NWPX Infrastructure Inc (NWPX) 2007 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session in today's conference.

(OPERATOR INSTRUCTIONS)

I would also like to remind parties this call is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to President and CEO, Mr. Brian Dunham, and Senior Vice President and Chief Financial Officer, Ms. Stephanie Welty. Thank you, you may begin.

Thank you, Dianne. Welcome to Northwest Pipe's conference call and the announcement of earnings for the fourth quarter of 2007. My name is Brian Dunham, I am the President and CEO of the Company, and I am joined today by Stephanie Welty, who's our Chief Financial Officer. Before we 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 most recent filing with the SEC for a discussion of risk factors that could cause actual results to differ materially. With that, I will turn this over to Stephanie to review our financial results.

Thank you, Brian. For the fourth quarter of 2007, we generated revenue of $98.2 million, which is a quarterly revenue record. Net income was $5.6 million and diluted earnings per share, $0.60. For the year, we recorded revenue of $382.8 million, net income of $20.8 million, diluted earnings per share of $2.26. For the year, both revenue and earnings were record results. For the fourth quarter discussion of our segment results, in water transmission, sales were $76.8 million for the quarter, up from $72 million in the fourth quarter of 2006. This is a new record high for quarterly water transmission revenues.

Gross profit was $17.4 million for the quarter, or 22.7% of revenue, compared to $13.9 million or 19.3% of revenue for the fourth quarter last year. Gross profit increased as a result of operating efficiencies, improved pricing and product mix, but we believe this margin improvement does demonstrate true improvements in our efficiency and in our markets. We do not anticipate that the gross profit percentage will be as high in the first quarter of 2008. The product mix in the first quarter will not be as favorable and we will continue to see some quarterly variability in margins as we have in the past.

In tubular products, sales were $17.9 million in the fourth quarter, which is down compared to last year due to much lower energy sales and weather related power outages. We expected lower sales in energy because we exited a sales agency agreement earlier in the year. We have had some success in booking new energy orders, but for the most part, shipments of these new orders have not yet taken place. In addition, we saw minor declines in some of our other markets which appear consistent with seasonal patterns. We expect sales volume to increase substantially in the first quarter of 2008.

Gross profit declined to $1 million compared to $2.1 million last year. Gross profit as a percent of revenue was 5.5% for the quarter. This is the lowest margin we have seen since the third quarter of 2005. The margin is down due to a combination of factors. Our average selling price was off approximately 2% due to partial mix and partial minor softness in the market. Volume is down, as noted earlier, and this impacted our overall cost per unit and we had slightly higher manufacturing costs. The combination of these last two resulted in overall increase in cost of slightly more than 3%. As we look ahead at our input costs, volumes and markets, we expect to see a rapid return to double-digit margins in this group.

Our fabricated products group, which does its manufacturing in Mexico, had sales of $3.5 million, which is down from Q4 2006. This group recorded a loss of approximately $400,000 for the quarter. The decline resulted from poor market conditions in our propane tank business. While we are focused on shifting production into water transmission, we have not yet fully transitioned this business. We do expect improved results ahead, as more production goes into water transmission fittings. Going forward, we will be reporting Mexico operations in the water transmission group to better reflect our organizational structure and strategic direction.

With respect to selling, general and administrative cost, the SG&A for the Company was $7.8 million in the fourth quarter of 2007. SG&A costs were slightly higher than expected due to increased compensation expense and professional fees. We expect SG&A costs to be flat to slightly higher in the first quarter of 2008.

Depreciation expense was $4.9 million, CapEx was $24.1 million, including our two acquisitions in the year and operating cash flow was $18.5 million. Interest expense was $1.7 million for the quarter, as expected, compared to $1.4 million in the quarter of -- last quarter of 2006. After adjusting for taxes, we reported net income of $5.6 million compared to $6 million in Q4 of 2006.

Net income per share is equal to $0.60 per diluted share on 9.3 million shares outstanding, compared to $0.72 per share on 8.3 million shares outstanding in the fourth quarter of 2006. The number of shares increased as a result of our follow on offering that was completed in the fourth quarter of 2006.

