NWPX Infrastructure Inc (NWPX) 2008 Q3 法說會逐字稿

Welcome to the third quarter 2008 earnings release 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 will turn the call over to Mr. Brian Dunham, President and CEO of Northwest Pipe Company. Sir, you may begin.

Thank you, Heather. Welcome to Northwest Pipe's conference call and the announcement of earnings for the third quarter of 2008. My name is Brian Dunham. I'm the President and CEO of the Company. 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 year-to-date, we have generated revenue of $329.5 million; net income of $23.7 million; and earnings per diluted share of $2.53.

For the quarter, once again, we were able to report record sales and earnings. Third quarter revenues were $123 million compared to $92 million in the third quarter last year. Net income for the September quarter was $10.2 million this year, compared to $5.1 million in the third quarter last year. This translates to $1.09 per diluted share versus $0.55 in the third quarter last year.

Moving on to quarterly results, in the Water Transmission division, revenue was $77.5 million in the group for the third quarter this year, compared to $66.8 million in the third quarter last year. Gross profit was $14.3 million or 18.4% of revenue compared to $14.2 million or 21.3% of revenue last year. Gross margin was somewhat lower during the quarter, primarily due to higher raw material costs.

For Tubular Products, sales were $45.9 million in the third quarter of 2008, up from $25.2 million in the third quarter of 2007. We continue to see strong demand and pricing for the Tubular Products energy market.

Gross profit for this group in the second quarter was $12.6 million compared to $3.1 million last year. Gross profit as a percent of revenue was 27.3% in the quarter, significantly higher than the 12.2% reported in the third quarter of 2007. This improvement in gross margin is the result of increased volume of energy products at higher unit sales prices than the previous mix of products, combined with the ability to pass on steel cost increases to our customers during the quarter.

The gross margin included the impact of Hurricane Ike and costs associated with our new facility for oil country tubular goods. Brian will say a bit more about the new facility in a moment.

The SG&A for the Company was $9 million in the third quarter of 2008 compared to $7.6 million in the third quarter of 2007. The year-over-year increase is due primarily to increased salaries and incentive compensation, as well as the timing for certain sales and marketing-related activities. SG&A is 7.3% of sales for the quarter compared to 8.3% last year. Looking ahead, we expect it will be around $9 million to $9.5 million over the next few quarters.

Interest expense was $1.3 million for the third quarter of 2008 compared to $1.7 million for the third quarter of 2007. Average debt outstanding increased from $95.5 million last year to $107.8 million this year. The reduction in expense is due to the reduction in our interest rates over the last 12 months. For next quarter, we expect interest expense will be approximately $1.7 million, based on estimated debt outstanding and the current interest rate environment.

On October 15, we completed a new amendment to our credit agreement that increased the capacity of a facility from $110 million to $200 million. Even in the midst of economic uncertainty, we see opportunities to grow the business. And with this new line, we have the additional capital resources to execute on those opportunities.

After adjusting for taxes, we reported net income of $10.2 million compared to $5.1 million in Q3 of 2007. Our tax rate is slightly higher than average this quarter, due to a true-up of the tax provision to the tax return. We expect the tax rate to be 37% to 38% for 2008.

Q3 2008 cash flow -- we had cash used in operations of $2.7 million. Accounts Receivable came down $8.9 million on very strong collections. Inventory grew $28.2 million, offset by growth in Accounts Payable and other liabilities of $9.8 million. The increase in inventory was primarily driven by the increase in steel prices and the need for additional inventory to support the increased production of energy pipe.

Depreciation and amortization expense was $1.3 million and our CapEx was $5.1 million.

Brian will now discuss our expectations.

Thank you. As we look ahead to the fourth quarter, we continue to expect good results. Bidding activity in the third quarter was lower than expected, due to project delays, and as a result, our backlog is at $235 million. This is still a good level, although it is down from last quarter.

The good news is that many of the bids that delayed in Q3 simply moved into the fourth quarter. Consequently, we expect a stronger bookings quarter in Q4, and we should see backlog grow between now and the end of the year, putting us in a very good position for 2009.

As we look at the Water Transmission Group in the fourth quarter, we expect to see a decline in revenue for three reasons. First, as you know, we generally expect a slower fourth quarter due to holidays and weather considerations.

