NWPX Infrastructure Inc (NWPX) 2008 Q2 法說會逐字稿

Welcome, and thank you for standing by for today's conference call. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now I'll turn the meeting over to your President and CEO, Mr. Brian Dunham. Sir, you may begin.

Thank you, Christy. Welcome to Northwest Pipe's conference call and announcement of earnings for the second quarter of 2008. My name is Brian Dunham. I am the President and CEO of the Company, and I am joined by Stephanie Welty, 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 second quarter of 2008, we generated $112.1 million in revenue, $8.4 million in net income, and $0.90 per diluted share. For 2008 year-to-date, we generated $206.1 million in revenue, $13.4 million in net income, and $1.44 per diluted share.

With respect to Water Transmission, sales were $74.9 million for the quarter, compared to $73.0 million in the second quarter of 2007. Gross profit was $14.8 million for the quarter, or 19.7% of revenue, compared to $15.2 million, or 20.8% of revenue, for the second quarter last year.

We expect the combination of a record backlog and strong third quarter bookings will drive a strong second half.

Gross margin was somewhat lower during the quarter, largely due to the effect of higher steel costs. As you know, steel is our primary raw material, and the cost of steel has increased dramatically. While we are able to include these higher costs in our sales contracts, there have been some slight margin compression because an equal increase in both costs and revenues will result in the same margin dollars with a lower gross margin percentage.

In the Tubular Products group, sales were $37.2 million in the second quarter of 2008, up from $28.9 million in the second quarter of 2007 and $30.1 million in the first quarter of 2008. As expected, we have seen a significant increase in the sales of energy products, and continued strength and demand for fire protection sprinkler pipes and agricultural products.

Sales growth is a function of both increased prices and higher levels of production. Gross profit for this group in the second quarter was $9.8 million, compared to $3.6 million last year. Gross profit as a percent of revenue was 26.4% in the quarter, significantly higher than the 12.5% reported in the second quarter of 2007.

By staying close to the market and responding quickly to changes, our managers were able to reflect the increasing costs in our selling prices. In addition to pricing improvements, we saw production volume increases over the prior year.

With respect to selling, general and administrative costs, the SG&A for the Company was $9.3 million in the second quarter of 2008, compared to $8 million in the second quarter of 2007 and $8 million in the first quarter of 2008. SG&A was 8.3% of revenue in the second quarter, compared to 7.8% in the second quarter of 2007 and 8.5% in the first quarter of 2008.

The drivers for the increase in SG&A over the first quarter of 2008 include additional accruals for employee bonuses, the cost of preparing the annual report and proxy, costs associated with the move of the headquarters to Vancouver, Washington, and preliminary costs associated with moving a mill from Portland to the new plant in Houston, a project that we announced earlier in the quarter.

We expect SG&A in the third quarter to be roughly flat to the second quarter due to additional variable compensation costs. SG&A in the fourth quarter will be somewhat less, but not back to the level seen in the first quarter.

Interest expense was $1.3 million for the second quarter of 2008, compared to $1.8 million for the second quarter of 2007. The reduction is largely due to the reduction in our interest rates over the last 12 months, as well as lower principle balance on our long-term notes.

In the second half of 2008, we expect our interest expense to grow only moderately. We expect higher steel costs and increasing volumes to drive working capital requirements up. Strong cash flow in the second quarter, however, will offset this trend.

After adjusting for taxes, we reported net income of $8.4 million, compared to $5.7 million in the second quarter of 2007. The increased tax rate in the quarter was due to the accrual of approximately $400,000 in contingent liability relating to an IRS audit. We expect the tax rate to return to approximately 36% to 38% in the third quarter.

The net income per diluted share in the second quarter of 2008 was $0.90 on 9.3 million shares, compared to $0.61 per diluted share on 9.2 million shares in the second quarter of 2007.

Cash from operations was $4.8 million. Accounts receivable grew $28.8 million as a result of significant increases in billing activity in the quarter. We expect to collect those receivables over the next 30 to 45 days, which should result in increased cash flow from operations and provide an offset to pressure from increasing prices and volume through the second half.