In water transmission for the year, sales are up 12.2% to $274.8 million. Gross profit is up 30% to $60.6 million compared to $46.6 million for 2006. Gross profit as a percent of sales improved from 19% last year to 22% for 2007. In tubular products, sales increased 12.1% to $95 million in 2007 from $84.8 million last year. We didn't quite hit our target of $100 million for the year due to slower than expected sales in the fourth quarter, as previously discussed. We do expect to exceed this target in 2008. Gross profit improved from $8.9 million or 10.5% as a percent of sales to $10 million, again, 10.5% as the percent of sales.

In fabricated products, sales were $13 million and the group lost $356,000 on the gross margin line driven by a poor fourth quarter. SG&A costs for the Company as a whole were $30.7 million in '07 or approximately 8% of sales compared to $27.4 million or 7.9% of sales for the prior year. 2007 interest expense was $6.8 million and 2007 was $6.7 -- and 2006 was $6.7 million. After adjusting for taxes, net income increased to $20.8 million for 2007 compared to $20 million last year.

Last year's result included the gain on the sale of the Riverside property. Without this gain, we have reported net income of approximately $14.9 million for 2006. Without excluding this gain, this year's results represent a 40% improvement in earnings. Earnings per diluted share was $2.26 on 9.2 million shares compared to $2.69 per share last year on 7.4 million shares. And again, the earnings per share for 2006 included the gain on the sale of the Riverside property. And without the gain, earnings in 2006 would have been $2.01 per share.

Moving on to the balance sheet. We had working capital of $181.5 million in 2007 compared to $166.7 million in 2006. The current ratio today is [3.9] compared to [3.4] in '06 and debt as the percent of capitalization in 2007 is 27.1% compared to 29.5% last year. Total assets have increased from 424.5 million (sic - see press release) shares to 453.6 million (sic - see press release) and equity has increased from $230.8 million to $256.3 million. Now Bryan is going to take a look at what our expectations are going forward.

Thank you. As we look ahead to 2008, we continue to expect strong results. Our backlog was at a record high level of $212 million as of the beginning of the year. Bidding activity throughout the year is expected to be very strong although it is weighted towards the second half of the year. At this time, we expect the total market for 2008 to be a new record high for the Company. The water transmission margin was very strong in the fourth quarter. We have seen some improved pricing and certainly our manufacturing performance is very good as reflected in overall volume as well as margin. However, the margin improvement was also partially due to a favorable mix of projects during the quarter and we do not expect the margin to be this high in the first quarter of 2008.

Water transmission volume was obviously very strong in the fourth quarter as well. We have experienced some delays here in the first quarter in our manufacturing schedules, generally due to an increase in lead times on steel deliveries. While this is not a long-lasting issue, it will result in lower sales in Q1 than we had in Q4. Combined with this, our manufacturing schedules are already a little lighter than we would like, just due to the timing of projects. Consequently, we expect Q1 volume to be closer to the levels we reported in the third quarter of 2007, rather than the quarter we are reporting today.

Based on anticipated bidding activity, we currently expect the second quarter to be stronger than the first quarter and we expect the second half of the year to be stronger than the first half. As we previously projected, the loss of the U.S. Steel energy business did impact our sales for the fourth quarter. Under that agreement, we would have expected sales between $4 million and $7 million for the quarter. Instead, our energy sales for the quarter totaled less than $2 million. We have been booking energy orders successfully and we do expect to see these sales increase substantially by the second quarter of this year.

We also see opportunities to grow our tubular products business in traffic signpost products, fire protection sprinkler pipe and certain agricultural products as well. Margins were quite low in the fourth quarter in the tubular products group. This was partly due to lower volume to the plants and therefore higher cost per unit and was partly due to the weather issues that result in lost production and higher cost. Overall, our costs in the quarter were up approximately $35 per ton. We expect this to correct as we go through the first and second quarters of this year.

