NWPX Infrastructure Inc (NWPX) 2011 Q2 法說會逐字稿

Good morning and welcome to the second quarter earnings release 2011 conference call.

(Operator Instructions)

Now I will turn the meeting over to your host for today, Mr. Richard Roman, President and CEO, and Robin Gantt, Chief Financial Officer. Please begin.

Good morning and welcome to Northwest Pipe's conference call. My name is Rich Roman. I am the President and CEO of the Company I am joined by Robin Gantt, our Chief Financial Officer. As I begin, I would like to remind everyone that the statements we make in this call about our expectations for the future, our forward-looking statements, and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risks 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 our results for the second quarter of 2011. We ended the quarter with net income of $5.4 million, as compared to a net loss of $1.4 million in the second quarter of 2010. Water transmission sales were up 33%, and tubular product sales were up 73%, compared to the second quarter of 2011. Our water transmission profitability improved over 2010, and our tubular products business continues to benefit significantly from the ramp-up of our Bossier City, Louisiana facility and the increase in oil and natural gas drilling operations, leading to increased sales of our energy products. Water transmission gross profit increased to 16% in the quarter from 9% in the same quarter of 2010. Selling prices were up 16% and volume was up 14%.

The increase in gross profit was driven by a more favorable mix of contracts and by the favorable impact of higher volumes on the fixed portion of our cost of goods sold. The more favorable mix is partially the result of the completion of lower margin contracts awarded in 2009, which flowed through the income statement in 2010 and which was replaced by higher margin contracts bid in 2010 and reflected in the 2011 income statement. Although we have seen a trend towards better margins in the water transmission group, there remain a lower margin contracts in the backlog. Tubular products gross profit grew to 9% in the second quarter of 2011, compared to 2% in the same quarter of 2010. Volume increased 48% and selling prices increased 17%. As I have noted during recent quarters, energy products comprise an increasing portion of our tubular products business. Our energy products comprised approximately 71% of sales in the second quarter of 2011, compared to 56% in the second quarter of 2010. Although tubular products' gross profit grew in the quarter, working against the increase were steel costs, which increased faster than we were able to increase our prices to or customers.

Selling, general, and administrative costs were $5.4 million in the second quarter of 2011, compared to $6.6 million in the second quarter of 2010. We had a net credit of $1.5 million from insurance proceeds related to our accounting investigation in the second quarter of 2011, compared to an expense of $1.7 million in the second quarter of 2010. This was partially offset by an increase bonus in share-based compensation expense of $1.5 million, associated with the increase in profitability, and other increases, including commission expense, associated with higher levels of business activity. Interest expense was $2.3 million and $1.9 million in the second quarters of 2011 and '10 respectively. The increase was the result of higher average borrowing, as we increased our working capital with the expansion of business, coupled with higher interest rates. In the first 6 months of 2011, the Company used $5.6 million in cash to support the growth of the business, mainly through fluctuations in our working capital accounts.

Some of the more significant changes include accounts receivable, which grew $29.2 million, partially offset by the collection of $14.7 million in federal income tax refunds. Capital expenditures in the first 6 months of 2011 were $8.6 million, with just over half for capacity expansion in our tubular products facilities, and the remainder for normal maintenance capital expenditures. As of June 30, 2011, our backlog was approximately $256 million, with water transmission at $208 million and tubular products at $48 million. With regard to water transmission, we currently project a decline in bidding activity during the remainder of 2011, which may result in a lower backlog for that segment as we enter 2012. In tubular products, demand for energy pipe is driven by drilling activities, which has been relatively strong in the first half of 2011, as oil and natural gas rig counts are up approximately 20% from a year ago. Demand for other tubular products is driven by nonresidential construction, manufacturing, and highway spending, which all continue to be soft. With the continued strength in energy pipe, this is an interesting exercise here, with the continued strength in energy pipe, we have seen significantly higher OCTG in line pipe import activity, particularly from Korea. Steel costs have been decreasing, which may cause some buyers to hold off raising orders until steel prices stabilize.

The increase imports in slower buying has caused the decrease in our tubular products backlog from the first quarter of 2011, and could negatively impact our sales and profitability in the second half of 2011. As previously discussed, the expansion project at our Atchison, Kansas facility will increase our estimated theoretical capacity in that facility from 100,000 to 250,000 tons. The project is proceeding as expected, and we anticipate that it will be complete during the first quarter of 2012. We are also upgrading our equipment in Houston, Texas to facilitate production of tubing with physical properties suitable for heat treating. This project is also proceeding as expected, and we anticipate that it will be complete early in the fourth quarter of this year. In conclusion, while the second quarter of 2011 showed improved results, there are some challenges ahead in the water transmission market through 2012. Tubular products results will be dependent on continued strength in energy drilling, as we do not foresee any significant recovery in our non-energy products. At this time, we would be happy to answer any questions you might have.

