NWPX Infrastructure Inc (NWPX) 2014 Q1 法說會逐字稿

Welcome and thank you all for standing by. (Operator Instructions) I would like to remind everyone that this call is being recorded. If you have any objections, you may disconnect at this point.

Now I will hand the call over to your host, CEO Scott Montross. Sir, you may begin.

Thank you, Eunice. Good morning and welcome to Northwest Pipe's conference call. My name is Scott Montross, and 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 actual results to differ materially from expectations.

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

Thank you, Scott. Our net loss from continuing operations was $1.2 million, or $0.13 per diluted share. Water Transmission sales decreased to $43 million in the first quarter of 2014 from $78.6 million in the first quarter of 2013.

Water Transmission gross profit as a percent of sales decreased to 3.9% in the first quarter of 2014 from 25.3% in the first quarter of 2013. The decrease in sales was due to continued weakness in municipal markets.

The decrease in gross profit and gross profit as a percent of sales was driven by product mix and some non-cash inventory charges, related to the Permalok acquisition, of about $1.3 million. The low volume and sales in the first quarter of 2014 contrasted sharply with the first quarter of 2013, which included production and sales from the Lake Texoma project.

Tubular Products sales from continuing operations increased 38% to $39.6 million in the first quarter of 2014 from $28.7 million in the first quarter of 2013. Selling prices decreased 2%, and volume increased 41%.

We sold 39,000 tons in the first quarter of 2014, compared to 27,600 tons in the first quarter of 2013. Tubular Products gross profit as a percent of sales was 6.7% in the first quarter of 2014, compared to 10.6% in the first quarter of 2013. Our energy products comprised approximately 80% of Tubular Products sales in the first quarter 2014, compared to 61% in the first quarter of 2013.

Gross profit and gross profit as a percent of sales were negatively impacted by planned downtime for the replacement of the existing front-end of our 16-inch mill in March 2014 as well as margin compression, as pipe prices have not kept up with steel costs. Shipment volumes for Tubular Products continuing operations in 2013 were: 27,600 in the first quarter; 29,800 in the second quarter; 32,400 in the third quarter; and 43,000 in the fourth quarter; for a total of 132,800 in all of 2013.

Selling, general, and administrative costs decreased to $5.4 million in the first quarter of 2014 compared to $6 million in the first quarter of 2013. The decrease is primarily related to lower incentive compensation expense with our decreased profitability.

Interest expense was $770,000 in the first quarter of 2014, and $957,000 in the first quarter of 2013. Decrease was the result of lower average interest rates, partially offset by higher average borrowings.

Our effective tax benefit rate from continuing operations was 35.5% in the first quarter of 2014, and our effective tax provision rate was 31.7% in the first quarter of 2013.

In discontinued operations we reported a pretax $12.1 million loss on the sale of the OCTG business. This included losses on fixed assets, transaction costs, and a goodwill write-down of $4.4 million.

In the first quarter of 2014, the Company generated $40.1 million in cash from operations to support the growth of the business, mainly through decreases in costs and estimated earnings in excess of billings on uncompleted contracts, inventory, and trade and other receivables. These were partially offset by an increase in refundable income taxes.

Depreciation was $3.2 million in the first quarter of 2014, and $3.9 million in the first quarter of 2013. Inventories decreased $14 million by the end of the first quarter from the end of 2013.

This was primarily due to a decrease in Tubular Products inventory and a decrease in Water Transmission coil inventory with the decrease in production. This total inventory reduction excludes the change in inventory that resulted from the sale of the OCTG business on March 30, 2014.

Capital expenditures were $5 million in the first quarter of 2014, primarily for planned capacity expansions in our Atchison, Kansas, line pipe facility. The remainder was for ongoing maintenance capital expenditures.

The total consideration for the sale of the OCTG business was $42.7 million. Of the proceeds received, $4.3 million was placed in escrow to secure our indemnification obligations under the purchase agreement; $5 million was used to repay capital leases related to certain assets at the Bossier City facility; and $1.8 million was used to pay for transaction costs; resulting in net proceeds of $31.6 million.

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

As of March 31, 2014, our backlog in Water Transmission was approximately $148 million. As of March 31, 2013, our backlog was approximately $136 million.

We expect that the second quarter of 2014 will improve from the first quarter. The backlog in Water Transmission has increased with the addition of the IPL job. We expect Water Transmission's sales to be higher than they were in the first quarter, with gross margins in the low to mid teens.

The following is an outlook on upcoming Water Transmission projects. The IPL job will start production in May and will be producing through the fourth quarter of 2014. The second segment of IPL is expected to bid in the fourth quarter of 2014.

The 22-mile Madison, Wyoming, project has bid, and we are awaiting the results. The 40-mile Odessa sub-area pipeline project near the Snake River in Washington State will bid sometime in 2015. The 140-mile Red River job in North Dakota will bid in mid to late 2015.

A newer project that we have not discussed before is a project in San Antonio that will reduce the depletion rate of the Edwards aquifer. The total program is expected to be in excess of $100 million and will be broken up into several projects. The first project is expected to bid in the third quarter of 2014 with production beginning late in 2014.

In Tubular Products, we are ramping up our operations after the planned downtime for our expansion in Atchison. Second-quarter net sales in Tubular Products will be similar to the first quarter, but we expect margin compression with the recent run-up in steel coil prices. We expect between $14 million and $20 million of total capital expenditures for 2014, which includes the remainder of the Atchison expansion project as well as normal capital maintenance.

In conclusion, the first quarter of 2014 was affected by a series of one-time events as we worked to position the Company for long-term future success. From an ongoing operating perspective, we believe the first quarter will be the worst quarter of the year.

The startup of the IPL project in May will begin to drive Water Transmission to a more normalized level. And the modernization projects at the Atchison facility completed commissioning in April and will lead to higher production levels, lower costs, and a more competitive position in the line pipe market.

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

Barry Vogel.

Good morning, ladies and gentlemen. First little question is -- you talked in the press release about weakness in municipal markets, which of course we've seen for many years now in all your filings. Could you give us your current definition of continued weakness in municipal markets?

