NWPX Infrastructure Inc (NWPX) 2007 Q3 法說會逐字稿

Good morning and thank you for standing by. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would like to introduce your host for today's conference call, Mr. Brian Dunham. Sir, you may begin.

Thank you. Welcome to Northwest Pipe's conference call and the announcement of earnings for the third quarter of 2007. My name is Brian Dunham, I'm the President and CEO of the Company.

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

For the third quarter of 2007, we generated revenues of $92 million and net income of approximately $5.1 million, which equates to earnings of $0.55 per share. For the year to date, we have recorded revenues of $284.6 million and net income of $15.3 million or $1.65 per share. We'll look at those results in more detail by group, starting with the Water Transmission Group.

Sales in the Water Transmission Group were $63.9 million for the quarter. This level of revenues was slightly below our expectations, as we experienced some production delays due to steel deliveries and project approvals. Over the past five quarters, this Group's production has averaged about $67 million per quarter. We continue to anticipate higher revenue in the fourth quarter and should exceed this average.

Gross profit was $14.3 million for the quarter or 22.5% of sales compared to $12.7 million or 19.4% of sales for the third quarter last year. This is the highest gross margin percentage that we have reported since the fourth quarter of 2003. Gross profit increased this quarter as a result of operating efficiencies, the elimination of rent expense that resulted from the payoff of operating leases at the end of the fourth quarter 2006 and a favorable project mix. We do not anticipate that the gross profit percentage will be as high in the fourth quarter of 2007, because the project mix will not be as favorable.

In the Tubular Products Group, our sales increased 13.2% to $25.2 million during the quarter compared to $22.3 million in the third quarter of last year as a result of increase in volume, generally across our product lines.

Gross profit increased to $3.1 million in the third quarter of 2007 compared to $2.2 million last year. Gross profit as a percent of sales increased to 12.2% for this quarter, up from 10.1% in the same quarter last year. This is the second consecutive quarter that margins have exceeded 12% for this group.

In the Fabricated Products Group, our sales were $2.9 million, which is down from last year and this group recorded a loss of approximately $123,000. The decline in volume resulted from soft market conditions in our propane tank business and this softness did not allow us to pass on higher steel and freight costs to our customers.

Selling, general, and administrative costs for the Company as a whole were $7.6 million in the third quarter of 2007 compared to about $7 million for the third quarter of 2006. SG&A costs increased due to increased compensation expense and professional fees during the quarter. SG&A is expected to be approximately $7.6 million for the fourth quarter of 2007.

Interest expense was about $1.7 million for the quarter, consistent with last year and after adjusting for taxes, we reported net income of $5.1 million compared to $4.1 million in the third quarter of 2006. This equates to $0.55 per share based on 9.2 million shares outstanding, compared to $0.57 per share on 7.2 million shares outstanding for the third quarter of last year. The number of shares increased from last year as a result of our follow-on offering that was completed in the fourth quarter of 2006.

Looking now at the year-to-date, again starting with the Water Transmission Group, our sales for 2007 are up 14.6% to $197.9 million and our gross profit is up 32% to $43.1 million. Gross profit as a percent of sales improved from 18.9% last year to 21.8% for the first nine months of 2007.

In the Tubular Products Group, our sales are up 20.9% to $77.1 million and our gross profit is improved from $6.8 million or 10.7% of sales to $9 million or 11.7% of sales this year. In the Fabricated Products Group, our sales were $9.6 million this year, down from $12.6 million last year and gross profit is approximately $48,000 compared to $960,000 for the first nine months of 2006.

SG&A costs for the Company as a whole were about $22.9 million this year, approximately 8% of sales, compared to $20.3 million last year or 8.2% of sales for that period. Interest expense again was pretty consistent at about $5.1 million and after adjusting for taxes, net income increased to $15.3 million for the first nine months of 2007 compared to $14 million during the same period last year.

Now, last year's results included the gain on the sale of the Riverside property. Without this gain, we would have reported net income of approximately $9.3 million for the first nine months in 2006, substantially less than the $15.3 million we are reporting for this year.

