the quarter? You stated that they were not as strong as expected.

Wondering if that means that we can expect sequentially lower gross margin in the Water Transmission business in Q2 and perhaps part of Q3? Is that how you wanted us to read that?

I think the margin that we have in the backlog today is fairly close to the margin that we're reporting after you adjust it for those non-recurring items that we identified.

We had expected, as I've said before, margins to start improving, which is traditionally the way this market works, is as business picks up, bidding activity picks up, you do tend to see an increase in overall margins.

And as I said at the end of 2006, we have not seen that pick up as quickly as we thought we would. And that's continued so far. So we still believe it's going to improve, however, it has not really improved much to date.

So given the $800,000 of incremental profit realized in the Q1 period, if I take that out, that lowers my gross margin in Water Trans to 20%. So could I perhaps hold that to Q2? Because chances are some of the orders that you booked in the latter half of Q1 won't even be realized given some of your capacity constraints, right?

Right. That's correct. And the margin will move around a little bit just based on the mix of projects that are rolling through and so on. But that's roughly where we are in terms of the overall backlog.

Okay. Thank you.

John Rogers, D.A. Davidson, you may ask your question.

Hi, good morning. Congratulations on the quarter.

Thank you.

Brian, the operating leases that you paid off or with the proceeds from the offering, how much did that add to margins this quarter compared to a year ago?

I don't have that exact number, John, but the overall total of operating leases was roughly -- would be roughly $1.5 million per quarter.

Not all of that, of course, is in Water Transmission. It crosses over to three different groups. So I don't have the exact number, but it's probably roughly two-thirds of that amount.

Yes. Okay. And then --.

And that's of course offset with deprecations and things as we talked before. But that's probably pretty close.

Okay. And speaking of that, do you have the depreciation number for the quarter?

About $1.5 million, I believe. It should be -- or more like $1.25 million, because it's about a $5 million run rate for the year.

Okay. And then in terms of your Tubular business, the improvement that you saw, were your volume -- what was your volume increase roughly? Your revenue was up 20%.

Pretty close to that. I don't think that there's a whole lot of change in pricing. Pricing might be a little bit different, but not very much. That's almost all volume.

Okay. And with your reorientation of that product over the last couple of years, you're pretty comfortable with the markets you're addressing now? I mean you've narrowed it -- you've narrowed the product line?

Yes. We're certainly much more comfortable with the markets that we're in today in terms of our ability to sustain those kinds of margins going forward. Absolutely.

Okay. And then in terms of the Denver plant, when you lost six -- was it, if I remember right, six weeks of production on one mill? Can you quantify what the impact of that was, if anything?

Well there was --.

I mean, I know it was hard because of when the orders come in and out anyway. But --.

Sure. No, there was a couple of different things that went on. We had one mill down and I don't think it was quite six weeks, but between four and six weeks anyway for an extensive overhaul. And we also had a significant amount of weather issues in Denver as well.

So Denver was really the facility that was most impacted in the first quarter and had the most significant impact in the reduction in our overall volume.

Kind of a rule of thumb for a mill in a month is probably $2.5 million a month or maybe $3 million a month might go through one mill in a month. So that gives you kind of a rough idea.

In the Denver plant, we have two mills. So if -- to the extent we're shut down several days, obviously you've got to multiply it by those two mills to get the overall effect.

So if you're talking about revenue in this upcoming quarter, somewhere between the first quarter and fourth quarter levels, it's essentially that mill be back up and going again?

Yes, there will be differences because, as I said, we don't have a full production schedule around the clock in all of our facilities and it varies from job to job and how many different projects you have going through, so how many different set ups there are and those types of things. But roughly that's correct.

Okay. And then just the last thing is in terms of orders and award potential over the next, I don't know, six or 12 months, how does the schedule look? I mean I know they move around a lot, but is a lot near term less in the fall or any way you can characterize that?

Yes, I'll give you some information there with the caveat that they do move around quite a bit. But as it looks right now, as we said, the first quarter was a little slow, that wasn't a surprise. We were saying that last year that the first quarter wasn't going to be the strongest. April is a whole lot slower than I thought April was going to be, however.

And that's partly because of some jobs moving around. But it does start picking up in May and I think we expect to see the next five months are probably the best as it's scheduled right now.

So May through September, it'll probably look like the highest level of bidding activities and it'll trail off a little bit in the fourth quarter.

Okay. Okay. And that's across the country?

That's the overall number, John. I don't have it broken down by region to give you that. But that's the overall.

Okay. Great. Thank you.

Chris Terry, First Dallas Securities, you may ask your question.

Thank you. Hey, Brian, how are you doing?

Good morning. I'm fine, thank you.

Good. A quick question on the Tubular Products segment, what's driving the growth there between the energy and the traffic sign post business? Can you split that out?

Well, there's really three product lines that we're looking to too grow in that business. And two of the three were up pretty good in the first quarter. Traffic was not so strong in the first quarter, but we expect it to get better as we go through the rest of the year.

