NWPX Infrastructure Inc (NWPX) 2012 Q4 法說會逐字稿

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's conference.

(Operator Instructions)

I'd also like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time. And I would now like to turn the call over to Mr. Scott Montross. Thank you, sir. You may begin.

Thank you, Angela. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm President and CEO of the Company, and 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 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. There is no change in the SEC investigation from the disclosures in past filings. On November 27, 2012, the court issued an order preliminarily approving the class-action settlement. And on December 19, 2012, the court issued an order preliminary approving the settlement of the derivative actions. There is a settlement hearing for final approval on both matters on March 22, 2013.

I will now turn to Robin, who will discuss our fourth-quarter and full-year results.

Thank you, Scott. Our fourth-quarter net income was $4.5 million or $0.48 per diluted share in 2012, compared to $1.5 million or $0.15 per diluted share in the fourth quarter of 2011.

Water Transmission sales increased 43% to $88 million in the fourth quarter of 2012, from $62 million in the fourth quarter of 2011. Water Transmission gross profit as a percent of sales increased to 19.9% in the fourth quarter of 2012, from 13.6% in the fourth quarter of 2011.

Tubular Products sales decreased 13% to $48 million in the fourth quarter of 2012, from $55 million in the fourth quarter of 2011. Volumes decreased 13%, while average selling prices remained relatively unchanged. We sold 40,200 tons in the fourth quarter of 2012, as compared to 47,100 tons in the fourth quarter of 2011. Tubular Products had a gross profit as a percent of sales in the fourth quarter of 2012 of negative 6.3%, and gross profit as a percent of sales of 5% in the fourth quarter of 2011.

The negative gross margins in the fourth quarter of 2012 was partly due to a $1.6 million lower of cost or market inventory adjustments. Total Company inventories decreased $18 million in the fourth quarter from the third quarter of 2012. Water Transmission inventories decreased $8 million, while Tubular Products inventories decreased $10 million.

Moving on to the full-year results. Our net income was $16.2 million or $1.72 per diluted share in 2012, compared to $12.7 million or $1.35 per diluted share in 2011.

Water Transmission sales decreased slightly $269 million in 2012 from $272 million in 2011. Water Transmission gross profit as a percent of sales increased to 16.7% in 2012, from 15.9% in 2011. The minor decrease in sales was due to an 8.9% decrease in selling prices per ton, partially offset by an 8.7% increase in tons produced. The increase in gross profit, and gross profit as a percent of sales, was driven by a decline in materials profit per ton, particularly in the fourth quarter as steel costs went down, and higher production volumes, which had a positive impact on the fixed portion of our cost of goods sold.

Tubular product sales increased 6.5% to $255 million in 2012, from $240 million in 2011. Selling prices increased 4%, and volume increased 2%. We sold 206,200 tons in 2012, compared to 202,400 tons in 2011. Tubular Products gross profit as a percent of sales was 4.4% in 2012, compared to 6.6% in 2011. Our energy products comprised approximately 74% of Tubular Product sales in 2012, compared to 70% in 2011.

Gross profit, and gross profit as a percent of sales, was negatively impacted by increases in materials cost per ton during the first quarter as steel costs went up, and by the increased competition from imports, which exerted significant downward pressure on selling prices and volume. In addition, gross profit was negatively impacted by the $1.6 million lower cost or market inventory adjustments mentioned above in the fourth-quarter discussion.

Selling, general, and administrative costs increased to $28.6 million in 2012, compared to $26.3 million in 2011. There was an increase in outside services, and wages and benefits, in 2012, as we had the costs associated with the [retainment] earlier in 2012. And then increased the accounting and finance staff, and utilized outside resources to address our internal control remediation efforts.

Interest expense was $5.6 million in 2012, and $9.3 million in 2011. The decrease was the result of lower average borrowings, and lower average interest rates.

Our effective tax rates were 25.4% and 43.2% in 2012 and 2011, respectively. During the third quarter of 2012, we performed a research and development tax credit study for fiscal years 2010 and 2011. We recorded a net tax benefit of $1.8 million resulting from the study in the third quarter of 2012, which reduced our effective rate for the full year.

In 2012, the Company generated $44.5 million in cash from operations to support the growth of the Business, mainly through our net income and depreciation, and decreases in accounts receivable, and increases in accrued liability accounts. These were partially offset by an increase in our costs and estimated earnings in excess of billings on uncompleted contracts.

