NWPX Infrastructure Inc (NWPX) 2013 Q2 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. After the presentation, we will conduct a question-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 introduce your CEO, Scott Montross. Sir, you may begin.

Thank you, Allie. Good morning and welcome to Northwest Pipe's conference call. My name is Scott Montross. I am President and CEO of the Company, and I am 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 the actual results to differ materially from expectations.

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

Thank you, Scott. Our net income was $5.6 million, or $0.59 per diluted share, in the second quarter of 2013 compared to $3.6 million, or $0.38 per diluted share, in the second quarter of 2012.

Water Transmission sales decreased 1.5% to $58 million in the second quarter of 2013 from $59 million in the second quarter of 2012. Water Transmission gross profit as a percent of sales increased to 20.9% in the second quarter of 2013 from 13.8% in the second quarter of 2012. The decrease in sales was due to a 34% decrease in tons produced, partially offset by a 49% increase in selling prices per ton.

The increase in gross profit and gross profit as a percent of sales was driven by the timing of production on the Lake Texoma project, which was substantially completed in the second quarter of 2013. In addition, cost-reduction efforts in labor hours, quality and material usage have improved profitability.

Tubular Products sales decreased 18.6% to $59 million in the second quarter of 2013 from $72 million in the second quarter of 2012. Volume decreased 6% and selling prices per ton decreased 13%. We sold 52,900 tons in the second quarter of 2013 compared to 56,500 tons in the second quarter of 2012.

Tubular Products' gross profit as a percent of sales was 6% in the second quarter of 2013 compared to 7.5% in the second quarter of 2012.

Our energy products comprised approximately 77% of Tubular Products sales in the second quarter of 2013 compared with 74% in the second quarter of 2012.

Gross profit and gross profit as a percent of sales were negatively impacted by increased competition from imports, which exerted significant downward pressure on selling prices and volumes. Profitability was positively impacted by a one-time state research and development credit of $1.2 million. Profitability has also been positively impacted by operational improvements made at all facilities, particularly at Atchison as a result of our capital investment project.

Selling, general and administrative costs decreased to $6.3 million in the second quarter of 2013 compared to $6.6 million in the second quarter of 2012.

Interest expense was $1 million in the second quarter of 2013 and $1.5 million in the second quarter of 2012. The decrease was the result of lower average borrowings and lower average interest rates.

Our effective tax rates were 34.5% in the second quarter of 2013 and 34.8% in the second quarter of 2012.

In the first six months of 2013, the Company generated $13.2 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and decreases in costs and estimated earnings in excess of billings and increases in accounts payable. These were partially offset by an increase in our trade and other receivable accounts.

Depreciation was $7.2 million in the first six months of 2013 and $7.5 million in the first six months of 2012. Inventories increased $6 million in the second quarter of 2013 from the first quarter of 2013 due to an increase in Tubular Products inventory. We had an increase in coil inventory due to a large-line pipe job in Atchison. An increase in finished goods inventory led to temporary shutdowns at our Houston and Bossier City, Louisiana locations at the end of June and the first half of July.

Capital expenditures were $18.4 million in the first six months of 2013, primarily for planned capacity expansions in our Tubular Products plants and the expansion project at our Saginaw, Texas facility. The remainder was for ongoing maintenance capital expenditures.

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

As of June 30, 2013, our backlog in Water Transmission was approximately $115 million. As of June 30, 2012, our backlog was approximately $245 million. We expect that the third quarter will be the weakest quarter for the year, particularly in Water Transmission. The backlog in Water Transmission has significantly decreased as we have completed much of the drought-related emergency work in Texas.

We expect Water Transmission sales, gross profits and margins to be lower in the third quarter compared to the second quarter, with gross margins in the low to mid teens. A potential bright spot for the fourth quarter is the KWA project, which is a 72-mile pipeline from Lake Huron to lower Eastern Michigan communities.

In Tubular Products, we expect to see compressed margins to continue in the third quarter as imports have had a negative impact on both volumes and margins. The trade case filed on July 2 addressing the high imports of oil country tubular goods has not yet had a significant impact on sales prices or volumes. The impact of the trade cases should become clearer as the International Trade Commission and the US Department of Commerce progress with their investigation and findings. We expect margins will be in the low single digits for the third quarter.

