NWPX Infrastructure Inc (NWPX) 2012 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen-only mode. After the presentation we will conduct a question-and-answer session. (Operator instructions) This conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your hosts for today's conference, Mr. Richard Roman and Robin Gantt. You may begin.

Thank you, Theresa. Good morning and welcome to Northwest Pipe's conference call. My name is Rich Roman; I'm the President and CEO of the Company. 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. With regard to the SEC investigation, there have been no changes from disclosures in the past filings.

On July 19, 2012, the shareholder class-action lawsuit and the shareholder derivative actions were settled in mediation for a total of $13.25 million, subject to court approval. We expect the total settlement with will be paid by our insurers, except for a retainer to be paid by Northwest Pipe. In our second-quarter financial statements we recorded $13.25 million in accrued liabilities to handle the settlement and a $13 million receivable for the insurance proceeds.

I will now turn to Robin, who will discuss our second-quarter results.

Thank you, Rich. Our net income was $3.6 million or $0.38 per diluted share in the second quarter of 2012 compared to $5 million or $0.53 per diluted share in the second quarter of 2011. Water Transmission sales decreased 21% to $59 million in the second quarter of 2012 from $74 million in the second quarter of 2011. Water Transmission gross profit decreased to 13.8% in the second quarter from 15.5% in the second quarter of last year.

The decrease in sales in the second quarter of 2012 compared to 2011 was due to a 19% increase in tons produced and a 3% decrease in selling prices per ton. The decrease in gross profit was driven by lower volumes, which had a negative impact on the fixed portion of our cost of goods sold, and higher material costs, including steel, of 5% per ton compared to the second quarter of 2011.

Tubular Products sales increased 4% to $72 million in the second quarter of 2012 from $69 million in the second quarter of 2011. Volume increased 1% and selling prices increased 1%. We sold 56,500 tons in the second quarter of 2012 as compared to 55,700 tons in the second quarter of 2011.

Tubular Products gross profit was 7.5% in the current second quarter compared to 7.4% in the second quarter of last year. Our energy products comprised approximately 72% of Tubular Products sales in the second quarter of 2012 compared to 71% in the second quarter of 2011.

Selling, general, and administrative costs increased to $6.6 million in the second quarter of 2012 compared to $5.6 million in the second quarter of 2011. There was an increase in wages and benefits in the second quarter of 2012, as we have increased the accounting and finance staff to address our remediation efforts.

Interest expense was $1.5 million in the second quarter of 2012 and $2.6 million in the second quarter of 2011. The decrease was the result of lower average borrowings and lower average interest rate.

In the first half of 2012 the Company generated $24.4 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and increases in our accounts payable and accrued liability accounts. This is partially offset by an increase in our costs and estimated earnings in excess of billings and inventory accounts.

Capital expenditures were $8 million, primarily for environmental upgrades at our Portland, Oregon, facility and plant capacity expansion in our Tubular Products plants. The remainder was for ongoing maintenance capital expenditures.

Now I'll turn it over to Rich for an update on our business.

As of June 30, 2012, our backlog was approximately $273 million, with Water Transmission at $245 million and Tubular Products at $28 million. As of June 30, 2011, our backlog was approximately $256 million, with Water Transmission at $208 million and Tubular Products at $48 million.

The backlog in Water Transmission has increased substantially with the addition of the recently announced Lake Texoma project. Production for Lake Texoma is starting this week and will continue through the middle of 2013. The addition of this project, along with some smaller emergency boat-related work in Texas, will lead to higher net sales in the Water Transmission segment in 2012 than we described when we spoke to you after the first-quarter earnings release. But we continue to expect Water Transmission sales will be lower and 2012 than in 2011.

In Tubular Products we expect to see compressed margins for the foreseeable future, as imports have had a significantly negative impact on both volume and margins. We have taken some short-term production reductions in the third quarter to help control inventories, and we will consider additional reductions as we react to future changes in the market.

In conclusion, we anticipated the lower sales margin and income in the second quarter of 2012 when we provided our outlook with the first-quarter earnings release. Currently, the outlook for Water Transmission in the second half of 2012 has improved, while the outlook for Tubular Products has weakened.

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

(Operator instructions) Brent Thielman.

Rich, is there any way to quantify the impact the downtime had on the Tubular Products segment by way of volumes or sales?

Are you talking about the downtime for Atchison in Q2, or are we talking --

Yes, correct.