(Operator Instruction)

Brent Thielman, D,A. Davidson

Hi, good morning.

Hi, Brent.

Good morning, Brent.

Rich, I guess your comments regarding sort of the expected decline in bidding activity and water transmission. Have you started to see some changes in the market already, and should we take this to mean that pricing is becoming irrational again?

We have not begun to see in the market yet the decline that we are projecting. The decline, or the expected decline, in contracts coming to market is prospective, and so as you know, we have line of sight to most of the stuff well in advance of when the contract actually comes to bid. So my concern is not really the level of current bidding activity or what is in the backlog, the rather what we see coming to bid as we move through the third quarter, and especially into the fourth quarter.

Okay, and then I guess on the Tubular side, has pricing plateaued at this point, or are you still seeing increases in the market?

We are not seeing any increases in the Tubular Products business, increases in prices. We had a period in the spring where steel cost was moving up faster than we could we could move up our prices. Now that steel costs have been declining for a couple of months now, and so we've had a little bit of the benefit of having raised our prices, not as much as the steel. The steel has come down, but now the prices are getting a little softer too.

And then just last 1, on SG&A, is it sort of a sustainable run rate, what you saw in the quarter?

Well, it is a sustainable run rate, but you have to remember that from that sustainable run rate, quote unquote, you really need to take out the impact of the insurance proceeds on the litigation issues and the SEC investigation. So if you take those out, those are going to cause things to sway, depending upon how much we get reimbursed from the insurance company and how much activity there is on the part of the legal team in that quarter, but other than that, what you see is what is going on.

Okay

And then in the second quarter we had a net credit of $1.5 million. So you need to put that back in, I guess.

Sure. That is helpful. Thank you.

Scott Graham, Jefferies

Good morning. Question around your comment on Water Transmission bidding now. I guess what I'm wondering here is that, is the situation where maybe the marketplace was -- because of the things that were happening, the dynamics of the Company that you have really done -- you guys have done a great job in starting to straighten out here, that maybe there was some bids that you either weren't in on, or you, let's just say, you didn't win for whatever reason, and now you are kind of getting your fair share, but the fact of the matter is, is that the market overall has really not changed much. Is it, because the numbers you are showing, this quarter particular, I know a lot of it was price. That is still really good performance in a water market that looks kind of flat right now, and now you're kind of saying that maybe things maybe go the other way on you a little bit. I'm to I'm trying to understand the dynamics of the market here, and your re-entry into them. Or am I just mischaracterizing that, that you've been in it all long, and that the water market was may be stronger in pipes than I was expecting? I'm just trying to understand that dynamic here.

Yes. I believe that we have been in the market all along. What happens in this business is that you do get periods in which contracts come together. I mean, it is not, it is a lumpy business by its specific nature, that is they are -- each sale is a significant piece in an of itself, but they can also, then, the lumps can lump together, and produce quarters in which you have unusual amounts of activity. Remember, all of us in this industry, the water transmission industry, have excess capacity.

Everybody can expand their production and so when you have quarters in which the lumps come together, as I described, then you have the ability to, the productive capacity to be able to meet that demand, and some of that has gone on across quarters here. So when you compare quarters to quarters, it can be a little artificial. But what I was trying to describe in terms of prospects is not a slowdown with regard to what we are doing, our contraction in our specific business, but rather the fact that we are seeing, as we sit here today, we are seeing and anticipate fewer projects will come to market in the next 9 months than we have seen previously.

And that's really the crux of my question. Why do you think that is?

Well, I think that it is a combination of a number of different things. I don't think there is a single reason for this, but -- because, again, this is a question of not regular demand for these things. As projects come and go, and when you have a number of projects that occur at the same time, it may look like a big increase in demand, and then you may have nothing for a little bit, and then it looks like a decrease in demand, but if the 3 projects had been scheduled out consecutively, it would've looked like constant demand, and so this is about timing. But the reason I think that we are seeing projects put off is that people are still very nervous about the financial status of what they are doing. And so, to the extent that we deal with water agencies and municipalities, people are concerned about financing these projects, and so they tend to be delayed where they can be, and I think that is what's going on.

Okay, that is very fair and very helpful. So would it be fair to say in pulling this all together that you are kind of expecting second half volumes to decline, but you will get some pricing improvements, whereby the business could be still up, but off of pricing with may be volume going negative, or are you expecting volume to be flat in those statements?