We expect between $26 million and $30 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 Saginaw project is now substantially complete. The Atchison modernization includes the installation of a second accumulator, which was completed in the first quarter. In addition, we are installing a new hydro tester and replacing the existing front end of our 16-inch mill. We expect that this project will be completed in the first quarter of 2014.

In conclusion, we anticipate a less profitable third quarter. As we have not seen a significant benefit from trade case on oil country tubular goods, we believe volumes and margins in Tubular Products will remain compressed for the near-term. While there are some larger Water Transmission projects on the horizon that could start production in the fourth quarter of 2013 and early 2014, our third-quarter order book is at depressed levels.

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

(Operator Instructions). Brent Thielman.

Hi, this is Taryn, filling in for Brent. Good morning.

Hello, Taryn.

Hi, Taryn.

So, as you mentioned, Q3 is expected to be your weakest quarter of the year. Would you mind providing the assumptions you have built in to expect Q4 to be stronger than Q3?

Well, I think one of the things that we see is we have seen a little bit more bidding activity than we have previously, specifically in California. And we have just gotten a couple jobs or we are working on getting a couple jobs that we expect to pick up or help pick up the fourth quarter.

Also what is potentially out in the fourth quarter is the job that we mentioned in the reading, which is the KWA project, or Karegnondi Water Authority, which is a lower Eastern Michigan water project. It is 72 miles from Lake Huron, to bring water to lower Eastern Michigan communities. And right now, our best information tells us that there is a possibility for that to start in the fourth quarter of this year.

So I think that is -- we are hoping that some of the additional project work that we have seen as we have gone out over the last several weeks and the KWA project will help start to pick up the fourth quarter a little bit.

Okay, that's helpful. And then Tubular margins were a little bit better than what we were expecting. How much did mix help with this quarter and will that be a factor into the second half?

Well, I think on the Tubular Products margins, as Robin said, something that contributed to them was about a $1.2 million research and development tax credit that we had related to our Bossier City, Louisiana facility. So that helped pick those margins up and made them the 6%.

But I think as we look at going into the third quarter and the fourth quarter, we are still projecting low-single-digit margins in Tubular Products, down to even breakeven, like we have been talking about, while the trade case is still trying to get legs, if you will.

Okay, that's helpful. And then lastly, how much of the 49% increase in ASPs for Water Transmission was attributable to the Texas project and how much was attributable to the overall increase in ASPs across the industry?

Can you repeat that? I didn't hear the first part of that.

Just the 49% increase in your ASPs for Water Transmission, how much, how much was attributable to the Texas project and --

Right.

-- compared to the industry.

Okay, so I am not sure that it is a big amount was attributable to overall Water Transmission. Now, the Texoma project did have a little bit higher price. And we have also had some additional projects that we carried out of [2004] into the first quarter and into the second quarter of 2013 that helped the average selling price. Okay?

I think one of the big things that really helped what we saw margin-wise in the second quarter, besides what we had left over from Texoma and a couple of the other projects that had higher margins, was the work that has been done on costs. We have focused very hard on taking cost not only out of Tubular Products business, like you have heard us talk about many times, but also on the Water Transmission side of the business we have had a pretty significant reduction in the man hours per ton that we have in Water Transmission between the beginning of 2012 and where we are now.

We have had a very large reduction in the cost of quality versus where we were in 2011 and 2012. As well as we have continued to focus on making sure that we leverage our raw material buys so that we are getting the best values we can in the marketplace for the raw materials that we are getting. So all those things really contributed to that.

Okay, that's helpful. Thank you.

Scott Graham, Jefferies.

Hey, good morning. Congratulations. Very nice quarter.

Thank you, Scott. How are you?

All right, all right. So kind of piggybacking on the last question, what would you say, Scott, Robin, would be sort of the pricing outlook for Water Transmission in the second half, based on what you are seeing in the order book?

