NWPX Infrastructure Inc (NWPX) 2009 Q1 法說會逐字稿

Welcome. Thank you all for standing by for today's conference. Your lines have been placed in listen-only mode until the question-and-answer portion of today's conference. (OPERATOR INSTRUCTIONS) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

And now I'd like to turn today's conference over to Mr. Brian Dunham. Thank you, sir. You may begin.

Thank you, Sarah. Welcome to Northwest Pipe's conference call and the announcement of earnings for the first quarter of 2009. My name is Brian Dunham I am 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. Stephanie will now address the quarterly results.

Thank you, Brian. First quarter revenues were $81.4 million compared to $94 million in the first quarter of 2008. Net income for the first quarter of 2009 was $2.6 million, while net income for the first quarter of 2008 was $5.0 million. This translates to $0.28 per diluted share in the first quarter 2009 versus $0.54 in the first quarter of 2008.

Moving on to quarterly results for the business groups. Water transmission revenue was $58.9 million in the first quarter of '09 compared to $63.9 million in the first quarter of '08. Gross profit was $11.3 million or 19.2% of revenue compared to $14.5 million or 22.6% of revenue last year in the first quarter.

First quarter results in the water transmission group were affected by the installation of the new mill in California, weather, and some unevenness in our backlog that resulted in limited production schedules in some plants.

Tubular product sales were $22.5 million in the first quarter of '09 compared to $30.1 million in the first quarter of 2008. As expected, we saw volume and price decreases caused by a combination of recession-driven reduced demand and the impact of lower steel cost.

Gross profit for tubular products was $1.4 million or 6.4% of revenue, compared to $3.3 million or 11.1% of revenue in the first quarter of '08. Gross profit in the first quarter of '09 was affected by sales of higher priced inventory and to a market characterized by falling prices.

Selling, general, and administrative costs were $7.2 million in the first quarter of 2009. This is down $700,000 from the first quarter of '08 and down $1.7 million from the fourth quarter of '08. This number reflects significant reduction in variable compensation costs, outside service charges, sales commissions, and travel, along with the effect of several other cost containment measures.

Interest expense was $1.2 million for the first quarter of 2009, compared to $1.8 million for the first quarter of '08. Over that period of time, we saw our blended interest rate come down from 7.1% to 5.6%. In Q1 of '09, we reduced total debt by $26.2 million. We expect interest expense to be down slightly in the second quarter of '09.

After adjusting for taxes, we generated net income for the quarter of $2.6 million which equates to $.28 a share compared to $5 million and $0.54 respectively in the first quarter of '08. Free cash flow was $26.1 million, comprised of $30.6 million in cash from operations, less $4.5 million in capital expenditures.

Our significant capital projects in 2009 include the installation of a new mill in California which is now complete and the relocation of a mill to Bossier City, Louisiana, to manufacture oil country tubular goods when that market returns to health.

In December, Northwest Pipe Asia acquired Byard Limited, a leading designer and builder of spiral pipe mills. The new mill in California is a Byard mill. As we expected, this relationship is generating a positive return in providing us with greater insight and exposure in international water infrastructure markets. We are already seeing more international opportunity.

On April 17th, we filed a $125 million universal shelf offering. We have historically been acquisitive when attractive opportunities present themselves, and we want to be able to act quickly in this environment should we identify an accretive acquisition target.

Brian will now provide further insight into first quarter results and our expectations for 2009.

Thank you. Last quarter we discussed the recession, the financial crisis, the changing cost of steel and finally the stimulus plan and how each of these may affect our businesses. I would like to talk to our expectations at that time, how the situation has since developed, and our current expectations for the future.

As of the end of 2008, our backlog was approximately $190 million. Backlog at the end of the first quarter grew to roughly $205 million. As expected, we saw water transmission backlog increase and tubular products backlog decline. The recession has had a significant negative impact on our tubular products business. As the recession hit late in Q3 and early in Q4, one of the consequences was the decline in gas drilling activity and a related decline in order activity for our energy products. Throughout the fourth quarter, however, we continue to supply our customers with pipe they had previously ordered in this market. This drove strong results in Q4, even as demand declined precipitously.

In the first quarter of 2009, we shipped a significant portion of our remaining backlog but demand remained very weak. New bookings in this product line are virtually zero today.

Other key drivers for our tubular products group include highway spending, non-residential construction, and agricultural spending. Last quarter we discussed our expectation that demand in all of these areas would be down in this recessionary environment, at least through the first half of 2009. As the quarter developed, we saw a magnified effect because our customers, primarily distributors, were reducing their own stocks. We are recently seeing some reversal in this trend, although demand for our tubular products is still lower than last year.

Our view of the impact of the financial crisis on our tubular products business has not changed significantly over the last three months. As expected, it appears that the availability and cost of credit has reduced demand somewhat. As we discussed last quarter, drilling activity can be traced to both economic conditions and the credit crunch. This is generally a highly leveraged business and the lack of credit may be exacerbating the slowdown that we currently see. Of course, trying to separate impact of the financial crisis from the recession is difficult.