$15.3 million of net income equates to $1.65 earnings per share based on 9,225,000 shares outstanding compared to $1.97 per share last year on about 7.1 million shares outstanding. And again, the earnings per share for the first nine months of 2006 included the gain on the sale of the Riverside property. Without this one-time event, the comparative earnings would have been approximately $1.30 per share.

Turning briefly to the balance sheet -- working capital as of September 30, 2007 is up to approximately $180 million from about a $138 million a year ago. Our current ratio is at 5.25 compared to 3.05 at September 30th of 2006. And debt as a percent of total capitalization is down to 27.8% from 35.8% a year ago. Total assets have increased from $364 million to $425 million and equity has increased from approximately $174 million, to approximately $249 million.

As we look ahead to the fourth quarter of 2007, we continue to expect strong results. While our backlog was down some this quarter, it was still at a high level of $174 million. Bidding activity in the fourth quarter is expected to be strong enough, so that we should increase our Water Transmission sales and still add to the backlog at the end of the year.

Even though several projects that were originally planned to bid in the second and third quarters of this year have postponed into next year, we still expect a total market in 2007 to be very close to the record market we experienced in 2006.

The Water Transmission margin was very positive in the third quarter. However, this was partially due to a favorable mix of projects during the quarter and we do not expect the margin to be this high in Q4. We did see a small improvement in overall pricing for projects bid during the third quarter and this may impact our margins positively in Q1 and Q2 of next year and hopefully, we will be at the beginning of a positive trend in pricing going forward from there.

As noted in our press release, we have discontinued our sales agreement with U.S. Steel. Losing their orders for energy products in the fourth quarter contributed to the reduction in our overall backlog. This will also negatively impact our Tubular Products sales in Q4. We were expecting energy product sales of between $4 million and $7 million for the quarter.

While we expect to be back in the market quickly, we will not rebuild to these levels for a few quarters, so our overall volume will be somewhat lower in the near term. Other than this temporary setback, our Tubular Products business continues to look good, although we normally see a decrease in volume in Q4 due to seasonality.

We are continuing to work to increase our capacity in order to be able to serve our growing markets in the years ahead. Our Continental Pipe acquisition in July was one step in this process. We have just recently ordered two new spiral weld pipe mills as we continue our growth agenda. We plan to build both of these mills in our Adelanto, California facility. The first will be permanently installed in this facility and the second will be built in a modular design to make it transportable. This will give us options as to where we install this mill and will enable us to react quickly to market opportunities.

We have also recently acquired additional acreage adjacent to our Saginaw, Texas manufacturing facility. We will use this land to improve our operations in that facility and to increase our overall capacity.

In closing, we are pleased with this quarter's results. The Water Transmission market outlook continues to be positive. If the market develops as expected, we should be able to increase our backlog in both volume and gross margin, finish 2007 strong and be well positioned for 2008. Our Tubular Products Group will lose some ground in near term in energy products, but I believe we will quickly rebuild our position in this market and continue to grow profitably next year.

In Monterey, we will continue to focus on water transmission pipe fittings and expect to see the benefit of this shift in strategy beginning in Q1 of 2008. We are excited about the challenges and the opportunities that we see ahead of us. At this time, I will be happy to answer any questions that you may have. Cathy?

Thank you. (OPERATOR INSTRUCTIONS) The first question comes from Bob Schenosky. Your line is open.

Thank you. Good morning, Brian.

Good Morning.

I actually have two questions for you. The first on the Tubular business, I was wondering if you can give us any further color on what took place between you and U.S. Steel and then, as well any color on the new relationship you have with this un-named company in Texas?

Yes, I think U.S. Steel has just a different philosophy and as they evaluated their acquisition of Lone Star Steel, I think they considered -- and this is my speculation of course, but I do think they considered continuing those alliances, at least that's the read that we got early on.

But, ultimately as they looked at it, I think they decided to discontinue ours and I don't know what they are going to do with the others going forward. It's just a different philosophy than Lone Star Steel had. Well, it was really a core part of their strategy. As far as the -- our new agency, the name is LSS Group and they are located in Texas, and we think that they will be very effective in the marketplace. We are really not going to disclose a lot more than that at this point.

Sure. And the U.S. Steel, do you sense the U.S. Steel will put in competing products with what you have?

