NWPX Infrastructure Inc (NWPX) 2009 Q2 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions.) Now I will turn the meeting over to Mr. Brian Dunham. Sir, you may begin.

Thank you, Brandy. Good morning. Welcome to Northwest Pipe's conference call and the announcement of earnings for the second quarter of 2009. My name is Brian Dunham. I am the president and CEO of the Company. Stephanie Welty, our CFO who usually participates, is away.

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.

In the second quarter we generated revenues of $74.9 million, compared to $112.1 million in the second quarter of 2008 and $81.4 million in the first quarter of this year. Net income was $2.4 million, while net income for the second quarter of last year was $8.4 million and net income in Q1 was $2.6 million. This translates to $0.26 per diluted share in the second quarter of 2009, compared to $0.90 per diluted share in the second quarter of 2008 and $0.28 per share in Q1.

In the water transmission group, our revenue was $59.3 million, compared to $74.9 million in the second quarter of 2008. Sales in the first quarter of this year were $58.9 million. Gross profit was $12.8 million or 21.6% of sales, compared to $14.8 million or 19.7% of sales last year and $11.3 million or 19.2% in Q1. Both the revenues and the gross profit for this quarter were consistent with our expectations. Revenues were not as high as we would have liked due to the unevenness of orders and production around the country, a consistent circumstance that will impact the third quarter as well.

In the tubular products group, our sales were $15.6 million in the second quarter of this year, compared to $37.2 million in the second quarter of last year and $22.5 million sequentially from the first quarter of this year. We expected sales to be down as we forecasted weak demand and declining selling prices. However, prices declined more than we had anticipated, more than 30% during the quarter. This decline led to a loss of $2.6 million or 16.4% of revenue, compared to gross profit last year of $9.8 million or 26.4% of revenue and a gross profit of $1.4 million or 6.4% in the first quarter of this year. While our costs improved as we worked through higher-cost inventory, obviously the selling price declined at a much more rapid rate, particularly in the latter part of the quarter.

Selling, general and administrative costs were $5.8 million. This is down $3.5 million from the second quarter of last year, and down $1.4 million from the first quarter of 2009. This reflects significant reductions in variable compensation costs, sales commissions, travel and entertainment, outside services and professional fees, along with the effect of numerous other cost-containment measures. As a result of the timing of certain expenses, we expect the SG&A expenses in the third quarter to be roughly in between the costs recorded in the first and second quarters. We continue to look for opportunities to manage our costs as we work through this recessionary period.

Interest expense was $1 million for the second quarter of 2009, down from $1.3 million for the same quarter of last year. Interest is expected to continue in this range next quarter. And after adjusting for taxes, we generate net income for the quarter of $2.4 million, which equates to $0.26 per share, compared to $8.4 million or $0.90 per share in the second quarter of last year.

We generated positive cash flow from operations of $21.6 million during this quarter. Most of this cash came from reducing inventories and collecting receivables. Capital expenditures in the quarter were $8.8 million, with most of that going to completion of the mill in Bossier City, Louisiana. We have generated strong cash flows throughout the first half of the year, reducing debt by more than $39 million from December 31st. As a result, our balance sheet is strong, and we have significant available liquidity within the terms of our existing credit agreements.

As we look ahead, we expect the recession will continue to have a significant effect on our tubular products business. Demand for energy pipe, our largest product line, was very weak during Q2, and shows only limited signs of improving in Q3. Natural gas prices and drilling activity remain significantly depressed. Many experts do not anticipate any real improvement until the end of the year.

Demand for our other tubular products line is still lower than we would like, but it has seemed to stabilize and is showing evidence of improvement. We believe that there has been a magnified reduction in demand over the past several months because our customers, primarily distributors, were reducing their own stocks. It is certainly possible we will see a corresponding uptake in demand as distributors restock, but it is too early to tell. Consequently, at this time we expect to see only small improvements in volume in tubular products in both Q3 and Q4.

Pricing in this group is still showing the effects of the recession in general, as well as lower oil and gas exploration and production. For energy pipe, pricing has also been depressed as the glut of material that was on hand at distributors and end users when activity slowed last year is worked down. We have seen a recent stabilization in prices, as well as increases in some product lines.