Last quarter we also talked about the significant increase in steel prices in 2008. Steel climbed to almost $1,200 per ton for the grades that we use in this business. Last quarter, those same grades of steel were selling for approximately half this amount. In the first quarter of 2009, steel prices dropped again by almost one-third. Steel has certainly gone lower than we expected several months ago. We continue to believe steel costs will remain low throughout the year, although there may be some increases in the second half. In tubular products, changes in steel costs lead very quickly to changes in selling prices. Our Q1 prices compared to Q4, for example, are about 30% to 40% lower. At this time, we expect prices to stay at a low level until steel costs moved up again.

We do not expect much of a benefit from the stimulus plan in the tubular products group, although, there may be some small benefits for both traffic signpost systems and structural products if highway spending picks up later in the year. The real boost for the tubular products business will come as the natural gas exploration market improves. Rig counts continued to decline in the first quarter and it is not clear when this will reverse. However, this country's reliance on natural gas will not end can we believe that the long-term fundamentals for this business are still strong and we have a good position in this market.

Turning to water transmission and again focusing on the recession, the financial crisis, the cost of steel, and the stimulus package, our views have not changed substantially. First of all, as I have said before, the water transmission business is not always run according to the business cycle. Projects are often planned for many years in advance and are sometimes part of 50 year build-out plans. Near-term issues can certainly delay projects, but fundamentally, this is a business with a longtime horizon.

As we look at the effects of the recession, we have not seen anything like the impact that we have seen in tubular products. In fact, our three-year outlook is consistent with our expectations from six months ago or a year ago. We still see a significant number of projects ahead of us, primarily new construction, that will provide greater market opportunity in our future than we have seen to date.

Last quarter, in the wake of the financial crisis, there were many concerns about funding issues for water infrastructure projects. Because water projects are typically funded by revenue bonds which are backed by connection fees or monthly water rates, there are generally not tax dollars involved. After a short freeze in activity in October, the revenue bond market has returned to somewhat normal levels of activity. We have not seen significant postponements of projects due to funding, although we believe some of the megaprojects which are still in the future could be more difficult if current economic and financing conditions extend for a long period.

Just as with tubular products, we don't expect a great benefit from the stimulus package in the water transmission group. The requirement projects begin within 12 months to access this funding makes it difficult to apply stimulus funds to water projects that take several years to develop. There may be some acceleration as projects originally scheduled just outside of the stimulus window get pulled in to take advantage of stimulus money and lower cost of materials and construction. We certainly know of a few agencies that are trying to make this work for some of their projects.

The cost of steel will also have an impact on this business. While steel is not nearly as big a component of our cost in water transmission and its impact is not as direct as it is in tubular products, it can still have a substantial effect. Based on our forecasted steel costs, we expect our average selling price in 2009 will be lower in 2008. We continue to be strong believers in the fundamentals of the water infrastructure market. Even with the postponement of the Southern Nevada project, we still see a very strong market over the next several years. New water infrastructure is required to support population growth and migration within the United States. Old infrastructure will continue to deteriorate and will lead to additional rehabilitation projects as well. There is still a significant gap between needs and current construction, and over time this gap must be addressed.

In addition to our two primary businesses, we continue to look for adjacent opportunities. As mentioned earlier, we are gathering information on a greater number of international projects and hope to increase our presence outside the United States over the next few years. Our industrial and power group continues to grow and we anticipate further inroads into power plants and other applications. We continue to look for related water infrastructure products that could be synergistic with our steel pipe. And finally, as Stephanie mentioned, we are alert to acquisition opportunities. Obviously, the current economic situation could result in some prospects in the near future and our shelf filing is a preparatory step.

In summary, our outlook has not changed much. We continue to expect tubular products volume will be relatively low in the second quarter and will improve in the second half. At this time, it is still unclear as to the timing and the strength of that improvement, particularly in energy pipe. Both price and volume will be down in the second quarter, however, raw material costs will also be down and will help offset the impact of working through any remaining higher cost inventory.

In the water transmission business, we continue to expect a much stronger second half. The second quarter will likely be similar to the first quarter, largely due to our uneven backlog and the timing of releasing jobs to production.

In closing, we have taken steps to help us through a difficult first quarter of 2009. As Stephanie mentioned, we have reduced spending, control costs, and generated cash. At the same time, we have continued to look to and prepare for the future. Adversity can trade opportunity, and we are well positioned to respond quickly to the opportunities that may arise because of the recession and those opportunities that will develop with the recovery.

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

Thank you, sir. (OPERATOR INSTRUCTIONS) Our first question comes from Ryan Connors. Your line is open. And please state your company, sir.

Thanks. It's Boenning & Scattergood. Good morning, Stephanie and Brian.

Good morning.

Good morning.

I just wanted to talk a little about the backlog. Just anecdotally, it seems like your announcement of major contracts has slowed over the last couple months. I know normally you would announce contracts, I think, Brian, in excess of $5 million. And so the fact that there haven't been a whole lot of those and yet the backlog increased anyway, I guess that suggests that these are mostly smaller contracts entering the backlog.