Depreciation and amortization expense was $1.3 million. CapEx was $6.4 million. Excluding the cost of the new facility in Houston, we expect CapEx for the year to be between $15 million and $20 million. Working capital was $198 million at the end of June, compared to $192.2 million at the end of March and $181.5 million at the end of December 2007. Management has been focusing on reducing the cash cycle. We do expect to see the benefits of that effort over the remainder of the year.

And that's it, Brian. Next to you.

Thank you. As we look ahead to the rest of the year, we continue to have high expectations. We ended the second quarter with a record backlog of $264 million. With this backlog, which is primarily for the Water Transmission group, and our current manufacturing schedule, we are expecting somewhat higher revenues in this group in the second half of the year.

We also expect healthy bookings in the third quarter, which should help us maintain a strong backlog through September before dropping off some by the end of the year, based on the timing of market activity.

As mentioned earlier, margins in the Water Transmission group were softer in the second quarter compared to the first quarter. While pricing has held up well, our costs have gone up dramatically with the cost of steel and, to a lesser degree, with higher transportation costs.

We have been very effective in anticipating these higher costs and building them into our fixed-price contracts. However, as Stephanie explained, even as we offset these costs, we see our gross margin percentages decline as both our costs and revenues are increasing at about the same rate.

As we look ahead, we see potential to improve margins yet this year. We expect a little more volume, and that will help leverage against fixed costs. And we expect a little better mix of projects in the second half, as well.

As we have previously announced, we have two mills under construction for the Water Transmission group. We expect to install one of these mills in our Adelanto, California facility beginning late in the third quarter and extending into Q4. We are planning for this and hope to avoid any significant disruption, but we believe this activity combined with the typical risk of bad weather conditions in Q4 will likely mean that Q4 revenues will not be as high as Q3 in the Water Transmission group.

In our discussion of the Tubular Products group during the last conference call, we said that if we were able to continue raising prices to offset increased costs, we would see margin expansion. Obviously, the demand was high enough to allow us to increase prices and grow margins in our Tubular Products group in the second quarter. Importantly, both pricing and volume have increased in 2008.

As we move into the third quarter, demand is still strong, and we expect higher revenues. Several of our products reflect some seasonality, with Q2 and Q3 typically being the strongest, and we expect this pattern to be in effect in 2008, so the fourth quarter will likely be down some from both Q2 and Q3.

At this time, we expect steel and fuel costs to stay at high levels, but not to increase significantly over the current levels. Given this expectation, it is unlikely that we will generate margins as high in the third quarter as we did in the second quarter. However, we believe we will see strong margin performance in Tubular Products in both Q3 and Q4. This assumes that the overall economy -- or more specifically, agriculture, non-residential construction and energy markets -- sustain their current levels of activity. Declines in these markets could certainly result in lower volume and/or lower pricing.

In closing, the second quarter was a record in terms of revenues, earnings and backlog. It is exciting to see the opportunities we have in front of us and to begin capturing those opportunities. As we look forward, we see even greater opportunity. In spite of economic uncertainty and volatility, we continue to see high demand in both of our groups and in most of our product lines. The Tubular Products group has been able to thrive in the current environment, and the Water Transmission group is performing well and will have a strong year.

We continue to be excited by the challenges and opportunities that we see ahead of us, and we continue to expect another record year in 2008.

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

Thank you. We will now begin the question-and-answer portion of today's conference call. (OPERATOR INSTRUCTIONS). Our first question comes from Ryan Connors. Your line is open.

Good morning, and congratulations, Brian and Stephanie, to you and your colleagues on your success.

Thank you.

Thanks.

I guess, Brian, you made some comments about the Tubular margins, but I guess if we could just sort of drill down on that a little bit. Obviously, you know, 26% I think was the gross margin. That's, you know, unprecedented, I think, in that business, where it's usually low teens, I guess, so really just trying to get a better handle around how sustainable that is. In particular, I mean, was there anything going on in the quarter from an inventory perspective that didn't cause that but contributed to that in terms of, you know, lower cost steel rolling through the P&L or anything of that nature?

