NWPX Infrastructure Inc (NWPX) 2014 Q2 法說會逐字稿

Welcome and thank you for standing by. (Operator Instructions). This call is being recorded. If you have any objections, you may disconnect.

And now, I am turning the meeting over to your host, the CEO, Mr. Scott Montross. Sir, you may begin.

Thank you, Al. 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'm joined by Robin Gantt, our Chief Financial Officer.

As we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause 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 income from continuing operations was $3.2 million, or $0.33 per diluted share.

Water transmission sales increased $62.2 million in the second quarter of 2014 from $58.1 million in the second quarter of 2013. Water transmission gross profit as a percent of sales decreased to 18.5% in the second quarter of 2014 from 20.9% in the second quarter of 2013.

We had a revision in our estimate of the contingent consideration related to the Permalok acquisition of $877,000, which was included in the water transmission results. Excluding this positive impact, the water transmission gross profit as a percent of sales in the second quarter of 2014 was 17.1%.

The increase in water transmission sales was due to the start of the IPL and Madison Gillette projects in the second quarter. The decrease in gross profit and gross profit as a percent of sales was driven by product mix, as well as increased price competition, which lowered selling prices.

With the low levels of bidding activity that we saw in 2013, the pricing has become more aggressive, reducing sales prices and margins. [Given] the product sales from continuing operations increased 34% to $39.8 million in the second quarter of 2014 from $29.8 million in the second quarter of 2013.

Volume increased 37%, while selling prices decreased 3%. We sold 40,900 tons in the second quarter of 2014 compared to 29,800 tons in the second quarter of 2013.

Tubular products gross profit as a percent of sales was negative 0.4% in the second quarter of 2014 compared to a positive 10.4% in the second quarter of 2013. Our energy products comprised approximately 77% of tubular products sales volumes in the second quarter of 2014 compared to 70% in the second quarter of 2013.

Gross profit and gross profit as a percent of sales were negatively impacted by margin compression, as steel foil costs increased 11% while the selling prices decreased 3%. In addition, we had a lower cost or market adjustment of $1.6 million.

Selling, general, and administrative costs remain unchanged with $5.9 million in both the second quarter of 2014 and the second quarter of 2013. Interest expense was $569,000 in the second quarter of 2014 and $867,000 in the second quarter of 2013.

In June, we had $2 million of principal remaining in our term notes, which were set to mature in October 2014 and January 2015. We opted to pre-pay these term notes a little early and they were paid in full in June. Even with the increased interest related to the early payoff of the term notes, interest expense decreased in the second quarter compared to a year ago as we had lower average interest rates and lower average borrowings.

Our effective tax rate from continuing operations was 35.6% in the second quarter of 2014 and 34.5% in the second quarter of 2013. In the first six months of 2014, the Company generated $33.2 million in cash from operations to support the growth of the business, mainly through decreases in trade and other receivables and inventory.

Depreciation was $6.1 million in the first six months of 2014 and $7.2 million in the first six months of 2013. Inventories decreased $13 million by the end of the second quarter from the end of 2013. This was due to a decrease in tubular products inventory and a decrease in water transmission coil inventory with the recent ramp-up in production. This total inventory reduction excludes the change in inventory that resulted from the sale of the OCTG business in March.

Capital expenditures were $9 million in the first six months of 2014, primarily for planned capacity expansion in our Atchison, Kansas, line pipe 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, 2014, our backlog in water transmission was approximately $143 million. As of June 30, 2013, our backlog was approximately $115 million. We expect that the third quarter of 2014 will improve from the second quarter.

The backlog in water transmission has remained relatively steady with the addition of the IPL and Madison Gillette jobs. We expect water transmission sales to be higher than they were in the second quarter, with gross margins in the high teens.

The following is an outlook on upcoming water transmission projects. The first segment of IPL will run through late third quarter, possibly early fourth quarter. The second segment of IPL will bid mid-August with a bid award expected by mid-October and production beginning by the end of the year and running through mid-2015. There is potential for two more segments of IPL to bid in 2015.

The 22 Madison -- the 22-mile Madison, Wyoming, project started production in the second quarter and will run through early next year. The San Antonio water resource integration project is expected to be split into five construction projects, with the first bid expected in September. More sections may also bid by the end of 2014.

The 140-mile Red River job in North Dakota is moving forward and will bid late 2015, early 2016. The Odessa Subarea pipeline project near the Snake River in Washington state has been significantly reduced through a lack of funding and its schedule is uncertain.

