NWPX Infrastructure Inc (NWPX) 2012 Q1 法說會逐字稿

Welcome and thank you for standing by. At this time all participants will be in a listen-only mode until the question and answer session. (Operator Instructions) Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to Richard Roman. Sir, you may begin.

Thank you, Danielle. Good morning and welcome to Northwest Pipe's conference call. My name is Rich Roman. I am President and CEO of the Company, and I am joined by Robin Gantt, our CFO. 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 filing on Form 10-K 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 Robin for a discussion of our first-quarter results.

Thank you, Rich. Our net income was $4.7 million, or $0.50 per diluted share, in the first quarter of 2012, compared to $2.9 million, or $0.31 per diluted share, in the first quarter of 2011. Water transmission sales decreased slightly to $58 million in the first quarter 2012, from $59 million in the first quarter of 2011. Water transmission gross profits decreased to 16.6% in the first quarter, from 16.9% in the first quarter of last year. The decrease in sales in the first quarter of 2012 compared to first quarter of 2011 was due to an 11% decrease in tons produced, partially offset by a 12% increase in selling prices per ton. The decrease in gross profits was driven by higher steel prices of 19% per ton, compared to the first quarter of 2011, and more volumes which had a negative impact on the fixed portion of our cost of goods sold.

Tubular product sales increased 59% to $84 million in the first quarter of 2012, from $53 million in the first quarter of 2011. Volume increased 40% and selling prices increased 17%. We sold 66,600 tons in the first quarter of 2012, as compared to 47,500 tons in the first quarter of 2011. Tubular Products gross profit was 8.1% in the current quarter, compared to 9.2% in the first quarter of last year. The margin was negatively impacted by higher inventory costs flowing through from the fourth quarter of 2011. These higher inventory costs resulted from planned downtime, particularly at our Atchison, Kansas, facility in December of 2011 to install equipment related to our capacity expansion project. In addition, margins were negatively impacted by higher materials cost-per-ton of 15% in the first quarter of 2012, compared to the first quarter of 2011.

As we have noted during recent quarters, energy products comprise an increasing portion of our Tubular Products business. Our energy products comprised approximately 77% of Tubular Product sales in the first quarter of 2012, compared to 68% in the first quarter of 2011. Selling, general and administrative costs were essentially the same with $7.3 million in both the first quarter of 2012 and 2011. While our professional fees increased from the first quarter of 2012, for accounting restatement-related work, we had similar costs in the first quarter of 2011 related to our accounting investigation. Interest expense was $1.6 million in the first quarter of 2012, and $2.6 million in the first quarter of 2011. The decrease was a result of lower average [bar links wings] and lower average interest rates.

In the first quarter of 2012, the Company generated $17.7 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and decreases in our receivable and inventory accounts. This was partially offset by an increase in costs and estimated earnings in excess in billings account. Capital expenditures were $4.4 million primarily for environmental upgrades at our Portland, Oregon, facility and plant capacity expansion in our Tubular Products plant. The remainder was for ongoing maintenance capital expenditures.

Now, I will turn it over to Rich for an update on our business.

Thank you, Robin. As we reported in our call a couple weeks ago, as of March 31, 2012, our backlog was approximately $198 million, with Water Transmission at $161 million, and Tubular Products at $37 million. As of March 30, 2011, our backlog was approximately $258 million, with Water Transmission at $194 million, and Tubular Products at $64 million. As we previously discussed, the backlog in Water Transmission has decreased. While we will not hit the lows of 2009, we are currently projecting lower sales in gross margin for Water Transmission in 2012, as compared to 2011. In Tubular Products, we expect we will start seeing improved margins in the second half of 2012, as compared to 2011 as we progress the expansion project in our Atchison, Kansas, facility this month, and continue the cost improvement program in place throughout our Tubular Products facilities.

In conclusion, while the first quarter of 2012 had higher sales and income than the first quarter of 2011, our overall margin, measured as a percentage of sales, decreased. The Tubular Products margin, however, has increased from the second half of 2011. With the downtime in Tubular Products and our production schedule in Water Transmission, we believe the second quarter of 2012 will have lower margins than the first quarter, but we expect some recovery margins in the second half of the year.