What we are seeing is we are still seeing relatively depressed levels of bidding activity, Scott, compared to what we saw in 2011. And I think what we expect is that there are fewer jobs overall. We still think bidding activity is down probably 35%. So there is fewer jobs and there is the same amount of competition, in some cases even a little bit more competition, focused on those fewer jobs. So there is more pricing pressure on those jobs.

So I think you will continue to see downward pressure on pricing in Water Transmission as we go through the third quarter and into the fourth quarter, and you will continue to see some downward pressure on the margins as a result of that.

Okay. So you are expecting essentially what was a plus 49 in the 2Q to flip negative in the second half.

I think we are expecting that the plus 49, if you look at the number of projects we had, we carried some pretty high-priced projects through the first quarter and into the second quarter. And those were projects over and above the Texoma job that we had.

So as we go out further into the year, the projects that we are going to be bidding, we don't have any of that high-priced work left. There is going to be more pressure on the price levels on the projects that we are bidding. So that is why we have said that we believe the profitability, margin levels and everything in total is going to be lower in the third quarter and going into the fourth quarter, depending on what happens with the KWA project. But there will be more pressure on those prices.

Okay, all right. Got it. So if I look at Lake Texoma in the second quarter, I am assuming that that was about $5 million.

Yes. The majority of it was --fourth quarter -- we did about in the area of $39 million in the fourth quarter, I think about $25 million in the first quarter, and I believe around $5 million in the second quarter.

Okay, okay. Are you guys around later? Because I have a couple of other questions.

Sure.

Great. Thanks.

Matt Sherwood, Copper Creek Partners.

Hey, guys, congrats on an excellent quarter in a tough environment. I just had a quick question. So KWA, so Lake Texoma is a 46-mile pipeline. You guys got some portion of it, and it was like $69 million in revenues. KWA looks like it is going to be at least like 50% longer. Can you just help us understand the potential for that job?

I think in total, you are looking at a job that is well in excess of $100 million. And I think, you know, if the job goes -- because that is really -- that really is the question. Because right now, we have done our bidding on the job to the KWA Water Authority, but they apparently are having a few issues with the bonds. JPMorgan is working on the bonds and the coupon rate that they are projecting into the marketplace isn't really getting the kind of attention that they wanted to. So that is starting to slow things down a little bit.

Now that being said, if it goes in the fourth quarter, I think we are positioned to take a relatively large part of that job. So I am not sure that it would be quite as big as the Texoma job, but I think that depending on how much of the job we get, depending on how competitive the bidding environment is, we could get a pretty substantial piece. But I think it would be hard to get to the levels of Texoma.

Well, if you have got about 50% of a $100 million job, you are pretty close to Texoma, I think, which is $69 million in revenue.

We call Texoma about $70 million in revenue, and I don't think what we would get out of this job would get to $70 million of revenue.

Spitting distance.

It would be something below that.

Fair enough. Okay, great. And then can you just update us on what is going on with the Tarrant County project?

Well, our latest information on Tarrant County is there is still a couple of issues with it. One is some right-of-way issues with some of the landowners that they are working their way through. And another one is an Army Corps of Engineers permit, a 404 permit, that they are trying to get squared away so that the whole project can go forward.

What they are saying right now, Matt, is that the bid will likely be in the first quarter and that production would likely start in the second quarter of 2014. That is the latest (multiple speakers).

Okay, great. And then on the tubular side, I think most industry observers believe that pricing should -- as long as the rig count hangs in that pricing for OCTG at the very least should start to firm in September, if this preliminary determination is successful on August 15. How much of that is baked into your guidance for Q3?

And I think, like you said, it depends on when it starts to firm. Because the next major event -- nothing really has transpired with the trade case at this point to speak of with volume or selling price impact. But the next major event is International Trade Commission in mid-August making its preliminary ruling on whether there is injury, threat of injury, harm on this (technical difficulty).

I think once that happens, that starts to give the -- as long as it is positive, and we all expect it to be positive, that starts to give really the form for the prices to begin to move up. And we really think that is more like a fourth quarter event, if everything goes the way that we hope it goes. So I think it is more fourth quarter.

So you are not giving yourself any credit in your outlook for that?

Yes, right now for the third quarter, we are not giving ourselves a heck of a lot of credit for that in the third quarter.