In tubular products, we are increasing volumes and enhancing our product mix with the Atchison expansion. Third quarter's net sales in tubular products will be higher than the second quarter, but we expect margin compression caused by continuing high levels of import line pipe that margin levels will be in the low single digits.

We expect between $14 million and $17 million of total capital expenditures for 2014, which includes the Atchison expansion completed earlier this year and normal capital maintenance.

In conclusion, the second quarter of 2014 was a definite improvement over the first quarter. We expect water transmission revenue to improve in the third quarter, but we also expect the bidding environment to continue to be challenging. In tubular products, we expect volumes will continue to improve and we expect line pipe prices to trend upward.

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

(Operator Instructions). Scott Graham.

Scott, your project synopsis was great and, obviously, I am going to have to go through the transcript because it was a little quick, but that was very helpful. I was just wondering. Is there any way to assign some dollar amounts, even if it's minimums, on each of these opportunities?

I think that, obviously, it gets a little bit tough. It's based on what the bidding landscape is going to be.

I think IPL, we are looking at -- I can give you a tonnage number on the IPL segments, but I think IPL, the next segment will probably be somewhere in the area of 21,000 or 22,000 tons, pretty similar to what we saw in segment 15-1, the one that we are working on right now.

We think that the job -- the San Antonio job will be somewhere between 15,000 and 16,000 tons on that job, and again, I am not sure how much detail you want to go in in all the jobs, but --

No, you are doing fine. Please keep going. Madison?

Madison was a smaller diameter project. It is 22 miles. Tonnage on Madison was probably 4,000 or 5,000 tons, in that area.

And when we're starting to look at stuff like the 140-mile Red River project, that job is still being worked on, spec'ed out, but we expect the tonnage numbers on that to be substantial and, obviously, substantially higher than the segments that we are seeing on the IPL.

So substantially higher in total --

Yes.

-- or substantially higher -- oh, in total, then, IPL?

Not in total. With the segments that we are seeing right now, we have got segment 15-1 that we are working on right now that is about 21,000 or 22,000 tons. We expect the next segment to be the same.

But the total IPL Project is somewhere in the area of about 150 miles to 165 miles. This is about 140 miles. So the total project will be somewhat less than the total volume on the IPL, which is somewhere in the area of 150,000 tons of pipe over the next several years.

That's awesome. That's exactly what we are looking for.

You talked a bit about the more competitive nature of bidding. How competitive? Is it price down 5 versus what a normal run rate product would be? Could you put some type of parameter around that, Scott?

A lot of times, it depends on the region, Scott, and the competitive landscape within the regions. In a lot of cases, some of the larger projects like we have seen, like IPL and Texoma before it, obviously carry a little bit more risk on getting a very, very low price.

So, what we have seen the past is obviously the bigger jobs have carried some pretty nice margins. On the smaller jobs, depending on what region you are talking about because, as you know, the water transmission market is pretty segmented and it's very geographical, a lot of it depends on the region and competitive landscape in the regions.

But what I would say is on some of the small jobs, we are seeing bidding activity that is very, very aggressive and down significantly over what we would have seen maybe in 2012.

Okay, okay, thank you. My last question is this. It's more about California because the news coming out of California is -- in some areas of that state, it's dire on the drought. I am just wondering. Are you guys seeing -- market intelligence-wise, are you seeing anything that suggests that there is going to be some type of acceleration in activity on the water side just to get water closer to where it needs to be, just to deal with some of these droughts?

I know it might be longer term, but maybe not. I was just wondering if you heard anything at all about California. Obviously, we have heard a lot about Texas and they are monetizing. California doesn't seem to be doing a lot of monetizing.

Right. I would say that with the current forecasts that we see, we see California slow, and really you have to look at California in the two sections, northern and southern California. We see southern California slow into 2015 and maybe picking up mid-year 2015 going into 2016 and we see northern California developing a little bit later than that.

But I think that the interesting thing is the new Water Resources Reform and Development Act that has been signed by the President. One of the pieces of that is that that is set up to be able to handle extreme weather situations. And I think when you look at the state of California and seeing the maps on the state of California showing drought and seeing that a large portion of the state is in exceptional drought, I think that's probably an extreme weather condition that may work its way through on that program.