At this time, we will be happy to answer your questions.

Thank you. (Operator Instructions) Our first question comes from Scott Graham with Jefferies.

Good morning Rich, good morning Robin. So, on the volume declines in Water. How much-- is there a way to bucket that, the impact it had on gross margin in the quarter in that business?

I don't know if we really have a way to bucket it beyond what we've done, in terms of what we wish to talk about. We definitely had the volume decline, but we had the selling prices go up.

Right. That's like the essence of my question is that your gross margin in that business, if my calculations are right here, declined 30 basis points year-over-year. Your pricing was so much better, it suggests that there was a pretty hard fixed-cost hit there. I guess maybe the best way to ask this is, where I'm going with this is, do you expect pricing to maintain at the current levels? And you expect this relative mix to continue? Or, I assume it will soften as the year goes on, on the volume side. The volume will decline, will be less as we get onto easier comparisons. Will at that point later in the year, will the pricing be still this favorable do you think?

We do not think it will be as favorable. However, it is so dependent upon project-by-project, what's included, what are the sizes. We did note that we are expecting decreases in sales. We do expect that some of these margins decreased that we are expecting will come on the sales side as well.

Right, right. Further on the Water side, is there any news about any new projects? I know that you are involved in one or two large ones out there. Is there any indication as far as, how that is going? Award dates, what have you?

I think it's fair to say, Scott, that I mentioned the last time that we spoke that, we had some upcoming projects in Texas that were really -- it really came up because of the drought situation there. The fear with that a project is that it will get pushed back as the region sees some rain, which happened a little bit, but not enough to push back the project. So, we are, relative to where we were a couple weeks ago, we continue to be on schedule with the bidding of those projects. Which is coming out later this year, in fact, well, the first really large one next month. So the good news is that, we haven't seen a delay in any of those projects that are being done on an accelerated basis, shall we say.

Okay. Okay. Let me just switch over to Tubular, because that was obviously a really good number there. How much was your productive capacity up year-over-year, would you estimate?

Yes, that's actually a tough question because we are in the middle of our capacity projects and we installed some in December. Certainly had some positive impact in the quarter, there's no doubt about that. We are selling some more this month, the current month of May, that will add some more. As to what our current theoretical was in the first quarter, that's actually a question that we don't know and we think it's irrelevant since we are adding more right now. But we are moving to that 400,000 ton in theory annually, that we talked about last time.

So would you say -- it sounds to me, Robin, that you are intimating here, that it's just a really good market. It's, your capacity is up for sure, but the 40% volume increase was also significantly market driven. If I'm right on maybe what you are implying there, and your outlook being favorable on Tubular for the rest of the year as well on the sales side. Is this a situation where your distributors are telling you that this gas-to-liquids switch in the market is really a good thing for them, a good thing for you --because there's been seemingly no interruption in your sales, and there's been a big change in where the rigs are operational, if you know what I mean.

Could you maybe, maybe this is more of a question for you Rich, can you characterize how this gas-to-liquids is impacting conversations with customers you're having; it doesn't look like it's impacting the top line at all, in fact, only in a good way.

Yes. And that is true. It has clearly a positive impact on what we've been able to do. We're clearly increasing our productive capacity, and that's being called for in the marketplace. Now, with regard to this focus on oil prices as opposed to gas prices. We do have to remember in looking forward that, the gas price is still pretty depressed and so that, eventually long-term, has an impact.

But thus far, we are seeing a pipeline of orders that is really more impacted by near-term price of steel than it is the price of oil. Because what's happened now, is people are being very cautious about the inventory that the building because there's a general perception that the price of steel will fall. So, we're seeing some -- as I explained the last time we were together, some choppiness in the orders. More choppiness now as we get in further into 2012 than we saw earlier in 2012.

So there might have been in the second quarter a little bit of pull forward volume?

I don't know -- the second quarter of this year, you mean?

