NWPX Infrastructure Inc (NWPX) 2010 Q4 法說會逐字稿

Good afternoon and thank you for standing by. I would like to remind all parties that your lines have been placed on listen-only until the question-and-answer portion of today's conference.

(Operator Instructions) Today's conference is being recorded. If you should have any objections, please disconnect at this time. It is now my pleasure to turn the call over to Mr. Richard Roman, President and CEO. Thank you. Sir, you may begin.

Thank you, Emily. Welcome to Northwest Pipe's conference call.

My name is Rich Roman. I'm the President and CEO of the Company. I'm joined by Robin Gantt, our Chief Financial Officer.

As 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 SEC filings on Form 10-K which in this case is indeed a recent filing for a discussion of risk factors that could cause actual results to differ materially from expectations. In addition as previously disclosed, a shareholder class action lawsuit and a shareholder derivative action have been filed against the Company and the SEC has undertaken an investigation. While these matters are outstanding, we do not intend to comment on specific related issues beyond the disclosure provided in our SEC filings.

I will now turn to a quick overview of 2010 results and then bring you current in the business before we call for questions. To briefly recap our 2010 results, we ended the year with a net loss of $1.4 million compared to a net loss of $7.3 million in 2009.

Water transmission sales were up 5% and tubular product sales were up 143% compared to 2009. We've seen a meaningful recovery of our business in 2010.

While our water transmission business improved some over 2009, our tubular products business benefited significantly from the startup of our Bossier City, Louisiana facility and the increase in oil and natural gas drilling operations leading to increased sales of our energy pipe products.

Water transmission gross margin remained steady in 2010 at 9% compared to 8% in 2009. Volume was up 15% and selling prices were down. Approximately one-half of the increased production resulted from the restart of our Pleasant Grove, Utah facility during 2010.

Tubular products gross margin grew significantly to 7% in 2010 compared to a negative 7% in 2009. Volume increased 250% while selling prices decreased 3%.

As I will discuss in our analysis of the fourth quarter, energy products comprises an increasing portion of our tubular products business and demand has been strong in that sector. Selling, general and administrative products were $28 million in 2010 compared to $20 million in 2009.

Professional fees increased $6 million. Tubular product sales expenses increased $1 million and we had severance expense of $600,000 in connection with the departure of our president in October 2010.

Interest expense was $8 million and $5 million in 2010 and 2009, respectively. The increase was primarily the result of higher average borrowing as we increased our working capital with the expansion of business coupled with higher interest rates.

In 2010, the Company used $22 million in cash to support the growth of the business, driven primarily by trade and other receivables which grew $31 million. Capital expenditures in 2010 were $19 million principally for the Bossier City facility and depreciation expense was $7 million.

Turning to the most recent quarter, net sales in the fourth quarter of 2010 were $97 million, a 50% improvement over net sales of $65 million in the fourth quarter of 2009. Wire transmission sales increased to $53 million in the fourth quarter of 2010 from $49 million in the fourth quarter of 2009.

Water transmission gross profit decreased to $2 million in the fourth quarter of 2010 from $3 million in the fourth quarter of 2009. Water transmission gross profit was negatively impacted in the fourth quarter of 2010 by an unplanned maintenance shutdown and severe weather disruptions particularly at our Adelanto, California facility.

Tubular product sales increased to $44 million in the fourth quarter of 2010 from $16 million in the fourth quarter of 2009 and tubular products gross profit increased to $5 million in the fourth quarter of 2010 from a profit of $200,000 in the fourth quarter of 2009. SG&A in the fourth quarter of 2010 was $7 million compared to $6 million in the fourth quarter of the preceding year, reflecting an increase in professional fees and severance expense. Net loss in the fourth quarter of 2010 was $1.8 million or $0.19 per diluted share compared to a loss of $1.9 million or $0.21 per diluted share in the fourth quarter of 2009.

As of December 31, 2010 our backlog was approximately $258 million. Water transmission backlog remained essentially unchanged from December 31, 2009 at approximately $200 million.

In 2009 we saw substantial pressure on selling prices in the water transmission business. Although we have recently seen a trend towards better margins, there are jobs at lower margins that remain in the backlog. Consequently, we expect to see varying margins until the older backlog is completed.

In tubular products, our energy products comprised approximately 63% of sales in 2010 and 69% in the fourth quarter of 2010. Demand for these products is driven by drilling activity which has been relatively strong in 2010 as oil and natural gas rig counts are up approximately 30% from a year ago.

Demand for other tubular products is driven by non-residential construction, manufacturing, and highway spending which have all been soft recently. However, the continued strength in energy price demand and the reopening of our Bossier City facility has kept tubular products growing through 2010.