I am terribly sorry, Barry; we are having such a hard time hearing you.

I have the phone right next to my mouth.

Really?

Yes. You know, this was not a good connection.

Try to repeat that question, Barry.

Okay. I couldn't be closer to the phone. Could you give us your current definition of continued weakness in municipal markets?

The current definition of continued weakness in municipal markets? Well, obviously, we have come through a time in 2013 where we saw very, very low bidding activity. Municipal markets were below $400 million, and that is the reason we are seeing the kind of revenue that we are in first quarter, for fourth quarter and the first quarter of this year.

We are actually starting to see a pickup in the amount of bidding activity as we go into the first and second quarter of 2014. In fact, when we were looking at the amount of work that we booked in 2013 versus the amount of booked work and pending work that we already have in 2014, we are actually well beyond, right now through the first week of May, where we were in all of 2013. So we have seen a pickup.

And when you look at specifically the number of jobs bidding, Barry, the number of jobs that we saw in 2013 were, I guess, probably about 55% or maybe 60% of normal. And we are actually seeing probably a 15 % to 20% pickup in the amount of jobs that are bidding at this point in time.

Obviously, from some of the jobs that we are talking about, we are seeing some larger jobs this year. Obviously, the IPL bidding and the first section being awarded to us; the second section being bid later in the year; and then the San Antonio project.

So I think it is picking up, but it is certainly not back to the levels it was probably in 2011 and early 2012. I don't believe that we are going to see those kind of levels until we get out into some time in 2015, where the number of jobs that I would call larger jobs, which are over $10 million, really, really start to grow.

But it certainly is picking up versus what we saw in 2013. I would call 2013, at least in the last 10 years, pretty historically low.

Now, could you give us a little bit of color on the San Antonio job? You used the term $100 million, I think, when you described it in your initial comments. What does that $100 million mean?

Yes, the San Antonio job is really a program that is broken up into several different projects, okay? So we are expecting to see this year probably somewhere in that area of about 14,000 or 15,000 tons' worth of pipe bidding. Okay?

It is a smaller-diameter project and a lighter wall thickness. So the project that we are looking at for stuff that is bidding during this year and will start sometime this year is about 28 miles of 60-inch pipe. But that, obviously, is going to be something that begins to impact later in the year.

Really what they are trying to do, Barry, just to give a little bit of background on it, the Edwards aquifer down there in San Antonio is under a lot of pressure from the water requirements of the city. And what they are trying to do is give something or create something there that starts to enhance what the Edwards aquifer is able to supply; and that is really part of the ongoing program and the development all across Texas.

Now, you talked about a commissioning of the Kansas facility --

Yes.

-- in your commentary. Could you or Robin give us some idea of the negative impact of the downtime in the first quarter?

Well, we really didn't have our big mill in Atchison, Kansas, which is the 8- through 16-inch mill, running through the whole month of March. So it was down for the installation of both the breakdown section and the thin-pass section, as well as an installation of a hydrotester at that facility.

So it is hard to determine the impact, but it was probably somewhere -- we would probably have had somewhere in the area of double the amount of tons shipped if that facility was running or that mill was running in the March time frame.

Well, how about the impact financially in the quarter?

I couldn't hear that.

The impact on -- I'm sorry. We didn't catch the last word.

On Kansas financially in the quarter because of the downtime.

Well, I think it was pretty substantial. Obviously, it is hard to give that total impact because there is costs related to labor internally that we were using to help install the project that we wouldn't have had otherwise, plus a bunch of margin loss. So all those together could be well -- could be in excess of $1 million.

Oh, that's all?

Say that again.

Is that all, just a little bit in excess of $1 million?

Yes, somewhere in excess of $1 million.

Okay. All right, now with that commissioning done, is Kansas now through with this project, where they can have the ability, if they were operating flat out with a normal mix, have a capacity of 225,000 to 250,000 tons of (multiple speakers)

Yes. We actually think that the capacity of the Kansas facility is probably somewhere, with a perfect mix, around 325,000 tons now.

What about an imperfect mix?

And we shipped somewhere in the area of about 132,000 tons out of Kansas last year, so you can see what the potential upside of the production is and the potential reduction in the conversion cost. We have already done a lot of work on the conversion cost, Barry, with the installation of the accumulators that we did last year, the maintenance project that has been installed.

And the reduction in conversion cost has been pretty large up to that point. We think that is going to -- the installation of the new front-end of the mill and the hydrotester is going to help conversion costs even further.

All right. I'm going to get back in queue. Thank you very much.

Thomas VanBuskirk.

Hi, good morning. I wanted to follow up on Barry's question about the downtime at Atchison. I am trying to understand what we are looking at going forward.

I think you said that the tubular sales in Q2 would be similar to Q1. But if tonnage was impacted by the downtime absent a big change in pricing, does that mean that we are looking at substantial period of downtime in Q2 again?

No. Actually, we are going through commissioning of that mill in April, and we'd probably get back to normal levels or have gotten back to normal levels sometime in the middle of April. But one of the things that has happened is we just finished a large -- or we are in the process of finishing -- running a relatively large project, a HH project that was 36,000 tons. So that really jumped up the production level of what we saw in the fourth quarter of 2013 and in the first quarter of 2014. Okay?

So we are going to be relatively flat for a period of time until we get another project and until we get orders to really start filling out the additional capacity on that mill. Because one of the things that you go through when you change the mill and change the size range that you can run on a mill, quite frankly, you go through a qualification process with the customers, too: them getting used to the heavier-gauge product or the higher-strength level product. And that is what we are going to now.

Until you can actually make it and ship it to them and then sell the product or use the product, it is still a testing phase. So we expect to see larger shipping levels as we go into the third quarter.

Got it. That's helpful. Then just as a -- it is not a follow-up exactly, but you went through the various projects kind of quickly. Could I trouble you to go through them one more time, just to make sure I have them all?

Sure. There are several projects out there. One that is -- obviously, that we have talked about for a long period of time is the IPL project, which we have been awarded the first segment of that, and it is a 15-mile project, approximately 21,000 tons of pipe.