At this time, we are expecting these increases to have a positive effect on our margins, which will be amplified over the next few months by our declining costs. This leads us to expect to operate at approximately break-even in Q3 in tubular products, with a further improvement in Q4. All of this, of course, is based on our current views of demand and pricing levels.

The situation is much better in the water transmission group. Backlog at the end of the second quarter was roughly $190 million. We had expected a higher backlog. However, one significant project did not materialize as expected. This is still a strong backlog. And we do have a healthy bid calendar in the third quarter, and expect to see backlog go up again in the latter half of the year.

As noted earlier, our backlog is not consistent across our operations. And this makes it difficult to run at the capacity utilization levels we target. Consequently, revenues in this group will not be as good as we would like, but our expectation for the third quarter is that revenues will be somewhat stronger than in Q2. We are currently anticipating a stronger quarter sequentially in Q4 as well.

As we look at our results and our projections in comparison to last year, we obviously see the effects of the recession. We also see the effects of the changing cost of steel. In the third quarter of 2008, steel climbed to almost $1,200 per ton. In the fourth quarter, steel was selling for approximately half that amount. And in the first quarter, we saw prices drop another third. In the second quarter of this year, steel stabilized and now is increasing. All of these changes had a significant effect on our tubular products group.

Looking ahead, we expect to see further increases in steel costs through at least October. However, we do not anticipate significant changes like we saw in 2008.

Our water transmission business has not been impacted nearly as much as tubular products. Our three-year outlook remains very positive, as it was six months ago and a year ago. We still see a significant number of projects ahead of us, primarily new construction, that will provide greater market opportunities in our future than we have seen to date. Conversely, we still have not seen much positive impact of the Stimulus Act.

The cost of steel certainly has an impact on our water business as well, although it is not as significant or obvious as it is in tubular products. As steel costs fell, our selling prices also adjusted. Steel is not nearly as big a component of our cost in this business as it is in tubular products, but it is still substantial. Based on our forecasted steel costs, we continue to expect our average selling price in 2009 will be lower than in 2008.

In summary, this was a difficult quarter. While we anticipated the slowdown in tubular products, we underestimated the severity of the price declines. As we look ahead, we expect tubular to recover slowly for the balance of the year. We will not see this business return to high production levels, however, until the energy pipe market improves significantly. And the timing of this is unclear.

As we have previously discussed, we have been in the process of building a new plant to focus on OCTG pipe in Bossier City. At this time, this plant is essentially ready to go. But there is no market, so we are delaying the startup. When the market turns, we believe we will be able to react very quickly and effectively with this new capacity.

In the water transmission business, lower input costs will keep selling prices and overall water transmission revenues lower than we have seen in the past few years. We do not expect to see a significant impact on margins, however. The market remains healthy. And we hope to see -- to yet see a little increase from the Stimulus Plan late in the year.

We have been and will continue to be aggressive in managing our costs and our cash. I am pleased with our efforts in these areas. We are financially strong, optimistic about our business fundamentals and capabilities, and are continuing to execute our strategy in order to prosper in the future.

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

Thank you, sir. (Operator Instructions.) One moment, please, for the first question. Our first question comes from Brent Thielman. Your line is open.

Good morning, Brian.

Good morning.

Brian, I apologize if I missed this in the commentary, but you have a slightly lower tax rate in the quarter. I just wondered if you could comment on that and sort of what you expect it going forward?

Yes, I think if you take the -- and I apologize, I don't have the exact rate at the top of my head. But if you take the rate that we have for the year to date, that's the rate that we're expecting going forward for the balance of the year. And the delta is basically some income generated in lower tax jurisdictions.

Okay, perfect. And then on the water transmission business, can you provide what the capacity utilization levels were for the quarter?

I don't have that exact number. But it was substantially less than we would like it to be.

Okay. But you'd expect that to take back up in the second half?

Not so much in the third quarter, Brent. We're still struggling with just where the jobs are laid out and how they're scheduled as leaving us with some downtime that we prefer not to see. And we're working our way through that, trying to figure out how to fill it. But I think it's still going to be relatively low capacity utilizing in Q3. And hopefully better in Q4.

Okay. And then on the order cancellation, can you provide a little bit more specifics on that?

Not a cancellation, just a job that we expected to win and did not get. And it's not dead yet. It's still pending. So I don't -- I don't really want to go into any other details on it.