Depreciation was $16.3 million in 2012, and $14.5 million in 2011. Inventories increased $6 million in 2012 from 2011, due to an increase in coil purchased for water transmission production, even though product inventories decreased slightly at the end of 2012, compared to the end of 2011.

Capital expenditures were $16.8 million in 2012, primarily for planned capacity expansion in our Tubular Products plants, and environmental upgrades at our Portland, Oregon facility. The remainder was for ongoing maintenance capital expenditures.

Now, I'll turn it over to Scott for an update on our Business.

As of December 31, 2012, our backlog in Water Transmission was approximately $173 million. As of December 31, 2011, our backlog was approximately $138 million. The backlog in Water Transmission has increased with the addition of the Lake Texoma project, which will complete production in the second quarter of this year. This project, along with other drought-related emergency work in Texas led to a record quarter in Water Transmission in both sales and gross profit. While we expect Water Transmission sales to be lower in the first quarter compared to the fourth quarter, we're expecting gross margins to be similar to the fourth quarter of 2012.

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

We expect to be between $30 million and $35 million of total capital expenditures for 2013, which includes some investment projects and normal capital maintenance. The biggest investment projects are the previously announced expansion at our Saginaw facility, as well as the continued modernization of our Atchison, Kansas plant. The Atchison modernization includes the installation of the second accumulator, which we've discussed in previous calls, and a new Hydro tester and the replacement of the existing [four main] and pre-weld section of the mill.

In conclusion, we anticipate another strong quarter for Water Transmission business, while we anticipate the continued competition from imports of energy products will limit profitability for our Tubular Products segment, at least through the first half of 2013.

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

Angela, is anyone ready to take a call?

Angela, is anyone ready to take a call?

We do have a couple questions.

(Operator Instructions)

[Ru] [Pender].

Hello, good morning guys, how are you?

Good morning.

Could you guys discuss the water transmission quoting activity recently, and if you can give us some details in terms of your sales without the Texoma project? Thanks.

Well I think one way to characterize that is if you look at quoting activity between the years of 2011, 2012, and 2013, that the actual amount of quoting activity for '12 and '13 is actually down quite a bit from what we had in 2011. Now one of the things that kind of increases it a little bit for 2012 was the emergency work that we saw in Texas. But I'd say it's down as far as the number of jobs being quoted 25% to 30% at least from what we saw in 2011.

But the one thing we are seeing is the jobs that are out there and that are being quoted are somewhat larger jobs than we've seen in the past. We've seen a sprinkling of smaller jobs, and the ones that we're seeing now are of a larger nature. But definitely the quoting activity is down.

Okay. And what were the sales from the Texoma project for this quarter?

The sales for the fourth quarter? Were you asking about the sales for the fourth quarter or the first quarter?

Fourth quarter.

We did approximately $39 million of the Texoma project in the fourth quarter.

Okay. And one more question actually, on your tubular project. Third quarter, I think you guys mentioned about you're trying to move up the value chain in terms of tubular. Can you just comment on that, like where you are and especially on the capacity, the total capacity at the end of 1Q '13?

Okay. Well first, I'll take the part on the value chain. When you look at the products that we're involved with, specifically the OCTG products or the oil country products, the larger percentage of that product market is moving toward heat treated products, especially with all the fracking and the pressures on connections and joints themselves. So a lot of it's moving to the higher strength heat treated products. So, when we're moving up the value chain, what we're doing is getting more into those heat treated products versus the more generic carbon products in that market.

And some of the things that we have done in order to establish our place in that is develop some longer-term relationships with third-party heat treaters, because at this point, we don't own any of our heat treating capacity or further processing capacity. So our focus has been establishing arrangements, a longer-term arrangements with heat treaters that allow us to have a little bit more control over the cost of heat treating versus just having spot market heat treating as we go into the future, and so we can move up that value chain and take advantage of that market.

As far as the capacity question, when discussing after we've implemented the second accumulator at our Atchison facility, our total capacity of our Tubular Products division is about 425,000 tons. And we have additional capital improvements that we're making to those mills that I mentioned when we talked about the capital that we're spending this year, which should take total capacity up to somewhere around 500,000 tons.

And that will be by the end of 2013 or something?

No. That will actually be by the first quarter of 2014. It's really a lead time on getting the equipment in and the installation time at the Atchison facility. So we're expecting that to be completed sometime in the late January, early February time frame of 2014.