There is a second section of that IPL project that bids later in the year. It is probably a similar size to the first project.

The next immediate project that we are waiting on is a 22-mile pipeline out in Madison, Wyoming. And that bid was done a few weeks ago, and we are waiting for the results on that. We think that we have a good chance on that, but we don't yet have those results.

Then there is the San Antonio project that we talked about, that is really a big program that is broken up in several different projects. We think the whole program is in excess of a $100 million program, and the first part of that program starts in 2014.

We expect to probably start bidding on that sometime in the third quarter. And if we are successful on that bid, we would see production on that sometime in the fourth quarter of the year.

Then there is a couple other projects out there that are -- have been on the radar for a period of time. One is the Odessa Subarea project, which is basically in Eastern Wyoming, and it is really a project -- or excuse me, Eastern Washington.

It is a project that there's wells out there that are old wells that are starting to be depleted. And the pumping cost on those wells is starting to put stress on the agriculture in the area. So there are some private groups looking at the potential of creating a pipeline to be able to get more water to that area for agricultural purposes. Okay?

So that is something that we think is somewhere out in 2015. There is not a definitive date on that.

Along with that, there is a project called the Red River project, which is in North Dakota, that is really a pipeline that is about 140 miles is what has been talked about, to be able to take water from the Missouri River and deliver it into a lake called Lake Ashtabula, in North Dakota, that runs into the Red River. So that higher water levels can be supplied to cities and communities in North Dakota, which, quite frankly, with all the fracking going on there and the development of population centers there is in requirement of a lot more water.

That is another project that is being hotly discussed right now. And what the state of North Dakota is doing is they believe -- not believe, but they have support of the state government to do the project, and they are apparently trying to stay away from federal waterways that's going to require any kind of federal funding or federal involvement so that they can push that project through. And we think that is sometime in 2015.

Along with that, there are probably at least another couple sections of the IPL project, which is moving water from Eastern Texas reservoirs into the Dallas Metroplex. So there are a lot of major projects that are being discussed and going on at this point, plus the increase in the number of smaller projects that we are seeing.

Okay. I appreciate that. With regard to -- just one quick follow-up on Odessa. Is funding still a concern with that, because it is a privately funded venture?

Yes. Whenever you get into looking at privately funded ventures, funding is always a concern. But I think that there are some private groups that are looking at -- that are in contact with the farmers that are affected by the water issues, and they are working through those issues with the farmers.

So that is always going to be a concern until the project is listed and ready to go. But we think that the chances there are at least pretty good that that is something that is going to move forward.

Got it. Then just one last real quick one if I may. The current level -- the current pickup in the backlog, which is certainly a great thing to see, how would you characterize the pricing that is embedded in that, as opposed to what it was in the latter part of last year where it got kind of thin?

I think some of the pricing levels that we are seeing, at least on I guess what I would call some of the bigger projects, are pretty good. And it is definitely a positive to what we have been seeing in 2013.

I think where we start seeing some of the issues are on the smaller projects. Some of those are still hotly contested.

Because when you look at the competitor base, they all went through the same thing that we did in 2013, with a low number of jobs bidding and pretty much all of those jobs were pretty hotly contested, which really has an impact on the smaller jobs, which is really what you are seeing in the first quarter of the year in the low margin levels, along with some of the one-time impacts that Robin described at the beginning.

So I think the bigger jobs are a little bit better on the price levels. Smaller jobs, I think that they are more under pressure. Because the bigger jobs are more of a risk in doing them, having the wherewithal to do them; you have to be able to deal with a large project and being able to deploy resources.

On the smaller jobs, most of the competitors can do them, so you have everybody bidding on those. So that is pretty much what we are seeing right now.

Okay. That's real helpful. I will get back in queue.

Scott Graham.

Good morning, Scott; good morning, Robin. How are you both? I have the pricing on the first section of IPL. I was hoping you could give us some parameters around the next 21,000 tons that you are talking about here. What would that be on a dollar-per-ton price basis?

On the next 21,000-ton bid?

Yes.

Yes, it is pretty difficult to give an idea of pricing level on that, simply because what is the competitive landscape at that point in time. We think that the next section of IPL will probably be even a little bit more competitive bidding than the first section.

So it is pretty difficult to come up with what we think the price level is going to be ending up at on that, Scott.

Fair enough. Would it be fair to say that the San Antonio job, which you will bid on later this year, that because it is the smaller-wall thickness that obviously the price per ton would be lower still. Right?

Well, that's a potential. Again, it depends on what the competitive landscape is on that job.

I think what you start to do when the number of jobs, especially in Texas, with a local supplier starts to pick up. Obviously, the potential suppliers in Texas start to get busier; and that bodes better for maybe higher price and margin levels as you go forward.

So we view that as a positive. But again, it really depends on, when we get to San Antonio, what the competitive landscape is going to look like on that bid.

I understand. Okay, thank you. A question about the first-quarter Water Transmission sales. So, down 45% year-over-year. Now my calculation has that Lake 'Xoma was like 30% of that 45%. Robin, does that kind of jibe with reality? That $25 million?

We did somewhere in there, between $25 million of that project, $25 million to $30 million in the first quarter of the year.

Let's, for the sake of argument, because that is the number that I am looking at, let's say it was $25 million; and that is a 30% impact; which means that you still had a 15% decline in the rest of the business. Of that 15%, what was the negative -- was there a negative price component, or was pricing kind of flat?

Well, again, it really depends on the job, because every job in Water Transmission is a little bit different, based on the wall thickness, the diameter with the coating, what the lining is, and who the competitors are on all those jobs. So it is hard to look at it on a total picture.

But I think looking at the first quarter, Scott, if you would bear with me on this, I think it's -- we knew first-quarter margins were going to be low. With the low bidding activity that we saw in 2013 and the competitive nature on that bidding activity, because it was so low, you obviously start to have a pretty big impact of fixed costs on the gross margins.