So we're expecting at some point in time, Scott, to see California really develop because of the drought situation. We just haven't seen a lot of anything yet. We have heard a lot of discussion from private companies talking about moving water into southern California, but really haven't seen anything more than that yet.

But our -- we believe that it is definitely coming, but it's just a matter of when it is going to get started. But I think the drought situation is certainly going to accelerate that.

Scott, Robin, thank you both very much.

Gerard Sweeney.

Staying on water transmission for a second, in the past you have talked about bidding activity being very slow, in 2013, and I think in the Q1 call, you talked about an improving bidding activity. I know you said it's still competitive out there, but any comments on how just overall bidding activity across the board is developing?

I think we -- we continue to see an increase in the bidding activity.

The one thing that we are definitely seeing that I think that we have talked about on some of the previous earnings calls is the increase in activity of larger jobs, and when I start referring to larger jobs, it is jobs that are -- that we believe are going to be in excess of $10 million of worth.

When you look at 2013, really there was the [Carongandi] job that was a big job and another job in Texas called Mary Rhodes that fit that bill. When you're looking in 2014, we are seeing five or six jobs that fit that bill. Obviously, a couple of those are IPL segments and the SAWS work that we are seeing. There is a couple of relatively large tunnel jobs that are out there.

So that's picking up, continuing to pick up through 2014, with a continued increase in the larger jobs that we see on the horizon out into 2015. We are seeing more like nine or 10 of those jobs that we expect to be in excess of $10 million.

So I think the overall number of jobs that are bidding is increasing. It is not increasing drastically, but it is increasing. But I would say that the number of jobs that are larger jobs that are bidding are increasing, at least from what we can see, out through 2016. And that's really what our -- I would call our pretty good view of the horizon look is.

Traditionally in the past, I think your average job was probably about $1 million?

Yes, I would say that's right.

Okay. Does that market come back at some point? Is that municipal finance driven? Is it needs, requirements, continued drought? What drives that market or (multiple speakers)

I think it's the municipal financing and I think it will continue to come back. I think it's been relatively slow because you see the shape of state general funds and the condition of the bond financing, and ultimately as we move through a period of time, I think there are states that are improving.

Fortunately, we're in some of the state -- at least one of the states that are very, very strong right now, in Texas, that is able to finance those projects. But I do think that continues to improve as we go through 2014 into 2015 and then in 2016.

Okay. And then jumping over to tubular, just looking at the capacity with the hydro test was probably about 225,000 tons, but looking at Q2 versus Q1, I think there was probably potentially some hydro test -- some implementation work going into 2Q, and then some qualifying processes with the thicker pipe. Can you give us a little idea of how that business grows over the next two, three, four quarters? How do you start cracking that market a little bit and the impact on margins as we go through that?

I think that -- couple things. Looking at -- first, addressing the growth over the quarters. I think that when you look at what our capacity utilization was at that facility before the modernization project, we had about 250,000 tons of capacity. So in the first quarter of the year, we were probably running on a quarterly annualized rate somewhere about 62% to 64%.

In the second quarter of the year, after the expansion project, which included the hydro tester that you mentioned, our capacity was about 325,000 tons. So obviously, Robin read the numbers where we were in the second quarter. We were over 40,000 tons of shipments, so we are just over 50% of capacity. We expect that we will be back, even with the new capacity, over 60% as we travel through the third and fourth quarters.

So that gives you a little bit of an indication of where we see the volume going, and obviously, our goal is to get the total volume on that facility over 200,000 tons.

Okay.

And when you look at the margins, in the second quarter of the year -- we talked about this in the last earnings call, that we saw an extraordinary run-up, really, in steel prices in the second quarter of the year, which was a different scenario than we had seen the three previous years.

And everybody in the marketplace is calling this certainly a supply side-driven event, where there was severe weather. There was issues at both US Steel Great Lakes and the Erie Works. There were issues getting iron ore to the Stelco facilities. So there was a lot of things that were weather driven that really caused that steel pricing to head into a different direction. It really started to compress those margins.

Now, in the second quarter of the year, we also finished our capacity -- or our modernization project at Atchison, which certainly improves our capacity and it improves our ability to run heavier wall, higher grade products at the Atchison facility. So as we get higher volumes on that facility, the mix will certainly shift toward heavier products, higher tons per hour, lower conversion cost, and at this point in time, we are seeing line pipe prices that are starting to move up into the marketplace.