The remaining difference in our margin was due to pricing. We did see some unfavorable pricing in the quarter -- in the fourth quarter, which is generally consistent with seasonality. Orders booked during the fourth quarter to be produced in Q1, however, already show improvements. So we expect margins will rapidly improve. As we move into 2008, our cost will be significantly impacted by rising steel costs and Stephanie will talk about our expectations regarding steel.

Steel is our primary raw material in both groups. In the water transmission group, steel is approximately a third of our overall cost. In tubular products, it can be 75% to 80% of our cost. Steel is currently rising rapidly and our average steel cost has gone from $550 per ton in December to more than $700 per ton for the steel that we -- steel orders that we are placing today. In a rising market, we face different challenges.

In the water transmission group, our risk is that we may have bid a firm price contract with steel estimated at a lower cost than we can actually purchase it for. This would result to losing margin points on that contract. To manage this risk, we focused on projecting steel costs ahead using all the sources we have available. Unfortunately, for most of our contracts, we only need to forecast a few months. For longer contracts, we try to get escalation clauses built in to mitigate any risk of rising raw material cost.

At this time, we believe we have been successful on both of these endeavors and we do not see much risk. In tubular products, the challenge is to pass along steel cost increases and higher selling prices. This is dependent on overall market condition. Over the past two months, we have seen prices increase and demand appears strong enough to absorb the overall increase in our raw material cost. Steel supply is often an issue as well in a rising market. As we mentioned earlier, we have a short-term issue with some steel coming in later than we had wanted it. This should be resolved by the end of the first quarter. Longer term, we are comfortable that we will see -- that we will be able to acquire the supply we need as we go through 2008. But at this time, we are watching still carefully, but we do not believe we currently have much exposure.

Thank you. In closing, we are very pleased to report another record year for Northwest Pipe. Even more importantly, the look ahead continues to be positive. We see opportunities in both of our main groups. There are certainly challenges, but the overall market opportunities and our position within our markets indicate another strong year ahead. Timing a bidding activity is of course critical to our performance and is always subject to change. However, the market develops as we currently expect, we will look forward to reporting another record year in 2008. We are excited about the challenges and the opportunities that we see ahead of us. At this time, we will be happy to answer any questions you might have. Dianne, can you start the questions?

Thank you. We will now begin the question and answer session.

(OPERATOR INSTRUCTIONS)

One moment please, while we wait for the first question. [Brent Tillman], your line is now open.

Good morning. Congratulations on the quarter.

Good morning. Thank you.

Can you guys give a sense of what the reduced rent expense contributed to the water transmission margin in the quarter?

I don't recall the number off the top of my head, but obviously, that's been running through the numbers all year long as we compared to prior year numbers, Brent. I am sorry I don't have that number off the top of my head. Let me think for a second. I just -- I don't remember what that number is.

Okay, I can follow up.

I apologize. I can find that.

No problem. And then on the timing of the two new mills, I mean, are you still projecting completion around August, is that still ongoing?

Yes, I think so. We expect the mills, right now, all the components are being put together and they are going to be shipped over to this country for the final assembly in Adelanto, California. We expect them to arrive here probably late second quarter and then we will do the final assembly there and then we will pick the right time to get to do the installation. So it's as least disruptive as possible.

Okay. And I just wanted to confirm. You said that the water transmission mark -- volumes, I am sorry, in the first quarter '08 should be comparable to Q3 '08? Was that -- or Q3 '07, excuse me?

Yes, for a couple of different reasons. One, just the way that timing of jobs lays out. We think it's going to be a little lower in the first quarter and then we do have a few projects where it has taken us a little longer to get steel than we had expected, so those things are going to combine and push us down probably closer to that Q3 number.

Got you, okay. And then, just last for me. Do you have a utilization rate during the quarter for the water transmission?

I don't, but I do have a calculator, so one second. It's always a little bit speculative because of the nature of jobs and so on. So we do this always on an average, but we're probably somewhere in the 80% to 82% range.

Okay, perfect.

And hopefully as you know, we're going to see that, our capacity number continue to expand as we go through here the next several months.

Right, right. Okay, thank you very much.