Okay, fair enough. And then, I guess lastly, I think US Steel was sort of out yesterday talking about distributor inventories for at least their DTG pipe. Still pretty high, but seeing some reductions there. Are you seeing a similar sort of situation in your channel for your energy-related products where some of the destocking is happening there?

I think if you're -- if you're looking for positive signs and you look hard enough, you can find a couple.

Yeah.

But I would -- it's certainly not real conclusive in our minds yet. It's better -- you know, I think three months ago when we did our conference call, I said bookings in this business is zero. It's not zero anymore. But we -- I think our bookings in the last three months were probably about 10% energy pipe. And we'd expect it to be more like 50%. So it's still pretty weak.

Okay. Thanks, Brian. I'll jump back in queue.

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

Hi, Brian. How are you?

Great. How are you?

Good, thanks. First, a couple questions on the water side. First on the backlog, are there any other projects in there that potentially could suffer a similar fate to this one that didn't work out in the quarter? Because certainly, from -- it seems like the order flow in terms of new contract announcements has been pretty solid the last few months. So we're a little bit surprised to see the backlog down. Is there anything else in there where that might be a concern?

I'm not sure I understand the question. I mean, this is the backlog. If we had booked this order, our backlog would've been up. We didn't -- we didn't get the order. So that's really the whole story.

Sure. But my question is, are there other projects in there where you think there's a possibility that they could suffer a similar fate to this one? In other words, you end up coming out of the backlog?

Well, it's not -- I guess I'm saying it's not a similar fate. We -- it's not in the backlog. We just didn't get the order.

Okay.

As we were projecting the backlog ahead, we expected to book that job. And we did not get it.

Okay.

Now as far as what else is in the backlog, as a rule the backlog has been pretty solid. There's been very few exceptions of anything coming out of the backlog once it's in there. So it's been pretty good. There is very late-breaking news on a project that we're doing for a company called -- or the owner of the project is a company called USEC, where their project looks like it's in some doubt because of the inability to get some loan guarantees. So we're following that. But as a rule, we haven't seen a lot of degradation out of our backlog.

Okay. And then just on the funding environment, you talked about stimulus a little bit. But what about -- obviously, we hear a whole lot about municipal water systems and the challenges they're facing and the cities are facing, and so forth. I mean, what is your perspective on the impact that this -- that those issues are having on your end market in water?

We aren't really seeing much of any impact in terms of funding ability on our markets at all. The municipal bond market is functional. Our customers are continuing with the projects that they have scheduled. The market for the year is -- continues to look like it's going to be very solid. So we're not really seeing much impact at all on those types of projects. I think, Ryan, on some of the mega projects that are being worked on, I think there's perhaps more of an effect. But we really aren't counting on any of those this year anyway, so --

Okay. And then just on the tubular products side -- the downturn in demand for energy-related tubing, it came pretty quickly on the heels of your changing your distributorship setup where Lone Star -- where you were no longer working with them, and you had a new party that you're working with. Can you just discuss whether or not that's had any impact on your ability to weather these tough times, and -- if at all?

No, actually we're very pleased with that relationship and think it's been very effective. There's no question that this is an industry-wide downturn. Several facilities are shut down. US Steel just came out and reported -- if you go through their report and look at their tubular products, you can see their commentary. It's clearly an industry-wide issue.

Okay, great. Thanks, Brian.

You're welcome.

Our next question comes from Yvonne Varano. Your line is open.

Thanks. Just on the tubular side, it seems like your prices have leveled off. And maybe you've seen some increases. Can you talk about that in terms of a percentage and how much the prices might be going up?

It's a little bit early, Yvonne, to draw any conclusions. What I would say is, in most of our product lines we have seen increases subsequent to the end of the quarter. They're not real significant increases at this point in time, but they're moving the right direction. It is not -- I wouldn't say it's in every product line. But it's in almost every product line. So we're optimistic about that. We do think we'll see that continue.

Obviously, you know steel prices drive selling prices for finished goods in this business pretty efficiently, if you will, in terms of time. And steel has started going up. And it's been going up for the last several weeks. So it's a change that we expected to see. And we're certainly starting to see it throughout the marketplace.