I apologize. I meant the first quarter of this year. In this 40% number that might have been a little bit of pull forward for the rest of the year?

I don't have the impression that there is much pull forward there, Scott. I do -- I think that the increase in demand is genuine. So, I think that we're just seeing some, our ability to produce it, and the fact that the orders continue to come in, the demand continues to be strong, although somewhat choppy.

My associate is tapping me here. He said that you said, that your customers are expecting sales -- steel to decrease in price. I'm sorry I thought you said increase in price, which is why I asked to pull forward question. That would not be relevant. So, thank you for that.

Something that we had not talked about that was more relevant to the first quarter of 2011 which is a phenomenon we saw then.

That's very helpful. Thank you.

Our next question comes from Brent Thielman with D.A. Davidson

Good morning. Rich, you guys talked about some expected down time for disruptions in Q2 associated with bringing this capacity online in Tubular. I'm wondering, do you expect it to be to the same degree as you saw in Q3 and Q4 in terms of the impact?

No. This is a smaller project than we undertook in Q4, so it should have a lesser impact.

And that should all be complete by the end of Q2?

Yes, it should be complete by the end of this month.

Okay.

There's another project going into Atchison in the fourth quarter, late in the fourth quarter which will increase production capacity again but between the end of this month and the fourth quarter, we don't have anything planned there.

Okay. On the Water side, and I understand it's obviously a very lumpy quarter-to-quarter. Do you look at the one quarter uptick in backlog here as an anomaly, was there a large project there, maybe a little more color on that side?

I don't know that it is an anomaly. There are large projects that come along from time to time, and there certainly was in the first quarter 2012, but we have some large projects coming up too, Brent. Some of these Texas projects are pretty big, and so there will be that big addition that occurs as we go through this year.

Okay Rich, and I'm sorry, because I missed those comments. I know you indicated that those were going to be up for bid, did you give a timeline on those again?

Yes. The first -- well, there has already been one in Texas that we won an award for. But there is another large one coming up, which is actually in the bid next month.

Any sense on the size of that?

Well, it's a very large project, but it's being bid in sections. There are four sections to it. But, it's a project that's, in total, as big as the project we built in Utah.

Got you. That's helpful. Then, Robin, on the corporate line. I understand there is some unusual stuff there, would you expect that to return to Q2 through Q4 levels, that $3 million to 4 million?

I do expect that it will decrease, I don't know if it will get back to $3 million or $4 million, it could get down to $6.5 million, $6 million, but probably not until Q3. We still have some overhang in the second quarter that are statement related to the quarter, we didn't file the audit until the end of April, so we will have some overhang there.

Okay. One last one, when do you guys expect to file the 10-Q?

We expect to file that today.

Okay. Thanks a lot. Good luck in the quarter.

Our next question comes from Barry Vogel with Barry Vogel & Associates

Good afternoon, ladies and gentlemen. You made a comment, Rich, in the press release that we will start to see improved margins in Tubular in the second half of 2012, as we complete the expansion in Atchison, Kansas, and the Atchison, Kansas, facility in May. You had an operating margin for Tubular in the first quarter of 7.4%. Could you give us your goals for Tubular operating margins in the second half of '12? What would be your long-term margin goal as tonnage and utilization of your new capacity continues to help the Company financially?

Yes, for the second -- you are right, we are in that 7% range now, 7% going up to 8%. So, for the second half, I would look for 9% going up to 10%, Barry. Then longer-term, something in the very low double-digits. We commented -- it might have been, you asked the question before about the 15% margin that some other companies have achieved, within the energy sector.

I explained that we don't have a full complement of products -- we don't make seamless, for example, that tends to be a higher-margin product. So, I think that we are headed for something that's low double-digits, but my target for the second half of the year is 9% to 10%.

All right, that would be pretty good, actually.

We are working towards getting there.

Now, would you think that, if everything goes -- comes as planned, in terms of the expansion and you can do the business, that low double-digit margin is a reasonable goal for 2013?