You are welcome.

Next question comes from Ryan Connors. Your line is now open.

Good morning.

Good morning.

Yes, just a couple of things. Number one, can you expand, Brian, on makeup of that record backlog in terms of is it higher margin stuff? Is it lower margin stuff? Is there a regional focus there, which particular regions are picking up more quickly than others or any color you can give us around that backlog?

I can give you a little bit of help there, Ryan. We typically don't break it down by region in any real detail fashion but as it's almost always true, it's not consistent throughout the country. We do have, I think, a reasonably good backlog in virtually all of our facilities, but in some of them it's much -- on that range recently good, some of them are at the high-end of that range and some of them are at the low-end of that range.

So we don't have any facilities that are really desperate for work at the moment, but we certainly have facilities where we could put some more work in there in a relatively near term. In terms of the overall margins in the backlog, it's -- the pricing in the fourth quarter, let me do it that way, was a little bit better, again, than it was in Q3. So we are seeing a positive pricing trend going forward. Obviously that should translate to a higher margin in the backlog. If in fact you produce projects at exactly the same average rate as you book them, in our case, it's not -- that's not what happened.

And as we mentioned, we have a little bit of a positive project mix in the fourth quarter, so we will see the other side of that in Q1. So the backlog number is a little bit lower because of that we have just been working on some of the better margin projects here in the fourth quarter.

Okay, that's helpful. In terms of the steel issue, I mean, coming out from a bigger picture. Do you, I mean, aside from the potential impact on your margins in any given project, is there a risk that some steel prices stay where they are and continue to go up from here? That some municipalities decide, you know what, given this increase in input cost, were just going to -- put some of these projects on the back burner for now or is that something that would happen or not?

Well, we -- I can't tell you obviously with any certainty what would happen there, but I can relate this to what we have seen in the past. We saw steel go up in 2004 from roughly $280 a ton to about $780 a ton in about an eight-month period. And at that time, we didn't really see any significant falloff in water transmission projects for municipalities. There were certainly some projects that we believe did get postponed, because of that they tended to be more private than municipal projects. Municipal projects get planned for a long time.

In some cases, ten years, 20 years in the planning phase before they start focusing on getting them built. As they get them built, they're building a pipeline that they expect is going to last for 75 to 100 years. So if you think about the change in the steel cost, it becomes a relatively small component in the overall big picture. Put it in another way, steel is about a third of our cost in that business and on a long distance cross country pipeline which is the majority of what we do, the pipeline, as a rule of thumb, costs about $2 for every $1 pipes.

So in another words, the installation cost is about -- equivalent to this -- to the cost of the pipe. So then, you start looking out and say, well steel then is about 16.5% or so out of the total cost of the pipeline to municipal water agency. So if a component of your cost is 16.5% of the total goes up by 50%, it's a big change but it might not be a deal breaker.

Okay, that certainly makes sense. And just kind -- over on the financial side, I mean as the business improves in the second half, in fact, it doesn't improve like you think it will, do you think the Company will be able to generate some leverage on the SG&A line or will that lines increase as the new facilities come on stream and so forth and new people relative to that or will there be leverage there?

Yes. We expect that SG&A will be relatively flat in 2008 and so there will be leverage, so SG&A as a percent of revenue should be coming down over time.

Okay, great. And then, just one final one. You mentioned that net working capital going up a little bit, I know that one of the things that's happen in the past is that as volumes increase, net working capital needs increase and I'm just -- Brian, if you could just give your outlook on -- for free cash flow if in fact the cycle does pick up in the second half, what's the time frame, how long will that net working capital need be elevated and what time frame would that reverse itself?

Yes, I'm going to throw that one to Stephanie, Ryan.

Okay.

Our outlook is that we should be able to pull some cash out of the balance sheet. We've got some pretty long cash cycle times and we see big opportunity to get that cash out of the balance sheet. So our target would be roughly $15 million over the course of the year to be able to improve that.

Okay. That's all very helpful. Thank you, both.

Thank you.

Next question comes from [Alex Ryerson]. Your line is now open.