We also note that our production ramp-up at Bossier City has been slower than anticipated as we continue to work through yield issues. There's capacity available at this facility for additional growth in 2011.

In conclusion, I'm looking forward to continued progress in 2011. We expect water transmission sales to grow in the first half of 2011 as compared to 2010.

We expect tubular product sales will also grow in the first half of 2011 as compared to the first half of 2010, primarily due to the additional capacity brought into production in Bossier City over the course of 2010. At this time, we will be happy to take any questions you may have.

(Operator Instructions) Scott Graham.

Yes, good afternoon.

I'm sorry, I didn't catch your name. Is it Pat Graham?

No, Scott Graham from Jeffries. So just several questions. First of all, when we are finished with this ramp-up of new production in tubular, what will the sales capacity be of the business?

Well, there's two things going on. The first ramp-up is as we've described of Bossier City. So we're bringing that plant back and we have brought that plant back online.

So that was a ramp-up that occurred during 2010. During 2011 as we have indicated in some press releases, we're actually doing some expansion work at Atchison.

And so we have committed about $6 million from a capital project there to increase the capacity there as well so that when we finish that, so not at the moment, but when we're done with the Atchison capacity expansion, we will be at approximately 400,000 tons of capacity for the tubular products business.

So that's not -- when you talk about capacity of sales -- because the sales number itself depends greatly upon the price of steel, since steel is something on the order of 70 or 80 or sometimes better than 80% of the cost of the tubular products sales, and so the other item that you have to think about -- so I think because the sales capacity so to speak varies so much with the price of steel, I think of the capacity more in terms of tons produced.

But the capacity in terms of tons produced also varies significantly depending upon what you are making. So you have a product mix question very much in the tons produced equation. So when I say 400,000 tons for those three plants, it could be more, it could be less depending upon the nature of what you're producing.

That's fine. We could do it in tons. If I may then ask, what was the tonnage capacity prior to reopening Bossier? In other words, in the end of 2009, what was your tonnage capacity at that point?

About 150,000 tons.

That's very helpful.

For capacity that was operating, because you had Bossier there. So operating capacity at the end of 2009 was about 150,000 tons.

That's helpful, okay. Next question has to do with kind of the way you operate the business. So when you look when you take on a booking, an order, and it's a firm order, I assume you buy the materials for that order at that moment, yes?

That generally is the case. There are exceptions, but generally we will buy the material -- now you're talking on the water transmission side of the business -- or do you want to talk both sides -- ?

Certainly the backlog is more transmission oriented, but sure. Just water transmission is maybe the bigger question.

The general principle is that we will commit to the steel when we have a firm order.

Right, so then if that's the case, and I believe you've laid out in your filings that with your current debt structure and leverage on your balance sheet that there are some restrictions regarding your accessing capital. I don't want to read this wrongly. Am I reading that correctly?

I don't know what you're reading, but the only restrictions that we would have would be the limitations in our credit facility.

Right, so -- and where are we on what that capacity is? I guess what I'm trying to get to here, Rich, as that is there anything credit-wise that is limiting your ability to book business?

No.

Here's my last question. It's all about the current steel pricing environment.

For tubular products, does not seem to be that much of a problem because of the health of that market. Water transmission seems to be a little bit more problematic. So how is it going with respect to being able to book projects large and small in the current inflationary steel environment?

Well, I think there you're really focused on the water transmission side of the business and as you have noted and I have noted elsewhere, the water transmission business is soft. There is no question about that.

And that does impact our ability to grow the business on that side of the house. But in terms of our commitments to improving the margin, the steel cost is only -- in an environment where steel costs are expanding, the steel costs are only a portion of the story. And we are focused on the other elements of the cost equation there in an attempt to improve the margin.

So what we will try to do is certainly in the competitive bidding that occurs acknowledge the fact that steel prices have been strong recently. They've come up a lot in the last three or four months.

And include that, acknowledge that in our bids, recognizing that this is a competitive bidding process and understand that to the extent that it is a competitive process and the cost of steel is rising, that we need to address other aspects of the cost equation in order to make sure that the margins continue to improve.

Fair enough. I'll jump back into the queue. Thank you.

Brent Thielman, D.A. Davidson.

Just on the water transmission business and looking at the fourth quarter, you mentioned I guess sort of sounds like one-time related items there and maybe that created some delays in terms of deliveries. Should we see that show up in the first half? Is that going to sort of inflate numbers so to speak in the first half of water transmission?

I don't think that will in and of itself, although we are catching up on some of that work that we did miss because of the weather or -- we had another weather issue as we go forward too. The weather was a particular bugaboo this winter.

But with regard to the maintenance downtime for the mill that we had, we are making up some of that. But I don't think that by itself, Brent, is going to significantly impact the first quarter. I don't think that's -- that's not a big part of the mix for me.