Energy was up quite a bit and the other product line is what we call our non-residential construction pipe, which is fundamentally fire protection, sprinkler pipe. And that's a product line that we're expecting to see some growth in throughout the year and it had a pretty good first quarter.

Okay. And then lastly, overall total sales was most of it volume driven in the quarter?

Yes. I don't think there was any significant change in pricing in either Tubular Products or Water Transmission.

Okay. Great. My other questions have been answered. Thank you very much.

Alright. Thank you.

James Gentile, BB&T Capital Markets, you may ask your question.

Hey, thanks. Sorry I'm -- I need another question. Brian, this is the third consecutive quarter where we've seen backlogs in excess of $190 million, right? There have also been, in the last two, three years have been characterized by significant inflation in steel costs.

I mean can -- and you also went through the balance sheet recap in the fourth quarter of last year. Now if you take out the Water Transmission gross margin and you look at -- there's clearly a better mix of Tubular Products business running through the P&L as well.

And we're still just not seeing that incremental leverage in the gross margin line. I'm kind of -- I mean, are you frustrated with these numbers? I mean, could you characterize some of the impediments that could perhaps be limiting the opportunity for the potential of leveraging these fixed costs?

We haven't quite gotten to the level consistently where I think we can get, in manufacturing, as I've said before and that's one of the things that we have to prove is that we can kind of run at that higher level consistently.

Here on the first quarter, obviously, as we always say there are weather issues that can impact you and they did. But we're still looking to run at slightly higher levels than we are on a routine basis and I think that will generate some more of that leverage. I'm still looking to see that by the end of 2007.

And that is sort of the period that we've tried to lead people to is to expect to see that -- those leverage improvements by the end of this year. So we're still aiming for that and I expect we'll still accomplish that. But we do have to continue to run at a little higher level.

And secondly -- and do it consistently. And secondly, I'm a little frustrated we aren't seeing a little bit better pricing, yes. This is -- well the first quarter was not the best quarter for bidding that we're going to see in 2007, it was still a good quarter overall and we should see prices go a little bit higher. And so I'm looking forward to see that happen.

Now besides the pricing dynamic, what would be the missing puzzle piece that you view within your manufacturing capability?

I think it's just difficult to continue to manage at these higher levels with -- when you're -- specifically when you're talking about a significant number of small jobs, all of which have individual set-up time.

You have to remember, this is really a custom fabrication type business. It's not a processing line. So that makes it -- it's a very difficult process to manage when you're dealing with a significant number of small projects out there.

Okay. Because the directional guidance that you've given us, I think near term, doesn't articulate a strong argument for incremental leverage and clearly the structural customized nature of your business model impedes your incremental opportunity for operating leverage as well.

So then that leaves us with the pricing dynamic. So who out there in the marketplace do you think is being perhaps a bit inefficient on price?

I'm not going to dive into those -- that kind of speculation, but I'll just tell you that we do believe as volume gets stronger, we will see pricing improve.

Okay. Thank you.

Steve Raineri, Franklin Advisory Services, you may ask your question.

Good morning.

Good morning.

I hate to beat up on this pricing thing, but I do want to understand it a little bit better. And I appreciate that you can't name names, but from what I understand, you're the market leader in your geographic region. Is that fair to say?

Yes.

And I gather are you -- so therefore, you dominate the region, you're also the largest, which also means your manufacturing conversion costs are probably cheaper than your competitors. So I'm just sort of wondering exactly how we're in the pricing dynamic we're in today given higher raw material costs?

Well let me start with higher raw material costs isn't really affecting the pricing. And raw material costs over the last few years have been relatively consistent on an average basis. So when we talk about pricing, it doesn't mean that we're not adjusting for higher raw material costs, higher costs. What we're really talking about is the margin over the top of that.

So it is not -- it's not a situation where we are not passing on raw material costs. The situation is that we're not seeing the margins just in general go up given those raw material costs.

And how we're in that dynamic, it's -- this is a project-oriented business. It's a bid business. Each individual project is different, and has its own dynamics and if you're competing with someone who is really eager to book a particular order because perhaps they're not busy, that tends to drive the overall pricing down.

So you can have -- you can literally have bids one day, Steve, that can be a very low margin and the next day you could be bidding the same product in another part of the country, with a different set of competitors and have a high margin on that product.

So there's a fair amount of variability in pricing in this business on a day-to-day basis on a project-to-project basis. There's not a set price list out there that people are working off of. So it is quite dynamic.

Okay. Obviously that implies that there's excess capacity within the regions you operate?

Oh we have never said that there wasn't capacity out there and capacity varies from job-to-job, again, based on the time period that it needs to be produced and where it is and who your competitors are.

Okay. Is there any sense as to the magnitude of that overcapacity in the various markets you're in? Are there guys operating at 50%?