Well, U.S. Steel has some products that compete at least on the edges of what we do already. I don't know what their plans are in terms of filling out the whole product line or whether we are going to leave a hole in their product line or not.

Okay, great. And then on Water Transmission, with the addition of capacity, two parts for this -- one, how much capacity will that add relative to what you have existing? And then secondly, I would take it then that you would have a sense that there are some significant projects out there whether new or replacement business that would give you enough confidence at this point in the cycle to add capacity?

Yes, certainly, we have talked in the past that we expect to see stronger markets ahead. The record market that we saw in 2006 was about $800 million and we are planning for $1 billion size market, although we are not predicting that to any specific time period, but that is what our near-term thinking is.

So, we are trying to prepare for that and the mills that we acquiring is a part of that process. Those mills will add -- it depends on how they are configured, what the projects are and a variety of different variables, but they should add around 25,000 tons each to our overall capacity

And what about Continental? How much has that added as well?

Continental is probably a little bit less than that.

And finally, do you have any color at all in terms of timing and size of this much talked about Nevada project?

The Nevada project is obviously a very large project. It is expected to be close to a 300-mile pipeline or 300 miles of pipe. There are some -- there's a few different lines involved and we do expect it to take place over a several-year period. At this time, we expect to see at least a portion of that bid in 2008.

Great. Thank you, Brian.

You bet.

The next question comes from Ryan Connors. Your line is open.

Hi, Brian. Good morning.

Good morning.

I had a question about the mix benefit in the quarter in Water Transmission. I wonder if you could just give us a little bit of color, as much as you can, about the precise nature of that mix shift, which types of projects were heavier in the quarter that drove that upside?

It's not really anything that's terribly scientific; we have margins that vary from project to project, oftentimes depend on where they are, how close to our plants they are, what is the competitive situation when they bid was for that particular job. And so, there's a variety of different margins that are inherent in the backlog that obviously averages out and we just seem to have a little bit of a weighting towards some of those projects or a little bit better margins, so that flowed through in the quarter.

Okay, and that helps. And then in terms of your outlook, obviously, you have got a positive outlook not only for the fourth quarter but into '08, if you could just give a little bit of detail around your outlook regionally, kind of where you see the strength coming in terms of which regions you expect to see strongest bidding activity, and then, also to the extent you can, talk about whether you see a lot of those high-margin projects sort of on the horizon where you will -- for one reason or another, you will get higher margin than the average?

Well, we certainly hope to see overall pricing continue to get better. And as I said, there are a variety of different margins obviously. But, overall, we did see a little bit of uptick in Q3, which is typically the pattern when the market is pretty busy. So, hopefully, we will see that continue as we go forward and a little bit of improvement in overall pricing that will be helpful.

As far as specific margins on specific projects, the biggest variable is the competitive situation at that time. So, it's pretty hard to predict that. However, there are a lot of projects that are well suited for us in terms of the types of products that we make and make well; they are also well suited for us in terms of the geographic location and in terms of, again, specifics on that, the west -- there are several projects in the west, virtually all the major metropolitan areas in the west are looking at some significant projects going forward, not specifically juts in 2008, but over the next few years.

So, the market opportunities look pretty good. The east is still a little bit more challenging for our types of products because there are a lot of smaller-diameter pipelines in the east. However, we have fairly good backlog in our West Virginia plant now and we do see some work coming forward there as well. So, it's a fairly well distributed market.

Okay. And then lastly, you talked in the press release and a little bit here in your opening remarks about the transition from the propane tanks into the water fittings. I wonder if you could just talk a little bit about your thinking right now in terms of the time line of what that will look like, how you expect sales, when you expect sales to really start to transition to where we see some stabilization there, and then eventually some good comps?

Yes, we expect to -- we have a backlog of orders right now for water transmission fittings down in that facility. We haven't done a tremendous amount yet, we have done a few small things, but we do have a backlog of orders down there now that they will start working on some in Q4, but more in Q1 of next year and we do expect that Water Transmission business down there to grown in Q1.

I think we talked last quarter, we kind of talked about maybe getting into 50%-50% split sometime late next year and I think that's probably about what we are looking for; 50%-50% between propane tanks and water transmission fittings.