Well, I think all of that, obviously, always contributes. I don't think it was extraordinary in this case. In other words, we didn't have an extraordinary amount of inventory at the beginning of the quarter that we flushed through. But, certainly if we are doing an effective job of monitoring the price increases in steel and those increases are flowing through the market, you have an opportunity to have some gains on inventory that you have on hand.

So as you look forward and you see prices moderate, as I said, I think it'd be unrealistic to think we're going to replicate or improve upon that particular margin number, the percentage, as we go forward. But we do think volume's going to continue to be strong, and we do think we'll continue to see pretty good margins in the second half of the year.

Okay, that's great. And then, I guess just kind of from a bigger picture perspective then on that Tubular Products business, you've talked in the past about a margin goal for that segment being somewhere in the mid-teens. Can you just kind of reset us on your long-term thinking in terms of that business unit? You know, is that sort of still the long-term run-rate type of goal, or does this kind of change your thinking at all in terms of improving your outlook there?

I think there are some things that have happened, Ryan, that may change that outlook, and I — rather than try and give you a new target, let me just enumerate a couple of things. Obviously, the ITC ruling on Chinese product has an impact. There's a lot of product that was coming in from China that is not coming in anymore, and won't for some time, and I think that's going to have an impact long-term on prices of a certain segment of our business.

It's not having much of an impact so far because we're really not focused on that segment right now, and that's because of another change that has happened. The energy market of course is very strong, and we're really focusing most of our available capacity into the line-pipe arena, where we've always had a--where we've had a presence for the last few years. But that market is very, very strong right now, so we have energy going very strong.

As we move into the new facility in Houston, we're going to get more into the OCTG end of energy, so that can be a little bit different market opportunity as well. And then on some of the standard pipe products, we have this change in China. And all of those things I think contribute to the possibility of higher targets in the long run.

Okay, that's very helpful, Brian. And then just a couple of questions on the Water Transmission side. You know, you release only--details on only contracts that are over $5 million in terms of your press releases, so I think we can get a pretty good track on that high end of the market. But I wonder if you can just give us some color, even just kind of qualitatively, on what kinds of trends you're seeing in the projects below that $5 million threshold. Are you seeing that part of the market improve as well?

Sure. In general terms, and as we've said before, Ryan, we do believe that 2008 will be our best year ever for the total market opportunity that we can address. We certainly have seen some projects slip, which is common. And at this point, I'd say the second half of the year is probably going to look about like the first half in terms of the overall market opportunity. It's going to be a little stronger in Q3 we think than in Q4, which, again, is not unusual.

So we're anticipating a pretty good bookings quarter in Q3, and probably dropping off a little bit in Q4. And that's not problematic for us really because the backlog's strong enough that we can manage our business quite some distance ahead. And we do expect 2009, again, to be a very strong year coming up.

So the market is developing, I'd say, generally as we thought it would develop. It may be just slightly stronger in the first half than we thought, particularly in Q2, and maybe it'll be a little bit weaker in the second half than we thought, but we don't see anything there that we think is a troubling trend. We just think that's the typical timing issues that we see.

Okay. Okay. And then just one last one, then. You mentioned transportation costs, Brian. Obviously, energy prices are up and that rises your shipping cost. I know that--I'm wondering whether that impacts how competitive you can be on some of the projects that are, you know, far removed--you know, distant from your production facilities and whether that sort of tightens the radius within which your respective facilities are competitive. Is that a dynamic in pricing that takes place?

Yes, it certainly does have an impact. And as we've talked before--and maybe not everyone's aware, but transportation costs can be a very significant part of the--particularly talking about the Water Transmission business. 7%, 10% is not uncommon of the total cost to be involved in transporting the pipe to the jobsite. And so as those costs go up, it does, first of all, put some pressure on your margins if you didn't anticipate it, and we've talked about that in the past. We typically have fixed-price contracts, so we have to be very careful with a rising cost environment to anticipate and get those costs into our contracts. And we've been doing a pretty good job at that, but that's certainly a risk factor to start with.

And secondly, your overall cost of projects is going up because of higher transportation, and so as a rule, it's going to make you more competitive on projects that are closer to home than those that are further away. Now, from our particular standpoint, because we have plants spread out through the country, we think that that probably gives us an opportunity rather than a risk, but it obviously depends on the specific jobs that are out there.