Okay, and arguably you talked about the trend toward better margins in water backlog. Would you say at this point you're getting closer to normal levels or are we still below that?

Well, I think we're still below it, but we're certainly above where we were in 2009. I think there's yet some ways to go before we get back to the kind of margins we saw in 2007, for example.

Okay. And the 11% gross margins in tubular products, I guess how sustainable was that into 2011? I know right now we're seeing some pretty significant increases in steel prices. Do you expect to see some pressure here in the first half just given the move in steel?

Yes, there is pressure on the margin because you can't recapture immediately that price increase that you receive from your customer. There is a lag.

We certainly are seeing some pressure. But as we stand today, there's been some good progress made towards increasing prices to our customers as well. We're not all the way back, but we are getting pretty close.

Sure, and then it looks like the tubular products backlog was down marginally on a sequential basis. Is that more seasonal?

I don't know. That business is still pretty strong.

So I'm not expecting that that is going to be a permanent issue here in the first half. Because that business is so -- because that oil and gas business is so volatile, it's kind of hard to project for the second half of the year. But first half of the year looks strong. It looks better than the first half of 2010.

Sure, sure. Sorry, and then one more if I could. The $16 million to $18 million in CapEx for 2011. Would that cover all the costs for the expansion in Kansas and work in Houston? Or should we see some additional costs in 2012 as well?

There might be a little bit that carries into 2012, but that number, the $16 million includes all of Houston and all of Atchison in Kansas.

Okay, perfect. Thanks very much.

Matt Sherwood.

Just had a quick question on the steel price environment and how it impacts the tubular business. Just because in 2008 when steel went up and the energy markets were tight, the margins spiked because you're in FIFO. Just could you walk through how the impact is going to look on a go forward basis?

Yes, well it all has to do with the relative robustness of the markets and how fast you can pass on price increases. That happened very quickly in the case of 2008.

In the case of let's call it fourth quarter of 2010 when the price of steel started to accelerate significantly into the first quarter of 2011, it's been an environment where it's much more difficult to pass on those price increases. And so there was a lot of resistance initially from customers to take the price increase, in part because the customers who -- now we're talking our customers -- were not convinced that these steel price increases were going to stick.

And so that's (inaudible) what was going on in 2008. And so there was less ability on our part to pass on these price increases, and we've seen that here in the first quarter. But as I said, eventually a balance is achieved and we have moved in the last month certainly a long ways in the direction of restoring the margin that we had otherwise. But there was a squeeze there for a period of time, there's no question.

And then also on the margin side in the tubular, you became API certified, so you (inaudible) pipe and also as you shift the focus to energy pipe which tends to have higher margins, is there an opportunity over time on that side of the business?

Yes, there is an opportunity on that side of the business and that's the reason why we are conducting the expansion programs that we have. Whether you look to Bossier which really isn't an energy product facility or the expansion in Houston or the expansion in Atchison, all of those things really are directed at the energy market.

Great, and I guess one last question on the margins. Brent touched on this a bit in water.

They've sort of been all over the place. There was a one-time issue in the fourth quarter that hit you. How much did that issue hit you in the fourth quarter on the water side?

Well, the single biggest reason for the disappointing gross margin in the fourth quarter for water transmission was the unplanned, unscheduled shutdown of a mill and the weather related issues principally at Adelanto. That's the biggest single item.

There are certainly other tissues in the fourth quarter as well but they are much, much smaller. But what really goes on and just so that you guys can appreciate, in the environment now where we have a backlog of jobs, a portfolio of work that has a lot of different gross margins to it, some of it was written in 2009, some in 2010, some of it was back even before that, when you have a lot of different margins for your inventory of work so to speak, the specific jobs that you work on during the quarter have a big impact on what the margin will be for that quarter.

So if it just happens that the mix was richer for that quarter on the jobs that have a higher margin, your margin will look good and then next quarter, you may be running something that has a lower margin that you maybe bid in 2009 but you're running now, and so the margin runs off a little bit that way. So the mix of jobs has an impact as well as the simple factors of extraneous events like a mill shutdown or the weather.

(multiple speakers) the inventory of what we have -- it's not like you are running things consistently through and so it's kind of a (inaudible) basis. There's actually a mix of things that occurs for a long period of time.

That's super helpful, and then one last question just to build on that is as you look at the jobs you're bidding now in the pricing environment, are you looking at pricing things back in the historical 14 to 18% gross margin range or how should we look at new bids in the marketplace?

As I said to Brent, the pricing -- the margins are getting better. Now it's not all pricing. It also has to do with some actions we're taking internally to improve the margins.

But the margins are improving, but they are not getting back to where we were historically. So I think that that will be a while.