I think that you will see, as I described, I think in the press release, but if I didn't I'll say it here -- you will can see continued improvement in sales and profitability year-on-year, but what I am talking about is looking forward into 2012, where I think then you're going to see some challenges in terms of sustaining any improvement that we have made thus far in 2011 over 2010.

Okay.

And I should also say that it is early days, and so we don't see it, but that doesn't mean he can't materialize. If, for some reason, we find ourselves in a situation where governments want to spend, if they can find more money and want to spend more money, there are projects to be done, but currently they are being delayed.

Okay. So would it be fair to say that your pricing should be up in the second half of the year in Water Transmission, right?

Well, the pricing depends upon the mix of what we are doing, but I am not foreseeing any significant decline in prices, that's for sure.

Okay that's fine, that's very helpful. That is really all I had. I might have 1 other but I will get back in the queue. Thanks.

(Operator Instructions)

Barry Vogel, Barry Vogel & Associates

Ladies and gentlemen.

Hello, Barry.

Hello. Yes, I want to try to ascertain the breakdown of the Tubular business. In your press release, some of the numbers that you have are fine, but some are not adequate, because I think that would be helpful to look at where the growth is coming. I know that Rich mentioned that the non-energy business is very soft, and so if you can help me with that, that is my first question. So if you could, for example, give us the energy tons and the non-energy tons in Tubular in the second quarter and the first quarter of '11, that would be helpful. And the estimated, rough estimates, of price per ton for energy versus non-energy, and sales for non-energy and energy. And the best indicator of all, operating profit per ton, energy versus non-energy. Can you give us some help on that?

We can give you some help. I'm not sure that we have every number that you want. And I don't know, this will be in a lot of numbers, I guess, that we could provide. So bear with us as we try to get through, in numerical fashion, some of what you requested. We want to talk about -- now this is just Tubular those haven't followed it as closely as Barry. We are just talking about Tubular Products, production of energy versus non-energy pipe in the second quarter of 2011 -- the first quarter of 2011 and the second quarter of 2010. Barry, is that what I understood?

Yes, and if you have the first quarter of 2010 that would be helpful.

Yes, and I do have that stuff all in front of me.

All right, that would be great.

So here we go. Let's start with 2010, and I am going to round these so we don't get too much detail. First quarter 2010 in energy, 15,000 tons, second quarter 21,000 tons. In 2011, that is 32,000 tons and 39,000 tons; and the non-energy 2010, 14,000 tons and 16,000 tons.

What was that again? I'm sorry.

14,000 and 16,000. This is 2010, Barry?

For the non-energy?

Yes.

All right. So first quarter of 2010, non-energy was how many tons?

14,000 tons

And the second quarter of 2010, non-energy?

16,000

Okay. Good, I got that

And then move that to 2011.

Yes.

It is 15,000 and 16,000

Non-energy?

Right.

So the first quarter is 16 and the second quarter is 16. Okay. So that is the tonnage?

Right. That's helpful, and how about price per ton? Revenue per ton, we have that as well. Energy is in the -- first quarter, second quarter 2010, $900 and $1,000

So it is energy is $900. Is that energy in the first quarter of '10, $900?

Yes.

And the second quarter was $1,000 for energy?

Yes.

And non-energy in the first quarter of '10?

$1,000, and $1,100 and the second quarter

Okay, and now about first quarter of 2011 and second quarter of 2011, the same basis? Energy for the first quarter of '11?

You want to do energy '11? Energy, first quarter of 2011 is $1,063

And second quarter?

Is $1,243

And how about non-energy, first quarter of '11.

$1,200 and $1,250, second quarter's.

All right. So prices are very similar.

Yes.

Okay, and would you dare to give us operating profits for energy and non-energy?

I don't have that

Okay

I don't have that here broken down. Now, remember, Barry, that even on the energy side, there is a mix of products. And so, although it is useful to break it down in energy and non-energy, both categories contain a significant mix of products. Within the case of energy line pipe and OCTG, but we don't see, with OCTG you get tubing and casing, and so, depending on while volume you are selling of those particular items, you will get a different average revenue per category, that is energy or non-energy, and of course the non-energy category is full of many different kinds of products.

Okay, and again, the non-energy is soft and the energy is, on balance, stronger than the non-energy?

Right

Okay. Now as far as your comment about steel costs, I think it was in your press release, about a squeeze. Steel went up, and you implied that will would hurt margins. Can you give us some idea of what the negative effect of the steel cost price squeeze has affected you in dollars in the second quarter?