Okay. That's all very helpful. Thanks for the time, Brian

You bet.

The next question comes from John Rogers. Your line is open.

Hi, good morning.

Good morning.

Couple of things, Brian. First of all, in terms of your backlog, if you look at the loss of the U.S. Steel business, how much backlog was that? I was under the impression it was $5 million.

Yes, probably. Like I said, we were looking for fourth quarter orders of about $4 million to $7 million in energy products. I can't tell you exactly what the backlog number was, but that's what we are kind of looking for at the end of the fourth quarter.

During the third quarter, we finished some orders for them, but they didn't continue to place other, so, I am sure it went down by -- the backlog went down by some degree during the third quarter, so something probably less than $7 million. It was probably between -- it was probably between $4 million and $7 million in terms of the backlog.

Okay. Okay, great. And then in terms of the margins on that product, is it comparable to your other Tubular Products, significantly different?

No, it is not significantly different.

Okay. And on the new mills, you will keep the three existing mills in Adelanto still operating?

Yes.

Okay. This will -- and is it roughly a 25% increase in capacity at that plant?

Well, that plant also has a rolled and welded line.

All right.

So, it's probably not quite.

Okay, but -- okay, that helps.

Ballpark anyway.

Yes. And then just in terms of the market, you made the comment that you expect backlog to improve into the fourth quarter. Is that relative to the three quarter or relative to a year ago?

Relative to the third quarter.

Okay. So if it comes back up to the levels that we saw earlier in the year, I guess we'd be down a little bit year-over-year, but how does that -- then give us sort of an indication what 2008 looks like, because the new mills will be coming on, I assume part way through '08, bidding activity will pick up, but the benefits of that, will that show up later in '08 or should we see that right away in the year?

Well, the new mills -- it takes some time to build mills and I don't expect to see those on line until sometime in the second quarter.

Okay.

And backlog as you know can be a little bit misleading, because you need to know also what else is bidding in the next few [years] afterwards and -- but, if our backlog is at this level or higher going into the year, I will be pretty happy.

Okay. In terms of --

In terms of meeting our expectations for 2008.

Okay. What are the -- have you said what those are?

No.

Okay, all right. Thanks very much.

Thank you.

The next question comes from David Fondrie. Your line is open.

Good morning, Brian.

Good morning.

Could you maybe just give a little bit more color on your arrangement with LSS? Are they already ordering pipes from you or have you signed the contracts and are you replacing an existing supplier for them or is this a complementary product to what they are currently selling?

It is a sales agency agreement. The products will be sold under our name in the marketplace, but they are going to handle the distribution network.

Are you replacing someone else?

Yes, this was the deal that we originally had with Lone Star Steel and then after U.S. Steel bought them, we discontinued that deal.

No, I understand that. I am talking about for your new --

No, no, no.

New sales agency agreement. Do they already represent this kind of product in the marketplace? And any color on the number of sales people they have or are they already in this market or is this probably -- are they just starting this up from scratch?

It is a new group, but a group that has significant experience in this market, and they will represent us as well as others.

And they are already selling into the market?

We have just executed this agreement, Dave. So, I would probably say probably not at the moment but, hopefully, within the next two or three hours.

But, are they selling similar products into the market or is it a formation of a new group?

It is a new group.

It is a new group, so okay. So, they have broken off from somebody else and set up themselves and say they are want to do business, maybe they even came out of Lone Star, who knows, okay. Thanks. So, it's a startup, so effectively.

Yes.

Then can you talk a little bit about the Fabricated Products Group at Mexico. I mean you have struggled with it for a long time, gone to a lot of iterations. Are you still pursuing other opportunities? I know there was an automotive opportunity at one time, or are you now focused on purely Water Transmission and the propane tank business?

We are looking at a couple of other opportunities as well. You are correct; we have investigated other products that we could make down there and we do have some of those that look very promising, that are more similar to Water Transmission, more of an engineer type product.

But, we are looking at those types of things right now. We are continuing to make propane tanks and continuing to be active in that business but, as I've said before, we are not really looking to grow that business; we are trying to grow on the other directions.

Okay. And then finally in Southeast United States, I know you had some pretty significant competitive pricing issues down there. Is that still the case, or are those folks getting more rational or --?