I think that with these soft water transmission markets -- and really driven by the fact that there is a very difficult financing market for the -- or let's just say generally a difficult financial markets for the people who may want to build these projects, until we have a change in that, it's going to be difficult for us to get back to historical margins.

Great, thanks a lot.

(Operator Instructions) Scott Graham.

A couple more, if I may. The question that was just asked was very helpful, Matt, thank you. The cost reductions, what specifically are you targeting? What are you guys doing outside of your steel costs that you're kind of optimistic about here that can actually start the margin trend back upward?

Well, the next biggest cost is labor cost. Now you're looking at measures of productivity through the plant, workflow through the plant. There has been a lot of focus on controlling costs at the plant level and that is a continuing process, but we certainly during 2010 made some progress in that regard.

Okay, anything on the -- is that for both water and tubular?

Tubular's improvement in margin really is more volume related because we're actually -- although certainly looking at the cost in Houston and Adelanto, in the case of Bossier bringing that facility up, we are actually increasing the work force on the tubular side. But what needs to happen -- so when you look at improved margin, it really has to do with a lot more volume being available to absorb the overhead.

When you look at where we're going to go in tubular from here, it really has to do with improving yield. And the yields that we have had at Bossier who has a startup facility are not where we want them to be, and so that is the focus in 2011.

That's helpful. Last question is -- and I assume that if we are profitable next year that the tax rate will kind of be normalized in the I'm guessing 35 to 40% range. Is that fair?

Yes, actually I cannot answer that. You want to take a stab at that, Robin? (multiple speakers) I don't know. I did not comment on this year's tax rate, Scott, because it is unusual but it's unusual because the net loss is so small. But there's one manufacturing credit that's kind of rolling through there that's ruining the rate.

But in terms of being able to project that it would be back (inaudible) statutory rates or near statutory rates if we're more profitable, I don't know the answer to that question.

Okay. Well, here's just -- and any comment you could share on this would be helpful. If I'm looking at interest expense, and I annualize that a let's say a $10 million cost for the Company, your operating income in 2010 was $5 million, let's say $600,000 in charges for the severance, another %$0.5 million to $1 million in the weather stuff and what have you.

So let's say that that operating income number for 2010 looks more like a $7 million. It does suggest that you need to have a $4 million to $8 million increase depending on how you look at the operating income from 2010 to be profitable next year. And I guess my question is, what level of confidence do you have in being able to get to an operating income level that will be in excess of your interest expense?

Well, I will tell you that we are working in that direction. And sort of level of confidence, I'm confident that we are improving our operations.

I don't really think of markets in terms of things that I have confidence in our don't have confidence in. So we could have some aberrations or some changes in either the oil and gas industry or further deterioration of what's going on in the municipal markets which will present some challenges for us. But I know that we're headed in the right direction with regard to the operations.

No, that does sound true. Is there any more room in SG&A?

I know that as a percent of sales looks like it's stabilized, but it is up a lot since last year. But I think it kind of needed to be. Is there -- can we freeze SG&A in and around this 7% of sales range? Is there some maybe opportunity there?

Well, there is, Scott, in the sense that $7 million of the SG&A in this past year, 2010, is related to professional fees which is an extraordinarily high number for the Company. And that number should be coming down.

It's a little tough for us to project what it's going to be given the fact that we have shareholder litigation and an SEC investigation. But in general, that number should be coming down. That is a big number for this Company.

Yes, that's helpful, thank you very much.

Matt Sherwood.

I was just going to ask about the professional fees, but I guess you sort of covered that. Is there a normal number for professional fees that's in there?

You know, I don't -- haven't had a normal number since I've been here. (multiple speakers) as well. I don't think I can answer that, Matt.

Certainly it's a small fraction of what the current is. But because the audit ran something like $500,000 prior to recent years and legal fees (inaudible) maybe a couple million dollars is a rough guess, but since I wasn't here and I don't have that material in front of me, I would be reluctant to put a stake in the ground on that one. But it's a lot less than $7 million, I'll tell you that much.

Great. Last question, just I know Robin came over recently and she came from [orgon] steel mills which had a turnaround that was very successful. Just was curious what her thoughts are on the opportunities for the Company given her experience in her prior life.

I was very excited to join Northwest Pipe Company. Theirs is a very strong solid company. We have a great employee base. We have a lot of opportunity.

It deals with steel which was very appealing to me as well because I have familiarity with that. But I truly believe the future of this Company is bright and there's a lot that we can be doing and I'm really looking forward to helping move this Company forward.

Thanks a lot. We are too.

Thank you. I'm showing no further questions.

Well, I thank you all for joining us and I think that concludes the conference call for 2010. Thanks, everybody.

This concludes today's conference. Thank you so much for joining. You may disconnect at this time.