Secondly, we have two new mills that are waiting installation. The first mill will be installed in the fourth quarter in our Adelanto, California facility. We hope to avoid any significant disruption, but the installation will certainly reduce our revenues out of this facility somewhat during the quarter.

Finally, we have seen a significant project postponement that we had planned to produce in Q4. This project was postponed after the bid, because the City felt the demand was not immediate and the project could be safely postponed, saving money and helping to keep their credit rating high. The late postponement makes it unlikely that we can fill this manufacturing time with other projects. The combination of these three factors will clearly result in lower revenues in Q4.

In the Tubular Products Group, we are expecting another strong quarter in Q4, due primarily to energy sales, which we hope will offset weakness in some of our other markets. As we view the markets today, energy is still very strong and pricing remains high. We may see some improvement in agricultural products as well, though it's too early to tell. However, many of our other products are used in structural or construction applications, and these markets are very slow at this time.

Steel prices have also begun to fall. To the extent this leads to lower selling prices, we are unlikely to maintain our current margins. Again, as long as energy continues to be as active as it is now, we should generate solid result in spite of the weakness in some of these other areas.

As previously announced, we are moving forward with plans to start up a facility to serve the oil country tubular goods casing market. We have studied our options and have determined that the best course of action is to locate the operations in our Bossier City, Louisiana facility, which has not been operating, as opposed to building a greenfield facility in the Houston area. This will allow us to bring up production faster at a lower construction cost and with some operational cost savings as well. We plan to be in production with this facility by the middle of 2009.

As we look further ahead in the Water Transmission market, the most obvious concern is financing. Credit markets are in disarray; municipal bond activity is very low today. However, with the exception of the project discussed earlier, we do not yet see an impact on our business.

We have talked with many of the municipalities with major projects scheduled for 2009, and find that most of them already have financing in place or have few concerns about obtaining financing. At this time, it appears the one job that was postponed was due to unusual circumstances. We are continuing to forecast 2009 to be a record year for bidding activity, although the ultimate size of that market will be dependent on the timing of a few major projects. Obviously, we will continue to watch developments on the financing side.

General economic conditions today are also challenging, and generally impact our Tubular Products Group more than our Water Transmission Group. As discussed earlier, we have already seen some of our Tubular Products markets slow down. As we look ahead to 2009, we expect generally lower demand for most of our products until the economic conditions improve.

However, we continue to see strong opportunities for energy pipe. While we believe drilling activity will likely be lower, we think there will still be adequate demand for us to generate solid results for the Tubular Products Group as a whole.

In conclusion, we are pleased to report these record results for the quarter. Obviously, at this point, as we look ahead to the end of the year, we expect to set new records in sales and earnings for 2008 as well. And this will be our fourth consecutive record year.

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

(Operator Instructions) Scott Graham, Ladenburg.

I just wanted to ask you something more in laymen's terms as I get to know the Company a little bit. Could you help me understand how pricing works specifically in tubular?

For example, what was pricing this quarter? And as material costs come down, how does that work in on a -- does that work in on a real-time basis? On a lag basis? Could you lay that out for me?

Sure. We obviously -- we make a lot of different products for different markets, so it's very difficult to come up with sort of an average price. But in general terms, steel is by far our biggest cost in terms of our finished product costing. And our prices tend to travel along the same route as steel costs go.

So as steel is going up, as long as the market conditions are strong, we'll certainly be trying to raise our prices to offset that increased cost. And that certainly has happened during the first part of this year, first nine months of this year.

Steel topped out sometime around August, maybe early September. And we are now seeing steel decline. And again, as steel falls, it's likely that our selling prices will come down somewhat as our raw material input costs go down.

There's certainly a lag. The Tubular Products business is an inventoriable business, so we probably have about three months worth of inventory on hand. And so you'll see a lag before those factors are built into new pricing.

So, could you tell us what the pricing was this quarter versus the volume?

No, I have no way -- I don't know how to tell you what pricing is. But there's -- we make 120 different products.

Okay. Right. Would you -- if you had to take an educated guess, would you say that the growth was more volume or price? It looks like there was a lot of price in there; that's why I'm asking.

Oh, I see -- yes, it was both. I don't have that exact breakdown, but it was both volume and price. And in some cases, that price -- I'll tell you one other piece -- because there's the ever-present product mix. And as our mix shifted more to energy, that impacted our average pricing as well.