Jobs that are bid in the San Francisco Bay area, where our largest competitor has a plant -- obviously, they have a bigger advantage today than they did a year ago because of higher transportation costs. The good news for us is there are a lot of jobs bidding around the country where we're actually closer.

Okay, that's great. Thanks for all the detail this morning.

You're welcome.

Our next question comes from Scott Graham. Your line is open.

Yes, good morning. I'm a newcomer to this story. Got a couple of questions for you. I noticed, obviously, the previous question about the operating margin in the Tubular business. Obviously, well above the past trend. Now, when you guys say that you think second-half margins in that business are going to be strong, I'm just maybe kind of hoping maybe for modeling or other purposes, you can maybe give a little bit more granularity on that. Strong defined as something in the upper teens range, your long-term goal, or something north of a low double-digit level, which has been your historical?

Yes, I think we're going to see a really pretty good quarter in Q3, where the numbers--as I said, I think it's unrealistic to expect you're going to see the same result as you did in Q2, but I think it's going to be a pretty strong quarter in Q3. I think it'll be between the--I think it'll probably be in the high teens to low 20s, somewhere in that range. And it may drop off a little from there in Q4.

The manufacturing costs are in pretty good shape. As volume slows down a little bit, our costs go up a little bit, and obviously that has an impact. But the biggest driver is going to be what's happening in the market, and right now we're seeing pretty strong market conditions in the three areas that really are driving our business today, and those are energy, non-residential construction and agriculture.

And if you look at that and try to figure out where those overall markets are going to be, ag might be close to a top right now. Non-residential construction I think people assume is going to go down, and we do too. However, we do think that we are gaining some market share in that, so that offsets some of that weakness in the overall market. And energy looks like it's going to continue to be very strong. So if those conditions continue, with construction coming down a little, ag kind of topping but staying relatively steady and energy being very strong, we should have pretty good results in the second half of the year.

Again, Q4 probably won't be quite as good as Q3. Q3 probably won't be quite as good as Q2, at least in margin, but we're actually hoping to see some growth in revenues in Q3--small growth.

Thank you. Now--.

I defined strong by saying "strong" I think three times.

Right. Yeah. Thanks, that was good clarity. The other question I had was regarding the Las Vegas project. I'm hoping that you might be able to just give us an update on kind of where that stands, how you're going to address capacity there. I might have a follow up on that, but maybe just give you the floor.

I wouldn't be a bit surprised if there was a follow up on Las Vegas. That project we believe is not going to bid in 2008, and we've been saying for the last few months, probably since our last conference call, there are some things that had to happen that just continue to not happen, so it became clearer and clearer that it was not going to bid in '08. At the moment, I think our best guess--and I'm using "guess," I think, as it's defined--is probably the third quarter of 2009.

The job--we don't know exactly yet what increments that job is going to bid in. We do think it will be broken into different pieces. They won't bid the whole thing as one project. They'll break it down. But whether that'll be three pieces or five pieces or eight, we really don't know a whole lot of other details about it at this point in time.

In terms of how we'll address it, we have been working to grow our capacity, both with some capital expenditures--and I mentioned the two new mills, and that's clearly a part of that--and also with process change, and we're continuing to work through that. Our target has been to get to a capacity level of $440 million by the end of September, and I think we're close to that target.

We've actually moved off the installation of one of those mills basically because of job requirements, so we won't have it in by the end of September. But on the other hand, at the same time, we know that Las Vegas has moved out, so we're not quite as--we're not really concerned about it.

So we think we're on target to increase our capacity so we can address major projects like Las Vegas, and there are others out there as well. And we just have to wait and see when that thing actually comes to bid.

So your capacity planning here obviously has to be-- will be modified as we go along, and you get more visibility on how these pieces break up. But for example, I think you have a Utah, plant--correct me if I'm wrong?

Correct.

And is that where you're talking about you're eyeing more capacity? And if, in fact, this pipeline maybe runs a portion of it through or near that facility, will that facility be able to service it? Will you need another facility, do you think? How do you think that's going to shake out ultimately?