We really -- it certainly had some impact, but I think that the increase in the imports had a much larger impact on the quarter.

Okay. And then I guess -- on Tubular, you are looking at the backlog, where you finished there, your comments on imports through the summer, and then trying to weigh that with, I guess, the effect of the downtime in Q2 along with your capacity expansion. Should we expect to see some sequential pressure on volumes in Q3, or should this new capacity allow you to grow volume still quarter over quarter?

Yes, so we finished the last expansion project or the most recent expansion project in Atchison in May, and we have further projects planned. We're going to put an accumulator on the big mill here that's going to -- by the time we get the equipment, it will be the first quarter of next year, it looks like.

But we continue to expand, and others have expanded production as well, Brent, as I'm sure you know. So we've had a significant expansion of production capacity in the US.

In addition to that, we've seen a very significant increase in imports. And those two things together, I think, will put some pressure on our ability to utilize the expansion -- expanded capacity that we have developed, especially near-term here in the third quarter. I think that especially imports are going to have a big impact on what happens in the third quarter, and I think it's going to be in the form of continued pressure on our sales.

Okay, understood. And one more on Tubular -- Rich, you talked about the operating margin target in the 9% to 10% range. Obviously, some dynamic things happening on the import side. Do you think that's still attainable here in the second half?

I don't think we will get there in the third quarter, because I don't think the market is going to be very insufficient volumes for us to get there. But I still am hopeful for the fourth quarter.

We will see as this quarter gets along. We are, Brent, as you may know, in the process of gathering data on the impact of the imports on us. And so we'll see where that takes us as well.

Barry Vogel.

On the import issue, has Canada filed a trade case on imports of OCTG, do you know?

I know that they have filed several trade cases, but I'm not aware that any of them are on OCTG, Barry.

What are they on, do you know?

They are welded pipe which has crossed over, but it's not -- it's my understanding it's not directly related to the OCTG. But they are doing the smaller welded pipe against a lot of the same countries that we are looking at.

Do the producers of OCTG in the United States -- I'm sure you have a trade association of some sort, I would think. What is the attitude about the imports in terms of potential anti-dumping suits?

Well, we are right now in the midst of gathering the information, all of us as an industry, to determine whether or not the imports have been harmful to the US industry. And once we have gathered the data and can make some analysis of the damages, then we will see if there is a trade case to be filed. We are in that process right now, Barry; we are gathering the data.

Okay. Now, as far as your record backlog of $245 million, I would think obviously it includes the $69 million Lake Texoma project. Is that correct?

That's right.

And now that you have this backlog and you know the mix of the backlog, meaning this particular project is a big chunk of the backlog, how will this -- this is a question for Robin -- how will this affect incremental operating margins at Water Transmission in the second half of the year?

Well, we certainly don't think that for the year for Water Transmission we'll end with higher revenue, as we did last year. In terms of the margins, we don't disclose margins for a particular project. But we certainly didn't sacrifice margins to take this job.

So I guess, if I were to classify, I would call it decent. There are certainly -- in the past I've heard rumors of really, really big margins; people could take advantage of jobs like this. We don't have that in this economy, where there isn't a lot of work all over the country. But the margin itself is healthy, and I guess that's how I would characterize it.

Now, could you give us the status in the bidding process of Tarrant County and the Houston project that you have talked about in the past?

Tarrant County right now -- there will be a test order bidding towards the end of the first quarter of 2013, and that will be delivered in the second and third quarter of next year. The first big section of the project, it will cover about 10 miles, will bid in the third quarter of 2013. The earliest revenue would be recognized would be the fourth quarter of 2013, but most of it will fall in 2014. The current plan, from what we understand, is that they will put a 10-mile contract out for bid about every six months.

And what about the Houston project?

The Houston project, what they currently are calling the greater Houston Groundwater Supply Project, it is another one that will be fairly big. It's not quite as big as Tarrant, but it will be a pretty big one all the same.

It's still in the planning stages; there isn't a lot of information out there. It doesn't have a website like the Tarrant County job. Currently, it's expected to bid in 2014.

Diane Daggatt.

On capital expenditures for this year, are you still expecting the $35 million?

No, we are expecting about $22 million to $25 million. Some of those works that we were planning on doing have fallen into next year, and we have also reduced some of what we were planning to spend. But right now we're definitely expecting about $22 million to $25 million.