So I wonder if you could just talk about whether that is, in fact, the case. And if so, how that impacts your business in terms of profitability, et cetera, and what it says about the state of the market in general.

Well, I really don't think there is a lot to conclude from that. I mean, obviously, it's a project oriented business and projects are uneven, which is one of the challenges we have. We have a huge proportion of our projects that are less than $5 million. It's still relatively rare to have those larger than that. I think our average project size, Ryan, is about $1.5 million at this point. So there's an awful lot of projects anyway that are under $5 million, and it just happens that that is the preponderance of the work that was booked in the first quarter.

Okay. So there's no, in terms of the mix of projects, there's nothing to conclude there that there's going to be a shift toward the next couple of quarters towards smaller projects, given that fewer of these large ones seem to be coming through?

No, I don't think so. And in some cases as well, it's important to understand that just because we don't have large projects doesn't mean there aren't large projects being done. The agencies often break large projects up into smaller pieces. So they might have a $20 million project, but they might break it into four different sections.

Okay. And then Stephanie, just at the outset there, you mentioned the California plant coming online as being an impact on the water transmission results. Is there any way you can roughly quantify that for us?

That would be very difficult. I would say that it came online mid-quarter.

Okay.

It is our largest plant, and so a disruption in production there is obviously more of an impact than any other facility. It was out for about half a quarter.

Okay. Well, your prepared remarks were detailed, so that's all I have. Thanks again.

Our next question comes from Brendan Watkins. Your line is open. And state your company, sir.

Hi. This is Brendan from D.A. Davidson calling in for Brent. I have a few quick questions. I was wondering if your tubular products segment, you said you can work through your inventory kind of fast. And I was wondering if there is still some higher cost inventory in there that's kind of overhanging on margins. I was trying to get an idea of what it would take for you guys to get back to double-digit gross margin in that segment.

There certainly still is higher cost inventory hanging around and partly because steel prices have continued to decline.

Yes.

So there is still an inventory lag between -- there is still obviously an inventory lag. And as prices continue to decline, you're going to have higher cost inventory. So as we see that settle down, we will work through that relatively quickly, but we're not through it yet.

Okay. Excellent. Then next, about your backlog, your commentary, you guys said you expect it to be higher in Q2. And I'm assuming you meant sequentially, but I just wanted to double check that.

That's correct.

Okay. And then last question. You guys talked about paying down debt and the lower interest rates have lowered your interest expense. It sounds like we can expect going forward about the $1.2, $1.3 million a quarter; is that fair? And then kind of playing off that is, is your kind of priority and allocation of capital to continue paying down some debt or are the acquisitions or potential build-out, is that more your priority in your allocation of capital?

Well, our priority on capital, we always went to reduce costs where we can, so we'll pay down where that makes sense. But again, certainly if there were an accretive opportunity, we certainly would take on more debt. We've got a lot of capacity available. So it really depends upon the circumstances that present themselves. Remind me the first part of that question.

Just with the interest rates coming down and lowering your debt level sequentially, I guess I'm just curious if we can expect a kind of run rate, this $1.2, $1.3 million a quarter in interest expense.

That's probably a good expectation, barring a significant event such as increase in steel cost because that would drive working capital up, could drive that up.

Yes.

And, of course, an acquisition. But all other things being equal that would be a reasonable expectation. We do expect interest rates to come up at some point, but probably not in the near term.

Okay. Well, excellent. That's all the questions I've got.

(OPERATOR INSTRUCTIONS) Our next question from [Shrok Patel]. Your line is open. And state your company, sir.

Thanks. It's Jefferies & Company. Just a couple quick [high escaping] items here. You said CapEx in the quarter was about 4.5. Is the run rate supposed to still be around $10 to $12 million?

Yes, outside of what we're doing with Bossier City.

Okay. And D&A in the quarter?

I'm sorry.

Depreciation.

Depreciation.

Depreciation, that was 1.2.

Okay. And then we can still look for a tax rate at these current levels, 38.3, 38, something like that?

In that territory.

Okay.

It gets the skewed a little bit when the earnings come down --

Right.

-- due to the relative significance of the discrete item.

Okay. And then moving onto just one last piece here. As we looked at the water transmission business last quarter, you had commented that there was $100 million in postponed bidding activity in the fourth quarter that you expected to happen within the next six months. Can you give us a feel for where that's current -- what do you see with that currently? Is that still next six months? Have you seen some of that activity start to pick up in the first quarter?

Yes, I think we are expecting a pretty strong second quarter. First quarter wasn't too bad, obviously, and a strong second quarter as well.

Okay. That's all I have. Thank you, guys.

You bet.

I'm showing no further questions from the phone line.

Okay. If there are no further questions, then this will be the end of the conference call for the first quarter 2009. Thank you for your interest in Northwest Pipe. Bye.

This does conclude today's conference. You may disconnect at this time. Again, thank you for your participation.