Okay. And the last question, I just wanted to get a sense of your the utilization rate for Tubular Products in 4Q.

Okay. So as we moved through the fourth quarter of this year, our utilization rate of all of our facilities on Tubular Products was somewhere in the 40% range. I think one of the things that we saw was obviously with the imports, the pressure from imports, it drove at least the spot market volume a lot lower in the marketplace. I think as we've moved into 2012, one of the things that we've tried to establish is to establish some longer-term relationships and agreements, if you will, with the customer base. So as we're in the first quarter of 2012, we're little over 50% capacity utilization on those facilities.

Okay. Thanks a lot.

Brent Fieldman.

Hello. Good morning.

Good morning.

Yes Scott I think you mentioned that the number of jobs in the water business is down 25%, 30%, but the jobs are somewhat larger. Would you say the dollar value of the quote pipeline so to speak is similar to last year?

I think it's down because there's not as much Texoma emergency work and other emergency work as we saw like in 2012. We saw, as we went into 2012, we were expecting a relatively low year compared to what we saw in 2011, and off pretty significantly. And I think all that emergency work that emerged in that year, really, really is what allowed at least the top line to get very similar to what it was in 2011. Okay, so, and right now, this year, we are not seeing that emergency work come to fruition yet.

Now as everybody knows, we have a pretty strong focus on the big IPL job at the end of this year, which we still expect to bid in the month of July and it's a supply to start in the fourth quarter this year. So that's a big one. So I think that just to answer your question, the jobs are of larger dollar values this year than we've see normally over the last couple years.

Okay. That's helpful. And then, I couldn't recall, but were there any headwinds I guess from downtime at your plants due to some of the expansion initiatives and focus on yield and on the tubular side of the business?

No. We don't have any headwinds this year on downtime at the plants for improvement initiatives. The things that we're doing this year, we're working on similar things that we've been working on and seeing improvements and trying to continue to drive those improvements. Like up times, yields, and particularly with the Tubular Product Group, First Time Prime is going to be a specific area of concentration this year, because we have to keep -- it's all about volume and all about cost in that business. So we have to keep making incremental gains and all those efficiencies so that we can keep making ourselves more and more competitive in that market.

But this year, there will be no downtime related to any projects past what we've done in January with the accumulator, and then we go through this year and in the beginning of 2014, we do the front end of the big mill at Atchison and a new Hydro tester.

Okay. And I know with this import situation, at this point, are you budgeting or planning for tubular tons to be down in 2013 versus 2012?

At this point, we're not planning for them to be down significantly. I think we've done a couple things and -- imports are kind of -- it's a fact of life. We have to deal with imports no matter what. So our focus is on creating the longer term customer relationship so that we have a more consistent base load of volume on our facilities. It's also on creating those arrangements so that we have ongoing and steady heat treating capacity for the marketplace, and better control of over our heat treating costs into the marketplace. And at some point, I haven't seen anybody this year whether it's positive thinking that's not projecting that the rig count starts to go up sometime by the middle of this year.

So those are all things that we're focused on. Obviously, the imports play a part, but our focus is really on improving the business, because we're going to have to deal with imports ongoing. It's just how much during what periods of time. So we're really focused on the building of our own business at this point, and that's why we think we'll have volumes that are at least consistent with what we saw this last year.

Okay. That's helpful. And last one for Robin, I guess, what should we be thinking about for a tax rate going forward?

We believe about 36% is what we're projecting for 2013.

Okay. Great. Good luck on the quarter, guys.

Barry Vogel.

Good morning ladies and gentlemen. I have a question for Scott going back to the large projects that were announced in a press release I think it was last January. If I recall, there were two Texas projects. And one was Tarrant County and one was Houston, is that correct?

Correct.

Could you give us some color on -- and I didn't catch when you were describing this fourth quarter of 2013 Texas job, is that the Tarrant County job?

Yes, it is. That's the IPL job, which is slated to bid in July and start in the fourth quarter of this year, and it is approximately 150 miles from the reservoirs in East Texas to supply water to the Dallas area.

Can you give us some idea in the scope of tons for that job?

Well tonnage wise I can tell you miles at this point.

Like tell us miles. Tell us how many tons per mile.