Okay. The announced increases, are they about in the $20 range? Is that--?

No, I would say higher than that. But I think our average -- you know we have a wide range of products, too. So anything you do on average is a little bit challenging. But I'd say on average our selling price is somewhere around $1,000 a ton, plus or minus. And I'd say we've seen increases at least double what you're talking about.

Okay. And then the USEC project, that's in the current backlog number?

We booked an order on that some years ago. And it's not -- it's basically been one of the very few orders that had a long lead time associated with it. We fulfilled the first phase of that -- was really some test products, if you will. And phase two, it was going to be -- come, I believe, in at least three other phases, which were basically, I guess in our view, annual-type numbers. They were going to take the order in three different separate years. And the first of that would've been in 2010.

Okay. And is there a magnitude that you can give us or a number on what that would be, either coming out of backlog or from a revenue perspective on an annual basis what it was supposed to be?

Well, we're not -- at this point, it's way too early to say whether it's going to come out of backlog. It's just simply one, as I said, that there was some very late-breaking news on. So we'll see what happens if it goes forward. I believe the total amount of that contract was about $26 million. But it was -- we announced that contract -- you can go back and find it. And I may not have that number exactly right. But I think that's about right.

Okay. Great. Thanks a lot.

Our next question comes from [Rick Dotay]. Your line is open.

Yeah, just to follow up on that one before I go to my others, the -- are -- do you have inventory that you're exposed to if that contract were to come out of backlog?

No.

Okay. So you did phase one that was in backlog. I mean -- and so that's complete. And you just haven't gotten to the other phases yet. And it now looks vulnerable.

Correct.

Okay. On the tubular side, particularly energy, I think you mentioned somewhere there was -- there's the effect of destocking in the distributor base. Where do you think you are? Any feedback you're getting from the distributors that -- are we in the late innings of the destocking? Have we completed it? Or--?

I like the baseball analogy. I'm going to go with that. I think we're in the late innings.

Okay.

But, Rick, it's - it depends on the products. You know, certain products are being used more than others. Certain products had more to start with than others. So it's still, I think, a little bit too early to tell. But it's my sense that if we got rain now, we'd have a complete game.

Okay. If the -- I mean, where does gas have to be for demand to look more -- is it $4.50, $5? Or does it have to be higher than that?

Well, if you look, the drilling activity has improved. And obviously, it's from a pretty low number. But it has improved a little bit over the last several weeks, even though the gas number is very low. A lot of those cases we think are wells being drilled just to maintain the lease rights. And they're not really completing them. And they're not turning them into production. So clearly, I think it has to be higher than it is now. I don't know what the magic number is. But the numbers that you're talking about are -- when you get to $4.50, $5, in those ranges, I think people start thinking that those are pretty good. Some people used to say $6. I don't think that that's probably the right number anymore, but certainly higher than where it is today.

Okay. Can you still hear me?

Yes.

Okay. There's some interruption in my line. So --

You're kind of fuzzy on this end now.

Okay. I'll call back. Thanks.

All right.

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

Yeah. Hey, Brian, one more follow-up. Just on the water transmission margins, was there any impact, either positive or negative, from I guess no longer operating that Utah plant?

Well, certainly there was an impact. I don't think it was a material impact either way.

Okay. And was that a drag on margins before, that Utah facility?

No. It only becomes a drag on margins if there's no work going through there. But when it was busy, that was a very nice performing facility.

Okay, perfect. Thank you.

(Operator Instructions.) Our next question comes from Rick Dotay. Your line is open.

I'm trying again. You hear me all right?

Yes. And I'm used to hearing you speak with clarity, Rick. So this is much nicer.

Okay. It depends where I am in the earnings cycle whether I have clarity or not. But the gross margin exiting the quarter for tubular, was it positive as you exit? So if you kind of -- a little bit of a catch-up with the decline in price stabilization offset by whatever's going on in the raw materials side -- was it positive or still negative?

Yeah. I think the turn for us was very late in the quarter, however. So the last month of the quarter there was some significant price declines. But we did see that start turning around very late in the quarter.

Okay. That's all I have. Thanks, Brian.

You're welcome.

At this time, I show no further questions.

Okay. Well, if there are no further questions, that will conclude our conference call for today. Thank you for your interest in Northwest Pipe.

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