Keep in mind that the third quarter, as I mentioned, we did have some plant shutdowns, and of course we are going to have those costs in the third quarter. So we have all of that kind of in the mix.

Okay, great. And then final question, the capital project on the Atchison facility, can you just sort of update us on how the plans are shaking out and the potential that it could have for 2014?

Yes, that project, as we have said, is basically a new hydro tester for this facility, and a brand-new front end to the larger of the diameters that we have there, the 16-inch mill, a breakdown section and a fin-pass section. So we expect that that will all be completed by the February of 2014 timeframe, at the latest, probably early March.

And as we have said in the past, what it does is it allows us, one, to take the volume that we currently have and run it at a higher production rate, a better speed, and obviously drive lower conversion cost, that makes us not only more competitive on the current product mix that we have, but it also opens up our product mix to really almost double the available market to us. Because that allows us to go from where we are now to going up to 3/8 of an inch thick X80 products, which really double the market available.

And the people that buy those type of products are really the same people that are buying the line pipe from us now. So I think it is a pretty easy transition. Obviously, we have to work to get that extra volume, but I think it is a pretty easy transition to get that volume for us.

Great.

Barry Vogel.

Good morning, ladies and gentlemen. First, Scott, I have a couple of questions for you. Assuming the ITC goes forward on August 16 -- and again, this is your guesstimates -- what would be the minimum outlook, the minimum outlook for tubular profits in 2014, given the capital expenditure projects, all the changes that you will have accomplished in production, your more aggressive marketing expansion and obviously modest tonnage improvements? What would be your minimum outlook?

Okay. Well, I think what we are looking at is, like we have been saying all along, we have got at least to get to the low-double-digit margins first.

And we have done several things. You mentioned the modernization project at our Atchison facility. We have also positioned ourselves in our OCTG products, which are our Bossier City and Houston facilities, to have a more longer-term, beneficial relationship with heat treat suppliers that give us more favorable pricing for heat treat and heat treat costs as we sell into the market. Which ultimately, we are paying spot market heat treating prices and we have been paying spot market heat treating prices. Now, going forward with the longer-term arrangements, we will have an arrangement where those prices that we pay for the heat treating process will be significantly lower.

Those things, along with the work that we have done internally to reduce our costs. Obviously, we have talked about implementation of lead manufacturing. And again, no matter which side of the business you look at, whether it is Water Transmission or it is Tubular Products it is a cost, cost, cost game. So we have focused on continuing to increase our uptimes at these facilities, not only the Water Transmission, but again, the Tubular facilities, increasing yields and ultimately driving down total conversion costs. And we have made a lot of progress on that, and it will be interesting to see what exactly the margins look like as a result of that when we get into better market conditions.

So I think all those things together, we are expecting to get us to the double-digit margins, like we have talked about for a long time here, but really we have yet to achieve. So -- and I think we have got the right things in place now to be able to get us there once we get into what I should say may be a more normalized market situation.

But I think even longer-term, Barry, we can't -- and I have said this before -- we can't rely on trade cases to protect us from the market. We have to continue to drive cost out of the business so that we can achieve those double-digit margins whether there is trade issues or not.

No, I understand that. Now as far as your tubular capacity, when the remaining projects are completed, let's maybe go forward to somewhere in the first quarter of 2014 -- and this question has been asked before. What is your effective capacity in Tubular around that timeframe, given that these projects will have been mostly completed?

Right. We will be right around 500,000 tons or so of total capacity, depending on how it runs. That is probably -- we are at about 425,000 right now, after the completion of the two accumulators at our Atchison facility. But once we put the new front end of the mill in at Atchison and the new hydro tester, we expect to have a capacity level above 500,000.

Now -- and again, the capacity level isn't really as important as the efficiency and productivity, especially the Atchison facility, when -- after we get that mill in. Because we do believe we can take our same product mix we have now, same volumes -- although we do expect to get more volume, obviously -- but we can take the same volumes that we have now and drive a substantially lower conversion cost and total cost of conversion when you include yield. So there is a lot of potential upside to that.

Yes, and you have done a great job in accomplishing that, there is no question about it.