I would say you're probably in the area of between 150,000 and 175,000 tons for that total job based on the miles that we're hearing now. Whether that all stays the same or not, we don't know, obviously, those can be adjusted and changed. And I think that's what we're looking at, somewhere between 150,000 and 175,000 tons. And that job Barry, is actually spread out over a several year time frame. The last information that we've seen on it actually takes that job out into from the end of this year out into 2018.

2018?

Yes. Yes. They're talking about 150 miles of pipe. (multiple speakers) Whether that stays that exact amount or not, that's open to what they decide. And that job runs for quite a period of time. And by the time it starts, we're almost in 2014.

No, I understand that. Now the 150,000 to 175,000 tons, is that based on the 150 miles?

Yes. Somewhere in that area. Yes.

Okay. And what about the second project, the one I think was Houston, Texas. Where is that?

Yes. That's the Houston MSA or the greater Houston Groundwater Project. Right now, that's scheduled out for sometime late in 2015 or 2016. And that's a project that's still under development and it's moving around quite a bit in the systems of the Texas Water Development Board or what they're planning on doing with it. But, it looks like 2015, 2016 and somewhere in the area. It's smaller than the IPL job, but we think that's somewhere in the area of about 120,000 tons of pipe as it sits right now. But that line is still being discussed, and changes are being made, so on and so forth.

Now, on projects of this scope, in this economic environment, because the Water Transmission business generally has had it tough ongoing in the last few years with housing collapsing, et cetera. Can you give us some color on what's likely to happen as far as how many companies might share in the project, or could it be that since you are lead dog and you've upgraded your equipment in Sag -- you're in the process of upgrading your equipment, you can offer many more things to the buyers. So, what's the likelihood that it will be more than one successful letting on these contracts? More than one --

I don't really want to speculate on who it's all awarded to. But I will say that we're right now currently engaged in supplying a trial half mile section for that IPL project, and besides us there's three others involved with that. So that should give you a little bit of a flavor of there's probably going to be more than just us involved in that pipeline.

Okay. Now, on the $30 million to $35 million of CapEx for this year, can you give us an idea of what percentage would be Water Transmission and what percentage would be tubular?

I think it's probably in the area of about 55/45. It's pretty even. Now obviously we're finishing up the big project in Saginaw so that we can handle that IPL project down there. And there's the upgrade that we're doing on the Atchison facility that we've talked about. The front end of the mill, as well as doing the accumulator and the Hydro tester. So we're really -- it is relatively close to 50/ 50.

Okay. Now one more question I have, it has to do with your capacity expansions and the state of the market, and of course, it's been very rough in the last six months or eight months, or nine months. If you go up to 500,000 tons of tubular capacity, like you expressed earlier in the call to answer one of the questions by first quarter of '14, are you confident that you can -- your utilization of that capacity could be very profitable? Or is there a question mark because of the imports issue, which you say is always here? How do you view that at this time? Because you obviously have committed to raise your capacity to that level.

Well I would view it in a couple ways, and make a couple statements to that. One, that capacity expansion at our Atchison facility expands what our product offering is in the line pipe market. And what it does is it opens -- it actually doubles what the available market is to us that we're currently dealing with in line pipe out of our Atchison facility. Being able to go to higher strength levels than we've been able to go previously, the higher gauge levels. So it opens up a much wider section of the market.

I guess the other way that I would characterize it is you do have the extra capacity, but it would also mean even if you're running the same volume that you're running now, you can run it at a higher speed at less of a conversion cost and make yourself more competitive in the marketplace with your conversion costs.

Okay. So this is tied hand to hand --

And that's a piece of it too. It's there if we need it.

Okay. So then what you're saying basically, you're doing this very cognizant of your cost factors, which is good. So if you could actually utilize that capacity at a high level, obviously the shareholders will be very happy.

Yes. And that's really what it is. It's all about costs. One of the statements I've looked at and made is, we can't control what the selling price is in the marketplace. But we can certainly do a lot to effect and control and reduce what our costs are at our facilities. And that's really the focus.

That's a great answer. Thank you very much. Good luck to you. Thank you.

Thank you.

And I'm showing no additional questions.

(Operator Instructions)

And we are showing no additional questions at this time.

Okay. Well we appreciate everybody calling in, and I guess we'll be seeing you in another few months for the next meeting. And good luck to everybody. Thank you.

Thank you.

That does conclude today's conference. Thank you for participating. You may disconnect at this time.