And when you are that low of numbers, you can work on all the cost reductions that you want; you can only get a certain amount of fixed and still have operating plants to be able to take on the upside production that we expect to be happening through the rest of this year.

And that is why, when we had our March earnings call, we said that we thought that the margins on Water Transmission were going to be in the high single digits. Okay?

The things that impacted that? Again, Robin talked about the acquisition charge related to Permalok; we had some weather-related shipping delays in the first quarter. And when your top lines are that low and the margin levels are that tight because of the low level of business, it doesn't take a lot to impact that. Okay?

Fortunately, we are seeing the increase of activity as we go forward so we can get to higher revenue numbers, which starts spreading that fixed cost and starts driving higher margins as we go forward. Obviously, you can probably understand we are looking forward to that very intensely.

Yes, yes, for sure. Okay. Here is my last question, and it's around the municipal marketing total. We had some pretty unhealthy declines in that business in the last three quarters of 2013. And just by the triangulation that we just did here, with the down 10% to 15% this quarter, that is actually better than what we saw in the last three quarters of last year. And you're saying that bidding activity has improved.

So really essentially two questions on this. When you were referring to the $400 million, I didn't follow that, Scott, number one.

And number two, we were talking -- and Robin, you and I have talked about this -- as the bidding being down on, let's call that the run-rate business. Right? The non-project business. That the bidding was down about 30% for most of 2013. What is that number in the first quarter?

Well, okay, so let me handle the $400 million piece first. When I said -- when I was talking about the municipal market being less than $400 million for 2013, and remember back to when we were talking about the KWA project and the size of the KWA project; and obviously there was some anomalies that took place with that project. But that was approximately an $80 million to $85 million project, and those were in those numbers for 2013.

So you can see what the rest of the market looked like without that in 2013. So, that is what those numbers are.

Now, with the IPL going on now in 2014 and San Antonio going on in 2014, we are expecting obviously the overall market to be in excess of $400 million for water municipal work in 2014. So pretty big jump up.

And it is not just one big project in the year, like we had in 2013 bidding at KWA. You have the two sections of IPL; you have the Madison project, which is a pretty large project; you have the San Antonio project or program, with the parts of the projects that are going to kick off. So you have not only an increase in the activity of smaller bids that we are seeing, but you also have a decrease in the activity of bids that I would call larger bids.

And when I say larger bids, Scott, normally it is above $10 million. Okay? I guess I would ask you to repeat the second part of the question, because I am not sure that we got that.

Yes. Obviously, there is a break and fix business within municipal, right? And there is drinking water, and then there is wastewater pipes. I know that you are more on the drinking water side.

Right.

But my point is that I was trying to understand -- we were talking about bidding being down 30% to 35% on a year-over-year basis for a lot of 2013. I was just trying to understand, if we X out the impact of the projects, I am just trying to understand what is going on in the break and fix business right now? What does that bidding look like?

Well, I think the break and fix business, there is a little more of that going on. In fact, we have actually been involved in some of it.

Just to frame it, we are really in the drinking water segment, like you said. Our involvement on the dirty water side, sewer water, is really pretty small. The only place that we get involved there is forced main applications where there are some pressure requirements.

On the drinking water side, as I think is what we are talking about, we have been involved in some of that break and fix work. We have been involved in some relatively large reliner projects through late 2013 in California; and we are looking at being involved in some other projects.

But I think the step up -- the look at things, to me, is when the funding is as low as it has been, obviously from federal support and being able to do projects -- and as you know, you get a lot of these state and local governments that when you're under budget crunch they are not able to fund these things. So quite frankly, one of the first things to go is the drinking water situation, right?

You have drinking water pipes; and everybody has read a million different publications that say: well, we leak 30% or 35% of our drinking water a year, based on the condition of the existing pipelines. Well, to this point, drinking water is pretty cheap. Right? It is not that expensive, so that is, quite frankly, tolerated.

And it has gotten more toward the fix and repair over the last couple quarters. But I think what we are starting to see now is stuff being -- going beyond the fix and repair thing with some of the projects that we are seeing now increasing on the smaller side. And it is more toward extensions, putting in new lines that are smaller lines to connect to other lines.

So we are seeing significantly more of that. I would say probably 15% or 20% more of that than we did in 2013.

I understand. Let me just, if I could, just put a final piece of data here within my question, because I think we are on the same page in your answer. If I look at 2012 Water Transmission revenues, they were $270 million; and if I strip out Lake Texoma, you are in the $225 million territory.

If I look at last year, 2013, you were $225 million in revenue, right? And there were really no big project shipments.

What I am getting at is, the municipal break and fix, plus those smaller projects that you don't necessarily call out, but they would be, I would argue, an extension of the break and fix business. So essentially we are looking at for you guys $225 million base in revenues; and what I am hearing you say is that the bidding activity within that base of revenues is better now than it was a year ago.

Yes.

Very good. Thanks.

You can see, Scott, just to build on that a little bit, as you said in 2013 at $225 million worth of revenue on water, we had $25 million in Texoma on that. Okay? When you look at the third quarter of 2013 and the fourth quarter of 2013 and the first quarter of 2014, during the period of time, we were on about $175 million annualized rate.

So you can see how low that bidding activity got during that period of time. We are seeing an increase in bidding activity as we go forward. Really it started in December for work that really started in the second quarter, but there is an increase in that smaller bidding activity, too.

Thanks a lot, Scott. That's great.

Gerry Sweeney.

Good morning, Robin; good morning, Scott. A question on the Tubular side. Could you give us a little bit more detail? Obviously, you've reworked the front-end; you have installed the hydrotester; this expands the markets growth that you can sell into. You've talked about that is going to be a process, probably ramping up into 3Q when you could actually accelerate the sales on that side.

But looking at those improvements, what happens -- curious as to the margin profile of this larger base business. Is it a better -- it's larger but also can you get a better margin or selling price? Just a little bit more detail as to how that works through, as well as maybe some of the tonnage increases and how we can frame that out going forward.