We don't believe that we'll need another facility to serve that project. One of these two mills that's coming in is going to be installed in our Adelanto, California plant, which is probably the closest facility to the southern end of that pipeline. So we're going to beef up that capacity there. The other mill, we have not determined where we're going to put it yet. We're going to wait and make that decision as the market opportunities become more clear.

So we think we'll be fine in terms of capacity and will not require a complete new facility to meet that demand. However, Las Vegas has said that they are--one of the specifications that they're considering is that they would require a portion of that job at least to be built at a facility located in the state of Nevada.

Right. That's what I assumed as well. That's helpful. Thank you. Here's my last question. The backlog, which was--really kind of jumped up this quarter, is there a whole bunch of sort of maybe in factories waiting for shipment where the backlog was that high, or this just a real good balance of bookings and sort of spread? I know you've got good visibility you think on the second half of the year. Is that more of a backlog issue where you just didn't get some stuff out the door or -- maybe just a little bit more color on the backlog.

Well, I think Stephanie would always say we stack up too much in our plants. But no, I think it's just a generally good mix. One of the things, as you look into Northwest Pipe, we are defined by the American Institute of Certified Public Accountants as a contractor--construction contractor, and so we're required to use what's called (technical difficulty) accounting, which means basically we recognize revenue as we incur the costs. So the shipment date is not really the driver. It's when it's built that's the driver.

And I would say that the production flow through our facilities was pretty good in Q2. It was not perfect. It was not a perfect quarter by any means. There are some things that we can do to improve, but there was no-- there wasn't a backup of things there that caused the backlog to go up. It was truly new orders that were booked during the period.

And is the pricing in the backlog at parity with materials inflation, or are you behind? Are you ahead?

Yeah, the challenge in the Water Transmission business is that we do work off of generally fixed-price contracts, so we have to anticipate what we think those costs will be when we actually order the material in order to get them into our bid and get them into the contract. And that is a challenge when prices are going up. I think we've done a very good job of responding to that challenge, but at this point I would say, with very few exceptions, I think we're in pretty good shape in terms of getting those prices in the contracts.

Thank you very much.

You're welcome.

Our next question comes from Brent Thielman. Your line is open.

Good morning. Congratulations on a great quarter.

Good morning. Thank you.

On the Water Transmission segment and sort of just given some of the comments in the press release relative to margins, it sounds like they're sort of going to approximate where we were here in the second quarter. What's the big driver of that going forward? I mean, is it a bunch of the material costs, production schedules? Just what's the bigger influence there for maybe not seeing potentially more margin expansion?

Well, the margin--and this kind of gets back to what we were just talking about. In 2004, which is the last time we really saw this rapid run-up in steel costs, we kind of went through the math, and the math at that time was, for about every $100 that steel increased, you'd see about a point decline in margin, even if we passed it on to our customers dollar for dollar. Because your costs go up, your revenue goes up at the same level, and so obviously the denominator is bigger and so you show a lower margin.

Today, the math is about $150 a ton, so for every $150 a ton that steel goes up, if we pass that $150 along dollar for dollar in our contract or get it included in our contract, we'll see the margin come down about a point from where it would have been if steel had not started to run up. And today, steel is about $1,100 a ton. The base at the beginning of the year was about $600 a ton, so we're up about $500.

Okay.

So that's really accounting for most of that. Now, not all of that is in in Q2. We also--you know, as I said, it wasn't a perfect quarter. We had a couple of manufacturing issues that reduced the margin a little bit as well. But what that means is in Q3 we'll see a little bit more of that effect hit. However, we think in Q3 some increased volume plus just a little bit better pricing on some of the projects we'll be doing in Q3 could offset that, and we expect to see margins at this level or maybe even a little bit higher in Q3, even with a little bit more of a dilutive effect, if you will, because of higher steel costs in the projects.

Okay. Okay. And Brian, I'd be interested in your take on just how you think, you know, sort of--obviously, I'm sure prices for pipe are going up pretty significantly--how the market's sort of accepting that, particularly in the Water side right now.