I really don't know the answer to that off the top of my head. I would say, as has been reported in the past, the Southern California market last year was not as strong as it has been historically, so I think there's certainly some there. We think there's some perhaps in the East as well. Those are probably the areas that are more at issue.

What is our capacity utilization today?

We're probably right around 80% or so.

Great. Okay. So you would think at 80% that you would be able to move the needle a little bit?

Yes.

But we can't yet.

We'll see.

Okay. I love it. Okay. CapEx for the year, have you talked about it?

CapEx, I think we're still in that sort of 15, 17 range. 15 to 17.

Okay. And just if you could refresh my memory, how much of that is really growth versus just maintenance?

Yes, a good question. I haven't gone through and looked at that again here in the last month, so give me a second here. It's probably somewhere on the order of $6 million or so is what I would term maintenance capital.

Yes.

And the balance is going to be either related to specific project opportunities or general growth opportunities.

Okay. And where are those monies being directed at this point? Is it all on Water?

Oh, it's primarily Water Transmission, yes.

Okay. It seems like you have an interesting opportunity perhaps on fabricated products.

Yes, we think we do. We think it is going to turn out to be a very valuable part of the overall Water Transmission business as we go down the road here.

How much money do you think you need to spend over there to really make it a viable opportunity?

Not very much. Not very much. I mean we're talking, I don't know, a few hundred thousand dollars perhaps.

Okay. And that's all it needs to be able to produce product for Water Transmission?

Most of the capability's already there.

Okay. And is there a way to quantify the available capacity there and the revenue opportunity?

It's still early days, really, to do that. But what we would hope to be able to do is put a fair amount of the special fabricated fittings down in that plant. So they're not going to be making a straight pipe, they'll be making the bends and the elbows and those types of things.

And we're really focusing our attention right now on doing that for our Texas facility, which from a geographic standpoint is the closest facility to Monterey.

Where would the product be -- where are the products being sourced today?

We make them in our own facilities in -- North of the border.

Okay. So these elbows -- so the manufacturing of these elbows and such would be shifted down to Monterey?

Right. Which was obviously -- hopefully we can do that and reduce our costs and at the same time, open up some bottlenecks in our other facilities.

Okay. Thanks a lot for your time.

Thank you.

John Rogers, D.A. Davidson, you may ask your question.

Hi, Brian. I forgot to ask. The $800,000 of non-recurring items, what were those?

I don't have the detail right in front of me, but primarily it's some legal issues that got settled.

So legal recoveries?

Right.

Okay. And do you expect any of that going forward or does that pretty well clean it up?

No, I think that pretty well cleans it up.

Okay. Great. Thank you.

Yes.

[OPERATOR INSTRUCTIONS]

John Slavik, Loomis Sayles, you may ask your question.

Hi. Could you just remind us again when you felt that the up cycle this time around really started? Was it the second quarter of last year?

In terms of the Water Transmission market?

Yes. Yes.

Late in the second quarter.

Okay. And --.

Like in June of last year, right?

Okay. And based on what you've seen to the extent that we have seen past cycles here, how long has it tended to take pricing to take hold, given the market dynamics as the cycle picks up?

I don't really have an exact answer for that other -- but I will tell you that it certainly seems like it has not taken off as we have expected this time. So it's definitely slower this time.

Okay. And then the 80% capacity utilization that you quoted, that's running on two shifts as opposed to running all out, correct?

That's running two full shifts, right.

Okay. Okay. So I guess in terms of trying to gauge when you expect pricing to kick in, in a bigger way at a given point in the cycle, it's kind of a work in process because we don't have any good templates to use from past cycles?

Well I think the templates we have to use from past cycles would have indicated we've seen a little bit more of an up tick already than we have so far.

But I think that also indicates the nature of this business, where it is all individual projects, it varies from region to region around the country, the competitors are different from region to region around the country, the competitors are a little different today than they were five years a go.

So there's a lot of variables in that equation. So I think it's hard to place a template on it and expect to get the right answer.

Okay. Thanks for your help.

You bet.

James Gentile, BB&T Capital Markets, you may ask your question.

I don't mean to beat you up, Brian - wondering, the regional strength that you're seeing with regard to some of the new Water Transmission projects that you're signing up, could you comment on perhaps the Southwestern portion of the United States, the Californias, the Arizonas of the world and what's happening there?

Yes, we expect that market to improve over what it was last year. It was down a fair amount last year. We were fairly successful in booking some orders that were producing in our plant in Southern California that were out of region orders.

So we have a relatively good backlog in that facility, but we do expect that market to be better as we go through 2007 than it has been in the last 15, 16 months or so.

Right. So you basically used your -- the Riverside facility is the one that's remaining right? So --.

No, Adelanto.

Adelanto. Sorry.

That's all right.

Adelanto then is also supplying projects that are leaving the State of California?

That's correct.

Okay. All right. Thank you very much.

You bet.

Okay.

There are no further questions at this time.

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

This concludes today's conference. You may disconnect at this time.