NWPX Infrastructure Inc (NWPX) 2007 Q2 法說會逐字稿

Welcome, and thank you for standing by. (OPERATOR INSTRUCTIONS)

I now turn today's meeting over to Mr. Brian Dunham. You may now begin, sir.

Good morning. Welcome to Northwest Pipe's conference call and the announcement of earnings for the second quarter of 2007. 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 that 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 2007, we generated revenues of $101.9 million, and net income of $5.7 million, which is equivalent to $0.61 per share. This is the first time we have ever topped $100 million in quarterly revenues.

In addition, this is the best quarter we have ever had in terms of operating earnings. The only quarter that was better was the second quarter last year, which included a nonrecurring gain of approximately $7.7 million on the sale of real property.

For the year-to-date, we have recorded revenues of $192.6 million and net income of $10.2 million, or $1.11 per share. We'll look at these results in more detail by group, starting with the Water Transmission Group. Sales increased over 35% to $69.5 million for the second quarter of 2007.

This level of revenues was consistent with our expectations, as the majority of our facilities were operating at high utilization levels throughout the quarter. Over the past four quarters, this group has run at an average of almost $68 million per quarter. We expect this level of production to continue through the end of 2007, although we anticipate a lower third quarter, followed by a higher fourth quarter, due to timing issues interesting he current backlog.

Gross profit was $15.1 million for the quarter, or 21.7% of sales, compared to $9.8 million, or 19.1% of sales for the second quarter last year. Gross profit increased as a result of operating efficiencies and the elimination of rent expense that resulted from the payoff of operating leases at the end of the fourth quarter of 2006.

In the Tubular Products Group, our sales increased 28% to $28.9 million in the quarter, compared to $22.6 million for the second quarter last year. This is the highest sales this group has reported since the second quarter of 2004. The majority of this increase is in our energy product line, although we saw increases in traffic and non-residential construction, as well.

Our efforts to refocus on sustainable and profitable profit lines that we started in 2005 is paying off. We set a goal to rebuild this group to $100 million in annual revenue by 2008. Based on the first half results of 2007, we may achieve this goal this year.

Gross profit increased to $3.6 million in the second quarter of 2007, compared to $2.7 million last year. Gross profit as a percent of sales increased to 12.5% for the quarter. This is the highest gross profit as a percent of sales for this group since 2004.

In the Fabricated Products Group, our sales were $3.5 million and gross profit was approximately $113,000. Gross profit declined from last year as our effective steel costs increased and we were unable to pass on these higher costs to our customers.

Virtually all of our sales of this quarter were from propane tanks. As we have said before, we do not expect to grow our position in propane tanks. Rather, we are focused on using the available capacity in this facility to support the Water Transmission Group by making pipe fittings.

Accordingly, we have transitioned the management of this group to Water Transmission. Specifically, John Peterson, who runs our Saginaw, Texas, division is now also managing the Monterey, Mexico, facility. Over the next several months, we expect to slowly increase the pipe fittings work in this facility while maintaining our propane tank business.

Selling, general and administrative costs for the company as a whole were $7.9 million in the second quarter of 2007, compared to $6.9 million for the second quarter of 2006. SG&A costs increased in this quarter due to settling some outstanding customer claims, increasing incentive compensation expense and also recording stock option expense.

SG&A costs as a percent of sales decreased to 7.8% from 8.9% for the second quarter last year. SG&A is expected to be approximately $7.5 million in each of the third and fourth quarters of 2007.

Interest expense was $1.8 million for the second quarter of 2007, compared to $1.7 million last year. The increase in expense resulted from higher interest rates in the second quarter of 2007, compared to the same period last year. And, after adjusting for taxes, we reported net income of $5.7 million, compared to $7.3 million in the second quarter of 2006.

This equates to $0.61 per share on 9.2 million shares outstanding, compared to $1.03 per share last year on 7.1 million shares outstanding. Again, last year's results included the gain on the sale of the Riverside facility that was approximately $0.67 per share. The number of shares used in computing the fully diluted shares increased from last year as a result of our follow-on offering that was completed in the fourth quarter of 2006.