So we see the margins starting to develop into the third quarter and then into the fourth quarter, and ultimately with the idea that we are going to be able to drive those margins back into the double digits with not only the cost improvements that we've had from the modernization project, but with the extra capacity, the lean manufacturing implementation, I think that puts us in a pretty good competitive position in this marketplace.

And if the spread between line pipe price and coil price opens up, I think it really bodes well for being able to drive even higher margins there. But the second quarter was certainly tough, and obviously we talked about that on the last call and why that was going to be.

Then one other quick question, then I will jump back in line. Trade cases. Obviously, you don't own the OCTG business anymore, but that came to fruition. There had been some rumblings that the OCTG business or trade case set the tone potentially for line pipe side. Any thoughts, comments on that or is it still too early?

I think that the success that was had on the OCTG trade case certainly allows the drumbeat to become louder on a line pipe trade case.

When you look at overall line pipe, the imports on line pipe have been a higher percentage of the market than they have been on OCTG products. It is just a little bit smaller market.

So I think this really gives a platform for something else to happen on line pipe going forward. It's a little early and we are seeing line pipe prices heading up, but imports being such a large percentage of that market, obviously, is something that we don't believe is sustainable going forward.

Thank you. I appreciate it.

Matt Sherwood.

Just had a quick question on the line pipe competitive environment. McKeesport, which was a big line pipe mill, is closing down, I think in the next week or two. How does that impact the competitive environment for line pipe?

I think that certainly US Steel was on some programs through McKeesport that are going to become available to the open market at this point. So ultimately, I think what that does is it gives a little bit more market share or the potential of a little bit more market share to the rest of the market. And I think that we are going to see some results of that as we travel through the third and the fourth quarter.

Great. And then in terms of your outlook for line pipe margins, if you look at this quarter, you did -- ex-locum, you were already in the low single digits. You were at 3.6%, excluding lower of cost or market adjustments, and it sounds like line pipe prices are increasing a little. High roll coil futures suggest that there is likely to be a decline in coil pricing. When does that start to benefit margins, since you are guiding essentially flat margin sequentially?

I think as we get deeper into the third quarter, Matt, we start seeing that develop, and ultimately, a lot of it is going to depend on how much of that spread between line pipe price and hot roll band price opens up, and how fast that opens up.

I think the other thing is, obviously, we are just getting off the ground with our running the upgraded mill at Atchison with the cost potential -- the cost-reduction potential that is there and having the ability to do the heavier wall products and higher strength level products that, quite frankly, because of their weight, it is significantly more tons per hour, so it helps to continue to reduce that cost.

I think that with the cost reductions that we are getting from the new mill and the potential of opening up the spread between line pipe and coil going forward, if all that happens and we start getting to spreads that are more above $400 a ton between line pipe selling prices and hot roll band prices, there is potential significant margin improvement in this.

So we'll just have to see how the line pipe market develops and the coil pipe market develops as we go forward.

The hard thing to get a view on is, how is the coil market going to develop? Now over the last several weeks, we saw the coil prices go down, but now we are seeing them start to move back up. Some of it may be related to the success on the trade case, so what is really hard to call is when is that thing going to open back up and generate the margins we expect.

We certainly believe that is going to happen, but I think it's going to be a slower process. I think line pipe prices move up pretty slowly over a period of time and I think coil prices start to moderate in the range, because they've been traveling in a relatively narrow range. But I do think the spread opens up as we start getting deeper into the third quarter.

Great. Then, I guess, just final question on the financing environment for water jobs. It looks like the SAWS project is a public/private partnership. Is that right?

I don't know that. I thought it was a public job.

Okay, fair enough. That's the question. All right, great.

I don't think -- because the interesting piece of that, Matt, is that job is broken up into five different construction pieces. So, none of those single pieces is really huge into itself, but when you add the whole thing together, I think it's a pretty good-sized project.

Great. Thank you.

Sir, at this time, we don't have any questions on the queue. (Operator Instructions).

We're having a difficult time hearing you on our end.

(Operator Instructions).

Any other questions?

Sir, at this time, we don't have any questions on the queue.

Okay, we appreciate everybody attending the call. Our next call, Robin, is when (multiple speakers)

Early November.

Okay, so we will talk again in early November. Obviously, we will see some of you at various conferences over the next couple of months, but thank you for attending and we will see you soon. Thank you.

Thank you. This concludes today's conference and thank you for joining. You may now disconnect.