Well, I think it's accepting--the market's accepting the price increases pretty well as you get into Water Transmission pipe, and part of that is the dilutive effect, obviously, of all the other costs that are involved. You know, steel for us is about a third of our cost, or maybe a quarter if you look at it in terms of our selling price. I haven't got that exact number, but let's say a quarter. So if an agency is buying pipe from us, only about 25% of the cost is steel.

And then, the agency obviously is not buying pipe. They're buying a pipeline that's got to be installed, and a basic pipeline rule of thumb is there's about $1 for installation cost for every $1 there is of pipe, so that means steel is now only about 12.5% of the cost of a project. So when steel goes up as dramatically as it does, there's a dilutive effect against that in terms of the total amount of the project itself. It's still significant, but not like if you just look at the steel number where steel is virtually double.

So that's part of it. And then, of course, they obviously build these things for a--to last for a very long period of time. So you start looking at the delta in cost on an annual basis or you start looking at the delta in cost in terms of the water rates they have to raise to pay for it, and it becomes a little bit less significant than it seems like on the surface. So I think that's part of the issue why it's being so well accepted.

Now, if you get on the other side, in tubular products, it's a little bit tougher because steel is a much bigger percentage of those costs, and there you're really looking at those market conditions. Is the market strong enough for our customers to pass those increases on to their customers, to the end user? And so far, that's been going pretty well in most of our product lines.

We do some piling, as you know, and piling appears to be slowing down. Now, whether that's economic considerations just in terms of construction or it's cost considerations, I'm not sure we could say yet, but certainly you see some products like that starting to slow down.

Okay, that's very helpful. And then--and I apologize if I missed this. I think you might have mentioned it, but the timing of the two new large-diameter mills--is that still on schedule?

Yes, because we revise the schedule every time it slips, so--.

Yes.

It looks like it's always on schedule. No, we were really looking at that for the last several months at least, looking at probably mid Q3. We're now thinking end of Q3 and moving into Q4. And we're really--we're kind of modifying that as we go, partially to fit with what we see as our manufacturing demands, as well.

Okay. But you did still expect it to be sort of online next year?

Yeah, we're very comfortable with that. Yes.

Okay. And then on the Tubular Products side, you've got the new mill you're working on in Houston. When do you expect you could get sort of the certification for that new mill? I guess--I think it's the API certification for that.

That's a good question. I don't know the exact timing, but there is a lead-time associated with that. And there are certain products that we will not be able to produce without that certification.

Okay.

And I can't--it's not years and years, Brent. It's relatively short, but there is some amount of lead-time with that.

Okay. And then lastly, and I guess I'm just sort of bouncing around here, but back to the Water Transmission business. I mean, as we got out of Q1, I think we sort of had expectations of seeing significant revenue growth in the second half for the Water business, and now it sounds like it's sort of somewhat better in terms of revenue growth, you know, and I'm assuming this is relative to the first half. Just some clarity there on your expectations, I guess. Is your outlook a little bit more tempered for that business in terms of revenue contributions, or what really drives that?

It's a little bit more tempered because--for a couple of reasons. One, as I said, [installing] that mill in Adelanto, you know, we're planning for it, we're trying to modify our production around it, but obviously there's always a risk of some disruption. Well, some disruption is almost guaranteed. There's a risk of more disruption than we anticipate. And of course, that's our largest volume plant, so a couple of million dollars there is not unreasonable.

And then, also, Q4 is always subject to weather issues and those types of disruptions, so we usually try to talk people down a little bit on Q4.

But we need to be in the 70s and, in terms of revenue in the quarter, we are nicely there this quarter. Hopefully we'll be there again as we go forward in Q3, and it'll probably drop off a little bit in Q4. That'll still be stronger I think in the second half than in the first half.

Sure, sure. Okay, very good. And congratulations again.

Thank you.

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

Hey, guys, congratulations. Outstanding quarter.

Thank you.

My questions have been answered, Brian. Thank you for the detail. Sure do appreciate it.

Oh. My pleasure.

Our next question comes from [Matt Sherwood]. Your line is open.