Yes, in terms of our operation, I think it's reasonable. In 2013, well, and for the second half of 2012, we need to keep our eye on what's going on in the marketplace, not only with regard to demand, but the supply of pipe. We are still seeing a lot of import. So, the pricing of the imports is going to impact the margins that we make, both in the second half of 2012 and 2013.

Now, but that is happening as we speak so --

That's right, so we are talking about increasing the margin in the face of that, but it is a factor.

Okay, I understand that. As far as going back to someone else's question about what's your capacity today. Would you have some idea, relative to that 400,000 ton number -- that you've have used in a couple of conference calls before, where you are right now -- roughly where you are right now?

I think in the last call, we said at the end of 2011, we were at roughly 275,000 or 280,000. You can see by the -- if you just multiply the first quarter by four that's you are at 260,00 to 270,000. So, we are someplace between that to 275,000 to 280,000 going up to 400,000 at the end of this year. At the moment, we are literally doing the -- just finishing the -- I don't know if finishing is the right word, but coming back up from the work that we do in Atchison. So, that's going to have additional impact. How much? Are we at 325,000 now or are we at 350,000? I really don't have a feel for that yet, but I think it's safe to say we are about 300,000 right now.

I have one more question on the Saginaw, Texas, facility. You talked talk about, on your press release, very large projects. You just said that you got an award already, and then you just said -- what with the prior questionnaire - questioner, that, that large project, where you got an award comes in four sections. Does that mean you got an award for one of the sections?

Yes, there's actually two different projects that have four sections. One that is coming up for bid, and one that recently bid. The one that recently bid, we did get an award for the section, yes.

So, that's for one section or all four?

Just for one section.

Is that in your backlog figures?

I think, I would have to look, Barry, because I don't remember whether that came up in April or it came in March. I don't remember off the top of my head to tell you the truth. It's either in March or April. If it's in March, obviously it's in the backlog numbers. If it's in April, it's not.

So, when would we have more of an understanding of what -- how successful you would be in these two large projects? What is the earliest date, we'd see that increase your backlog dramatically?

You will see -- when we report the backlog for the second quarter, you will see how we fared on those projects.

Assuming that they aren't delayed in bidding.

Right, but we can explain that too.

Excuse me?

Now, Barry, these big projects, neither one of them are the Tarrant County integrated pipelines that we've been talking about. These are emergency work. So that really, really big Texas job is not what we are talking about here.

Okay. Thank you very much. Continue the job you are doing, and you are doing a much better transparency on your calls, I must admit that.

Thanks Barry.

You're welcome.

(Operator Instructions) Our next question comes from Matt Sherwood with Cooper Creek Partners.

Hi guys. Congratulations on a great quarter. I just had a quick question on the Tubular and the capacity constraint questions that you've been asked. Were you capacity constrained in the first quarter? In other words, if you had the full 400,000 tons of capacity, would you have been able to -- did you have orders available to ship more product?

Well, the issue would have been, for us, the ability to make it. We are not running any of our plants on around-the-clock shifts. We are running two shifts. So, the issue about going out and seeking more orders and being able to make them, would have really need to have been addressed previously in order to bring on the crews and train them and get to around-the-clock operation. But that story is more complicated by the capacity expansion that we are undertaking in Atchison, which would have been the first plant we would have expanded to around-the-clock operation. So, we are looking at that coming up, but we were not -- it was not as if we were going out and trying to get orders to get to around-the-clock operation.

That would be an around-the-clock operation, what level of capacity utilization would that correlate to versus two shifts?

Well, the around-the-clock operation would bring us to the full amount of what we are talking about. The 400,000 tons, when we eventually get there, we still have a capital project to go to get there.

Fair enough. The capital project in the fourth quarter at Atchison, what's the nature of that project?

Put an accumulator on the big mill. There are two mills there and on the larger mill, we are going to put an accumulator. We put an accumulator on the smaller mill in this most recent May project that we are doing.

Will that increase the capacity or improve the efficiency of the operation?

Yes, it will increase -- it will do both. It will get you more throughput and a better yield.

