NWPX Infrastructure Inc (NWPX) 2014 Q4 法說會逐字稿

Welcome and thank you for standing by. At this time all participants are in a listen-only mode until the question-and-answer period. (Operator Instructions). Today's call is being recorded. If you have any objections, you may disconnect at this point.

Now let me hand the call over to Scott Montross, CEO. Sir, you may begin.

Thank you, Elle. 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 actual results to differ materially from expectations.

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

Thank you, Scott. Our fourth-quarter loss from continuing operations was $14 million, or $1.47 per diluted share. This included a non-cash goodwill impairment charge of $16.1 million. Excluding this charge, adjusted income from continuing operations in the fourth quarter of 2014 was $2.1 million or $0.21 per diluted share compared to income from continuing operations of $2.4 million or $0.25 per diluted share in the fourth quarter of 2013.

Water Transmission sales increased 32% to $56 million in the fourth quarter of 2014 from $43 million in the fourth quarter of 2013. Water Transmission gross profit as a percent of sales increased to 17.5% in the fourth quarter of 2014 from 16.4% in the fourth quarter of 2013.

There was a net credit in the fourth quarter of 2014 of $1.1 million for insurance reimbursement. Excluding this net credit, the gross profit as a percent of sales would have been 15.5% in the fourth quarter of 2014.

Tubular Products sales from continuing operations increased 7% to $46 million in the fourth quarter of 2014 from $43 million in the fourth quarter of 2013. Volume increased as we sold 45,000 tons in the fourth quarter of 2014 compared to 43,000 tons in the fourth quarter of 2013. Tubular Products had a gross loss as a percent of sales of negative 1.7% in the fourth quarter of 2014 compared to a positive 8.9% in the fourth quarter of 2013.

We continue to be negatively impacted by imports which compressed our margins in the fourth quarter. Total Company inventories decreased by $4.5 million in the fourth quarter from the third quarter of 2014.

Moving on to the full-year results, our loss from continuing operations was $6.2 million or $0.65 per diluted share. This included a non-cash goodwill impairment charge of $16.1 million. Excluding this charge, adjusted income from continuing operations was $9.9 million or $1.03 per diluted share in 2014 compared to $21.7 million or $2.27 per diluted share in 2013.

Water Transmission sales increased to $239 million in 2014 from $226 million in 2013. Water Transmission gross profit as a percent of sales decreased to 16.6% in 2014 from 20.7% in 2013. The increase in sales was due to the addition of Permalok in 2014 partially offset by decreased activity due to continued weakness in municipal markets.

Gross profit was positively impacted by a one-time net adjustment in 2014 of $2.7 million. Excluding these one-time adjustments, gross profit as a percent of sales is 15.5% in 2014.

Tubular Products sales increased to $165 million in 2014 from $133 million in 2013. Volume increased 24% and sales prices stayed relatively even. We sold 164,600 tons in 2014 compared to 132,800 tons in 2013.

Tubular Products gross profit as a percent of sales was 0.6% in 2014 compared to 10% in 2013. Our energy products comprised approximately 77% of Tubular Products sales in 2014 compared to 71% in 2013. Gross profit and gross profit as a percent of sales was negatively impacted by the increased competition from imports, which exerted significant dollar pressure on selling prices and volume. This was partially offset by cost reduction initiatives successfully implemented at our Atchison facility.

Selling, general and administrative costs increased to $24.3 million in 2014 compared to $22.7 million in 2013. This increase was due primarily to the Permalok acquisition.

We recorded a $16.1 million goodwill impairment charge in 2014. In conjunction with the preparation of our year-end financial statement, we concluded the fair value of the Tubular Products group was less than its carrying amount at December 31 and the entire goodwill balance in the Tubular Products group was written down. This was a direct result of the significant decrease in crude oil prices in late 2014, which has continued into 2015.

Interest expense was $2.3 million in 2014 and $3.6 million in 2013. The decrease was due to the payoff of our high interest-bearing term notes in 2014 and lower volumes on our line of credit in 2014 compared to 2013. Our effective tax rate from continuing operations which were unusual in 2014 due to our goodwill impairment, which is not deductable for tax purposes.

In 2014, the Company generated $35.6 million in cash from operations to support the growth of the business mainly through decreases in accounts receivable, inventory and costs on estimated earnings in excess of billing on uncompleted contracts. These were partially offset by decreases in accounts payable and accrued and other liabilities.

Depreciation was $13.6 million in 2014 and $13.3 million in 2013. Inventories decreased $38 million in 2014 from 2013. This was primarily due to the sale of our OCTG business partially offset by an increase in net inventory at Atchison.