Yes, I think the margin profile on the larger sizes is certainly better because your costs are lower. You're certainly running -- when you are running a 16-inch 3/8-wall pipe, your tons per hour on that are higher than when you are running an 8-inch 188-wall pipe. So I think that margin profile gets better as we are able to move into the heavier sizes. Okay?

And I think that is really what we are trying to do. And by moving into those heavier sizes, just to answer part of your question, we have expanded the market that we are able to participate in. Really we've essentially doubled it.

We think that the line pipe market that we were able to participate in, when we were with the mill before the modernization project, was probably $1.2 million; and we think it's closer to $1.4 million -- or $2.4 million now, with being able to do the larger-diameter, heavier-wall projects, as well as higher strength level projects.

And on those higher strength levels and those bigger gauges and bigger wall thicknesses and diameters, Gerry, you're also able to get a little bit more money on those, because you start to separate yourself out from others who can't make those kind of strength levels.

Then correct me if I am wrong, but also as you move forward on the line pipe, you have worked somewhat with distributors, but the goal is maybe to go direct a little bit more, which would also help the margins?

Yes, I think there's -- in the past, it's been a significant amount of our business was through the distribution network. And obviously, we are going to continue with the distribution network of our key distributors that we deal with now.

But I think the idea is as we evolve in this business and have better capabilities is to start doing more end-user project-like work, like we had associated with the HH project. Even though that went through a distributor who had some involvement in it, we think our ability to go direct on those kind of projects has improved.

And it is all about developing the relationships with the end-users now, getting probably the over-the-horizon view on when those projects occur, and getting those in. Because, quite frankly, you don't have somebody in the middle of those projects which -- obviously, when there is somebody in the middle helping, trying to manage the project, that has somewhat of an impact on the margin profile of those shipments.

But I will say, our key distributors are key to us and will remain key to us. But our movement as we go to maintain those key distributors as well as getting into more end-user type of business, and growing the total production and shipments off of the Atchison facility. All that's going to do as we grow production and shipments is continue to help drive down our conversion costs and ultimately move that margin profile into the double digits, like we think it should be.

When we look at the margin profile for the first quarter of the year, we're at about 7% margin on the shipments from Atchison. Again, the big mill was down for the full month of March. But if you look at what the margin profile was -- and you can't see that, I guess -- but for January and February, our margin profile was closer to 10% for those two months when we were running like we were with both of the mills.

I do think, though, it is important to note that right now with the recent run-up we have seen in steel prices, we have seen steel prices run up by $65 a ton in the last 30 days. And, quite frankly, there is not a run-up in line pipe prices at this point. Line pipe market was a little bit slower in the first quarter with weather conditions.

So that will pinch the margin in the second quarter. But once steel prices start to moderate, which we think they will, I think we see us approaching that, those double-digit margins again.

So you look at the steel prices as a temporary issue?

Yes. Gerry, I think the steel prices are starting to move within a more narrow band all the time. And right now, we are seeing that steel band anywhere between $600 and probably $700 a ton. Just in the last four weeks it has run up to $680.

And really that is not a demand-driven event. Really, it is a supply-side event with supply-side disruptions in a couple US steel mills, one in Gary and one in Great Lakes; disruption in supply from the SR mill in Sault Ste Marie, Ontario.

So all those things together starts to tighten up supply. I think AK had some disruptions, too. It starts to tighten supply and let those prices and leadtimes run up for a period of time.

But what we do know is we do know that internationally, hot-rolled band prices are lower than they are in the United States, and we expect a significant amount of imports to start coming probably in the beginning of the third quarter that starts to moderate that price down. Because that steel price has to get down to a level because we are not seeing really any upward movement in the line pipe prices right now.

Not saying that that won't happen as line pipe prices continue -- or line demand continues to increase, which we think it will over a period of time, because of takeaway capacity requirements of the new shale plays. But steel pricing is up right now and it is going to pinch things in the second quarter.

Understood, understood. Okay. One quick clarification on San Antonio. You said $100 million. Is that the size of the project, or the size of the pipe that is going to be used in the project?

No, I think the project is significantly larger than that with the installation. So we believe that the pipe requirements over the life of the project, which could go on for quite a period of time, should be in excess of $100 million.

Got it. Then a question on California. Obviously a lot of drought issues out there. Are you seeing any uptick in RFPs out there?

I also know -- I've talked you guys in the past -- I think you are doing some process you called canning before, which I think is a repair/replacement type of work. Any type of qualitative or quantitative background on what is happening in California and if you are seeing business out there?

I think the business levels in California still, if you look at East versus West -- and obviously, California is a big part of the West -- are still down pretty substantially. Okay? Although with the drought conditions that are going on in California right now, we know that there is a lot of speculative work right now going on. And some of it is publicized, with taking additional water that's from the Colorado River and moving it into the Colorado River Aqueduct and getting it into Los Angeles sometime in the future; and there are some well-publicized things going on with that. But we have not seen a significant pickup in the work in the West yet.

I think we are probably starting to see a few more projects. Those projects are probably in the more smaller-diameter range, probably 32-, 36-inch range, but no major pickup yet.

But we do expect that to come with the drought conditions that exist in California. I think there is going to be some pent-up demand there from water requirements into the major population centers that obviously bodes well for us, with a facility right outside of Southern California, right outside of LA.

Okay, great. That's very helpful. That's all from my end. Thanks a lot.

Matt Sherwood.

Hi, guys. How you doing? I guess just to start, can you talk a little bit about the incremental profitability on the Tubular -- incremental margins on the Tubular business? So as you ramp towards a better utilization of the capacity.

Because 132,000 tons versus 325,000 of capacity is a pretty low utilization. Can you talk about the incremental profitability and where margins could go in the normal environment?

Yes, I think it is fair to say that they'd go into the double-digit level. I think the hard question to answer, Matt, over the long term is: what does the line pipe price do? Is it going to remain under pressure? Or is it going to -- as demand improves, is the line pipe price going to improve? Which we hope is going to happen.

The other piece is: what is the steel price going to do over that period of time? Right now, right now what we have seen in the entire line pipe market is that, since the beginning of 2012 through really the end of 2013, we have seen line pipe prices and the steel coil price, we have seen that spread be reduced by some probably $180 a ton. Okay?