Positively?

Yes.

Okay. Because the type of growth we saw this quarter in tubular obviously was suggestive of a fair amount of pricing, perhaps pricing being in excess of the volume -- would that be a fair statement?

I don't have the breakdown.

Okay, no problem. Two other questions on projects. You referred to a large project, which got pushed back for kind of its own reasons. Which project was that?

I don't think we're going to identify it specifically by name, but it was a major project. And it was pushed back, I think, for a couple of different reasons.

One -- I do think that the financial situation had an impact, although the financing -- my understanding is that the financing for this project was in-hand. But I think the agency was -- seeing an opportunity to postpone this because they had reevaluated their requirements for when they needed the water to be delivered, and moved those requirements out.

So they saw an opportunity where they could postpone this and kind of keep the dry powder, which obviously makes their balance sheet look better going forward. And they did have future bonding requirements for other projects. And I think they wanted to show as strong a financial position as they could before they got to that.

Okay. That actually makes a lot of sense. Okay. You can't say the project; could you tell us what area of the country? Because I know where your strengths are; would it be an area where you guys have a large presence?

Oh, yes. It's in the Midwest.

Midwest. Got you. All right. Last question is, you made a very interesting statement, which I just wanted to make sure I heard you right; I think I did.

You indicated that, based on your conversations with municipal customers, that you've seen no changes in your project schedules. You've seen no issues with financing of the munis. You actually think 2009 is going to be a very good year for bidding on muni water. Is that what you're saying?

Well, it was more interesting the way you said. Because I think I didn't say no in there; I said most of the municipalities have -- already have the financing in-hand for the projects that they have planned for 2009. And these are projects that are to bid in 2009; these are not projects that are in our backlog. The ones in our backlog, financing is in-hand as well.

So, we feel pretty good about the backlog, in spite of this one job with a very late postponement. That's pretty unusual. But we feel pretty good about that. And we feel pretty good about the jobs that are currently scheduled for 2009, because the financing is generally in-hand.

Now, not all of them are in that position. There are certainly some agencies that say, look, we have to sell bonds for this and the state of the bond market is going to matter. But the vast majority of them had the financing in-hand.

Very good. That's really all I had. Thanks.

You're welcome.

Ryan Connors, Boenning & Scattergood.

Good morning, Brian and Stephanie. I just -- actually, your remarks have been very comprehensive, so I don't have a whole lot. But I just wanted to talk for a minute about the bidding environment in the water business.

We've been hearing kind of some chatter out there that the bidding in certain areas of the country has gotten very competitive, because the level of bookings has slowed down. And I'm wondering if you can just give us some qualitative color around the margins being down sequentially, is that due to bidding getting more competitive and therefore, margins on the individual projects getting tighter because of that? Or is it more of a just a mix issue and the types of projects, the diameters and so forth, that you sort of shift in the quarter?

Well, we're -- there's a few different points in there and let me try and address all of them.

First of all, in terms of overall bidding activity in our markets, we have not noticed what I would think of as any kind of a sea change in either the level of activity or the competitiveness. It's always competitive in our business and it continues to be.

We have noticed maybe some instances where competitors might be a little bit more aggressive, which we think is based on their own backlogs and so on, but nothing that I think is terribly significant at this point in time. I said earlier, and we just re-addressed in the last question, that we think 2009 will be a record year. We think that will be building on a record year in 2008 as well.

So we continue to see 2008 as being a new record and we continue to believe that 2009 will be at least slightly better than 2008.

The other piece -- a point I'll make on that is, I also mentioned that there's some timing of some major jobs in 2009 that obviously could impact it. Just to be very clear, we are taking a conservative look at the timing of those jobs and still think 2009 will be slightly better than 2008. So, it is a good-looking environment for us, right now, today.

The financing issue obviously could be a problem, if you believe that there will not be municipal bonds sold in this country over the next year. At some point, that's going to be a problem. It probably won't be a significant problem based on the research we've done in 2009, but obviously that would catch us at some point. So I guess you have to make a call on what you think the overall opportunity is for municipal bonds in the long-term.