Great. All right great.

What the accumulator does is allow you to process the coils at the front end of the mill continuously, rather than stopping the mill and putting new coil on. When that one runs out, stopping the mill and putting another new coil on. The accumulator just allows that to be a continuous process.

Great. Looks like good things to come in the future. Congratulations.

Thanks Matt.

Our next question comes from David Fondrie with Heartland Funds

Good morning. First, congratulations on a nice quarter. Secondly, on Atchison, when did you take that down? Was it before the second quarter started?

No. We took it down in May.

Took it down in May. So it's only going to be down for approximately one month.

Not even, yes.

Then, inventories in total were down from the year end, which I thought you were going to try to build some inventory for the Atchison improvements. Was just demand -- was most of that decrease in inventory coming on the Tubular side, or do they come on the Water Transmission side?

The decrease came on the Tubular side, and that was pretty much all the raw material and that we had to build up in Atchison the coil to get ahead of the increased production we knew we were going to have, beginning in January. So we had that little buildup, especially while they were down, that went -- that decreased so that inventory decreased, the finished goods is about the same.

Okay. I think you said that some of the steel, particularly back in the first quarter, was probably bought at somewhat higher prices. Are steel prices -- can you give a trend of steel prices, I guess that is what I'm asking?

Steel prices have been holding pretty steady for a couple of --

Please standby. (technical difficulties)

Sorry about that we seem to have gotten disconnected from everybody. Dave Fondrie was asking about the steel cost, Dave are you still on?

You are back into the conference. David's line is open.

Hello. Sorry about that, I didn't think it was that difficult of a question.

(Laughter) We just decided to call it quits. As you can imagine we have no idea what happened but we are currently back.

Not quite sure exactly when it cut off, we were talking about steel prices.

It cut off right at the beginning.

Oh good. (laughter) What we are seeing is that the steel prices have been a little bit up, a little bit down for a couple of months now. There is a belief that they are going to decrease, which is what has led to some of the uncertainty in the tight markets. If people believe steel prices are going to go down, therefore pipe prices will go down. So, they haven't been buying pipe as much ahead as they do when you have the opposite happening. If they think steel prices are going up, they, of course, try to get their orders in. Which is what we saw a year ago.

What is the lag in time between -- I mean, obviously if steel prices start going down and people are looking for lower pipe prices, the inventory of older higher-priced steel obviously flows through. What is the lag time between the repricing of tubular pipe due to the lower steel prices and the timing to get it through the production process?

It -- I've seen that really narrow band, I've seen wider bands. I think it depends on how high it goes up. When steel prices a few years ago were real, real hot, the pipe prices were really flying up, right behind them, pretty closely. At other times, it will be narrower, but I think it's probably -- a good month, 1.5 months.

So, if we had a period of downward projected steel prices, you probably would have some margin pressure in the Tubular side, is that a fair statement?

Yes, as we start working through orders, yes.

The last question I have, you mentioned that imports were still pretty prevalent. Maybe you could give a little more color about that. I think in the last call, you talked about some potential of some tariffs on some of the imported pipe. If you could in that analysis, talk about the -- clearly there is a huge cost to ship heavy pipe from overseas into the US markets. What perhaps that, that cost is versus -- or what cost advantage you have just on the freight side?

I talked a little bit the last time about the import situation. The imports are still running very, very high. They were high in let's say late 2008, early 2009 with the imports that came from China. Following that experience, there was a trade case brought against China and some [extra] duties put on Chinese pipe. So, that pipe no longer came to the United States, or at least no longer can directly from China to the United States.

But, the role of supplying that pipe has really shifted to other countries, now -- supply and import of pipe. Korea is really the principal exporter of pipe -- of energy pipe to the US now. But is also coming a little bit from India, a little bit from Turkey, it's coming from a lot of different spots. A little bit from Vietnam, one of the things the Chinese manufacturers did was simply shift their mills to Vietnam. So, they could export Vietnamese pipe instead of Chinese pipe. So the role of imports continues to be a very important one. It's about half the supply of certain kinds of energy pipe. It really is one that is starting to build in terms of inventory carry in the US from places like Korea.