And we are sitting with a pretty significantly reduced spread as we move into 2014. Now, in 2013 we were able to still do pretty well at Atchison throughout that year even with that reduced spread; and a lot of that was running higher volumes and continuing to take cost out of the business and those type of things.

I think we will get into the double-digit margins at Atchison, but it is going to continue to require costs coming out of the business, which we believe that we will be able to do with the new mill and the heavier sizes that we are going to be able to run. But to give an exact estimation on that is really going to be based on: what does the line pipe price look like as demand increases? And what does the coil price look like through that period of time?

One thing that we have seen different on line pipe pricing versus, say, structural pipe pricing -- structural pipe pricing has a tendency to move pretty much in lockstep with what the hot rolled band price does. And we have seen structural pipe pricing run up over the last month or so simply because hot rolled band pricing is moving.

With line price pricing, because that hot rolled band price has moved up or down over that period of time, it really hasn't impacted what is going on with the line pipe price. So that is going to continue to be a cost gain for us. Okay? Continue to drive cost out of the business.

Which -- obviously if we were able to perform the way we did in 2013, we were able to drive a bunch of cost out of that business. It is going to be a cost business, continue to work on costs and continue to be able to drive those margins.

But I think anything we get from the spread widening back up, whether it is coil price reductions or line pipe reductions, is just going to enhance the margins that we are going to be able to see off of that facility. Particularly at higher production levels with the lower conversion costs that we are going to be able to generate.

Right. I mean because I guess if you look at the run rate for Q4 and beyond -- and Q1 and Q2 now, on the previous capacity you were at close to 70% capacity utilization, whereas over the year you weren't anywhere close to that.

If you get to 70% capacity utilization on the new capacity, you could be talking close to 230,000 tons, which at a $1,000 price and even a 12% margin would create $10 million to $15 million of enhanced operating income at the line pipe at Atchison, which is a big deal on 9-point-something, 9.4 million shares.

Right. That is exactly right. And the numbers that you are coming up with, those are the kind of levels that we are striving to get to. Obviously, with having 325,000 tons of capacity we can't sit and run at a 132,000-ton rate. Our goal is to get above 200,000 tons.

Right, that's great. Okay, then just quickly shifting gears to water, just in terms of timing of projects. If you are indeed the winner of the Wyoming project, the Gillette Madison Pipeline, when would that project start to ship? And what is the timetable of the shipments there?

I think we would probably be making pipeline -- that we should know probably within the next week or so whether we win that project. But I think the timing for that is probably a July time frame where we start recognizing revenue on that.

Got you; okay. Then I guess just in terms of -- Gerry had asked about California. In Texas, I guess there is, whatever, like 50 cities that are going to run out of drinking water in 180 days. And people are drinking toilet water, if you read the popular press.

California is just starting in a drought. When do you think the sensationalism and the real urgency picks up there?

Well, I can say that we have a pretty good over-the-view horizon on how 2015 looks; and we see some projects developing in California in 2015. But we are yet to see any major projects.

If you read anything about the things people that are looking at now, like I mentioned before, there is a company that is looking at taking water out of the Colorado River that they are saying is basically water that is lost in basically dry lake basins in that area, and taking it to a position where they are creating a pipeline that is approximately a 43-mile pipeline to get it into the Colorado River Aqueduct to feed the Los Angeles area. We don't see any of that yet, any of those major things.

But I think of the drought conditions continue in California, then you are going to start to see some of that. Now, the amount of large scale that you see is going to be a little bit questionable, because when you look at Texas and their revenues or tax revenues related to the oil and gas business, obviously, there are some tax revenues related to that in California from the stuff that goes on in and around Bakersfield, but it is not quite what Texas is.

It is still about: is there the potential of federal funding for some of those projects? Will they be private work? And some of the stuff that we are hearing right now is really being discussed by private entities; so that probably is going to take a little bit longer period of time to develop.

Got you, great. Thank you.

Brent Thielman.

Hey, Scott. Hey, Robin. Just on the Water Transmission outlook for Q2, obviously the margins, much better outlook there. But I am assuming you're getting some pressure from some of these smaller project you talked about, where the pricing landscape has been a bit tougher.

Listening to this call it sounds like the environment overall is getting a little better. Does that margin headwind from price start to abate as we get into the second half of this year?

Does the margin headwind -- say that again, Brent.

Does the margin headwind, I guess, from some tougher pricing on these smaller projects start to alleviate as you get into the second half?

Well, I think what happens is when you start getting into the larger projects, some of the things that we are talking about -- IPL, second section of IPL, San Antonio, projects like that -- obviously again it depends on what the bidding profile is on those jobs or who the participants are in the bids. But I think on the larger jobs, those jobs are jobs that carry a little bit more risk with it. Obviously, risk related to timing on projects and things like that.

So they are a little bit, I guess again, I just would say risky for smaller people to do. We are seeing those carry obviously a little bit higher margin and margin potential.

But the smaller ones, until everybody starts to get at least a little bit of a baseload of work, I think the smaller ones are going to stay under pressure. You have some smaller competitors in the business now that are located some on the West Coast, some in the East, some in the center part of the country.

And then the larger competitors, that again have gone through the same kind of bidding situation that we went through in 2013, that are quite frankly starved for work -- and that is why a lot of the smaller jobs are contested. And I think until everybody starts to get a little bit of work in their backlog, I think that there is still going to be a little bit of margin pressure.

I think that that is where the cost-reduction activity comes in that we have worked on in the Water Transmission business. I think you started to see the impact of those cost-reduction efforts in 2013, with especially the margin levels that you saw in the second quarter and in the third quarter of the year at -- especially the third quarter with relatively low run rates.

So, I think we have focused on being able to run at lower rates and be able to get cost out of those jobs and taking -- quite frankly, going as granular as what our costs per man-hour of operations are, and looking at the pieces that are controllable by the plants, like the cost of labor and the cost of overhead, and really grinding on those and getting the costs out. I think that is what you saw with the margin levels picking up in 2013.