Now, to get back to the margin point, the margin on projects that we produced in the third quarter would be based largely on work that was probably bid, Ryan, in maybe the first quarter or early second quarter. Because remember, there's a lag time before we get these things into the revenue stream. So, I would tell you that I don't see any sort of late-breaking issues there with pricing causing any margin compression.

I do see -- it's a bit of a mix issue, without a doubt. And it's partially due to -- a significant portion of it is due to higher raw material costs. And even if we pass that cost on, as you know, the higher raw material gets, the lower your margin gets, because you're basically increasing both the numerator and the denominator in that equation.

And so, we saw some squeeze there during the quarter as well. So I think those were the primary issues.

Okay. Well, that's great. That's great detail. That's it for me. Thanks, Brian.

You're welcome.

Brent Thielman, D.A. Davidson.

Good morning and congratulations on the quarter.

On the Water Transmission business, I know you made the comment in the press release and on the call that revenues would be down. I just wanted to clarify -- are you talking down year-over-year or down from the third quarter?

I think we will be able to achieve both of those.

Okay.

Last year, Water Transmission revenues in the fourth quarter I think was probably our all-time high.

Right, right. And that's why I just wanted (multiple speakers) --

At $80 million, so -- yes, we will not be between $80 million and $77 million, I will guarantee you. We will definitely be lower than that.

The job that we were talking about that postponed -- and I don't know if I said this earlier, but that job was in excess of $10 million. And we see nothing that will fill that slot in the fourth quarter.

Okay. And I guess just to clarify on the margin point in Water Transmission, I mean with the postponement and maybe some holes in production schedules there, I mean, do you expect to see margins improve from Q3 as steel costs decline as well?

I'm sorry -- in -- can you --?

In the Water Transmission business in Q4 versus Q3.

Well, there's a lag on that as well. But typically, we bid Water Transmission contracts as fixed price contracts. And it does happen, if steel -- it comes down quickly, we sometimes have an opportunity to buy the steel at a lower cost than we had originally bid in the job. So that can account for some expansion.

Okay. And then lastly, I noticed in some mills, we talked about some production cuts. Do you see any issues with steel availability or any timing issues with getting steel in the near-term?

No, but that's a good point. The mills have certainly cut back, taken some supply out of the market. So they're sort of taking advantage of a little bit slower period in the market to do some of the maintenance that they need to do on their mills. And that has kept steel, I think, at a little bit higher price than if they were flooding the market with it. But we haven't seen any issues with availability.

Okay. Okay, thanks, guys.

(Operator Instructions). At this time, I'm showing no further questions -- I'm sorry, we do have one question. One moment. The next question comes from Sean Feng with NorthPointe Capital. Your line is open.

Hi, Brian, just a quick question. The end market for Tubular Products, could you comment on ag and the third end market, I think it's industrial?

Sure. We break it down in a variety of different ways, but if you kind of group it, as energy as its own separate group -- and as I said, we see that as being still very positive, even though we do expect to see drilling activity decline some in 2009, but we still think there's going to be strong demand for energy.

Ag separately, there's typically a seasonal downturn in ag products at this point in time. And we've certainly see a downturn. There are many people who are speculating that there is more going on there than seasonality. We think it's just a little bit too early to tell. So, we're waiting to see if ag gets a little bit better here over the next couple of months.

But right now, it has certainly slowed down. Again, as I say, it usually slows down at this time. Farm economy was at an all-time high in '08; I don't think anybody expects it to be that good in 2009. But it's a question of where it will really settle out and how the farmers will project their own needs in terms of buying new equipment. So, it remains to be seen.

The other products you can sort of loosely group in construction-related or structure-related applications. And the main one there for us is the fire protection sprinkler-pipe that we make, that gets installed into new construction, primarily, you know, large construction -- schools, warehouses and so on -- you know, office buildings and so on. And those markets are very slow right now.

The last one I'd say is traffic business. Traffic business seems to be doing okay. But certainly the products that tend to go into construction applications are very, very slow.

All right. Thank you.

You're welcome.

At this time, I'm showing no further questions.

Well, I hate to end the phone call on the words -- very, very slow -- so, I'll just reiterate this was a great quarter for us. And we do expect to set a new record for 2008 and hopefully, we'll see good performance in 2009 as well. Thank you very much for your interest, and this will conclude our call.

Thank you for participating in today's call. You may disconnect at this time.