I do not have that number. The prices continued to increase -- the price of steel continued to increase in the second quarter, and it really was more of a problem in the first half of the second quarter, because by the time we got to late May, steel prices had started to ease, and our prices did not come off immediately. So what we had was an increase in the steel price, and we were able to pass a little bit of that on, but and we were making some progress to getting back to normal margins, when the steel price began to fall again. And so that helped with the problem that we were having, but we didn't, we still had, for the first half of the quarter, a squeeze on the margin, but I don't have the exact dollar amount of what that squeeze was for those first 6 weeks or so.

All right. Now, if we look at the third quarter, steel prices have, as you said, started to decline?

Right

And you may not be able to raise prices, is that what you said in the commentary?

Yes, the question is going to be how the fast the prices come down, that is selling prices. So we've already seen the benefit now -- and remember, it takes you 30 days to 60 days for a steel cost to work its way through the inventories in your income statement. So we saw steel prices come down in June. We should see that reflected in improved margins in July, unless the selling price comes down. Well, we didn't see much of the deterioration in the selling price in July, but my commentary with regard to Korean imports and the decline in steel prices, signals that we expect prices to get softer. And another piece of evidence that others suspect prices to get softer, is you saw the backlog in our energy business, go down -- the backlog in our Tubular Products business, which is essentially an energy business now, go down. Well, other people are expecting a softening in the prices, in my view. They are holding off on ordering because there isn't another reason for the backlog to go down. The demand itself in the industry is as strong as it's ever been. The recounts is over 1,900. I mean, it's a very strong recount. There's a lot of demand for pipe, but people are procrastinating, in part because we've got this decline in price scenario, and in part because there are imported products now in Houston and on their way to Houston.

So if we look at, on a net-net basis, looking at the costs coming down and the prices still on the soft side, would you expect, if you have the same amount of volume in the third quarter in energy tubulars versus the second quarter, that operating profits per time would rise, or margins would rise?

If we had the same volume would I expect, well it all depends. It depends on what your view on prices is, how soft are prices going to get? I don't know.

Okay, and as far as volume what are your marketing people tell you as to what would be the logical volume for energy tubulars is in the second half of the year?

Yes. Well we don't expect to see any decrease in demand. We are not projecting any decrease in demand for energy tubulars in the second half of the year.

Okay. I will get off and I will come back on was more questions. Thank you very much.

Yes.

(Operator Instructions)

Scott Graham, Jefferies,

Hello. Can you just give me the cash from operations number for the quarter?

We have to turn to the right page, but we sure can.

We used net cash about $5.6 million.

Used?

Yes.

All right. So that is another big investment there, it seems, in working capital.

Right, and the biggest piece was where accounts receivable that I mentioned of $29 million.

Should we see that empty out in the second half of the year? In other words, shouldn't working capital be a source of funds for full second half?

Well, working capital --

It won't increase as much, we are not projecting that. However, when you look at that -- I said receivables are up, however, our days in receivables and our cash cycle have decreased substantially from just a couple quarters ago. So we are definitely getting the volume, but the growth in the business, particularly on the Tubular side has caused that receivable number to go up a lot.

So, in my view, it doesn't empty out until your business contracts.

But you are saying that Tubular volumes are going to, both Tubular and Water volumes, are going to weaken in the second half of the year, on a year-over-year basis? Increase, perhaps, but by lesser amounts, and we cannot monetize any working capital from that?

If business does decrease, yes. I believe, though, we are saying Water Transmission -- we expect the decrease will happen, really going into 2012 and not 2011. Tubular Products, we certainly believe that the market will stay strong. So it's just how much of it that we are going to be able to capitalize on. So, I don't think we're forecasting any significant decreases. So, therefore, I expect working capital will hold steady.

Okay, all right, thank you.

Thank you. Mason Stark Ballast Capital

Hello, good morning.

Good morning.

If you could just -- you had a nice improvement in your tons shipped on the Tubular side from, sequentially from the first quarter, and I know, obviously, there are a lot of projects in terms of your capacity that are ramping up this year. Could you just go -- and in terms of -- give us some idea of exactly how much of this quarter's tons shipped is a source of, and projects that have either been completed or in the process of being completed? And theoretically how much of capacity utilization you thought you had in this quarter, and maybe give us an idea of where that might be going in the second half?

Well, I don't think we have the specifics to be able to answer how much was actually produced by the increase in capacity, that is, the capital projects, but --

Well, we really haven't seen the impacts from the capital projects as of yet.

That is true.

They will be completed in the first quarter of 2012, and fourth quarter of 2011 in the case of the Houston project, and the Houston project does not increase the capacity, it just increases the number of products that we can produce, but it is not going to increase capacity.