Now as far as the Water Transmission business, you continue to impress with the level of sales and the level of gross margins. If we look at the second quarter of this year, you had a gross margin of 20.9% on revenues of $58 million. In the second quarter of 2012, you had a 13.8% gross margin on the same revenue basis, about $59 million. And I know you talk about Texoma contract, but earlier in the call, you stated that it was about only $5 million of revenues out of the $58 million.

Can you give us an idea what percentage of the gross margin improvement was due from the Texoma contract in the second quarter versus all the changes that you have made that have improved margins dramatically in the last two years?

I think a little bit -- it's hard to put a percentage on Texoma in the second quarter, because there was only $5 million or $6 million. But there was additional jobs that we have been doing through the first quarter and into the second quarter that also had margins that were significantly above Texoma. So those also played into that.

So I think those jobs, if you go from 14%, 15%, 16% margins up to 20%, those probably started to have an impact on more than -- a little bit more than half of what the total increase was. But again, we have been pretty solidly focused on cost here, even when the market was good, making sure that we are getting our man hours per ton down at the Water Transmission facilities. Because really it is all about labor -- a lot of it is about labor at the Water Transmission facilities. And we have had somewhere in the area of about a 15% reduction in the man hours per ton that we have had in 2011 versus where we are right now. So a lot of work has been done on that.

You heard me mention the cost of quality before. We are down in the Water Transmission Group versus what we were in 2011 about $1.8 million less in quality issues related to customer claims and things of that nature, based on the work that we have done with our quality systems internally. And we have also -- I think we have also put together a better program for leveraging our raw material buys, whether it is steel or linings, coatings, [weldings], any of those things.

So all those things together, I think, you are starting to see the impact on what the margins is. It is not just higher selling price; it is some of the cost efforts that we have been making and that we are continuing to make. Because I will tell you, at this point, as we walk our way into the second quarter of the year -- or in the third quarter the year, which we expect to be low, we are focused on our direct labor cost at the plants, our indirect labor costs at the plants, as well as our total SG&A cost as a Company, so that we are making sure that we are not only rightsizing what we have got going on at the plants, but making sure that we are doing the right things to reduce our costs as much as we can while the business levels are this low.

There is no question you have done an outstanding job.

(multiple speakers) there is a lot going on.

And hopefully, the markets will come on in terms of getting increased demand, and then you will really start to hit all cylinders (multiple speakers).

That's exactly right.

Robin, I had a couple of quick questions for you. Hello?

Yes.

Robin, could you give us an idea of what your full estimates of G&A and interest expense for this year is, and also what you think the provision for taxes would be for the year?

Right. Our G&A we expect will be about $26 million for the year. The tax rate will be about 33%. And did I miss one in the middle there?

Interest expense.

Interest expense. We expect that will be about $4.5 million, $5 million.

Thank you very much.

You are welcome.

Gerry Sweeney, Boenning.

Good morning, guys. A lot of my questions have been answered, but the one question that I think Scott just gave some detail on was -- I was looking to see how much improvement was done in Water Transmission Group and maybe some metrics, and he went over that.

But would you characterize that as maybe some low-hanging fruit? Is there still a lot of opportunity there, knowing that, especially on the Water Transmission side, it is a lot more labor-intensive? Any thoughts on that front?

Yes, I think there is more opportunity there, and we are certainly focused -- what my motto is on this is that we want to continue to drive improvement on there and continue to drive at each one of these plants until the people at the plants can't do anymore without making some kind of capital adjustment to the equipment.

So I think that there has been a lot done, but I think that we still have a good ways to go on not only improving our man-hours per ton, but many of the different metrics that we are looking at. And it just becomes a matter of time and a matter of focus.

And even though the business levels are low, as we see in the third quarter, we have focused on that all the way through from the fourth quarter through now. And that focus will continue. I think it almost even -- it increases when business is slow, trying to find a way to get costs out. Because theoretically, what we want to try to do is have the same man hours per ton at a plant when we are running, say for example, 65% capacity as we are when we are running 40% capacity.

So I think there is more work to be done. We are going to continue the program. And it is just -- we will have to see what it does. But I think we will get more cost out of it as we go, significantly more.