Thanks for taking my question, guys. I don't mean to go back steel question, but just for the recent rise I had a few more follow-up questions. But the first one is just in the tubular -- in the tubular segment, I know you guys talked about end market demanding very strong. I just am curious, one if you think your -- if using your competitors increase prices as well and to what has happened in the past in that segment with the increase in steel prices?

Well, as a rule -- rule is a tough word, as a rule of thumb, let's go with, as steel cost increased, we are able to pass on those increases to our customer base. There have been some exceptions to that where the market has been weak for the finished goods and you have still strong for steel, and some other components of their markets so steel prices were able to go up and our prices were not. But that's a relatively rare occurrence. Typically, we can pass on these increases. We saw in -- again I'll refer back to 2004, we saw an extraordinary increase in the cost of steel over a short period of time and we were capable of passing on those increases at that time and those were absorbed in the marketplace.

So we feel reasonably confident at this point that we will be able to do that. There are certainly strong evidence out there. Our markets in spite of discussion about a slow in economy, our markets continue to look pretty good for our tubular products, pretty much across the board. And we have seen our competitors increase prices, in fact, just day before yesterday, U.S. Steel announced across the board $150 a ton price increase effective April 1. So we are seeing that those kinds of increases going into effect and we do think we'll be able to do that as well.

Okay. All right, great, that's helpful. And then just on the -- on the water segment just with your fixed priced contracts -- just with steel going up $150 a ton from December to today, how were you able to manage that? It seemed like -- maybe you guys have bid on some contracts with the lower steel price in mind. But you said it wasn't going to be an issue. I'm just trying to connect those two points.

Yes. I mean, the key is being careful and profitable about how you did those jobs and take into account all the informations available in the market, forecast where you think the steel price is going to be. If you do that successfully then even though steel price rises, you've already incorporated that into your bid.

And you -- okay. And you guys, I mean going forward, assume -- your assumption is that steel is going up $700 a ton going forward. Are you guys --

We believe it is still going up from here. And part of this, that's an important piece, is for the most part, we only have to forecast ahead a couple of months, I think, Stephanie referred to that, that when we get an order, typically we will buy steel for that order within three months after we put our final bid in.

Right.

So it's not a real long-term forecast. When we do get to some long term projects, then it's a little bit different. And then, we try to get escalation cost is built into some of those longer term contracts and we've been generally successful in doing that.

Okay. All right, that's helpful. And just one final question. Have you guys seen an increase in Chinese imports just in your products at all over the last few months?

Are you referring to steel or finished goods?

Finished goods.

No, not -- nothing substantial. I would say, no. There is --

Okay. I'm just curious if there have been -- manufacturing [issues] over there and exporting it to get around the regulations?

Well, there was a trade case that was found in favor of the U.S. and against China that was -- boy, I think, it was in January when they made the decision that applied a roughly a 16% countervailing duty for Chinese tubular goods. And that has not gone into effect yet. I think the date has been delayed. So now the final hearing is going to be in May. We certainly saw that reduce the impact of Chinese goods in the U.S.

Okay. Okay, well, great. Well, thanks a lot guys and congratulations on the great quarter.

Thank you.

All right. Bye-bye.

(OPERATOR INSTRUCTIONS)

I show no further questions at this time.

Okay, if there are no further questions, then this will conclude our conference call.

Excuse me. Two questions just popped up.

I don't know, it's too late. Isn't it? No, okay.

One moment please. It's now open.

Hello?

Yes, you are on.

Hi, I'm sorry. I was wondering if there was an update on the Las Vegas project if the timing was still intact that you were thinking.

Last Vegas, we -- there's a couple of events going on, I believe in terms of their time frame. First, they are putting together their specifications for the project. I think they have an engineering firm that's providing that to the agency. We understand the agency has the engineering firm's recommendations and are reviewing them. They are then going to put those out for us and other bidders to look at. We expect that to happen within the next few weeks, maybe -- certainly within the next month.