Okay.

I thought he was referring to the increase coming from what we are doing in Bossier. But just to give you a view of what the production capacities are at a good product mix. Atchison is about 100,000 tons a year, as I mentioned, is going to 250,000; Bossier City is about 125,000 and Houston is about 50,000 tons

Okay, got you. I know Bossier City was taking a little bit of time to work the tweaks out as you were. Should we take it that this quarter's improvement, just sort of you're getting those sort of tweaks worked out of the systems down there, and is it starting to run a little bit better?

Is starting to run better. It is not to where we want it to be, and so we continue to work on up-time for that mill, but it certainly has improved. Actually we've made progress every month since we started it up, but we have improvements to make.

Okay. Is it a stretch -- we assumed -- you did just under 56 tons this quarter. If we go to an idea, is 60 within reason, or should we be thinking about the next quarter as somewhat similar to this quarter?

Well, it will depend on what we see by way of demand and I don't see any fall in demand. So I would say that there shouldn't be any reason that we see a fall in productive capacity or our production here. We are expecting demand will hold up, and we are expecting that we will be able to get our share of the market, and, which is very small, and so I'm not expecting any fall in production here.

Okay thank you.

You will be able to do the math, but based on the capacity numbers he gave you, our utilization in the second quarter was about 81%.

Got you. That is what I figured. Thank you very much.

Thank you. Barry Vogel, Barry Vogel & Associates.

Yes. I have a question about the commentary that US Steel made on their conference call about rising prices, and from what you are saying, it is sort of the opposite of what they had said, and of course US Steel has a very large Tubular operation. Could you give us an idea of where the reality lies?

Well, in the comment from US Steel was that they were increasing their tubular product prices?

Yes.

Yes. They did have a couple of price increases, here, I don't remember anything in the last few weeks, but going back earlier in July. And that was part, Barry, of what I described of this progression that we had of trying to pass along steel price increase. We did get some of it passed along, but we didn't get all, or at least in our case, we didn't get all of it passed along. And so I don't know what US steel would say to that, whether they feel they got all of their steel price increase passed along in their tubular price increases, but we did see some of that. But that stopped, let's say a month ago, and what we are expecting now is some softening in that.

Yes, because the price per ton that you gave us, which we appreciate, $12.43 for the second quarter in energy tubulars.

Yes

So you're saying that the best that might happen under these current circumstances is a flat price for the third quarter in energy tubulars?

That would be the best.

Okay, and can you give us some idea of what the new Chief Operating Officer is accomplishing in the short time he's been there?

He hasn't been here very long. It's only been 2 or 3 months, and his first assignment has been going through all of our safety procedures. He has really taken on the safety aspects and introduced some new programs for us. Second thing that he has done, and he is well into this as well, is going through the maintenance programs that we have, and is actually bringing in some new maintenance resources to address some of the issues that we have in the operation of the plants. I would say in the first 3 months those have been the principal focus areas for him, safety and maintenance.

And going forward beyond that, what would be the number 3 issue that you think he should be putting in effort into?

Well, I think he ought to be putting an effort into the cost structure -- the operating cost structure of our facilities, and that is his next focus. Why does it cost us what it does to produce what we produce, and so that's the next round. We are also, Barry, going through a strategic planning exercise, and that look at operating costs will be a part of this strategic planning exercise.

Thank you very much. I appreciate it.

Thank you. Brent Thielman, D.A. Davidson.

One more for me. Any change in behavior from your primary competitor in the Water business, just given that pretty significant event associated with them?

We have seen no change in Ameron's behavior in the marketplace. Now, it is early days and they are trying to -- I think the people in the water transmission business at Ameron are trying to figure out what it means to them, because they have been acquired by non-water transmission entity, but and [the deal] is not done, and so I guess I'm not surprised that we haven't seen any change in their behavior is yet.

Great. Okay. Thank you.

(Operator Instructions)

At this time we have a question from Barry Vogel

Robin, can you give us your current estimate for capital expenditures and D&A this year?

We believe it will be between $16 million and $18 million for the CapEx. For depreciation, we expect it will be -- sorry, give me a moment while I look at that. We expect it will probably be between $9 million and $10 million.

And I know your tax rate has varied a bit in the first and second quarters. What is your best guess today for your effective tax rate for the year?

I think it will be around 38%.

Okay, thank you very much.

You're welcome, Barry.

Thank you. At this time not showing any more questions.

Thanks everybody.

Thank you.

And thank you for your participation. This concludes today's conference call. All parties may disconnect at this time.