Well, there is a competitor that is entrenched in the Southeast and has a very significant market share down there. We take a little bit of work out of that region, but not very much and they come out and compete with us in some of the regions where we're -- where we think we have an advantage because of freight from time to time. I don't know if that situation has really changed in any significant way.

Okay. Very good, thank you.

You bet.

The next question comes from Chris Terry. Your line is open.

Thank you. Good morning, Brian.

Good morning, Chris.

A couple of questions and then one that I -- that you may have already addressed that I didn't catch. What was the dollar amount of the total capacity increase that you would expect?

With the new mills you mean?

Yes, the new mills.

I didn't give a dollar amount. I gave tons, about 50,000 tons.

Okay. And then in addition to that would be the potential tonnage increase from the land down here in Saginaw?

Yes and that's a little bit longer term. Our immediate use for that land, we are going to clean up some production flow issues down there.

Okay.

So, it should increase our capacity somewhat by doing that but even more so lower cost a little bit. And in the long run, we may do some other things that will increase our capacity further in that facility.

Okay, great. And then could you talk about steel cost, what you are seeing out there now?

Yes, steel costs are generally expected to go up. Steel has gotten a little bit tighter here, again, in the fourth quarter and generally expect it to go up again as we go into the beginning of next year.

Okay. On the delivery delay here in the quarter for steel, has that issue been resolved? Can you give a little more color there?

Yes, it really wasn't a significant issue, just a little bit slower delivery on a couple of projects that slowed us down for a few days. We actually had more of an issue with project approvals and each of these projects has to go back to the engineering firm and the agency and be completely approved before we can start working and a couple of times, we were ready to go and we didn't have all those approvals back yet. So, no significant issues, but it did -- it dropped us off a couple of million dollars from where we thought we would be for the quarter.

Okay, okay, got it. And then your SG&A outlook for this quarter, $7.6 million in Q4, what -- the increase in professional fees, is that something that we should expect to go away looking into '08?

Yes, I think so. There are some other things I think are going to replace that and so we are predicting basically the same total. But, yes, we had some professional fees in the third quarter that will go away.

Okay. Are those a result of the acquisitions you guys have made?

To some degree, yes.

Okay. All right. Well, Brian, appreciate it. Thanks a bunch.

You bet.

(OPERATOR INSTRUCTIONS). The next question comes from Eric Mintz. Your line is open.

Hi, I was wondering if you might be able to quantify the longer-term prospect list that you are seeing relative to what it has been historically and what it was maybe a year ago.

You mean in terms of Water Transmission project?

Yes. Yes, the large projects you are looking at that now.

I don't want to quantify in too much detail but, in general, the list is certainly better. I mean, obviously, we believe the markets are going to improve. We don't think it is going to be a one-year blip and we think that there is several major projects out there, as well as a base of business that make us pretty optimistic that we are going to see pretty good market numbers over the next several years.

The replacement side of the market is also growing and we will see more of that playing to the overall market as well. So, we are pretty optimistic that we are going to see some pretty good years ahead, but I don't want to start quantifying those numbers. We typically do not do that.

Okay. And then on the Nevada project, is there something in terms of milestones we should be looking for or any risk - what's the near-term risk that this thing starts to slip in terms of I guess environmentalists or whatever?

There are certainly some obstacles that they need to overcome still. At this time, we think it's going to start bidding and I think that's really the first milestone when they start bidding out some of this work. But, they do have some issues that they have to overcome.

There's potentially some protests from up in the northern part of Nevada still that have not yet gone away. There are some other permitting issues that they have to get resolved. The best place to look for that is the Southern Nevada Water Agency web site and there will be information there.

Okay. Have you changed your view on opportunity in the water - in the wind tower market by any chance?

Well, I'm not sure what you think our opinion was.

Well, I think you said that it was just challenging to do in prior conversation I had with you --?

I apologize because I don't recall that comment. But, no, we haven't changed that viewpoint. We have looked at it a little bit. We don't think it's very well suited for our capabilities.

Okay. Great, thanks.

You bet.

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

Okay. Well, if there are no other questions, this will conclude our conference call. Thank you all for your interest.