So that's why I say that, we really have to have one eye on what is going on, with regard to imports, as well as the other eye on what is really happening with demand, because demand is pretty good. The recon continues to be relatively high and that has been a strong draw for demand. Now, with regard to any [counter adjudication] we might have, against let's say Korea, I explained last time, I didn't think much was happening. I still don't think much is happening. So, that although the Chinese case proceeded directly and was -- our thoughts clearly expeditiously by the US Government. There is nothing of a similar ilk going on with regard to the Koreans or Indians or anything like that right now. So we will still be subject very much to the pressure put on by the pricing of this imported good.

What is their cost disadvantage or their freight disadvantage, Rich, coming from those overseas locations?

Relative to the -- I don't know what their freight is across the ocean. I know that ocean freight in general is very inexpensive. Since the cost of the steel -- depending on the price of steel at the moment, but at current prices of steel. The cost of the steel really is 70% or 80% of the cost of the product, and so that really is -- the cost of your steel is really what's driving the cost of your product, not the cost of the freight to get there. We've seen a lot of imports from all over, not just from Asia. So, that leads me to believe, Dave, that whatever the price is, they're paying for that transportation, it's not the significance of the total price of the product.

So the US market is fundamentally under-supplied. We do need foreign pipe, I guess, to meet the demands of the market, but there is concern about supply long-term, -- or too much supply, long-term, is that a fair assessment?

That's right. So, if you just look at OCTG, so the oil country part of the -- what we refer to as energy pipe is line pipe and oil country, OCTG stuff. The OCTG market has been supplied roughly half from overseas historically.

Okay. Thank you very much. I appreciate that. Again congratulations on a nice quarter.

Thanks, Dave.

Thanks, Dave.

Our next question comes from Diane Daggatt with McAdams Right Ragen.

Hi. Just a couple of questions here. You mentioned you are bidding on the second Texas project next month, that's large four sections similar to your Utah project, which I think was around $61 million. So, are you bidding on all four sections? So it potentially could be around a $60 million backlog project down the road?

It's unlikely we will bid on all four sections.

Okay. Any color on the size of the first Texas project, I may have missed it on the call.

Well, there are a couple projects going in Texas now, but I don't think that we talked about the specific size of our projects. We don't associate for us a specific revenue amount with a project, unless you have something like the Provo project, which was a pretty unique situation for us, because it was so large. But, so these projects that we're talking about in Texas are large projects but they are other projects that we have from time to time that are similar size. So, we don't try to break them out and tell you specifically what's in the backlog and what portions of the revenue we have that relates to a specific project, in parts for competitive reasons.

Okay. Then, on the energy products side, the 77% of your Tubular sales were energy this quarter. Those margins, are they higher than the construction side and should we see that percentage even go higher?

Well, in general and, especially right now, the margins on the energy side are better than the standard and structural margins. You have to remember, that this standard and structural end of the business is a very depressed end of the business. So there isn't really much demand going on at all for commercial construction. So it's an unfair comparison at the moment to say that energy margins are better. They are, but the commercial construction is really suffering.

Right, okay. Thank you.

Our final question comes from Brent Thielman with D.A. Davidson.

Hey guys, sorry, one more. Again, sorry to beat on these Texas projects, but if you were successful in winning more sections here, would that change your outlook for Water Transmission or is the timing of delivery for these projects beyond 2012?

Some of these projects will deliver, will certainly deliver into 2013. So, if we are successful in these projects, it will certainly project us -- or allow us to project sales beyond what we are describing to you here today. But Brent, I don't think that, even if we were to be as successful as we can be with regard to these projects, that we can get enough work into 2012 to make 2012 reach the 2011 revenue number. I still think we are going to be below 2011 revenue. I think we [can] work fast enough now and get it to the plants. (multiple speakers)

Okay, thank you.

At this time there are no further questions.

All right. Thank you everybody. We will see you on the next quarterly call.

Thank you.

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