Hi, guys. Again, great quarter. I just had a quick question on the Tubular margins. I know you've spent some time on that, but what I was just trying to understand is, if you look at the costs of goods sold, they're up about 8% year on year, and we know how much steel prices are up year on year, so would you say that the units in that segment were down?

No, I think the units are up.

Okay. So can you walk me through the math on how--?

Are you looking at quarter or year-to-date?

So I'm looking at this quarter's costs of goods sold in the Tubular segment.

Yeah, in this quarter units are up not a significant amount. Units are up probably 15% or so year-over-year--or for the six months, but they're up a little bit in the quarter.

So with-- on the last call you said steel prices are about 80% of your costs in Tubular.

Uh-huh. It varies by product line, so mix is always a potential issue if you're trying to do that kind of an analysis.

Okay. So you're saying it's just that you had better--a lower cost, higher price mix, like a higher margin mix?

Yes. And I'd have to dive into it if you want to get into understanding that a little bit better because I just don't have it in front of me. But we could certainly talk about that. But overall, volume was up the first half, like I said, probably about 15%. Volume in Q2 was up single digits, but it was up in Q2 as well. We had a very strong second quarter last year in terms of overall volume.

Yes.

Probably the best we've had in quite some time, so we're still up a little bit over that. And then, of course, pricing makes up the bulk of the difference.

Yes.

But obviously there's going to be some mix in there too.

Okay, that's great. Then I just had a quick question, the--just a housekeeping question for my model. The receivables were up a bunch. Do you know what drove that?

We had just some extraordinary billing volume. Because we are a construction/accounting house, we recognize revenue as the work is completed, but we don't usually bill until later down the line. And so, we earn revenues on a pretty steady stream, and we do sometimes have stronger billing periods than others. And we just hit the timing such that we had a lot of billing. So what really happens is the charge is moved from unbilled revenue previously recognized to billings. And so, it's a good indication of future cash flow.

Yeah, it's great. Yeah, so you should have a--and those receivables are with municipalities or with construction companies?

Typically with the construction companies.

Yes. And of course, there are also receivables in the Tubular Products business as well, but, yeah, the Water Transmission--our customer is typically a construction company.

All right. Well, great quarter. Keep it up.

Thank you.

Our next question comes from Scott Graham. Your line is open.

Hi. I'm sorry, I just have a couple of follow-up questions.

Sure.

Okay. First one is back on Las Vegas. Now, if some of this pipeline ends up spewing over into Nevada, doesn't that require you to put some capital spending, some capacity there as well?

You're talking about the major Las Vegas project, the Southern Nevada project

Right.

Yes. Their final specs, of course, are not out, but in the preliminary specs they have included language about having at least part of the pipeline built at a plant in Nevada.

Right. So would that make this award--or let's say a portion of this award--still attractive for you?

We won't know until we evaluate the final specifications what our level of interest is in that project.

Gotcha. That's fair.

And that may not--you know, that--like I said, if their current--if our current expectation is correct and they're going to bid that in the maybe late second quarter--or excuse me, in the third quarter of next year, it'll be quite some time before we'll probably see the final specifications come out.

Okay. Then the second thing is that with the new mill capacity in California, worst-case scenario--what if you get none of the pieces of this project? Is that mill still supportable with bookings elsewhere?

Well, we're going to get none of it this year because, obviously, they're not bidding it this year, and I think we're going to have a pretty good year. The overall market is very strong. It's obviously much stronger with the Vegas project included in it, but the overall market opportunities are very strong, and we think they're going to be very strong. So if we don't get that job, that means one of our competitors must get it, and it'll tie up their capacity and leave some more room for us on some other work.

Excellent. Thanks very much.

You bet.

Our next question comes from [Craig Patel]. Your line is open. Sorry, I probably said that wrong.

You did. [Chiraq].

Chiraq. I'm sorry.

He's still not there.

Mr. Chiraq?

Hi, sorry about that, guys.

There he is.

There we go. Yeah, with Bob traveling, I thought I might just jump in here for a minute. In regard to the Monterey facility, can you speak to how much of the work being done there is related to just water in general versus the propane stuff? And then, also, how much of that contributed to Water Transmission revenues?

Yes, I can speak to it. I'm not sure I can give you a very good answer. I don't have that breakdown in front of me. We're still doing both there, Chiraq.