That's probably a little bit later than we'd expected it previously, but nothing that's too surprising. After that is done or after that comes out, there will be a review of that on comments we made back and we may make another revision before they ultimately bid the project. Our understanding at this point is they are planning on bidding a 100 mile section of the pipeline. And we don't have any bid dates scheduled for that at this point in time.

Any idea what the estimated dollar value of that would be then?

Well, that's going to depend on what people bid on and we are not going to talk about that.

Okay. So as far as getting derailed by protest from, I guess, some of the local interest and environmentalists, that's -- that doesn't appear to be an issue at this point?

Well, a project like this attracts a tremendous amount of attention and until it's done, it's not done. They obviously have things that they have to -- they have to deal with and overcome, final design, final right away. Dealing with any protest could be -- could be on that list as well. So there is a lot of things that they have to do to move us along. But we continue to believe that they've got the wherewithal to make it happen.

Okay. And then, your comments on pricing on water transmission being better in Q4. Was that broadly across the entire nation or was that more specific to certain regions?

It's -- pricing is a little bit difficult in the water transmission business because there's no such thing as a price list. Each one of these projects is a custom designed project. So when we talk about pricing, what we typically do is we will group together all the activity for a quarter and look at how those average prices worked out. So it's essentially across the universe of bids during a quarter.

Okay, great. Thanks, nice quarter.

Thank you.

And our last question comes from [Shirad Patel]. Your line is now open.

Good morning, Brian.

Good morning.

Just one quick housekeeping item here. What were you guys anticipating for a tax rate for the first quarter of 2008?

We expect that we'll be roughly in 36% to 37% range.

Okay. And then, do you have a CapEx target for 2008?

I think in 2008, probably $15 million to $18 million is the target.

Thanks a lot and I guess some following on the Las Vegas. Do you guys have additional updates for projects that you're seeing in the Texas region?

No. I don't think we have any specific updates. There's several projects in Texas and several of them are quite large that are moving through their system. But I don't think we have any specific updates on any of those.

All right, thanks. Good quarter guys.

Thank you.

And we do have a question from Andrew Nevadomski. Your line is now open.

Hey guys, how are you?

Good, how are you?

I'm doing well, thank you. Just want to get a little more color on the tubular side of things. I guess, you are looking for the revenue to improve in Q1 versus Q4, is that correct?

Yes.

But not necessarily to $25 million quarter range that we saw the first few quarters of last year.

Yes, we have. We didn't get terribly specific, but we think it would be up quite a bit from where it was in Q4.

Okay. And if you could be looking at the similar run rate and start to see some nice growth by Q2 and into Q3 from what you've seen last year.

Again, we didn't get very specific with those numbers. We think, overall for the year, we certainly expect to see tubular products grow. I would say, as a rule, we would expect to think of Q2 as being higher than Q1 in the tubular products group. Q3 probably being up there and Q4 drops off a little bit. That's generally the pattern.

Okay. Just a normal seasonality in Q4 and then, but looking out a couple of years, where do you think this business can be?

The target for this business is to get into $150 million in the next three years.

Okay. And that's mostly driven on the energy side of the business or do you see a lot of opportunities -- any other areas, the tubular side?

I think energy will be a big component of that. But I think, there are other opportunities as well.

Okay. And then, on the margin side, I guess similar question. I mean, it sounds like you expect gross margins a lot better in Q1, but maybe not quite to that double-digit range in Q1, but certainly as the revenue improves in Q2 and Q3, that's more when we should expect to see the margins back in the double-digit range?

Yes. I think we'll see it move up in -- over the first two quarters we'll see a recovery in that margin and the long-term objective has been for quite sometime in the last few years to get that margin into the double-digit range and keep it there. And we've done that successfully with the exception of this fourth quarter of 2007. I think we will see it back at that level. It certainly hit that level for the year of 2007. We should see it at that level or maybe a little bit above that in 2008.

Okay, great. Thank you. Good luck.

Thank you.

I show no more questions.

Are you sure?

Yes.

Okay. Well, thank you very much for your interest. This will conclude our conference call.

That concludes today's conference. Thank you for participating. You may disconnect at this time.