As our revenues pick up in 2014, I think you still see those. You'll continue to see the effects of the cost work.

But it is going to take a while. Because I think that looking at and obviously being involved in a lot of these bids, some of these bids -- in fact, a lot of the bids -- have been hotly contested over the last six months. So it is going to take a while for those margin levels to come back in line with -- you know, as we have talked about, the kind of margin levels that we want to see this business generate.

So, it is going to take a period. And that is why when we look at the second quarter of the year, I think we still face some headwinds. The idea is we start the IPL project in the May time frame; but some of those headwinds from the structure in the bidding activity and coming out of those small revenue numbers that we have seen, they are still going to be there through the second quarter.

And obviously as we get into the third quarter and work develops, we hope some of those headwinds start to abate. But again, I can't sit here and say that we are on 2012 number of jobs bidding level, even as we get later into 2014, because we are not yet.

We used to see somewhere over 400 jobs bidding in individual years back in 2011 time frame. And we have seen in some cases 60% of that now.

So as you can see, as you can well imagine, with the competitive profile and our competition everybody is hot after getting work. And that really has an impact on what the margins are for a period of time.

Okay, that's helpful. Then, Scott, if you won some of the San Antonio work, or all of it I guess, and presuming you are still working through IPL, could that effectively absorb all your capacity in Texas?

I think that the difference between us and a lot of our competitors, Brent, is the fact that we have other capacity that we could deploy. One, obviously, our Saginaw facility gets pretty busy.

But for example, in Texoma, obviously that was a $69 million project, and we actually had three mills working on that project. We had the Saginaw mill which was our primary mill; we also had some of that material coming out of our Denver's facility as well as our Parkersburg, West Virginia, facility. So we have the ability to deploy probably a wider range of assets than some of our competitors.

I think we would be very busy at the Saginaw facility. The question is, once we get on IPL, how fast can we run IPL? When does the next section start? And if we are lucky enough, can we get the next section?

And where does San Antonio fit in? And if it doesn't fit into Saginaw, we will figure out how to deploy other assets to be able to handle the jobs.

Okay, great. Then just one more, probably for Robin. But can you quantify the unusual costs in SG&A related to the sale of the OCTG assets? Then also a run rate going forward for SG&A, now that that business is gone?

Right, so for the selling, general, and administrative, we think it will be about $24 million for the year, is what we are looking at right now. We really didn't have anything in SG&A related to the acquisition. Everything related to the acquisition actually fell into discontinued operations.

Got you.

Yes, because SG&A is down a little bit from where we were a year ago. But we didn't have anything in there really related to the disposition or the acquisition.

When we look at the SG&A rates, Brent, if you look at where we were finishing the year in 2013, obviously we were down pretty substantially in SG&A expense versus where we were in 2012. And some of that was related to reductions that we were planning, obviously, with selling the Bossier and Houston assets. So we took a pretty hard line on working our SG&A down through a big piece of last year.

Okay? So that is why you are on about a $24 million run rate, versus I think the end of 2013 was about a $28 million run rate. At the same time, we have acquired two new facilities, and we are going through the program of integrating the Permalok facilities into Northwest Pipe.

So obviously we will keep working on our SG&A cost, but we certainly think that we are in a pretty good position where we are to be able to run the business. And, quite frankly, we -- Robin and I -- have looked pretty closely at our peer groups, what our peers are, SG&A numbers versus what their total revenue is, and SG&A numbers versus what their income before tax is. And I think we are in pretty good shape versus a lot of our competitor group.

But we are going to continue to work on our SG&A cost, as well as every other costs that we have, and bringing that down.

Okay. Thank you, guys.

Barry Vogel.

Thank you. I only have two questions left, with all these thorough questions in this conference call. The first one is, you have been very good at lowering your costs in the last couple years; and obviously you have to be forward-looking to continue that effort.

So are there any things in terms of actions that you can take for additional efficiencies or cost improvements during 2014 and beyond in Water Transmission? That is the first question.

Yes. I think, Barry, we mentioned it a little bit before, we have gotten pretty granular in looking at our costs on the Water Transmission side. You can look at it on a man-hours per ton basis, when you are running pretty high volumes; but it starts to get a little difficult on the man-hours per ton basis when the volumes are so low, even though we know we have taken a bunch of man-hours per ton out, because we look at each segment of our operations and try to reduce the number of man-hours that it takes to produce a unit within that segment of the operations.

So what we have done is made it as granular as looking at what our total cost per man-hour is and the direction is certainly to continue to work down those controllable costs per man-hour, what our labor rates are.

And obviously when you work out -- when you work done your man-hours per ton, your labor rates start to decline as well as your overhead rates. And those are two things that we have focused on, as well as reducing what quite frankly our cost of quality is.

I think that when you look at where we are now versus probably where we were in 2011, we have taken about probably somewhere in the area of $2.5 million out of our -- a year on our total cost of quality in the Water Transmission side of the business. And that, along with making sure that we are leveraging our raw material purchases, is a big part of what we are doing in Water.

Plus the thought -- and obviously you have heard this before -- we are implementing lean manufacturing at all of our Water Transmission plans. We are -- we have done it at our Saginaw plant. We are in the process of doing it in Denver. Adelanto will be next.

And we will get through all of the original Water Transmission plants some time in 2014. I think on the Permalok side it will probably be sometime in 2015, because we are still working to get them with -- on the KPIs that the Company is on and how we measure ourselves, and basically trying to integrate them into the culture of the Company. Obviously, when you go from a small private company to a bigger company you want to try to go a little bit slow with that, so you don't overwhelm the group and so that we are getting the kind of results that we want out of that.

But that is a pretty broad cross-section of everything -- and I think, in every one of those areas, specifically in our total cost per man-hour and our looking at lean manufacturing and developing efficiencies out of that, we've got a lot of work to do on cost still.

The last question I have has to do with M&A activity. All of a sudden you are an acquirer and a divestiture Company, as you reshuffle the assets on behalf of the shareholders. So having gone through some of these experiences in the last year, how would you describe your posture in M&A going forward, relative to the base that you have right now and the skills that you are honing, as things improve with the Company?