Looking briefly at the first half of the year, again in the Water Transmission Group, our sales are up 24.9% to $134.1 million and gross profit is up to $28.8 million, compared to $20 million for the first half of 2006.

Gross profit as a percent of sales improved from 18.6% last year to 21.5% for the first half of this year. In the Tubular Products Group, our sales are up 25.1% to $51.9 million and our gross profit has improved from $4.6 million last year to $5.9 million for the first half of this year.

And in Fabricated Products, our sales were $6.7 million and gross profit was approximately $171,000, compared to $717,000 for the first half of 2006, again, the major difference being the inability to pass on higher steel costs.

Selling, general and administrative costs for the year-to-date were $15.3 million, or approximately 7.9% of sales, compared to $13.3 million, or 8.5% of sales in 2006, and interest expense was consistent at roughly $3.5 million for both periods, leaving us, after adjusting for taxes, with net income of $10.2 million for the first half of 2007, compared to $10 million for the same period last year.

And if you exclude the gain on the sale of the Riverside property in the first half of 2006, we would have reported net income of approximately $5.2 million last year, compared to $10.2 million for the first six months of this year. This equates to net income of $1.11 per share, again, on 9.2 million shares outstanding, compared to $1.40 per share last year, on 7.1 million shares outstanding.

Looking at the balance sheet, our working capital as of June 30th, 2007, has increased to approximately $171 million, from about $137 million a year ago. Our current ratio is 4.58, up from 3.52 last year, and our debt as a percent of total capitalization is down to 26.9%, compared to 35.6% a year ago. Total assets have increased from $347 million to $415 million, and equity has increased from $170 million to $243 million.

As we look ahead to the second half of 2007, we are pleased that we have been able to sustain our backlog at a high level. Even with lower bidding activity during the quarter than we had expected, due to various project delays, we were able to book enough work to maintain our backlog at $192.2 million. This certainly gives us a strong base to build on.

Even with this strong backlog, however, we still have openings in our manufacturing schedules in both the third and fourth quarters. At this time, we expect overall Water Transmission revenues to be down somewhat in the third quarter and increase again in the fourth quarter.

Overall, we expect to finish the year at roughly the same level we've operated at for the past four quarters. The market over the balance of the year continues to look strong, even after several projects have been delayed. We are tracking a large number of projects, including some that were originally scheduled in the first half of the year.

We continue to believe that the 2007 market will exceed the 2007 market will exceed the 2006 market, and that there are sufficient opportunities in the Water Transmission market for this group to set new sales and gross profit records in 2007 and enter 2008 with a very strong backlog.

Our Tubular Products Group's second quarter results exceeded our expectations. The energy market was stronger in the first half of the year than we originally expected. We are forecasting that energy product sales will decrease slightly in the third quarter of 2007 and total sales will decrease in the fourth quarter 2007 as a result of normal seasonality.

Even though sales are expected to decrease slightly in the second half of 2007, we may still achieve our near-term target of $100 million in revenues for this group. Gross profit as a percent of sales is expected to continue to remain in the low double-digits range. Earlier this year, we announced that Bob Mahoney is taking over leadership of this group. I am confident that he and his team will continue the positive trend that we're on.

Our Fabricated Products Group will continue at the current levels. Demand for our primary product, propane tanks, is not expected to change significantly for the remainder of 2007. We continue to focus more of this group's resources to support the Water Transmission Group by providing fabrication support. This focus continues to provide the best long-term utilization of this manufacturing facility.

Steel prices have softened recently. We currently expect prices to increase some in the third quarter and stabilize in the fourth quarter. Lead times are beginning to increase and import availability continues to be limited. However, we do not have any significant concerns about pricing or availability at this time.

The acquisition of Continental Pipe was completed at the beginning of July. We are currently working on the transition and are operating, although at a limited level. This facility did not have much backlog on the acquisition date. Accordingly, we will have a slow start, and this may reduce earnings slightly in Q3 and Q4.

By the first of the year, however, we expect to have a solid backlog, steady manufacturing and profitable operations. We believe we have a good group of employees at this site and a cost-effective operation. Over the long run, this facility will give us additional capacity to serve the Western states, where we expect significant growth in the years ahead.