Okay. And then jumping over to Tubular, you mentioned the heat treating side. And I know in the past, you have spoken about pricing is pricing in the market, and you had to do things to enhance either your value-added services or (inaudible) deals like the heat treating side. Is there anything else you are working on from that perspective to increase the value-added services?

Obviously, you have heard about our heat treating arrangements that we have made. While they don't sound like they are a big deal, they are pretty significant to what our cost is on total heat treating.

So as far as anything that we have done really that is related to commercial, that is probably as big a thing as we have done. Plus, we have worked hard on developing longer-term arrangements with the customer base that we have on all API products so that we are not so much of a --

Spot player?

-- (multiple speakers) spot market. And obviously, you are subject to all the big swings in the market. And obviously, when the market is swinging up and pricing is moving up, that is a good thing. But when the markets are not in your favor and swinging down, you are making the price adjustments in the market every week. So those things are two big things on the commercial side.

And then I would just say again, reiterating what the guys on the Tubular Products side have done on cost, they have done a fantastic job, I think, of getting their uptime up. There has been -- obviously, we've put some capital in this business to be able to improve our uptime. But our uptime has improved, for example, at our Atchison facilities by in excess of 40%. So you can imagine what that does to what the conversion costs are.

And even at our Bossier City, Louisiana and Houston plants, by things that we have done on the maintenance side with the predictive maintenance program that we have right now has really increased those uptimes, even without making capital expenditures. So that really reduces costs and hopefully continues to spread the margins out.

But again, that is kind of a long answer, but I think the biggest thing to add value really is the heat treat relationships that we have going forward and what that does for our cost.

Got it. And then just back to real quick on spot, how much do sell into the spot market versus contract?

It used to be our agreements -- our longer-term agreements were less than 5% of the total. Now they are -- I don't want to say exactly how high, but they are a little bit higher than that now, based on what we have started to put together.

And as you know, with the amount of competitive activity that is going on in this current marketplace, being able to put longer-term agreements together is kind of a tough business. Because customers look at this and say, well, why would I want to do something for putting a longer-term agreement together when the price will be lower next week, based on what we are seeing supply side.

So it has been a little tough. The going has been a little bit slower. But we probably doubled what we have in longer-term agreements versus what we had previous.

Okay, great. I appreciate it. Thank you very much and nice quarter.

Thank you.

Diane Daggatt.

Good morning. Most of my questions have been answered. But with capacity in Tubular Products going to 500,000 tons and the uptime at Atchison now around 65%, where do you think the uptime can go for the other facilities as well as Atchison higher than 65%?

Well, we like to think that the uptime could be over 70% in all of our facilities. Obviously, it take some time to get there. It takes training. A big part of that, Diane, is the implementation of lean manufacturing that we are doing and having the guys understand and be able to do quicker changeovers, and understand being able to do root cause analysis on why we have downtime. So we think all of our facilities can get above 70%.

Obviously, the Atchison facility is moving there very quickly, and the movement is a little bit slower at Houston and Bossier. But I think what is going on not only from a lean manufacturing perspective, but also what work has been done on a predictive maintenance perspective and the programs that we have going on there now should be able to get us there at Bossier and Houston at some point in the relatively near future.

Okay. And where are you in rolling out the lean manufacturing?

We have Phase 1, Phase 2 being completed at Bossier City and Houston right now in Tubular Products, Phase 1 going in at Denver in our Water Transmission, and Phase 1, I think, is going to be scheduled for Adelanto sometime later this year.

We have tried to put the appropriate cadence in, so that as we roll out these phases, that the improvements that we have made and the change in how the people approach things is kept, instead of reverting back to what has gone on previously.

So this is really an ongoing process. Lean manufacturing really never ends. But it probably takes us a good year to get Phase 1 and Phase 2 rolled out to all the plants. So we are at the very beginning stages, but definitely seeing benefits.

Great. Okay, thank you.

(Operator Instructions). I have no further questions at this time.

Okay, well, thanks everybody for attending the call. When is the next --?

November.

November? The next call is in November, and obviously, we will expect to see everybody then. Until then, see everybody later.

Thank you.

Thanks.

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