Right. Obviously, I guess I would start by making the statement that we generally don't discuss any M&A activity. But I think the idea is what we are trying to do is position the Company to provide a better return on invested capital for the shareholders. Right?

So we have an existing Water business that we have a lot of work to do. We have got Permalok, and we have got a facility at Atchison that has got a pretty strong platform.

Now, I think the idea is that we are certainly looking beyond that for ways to be able to grow the Company. So that is an ongoing effort.

And those things are going to continue on, because I think we can get to a point with what we have right now but I think in order to grow the Company to the kind of levels that we want, it is certainly going to require something with adding something. So that is probably as much as I am willing to say at this point.

Thank you very much. Keep up the good work.

Thanks, Barry.

Thomas VanBuskirk.

Hi, just two fairly quick last questions, the first a little bigger than the second. First, is there a way to help us think about -- obviously the cost per ton changes in both businesses with diameter and wall thickness and so forth. Is there a way you can help us think about the range in cost per ton in each of those businesses that you are likely to see, depending on how it changes with mix? That is one question.

Then the other is just, can you just describe a little bit about how Permalok enhances the business and what opportunities it creates, other than just the incremental revenue from their product?

Right. I guess the way that I would characterize cost per ton, and I really don't want to get into specific cost per ton numbers -- obviously, that is a competitive issue in the marketplace. But when you are running a product that is 25% heavier at the same tons per hour, obviously it's -- or at the same rate -- I guess I would use feet per minute. If you are running a product that is 25% heavier at the same feet per minute rate, you are obviously going to start to really have an impact on what, one, your tons per hour and your revenue generated per hour and what your total cost is there.

So that is the idea behind the heavier product. And I don't really want to get into any more specifics than that, because it starts to become a competitive situation in the marketplace.

And I am sorry, what was your second question?

The second -- well, actually before we get to that, I have one quick follow-up to that. And that is simply, does feet per minute change much from the smaller pipe to the larger?

Well, as it sits right now, I am not sure that the feet per minute would change that much. In I think some of the heavier-wall product, the really heavy product that we can produce might be even a little bit slower feet per minute based on the weld penetration and -- not the weld penetration, but the annealing penetration of the weld. That may be a little bit slower, but it's so much heavier that the tons per hour number increases, and it really has a positive impact on your total cost per hour.

Because you are running at one cost per hour at tons at a lighter gauge; and if you have got that same cost per hour and you are producing 25% more tons in that hour, even if the production rate is a little bit slower, obviously your total cost is going to be a little bit lower. So I think that is what we expect to get.

And I do think there are things that we can do even on the heavier sizes to be able to allow us to run a higher tons per hour even on the heavier sizes. And those may be some projects that we are looking into here in the near future.

I think, Tom, to help with where you're try to go with this is water is very different, because every project can be different. You've got very different competitive factors going on.

But if you look at a more commodity-type product in pipe, generally the smaller the diameter you are going to have higher prices and cost per ton. You also tend to see lower margins.

When you've got a much bigger diameter, you will tend to see a lower price per ton and a lower cost per ton. But your margins will generally tend to be bigger than they are for smaller.

So you do tend to see that, and that is true of pretty much all pipe, whether it is bigger or smaller, when it is more of a commodity and it's a much more open market. Water is different; but I don't know if that helps you a little bit in terms of relationship.

Yes, the other thing to think of on the water business is a lot of it depends on the coating, the lining, the amount of fabrication work that has to be done. Because each one of these jobs is different. You have different coatings, you have different linings, you have different wall thicknesses, you have different diameters.

And you have fabrication work that is all done along with that. So it really is -- the tons per hour thing gets to be a hard way to define what a Water Transmission job looks like as far as margin contribution.

No, that is helpful.

Because a lot of what we do on the Water Transmission side of the business, a lot of -- we are selling hours in our plants, right? So how many hours does a specific project take; okay?

If we continue to focus on the things like reducing our total cost per man-hour and reducing the amount of man-hours it takes to perform, whether it is 1,000 square feet of lining or coating or tape coating, any of those things, if we continue to focus on those type of things, our overall margins will improve.

That's very helpful. Thanks. The other question was very simply on Permalok. Just to -- you guys don't really talk about it much; I know it is small. But I was hoping you could tell us how it enhances the rest of the business, how it is additive.

Well, it gets us, one, into a different market than we have been in, substantially the micro-tunneling market. It has got a proprietary connection that is patented, okay? And basically that product is basically for casing or carrier pipe that other pipe will run inside of, whether it is under railroad tracks, or in some cases under lakes or roads or whatever.

A good deal of the projects that we see, that we bid will have some of those kind of requirements in that. So it just gives us something else potentially to pick up on in some of the jobs that we bid that we haven't had before.

So it really is an accessory type of product. And quite frankly, the salesforce that we have now in our Water Transmission group, with having a much wider geographic reach, sees -- and I will use a sports term -- many more opportunities to bat with that type of product than what we were seeing when Permalok was a small, private company that has got a relatively limited, but skilled, salesforce. But there was only a couple guys; now we have our whole salesforce looking at ways that we can move this product into the marketplace.

So I think it is a pretty nice enhancement for what we have, not only for existing projects but it allows us to get more in-depth into the micro-tunneling work that is becoming more prevalent in cities and urban areas, where you just can't have an open trench in the street. You actually have to micro-tunnel to put a pipeline in.

So I think that is a very additive thing, which is obviously the reason why we looked at it and decided that we were going to purchase that business.

That is helpful. Thank you.

Thank you. At this point, there are no questions on queue.

Well, I would like to thank everybody for attending the call. And, obviously, we look forward to the better markets and performance as we go forward. I think the next thing we have is our annual shareholder meeting on -- Robin, when is that?

It is on May 29 in Portland.

We hope to see as many people there as we can, and we will go from there. So thank you.

Thank you. That concludes today's conference call. Thank you all for joining. You may now disconnect.