In closing, we are pleased to report our best quarter ever. We continue to see strong market conditions ahead and continue to believe we are well positioned to take advantage of these conditions. We have been working on many changes to better position the company.

We have refined the product mix in Tubular Products and now added new leadership to this group. We are redirecting our capabilities in Monterey to focus on pipe fittings and we've added a new manufacturing facility via acquisition to our Water Transmission Group. We expect all of these changes to continue to be beneficial and we expect to set new sales, gross profit and earnings records in 2007 and be positioned for a very strong year in 2008, as well.

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

(OPERATOR INSTRUCTIONS)

One moment from our first question, which is from [Bob Chanowski]. You may ask your question, sir.

Good morning, Brian.

Good morning.

A couple of questions here. First, on the backlog timing, out of that 192, is the bulk of that slated for '07 or does some of that go into '08, as well?

In general terms, I'd say it's essentially a 12-month backlog. Some larger jobs will extend beyond that, but, generally, pretty much the backlog will get worked through in approximately 12 months.

Okay, and how does the trend of the backlog look at this point, as you're looking out towards '08 in terms of potential bidding activity and so on? Does it look like it continues to ramp?

We continue to think the market overall in '07 is going to be a little better than '06. The market in '08 also looks very strong.

Okay, you mentioned project delays, several project delays. Are they consistent in terms of the issues? Is there anything that you're concerned about in terms of those being canceled?

No. Projects delay all the time in this business. I think more than 50% of projects actually postpone from their original bid date. Sometimes it's more prevalent than others. We've had several here so far this year. We have them every year. The good news is there's other projects out there, so it's not that significant an issue.

Okay, and do you have any sense of the Continental Pipe startup in the third quarter and fourth quarter.

I don't think it's going to be very significant, Bob, but there isn't much work there, so we're going to absorb some costs certainly in the next two quarters and certainly in the third quarter and probably some in the fourth quarter, as well. But I don't think it's going to be terribly significant. I'd say it's on the order of a couple hundred thousand dollars.

Okay, great. And then, finally, in the Monterey facility with you changing over in mix, can you give us a sense just in general terms what you think the mix may be in '08, which I'm sure you've thought through, the idea of once you have the mix shifted, what do you think the revenue capacity out of that operation might be?

It's a good question at this point, because everything that we're talking about doing down there is really custom work for the Water Transmission Group, so capacity is going to be highly dependent on the timing of orders and how that all slots in. But, ideally, I think I'd like to see in 2008 maybe a 50-50 mix between propane tanks and Water Transmission business.

Okay, in general terms again, though, even though it's custom work, I recognize that and you're going to have mix changes and so on, but any sense of the magnitude of the long-term potential there in revenue?

I think the way we're situated right now, the limiting factor is probably space, once we get into that business full time. And with the space we have available, the capacity is probably somewhere in the $25 million range.

Okay, great. Thanks, Brian.

Thank you. Our next question comes from [Brent Tillman]. You may ask your question, sir.

Good morning, Brian.

Good morning.

Just a question. You made the comment that the Water Transmission sales would be lower in Q3 versus Q2, and then that Q4 would be stronger. Is it fair to assume that the second half sales for the Water Transmission would be stronger than the first half?

I don't have the number. Hang on one second here. I think over the last four quarters, we're looking at an average of about $68 million a quarter, and I think that's probably what we're going to be in the second half of the year. The first two quarters of '07 were a little bit less than that.

Okay, okay. And then on the Tubular segment, and I apologize if I missed this, but, I mean, obviously sales are a little bit stronger than we had anticipated there. Is that still a function of volume versus pricing?

Yes.

Okay. And then, also, do you have a depreciation number for the quarter?

I think it's about $2.6 million for the first six months, and it's probably split roughly down the middle. I don't have the exact number, but I'd say about $1.3 million for the quarter.

Perfect. Okay, thanks, Brian.

Thank you. At this time, there are no further questions, sir.

Okay, if there are no further questions, then this will conclude the conference call. Thank you for your interest.