Uh-huh.

So we see both propane tanks and water transmission fitting down there. I think the numbers are relatively light still this quarter, and hopefully we'll see that start increasing here very soon. But I think it's still a pretty small amount--$2 million, $3 million probably of water transmission fittings.

Excellent. Thanks for the clarity.

You're welcome.

Our next question comes from Arieh Coll. Your line is open.

Thank you. I always wanted to be a mermaid, so thank you for the Ariel.

I've got an image in my mind now that I'm going to have to work to get out.

Yeah, I'm a pretty boy. So, this question is for Stephanie. I've been listening to the questions from your buy side and sell side audience, and it seems clear to me that there's not a good understanding of how steel prices impact your income statement. I know it's a little complicated, but could you just make an attempt to explain how a rising steel price environment is actually very beneficial to your company? Because earlier comments suggested would make someone walk away saying that steel prices actually hurt your business when they rise, but in fact they actually help your profitability. And maybe by chatting maybe about your--the type of accounting you have, it might help people better appreciate how the environment we're in actually is excellent because you have rising steel prices as well as a very strong, robust demand for your products.

Yes. The way that the steel prices operate in the two groups are rather different. The biggest positive impact comes in the Tubular group. The primary driver for the positive impact is the fact that we are able to sell the product at a price in effect at the time of shipment. So someone alluded earlier to the question of how much was this an inventory impact. Well, to the extent you've got raw coil on hand, raw steel on hand or work in process that was acquired at lower steel prices and you're selling at a perfect--in a price in effect at the time of sale, you can see improving margins in rising prices. That's just the mechanics of the way that industry operates.

The issue is that we have to be careful about managing inventory as we hit the top, so the big challenge will come as prices come back down. And still, the prices are the prices in effect at the time of shipment, and so we want to make sure we've got a minimal amount of inventory on hand when that happens. So, you know, we're just working with the mechanics of the market overall, and it's a classic demand and supply issue.

Okay. Thank you.

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

Hey, guys, I had a follow up. Brian, on the Nevada project, is there a particular reason behind the delay? You know, I'm kind of thinking is this engineering related to some design plans, or is it any way tied to bond sales out there?

Well, it's hard to know what all the issues are. There's a lot of different pieces that have to be put together. They have to get approvals from a variety of different federal agencies, some of which they have, some of which they don't have. They have to get approvals for withdrawing the water, which has to go through almost a trial process in different basins in the state of Nevada, some of which they've done at least preliminarily and some of which have more to go. And some of those are fairly controversial with, obviously, the people who see that as being detrimental to their particular area that they live in or their lifestyle, so there's a lot of issues involved there.

They have to fund the project. They have a lot of funding capacity and a lot of cash on hand, but they have to figure out is specifically how they're going to fund these particular projects. And if they're doing bond sales for that, obviously they've got to go through that process as well. So there's a lot of different moving pieces to put a project together that's of this size. And I can't tell you that any one of those is the specific reason for the schedule that they have out there today as compared to what they had out there six months ago.

Okay. Great. And then with this project not included in the outlook for your strong bookings here over the next few months, can you kind of point us in the direction of, you know, certain projects that would stick out that would kind of indicate to us what's driving the market?

No, I don't think we're going to go through a listing of specific projects, but there's a significant number of projects out there. As I said, we think for the year it's going to be probably the best year we've ever seen. Most of those projects--by far, the vast majority of those projects are small projects. And again, our--and people miss this fact as we focus on the big ones, but our average project size is still only about $1.5 million in size, so most of these you will never hear of. There are several that are more than that. There will certainly be several opportunities for projects that we announce, and we announce all those over $5 million, but we're not going to go through and detail those out at this time.

Okay, sure. All right. Guys, thanks again, and congratulations.

You're welcome.

(OPERATOR INSTRUCTIONS). Okay, Mr. Dunham, I'm not showing any further questions at this time.

Okay. Well, that will conclude our conference call. Thank you for attending and for your interest in Northwest Pipe. Thank you.

Again, thank you for your participation in today's conference call. You may disconnect your lines at this time.