Okay, and then is your production capacity on the Tubular Products site still going to go up to about $400,000 by the end of 4Q?

Yes. I think that it's actually already there, in theory. It's just -- well, first off, we have to have the orders and without the imports getting in the way. But we are there right now. That's the perfect product mix, too, of course.

Jere Sweeney.

Good morning, guys. A couple quick questions. I think most of mine have been answered. But on -- Rich, you mentioned you were hopeful to get margins back up to the 9% to 10% range in the fourth quarter. Obviously, the imports are going to make it difficult in the third quarter.

What's your thinking on getting there? Is it the trade case becoming finalized, or is it some efficiencies working through your system? Just a little bit more clarity on that?

Yes, it really has principally to do with volume, Jere, and our ability to handle volume. We have been making improvements to our capital equipment, so to speak, which enable us to improve yields, let's just say, in general to improve our productivity. And, while very good improvement has been made there, it really can't get reflected in the margins if we run at, let's just say, reduced volumes.

So to me it really is, yes, it is continued improvement in the way that we operate. We need to continue to improve yields and our productivity in general.

But we need to do that in the context of volume. And we were starting to get some of those volumes for -- not extended periods of time, but for short periods of time, so that we can see that we can reach that far. But without the volume, it's very hard. And I do think that the imports are going to impact the volume here for at least the third quarter, and then we'll see what happens beyond that. The folks importing the pipe currently are aware that the industry is gathering data for a trade case, and we'll see if that knowledge or that awareness of what we're doing impacts the volume of imports coming into Houston.

Understood. So it essentially -- they're aware of maybe some potential trade actions that may slow down some of the imports just to avoid, we'll say, that confrontation?

That's right. You know, remember, this is a case of being able to prove damages, so to the extent that the volume decreases, the damages would decrease as well, and at a limit would disappear.

Just a couple housekeeping items. You mentioned that it looks like your work or your next upgrade cycle on the Tubular side is being pushed into Q1 from Q4.

Yes, that's right. And that really has to do with the delivery of some equipment.

Okay. How long of a downtime would that have been, or do you anticipate that being?

I think it will be about three weeks, but they are still working on that timeline and what they are looking at.

Okay, and was that similar to the one Q4 2011 or comparable to the most recent one in, I think, in Atchison?

Probably more comparable to the Q4 of 2011.

Okay. And then finally SG&A -- is that $6.6 million a fair estimate going forward? For the time being?

Right. In the first quarter I said that I expected about $6 million to $6.5 million a quarter in the second half of 2012. And I still see that.

Okay, got it. That said, I appreciate it. Thank you.

David Neuhauser.

My question centers around the current economic environment. I just wanted to see, given that, are you expecting to see further consolidation with your competitors in the industry as a whole? Could you comment on that?

Well, our business is divided into two, you realize, two separate groups of competitors. And on the Water Transmission side, I'm not aware of any consolidation that's being discussed at all. And on the Tubular side, it's a much, much bigger industry in which we are a much smaller player. And I'm sure there will be activity of various kinds, but there's nothing that relates to Northwest Pipe at all.

Okay. I guess that was kind of the question -- are you -- given the environment, would you be on the prowl to be acquirers, or I could look for strategic joint ventures of some kind with competitors?

We have under consideration a whole range of business development activities. But there's nothing that is near enough at all in terms of where we are going for us to disclose any kind of direction that we are headed in.

Okay, I appreciate that. And then also I know that you touched on margins again. How long is the potential there that you are seeing a protracted view on margin? And when could we identify at least the potential for that increase of what your goals are?

Well, you'll see some additional information on the trade case. The trade case takes 6 to 9 months to develop, and so I think the next important piece of information will be what the potential damages might be and therefore our ability really to get aggressive with the trade case.

The other thing, David, that you need to watch -- and I'm sure that you do. But -- so you can watch the trade case. That will tell you something about the domestic volumes could be. The other thing is the number of oil rigs that are in operation. Now, the oil rig count continues to remain very healthy, and so demand for the product is quite good. But if that were to change, then that would be another indication that it would be a stretch for us to achieve the volumes that we need to bring those margins up.

Well, that's fair. All right, I appreciate it. That's all I have. Thank you, guys.

At this time there are no other questions.

All right. Well, we thank you all for participating, and we look forward to being in front of you again, in another quarter. Thanks, everyone.

Thank you for joining today's conference call. All parties may disconnect at this time.