Capital expenditures were $14.3 million in 2014, which included $4.3 million for the capital expansion at our Atchison plant. The remainder was for ongoing maintenance capital expenditures.

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

As of December 31, 2014, our backlog in Water Transmission was approximately $121 million. At December 31, 2013, our backlog was $103 million.

We expect that the first quarter of 2015 will continue to present significant challenges. The backlog in Water Transmission has decreased from third-quarter levels due to a smaller and therefore more competitive bidding environment in the fourth quarter. We expect Water Transmission sales to be in line with the fourth quarter with gross profit margins in the low to mid teens.

The following is an outlook on upcoming Water Transmission projects. The first segment of IPL completed production in the fourth quarter. The second segment of IPL had half its production in the fourth quarter and the second half will be mostly completed by the end of the first quarter. Based on the current construction timeline, we expect two more segments of IPL to bid in 2015.

The next segment will bid by the end of April with bid award in May or June and the fourth segment is expected to bid near the end of the year. The 22-mile Madison, Wyoming project was mostly complete by year end. We have two segments of the San Antonio Water Resource Integration project. Production will take place in the first and second quarters. We believe that the 140-mile Red River job in North Dakota may be delayed due to political and economic reasons. While we are watching the drought situation in California very closely, we have not yet seen an increase in bidding activity. California voters approved Proposition 1 in November, a $7.5 billion bond measure that authorizes the state to issue new bonds to pay for a wide variety of water related projects. There are some longer-term speculative projects that could start appearing in 2016 and later as a result of this bond measure but it is too soon to know for certain.

We also expect that the Texas SWIFT program will fund additional projects in Texas.

In Tubular Products, we are scaling back production to match the market demand. First-quarter sales and sales prices will be lower than fourth quarter and we expect to have a small gross loss for the quarter in Tubular Products. As we have discussed before, we are part of an industry trade case filed against Korea and Turkey on line pipe. The ITC preliminarily determined that there was harm and the Commerce Department's preliminary determinations are expected in the second quarter of 2015.

We have planned approximately $15 million to $16 million of total capital expenditures for 2015 maxing our depreciation. We continuously monitor all spending, especially capital, and we will quickly adjust as conditions warrant.

We closely manage our balance sheet and had a balance on our credit facility at the end of February of about $27 million.

As we have discussed in the past, we are aggressively seeking acquisitions. As all of you know, it is our policy not to discuss M&A activity on these calls. However, we have engaged a strategic firm to help us focus our efforts and we are working closely with investment banks to identify specific targets. We cannot share any further information at this time but this is a high priority for Northwest Pipe.

In conclusion, the fourth quarter of 2014 ended as we anticipated. With continued competitive and bidding environment we expect Water Transmission revenue to be flat in the first quarter with margins in the low to mid teens. In Tubular Products, we anticipate that first-quarter orders, production and inventory will continue to be negatively impacted by decline in crude oil price as well as continued high levels of imports. As a result, we expect a small negative gross loss for tubular products in the first quarter.

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

(Operator Instructions). [Frank Haflich].

Yes, Scott, can you please give us the outlook for steel prices?

Well I guess, Frank, this morning we got the latest updated CRU and actually saw that the steel price had actually fallen to I guess it's $488 this morning based on CRU and obviously as we look at that from the end of the year if you look at fourth-quarter numbers at the end of the fourth-quarter, the steel price I guess averages was about $629 a ton. So we are in excess of $140 a ton down and I think -- I believe and we believe it is starting to get toward the bottom. I think we may see a little bit more price movement down, maybe down to around the $470 number but we actually hope that it hits bottom and starts to move a little bit up again. Because we certainly feel that that is one of the major things that has slowed the line pipe order intake over the last several weeks. And we hope that it is getting relatively close to its bottom now.

Where is it now again? I'm sorry I didn't get that.

The CRU said it was at $488 this morning -- on the weekly publication.

So you see it getting down possibly to about $470?

I think that's a number based on what we are looking at for scrap prices in the marketplace and what we have seen the movement on that being and obviously that continues to move down. And we are hearing more rumblings and I think it is getting towards its end and I would like to think that it hits $470 and ultimately stabilizes and maybe starts to move back up because like I said, it is certainly we think putting a crimp in the line pipe line at this point in time.

Thank you.

Matt Sherwood.

Just going to start with an easy one. Just starting off, you talked about the decline in steel prices and also the reduction in the volumes in the tubular business. Can you talk about how that impacts your cash flow statement and whether we should see debt coming down in the coming quarters?

Obviously the higher the tubular business is it ends up tying cash and generally we get a little bit higher into our line. Like I said in the script, at the end of February, we were actually down to about $27 million on our credit facility and our debt was less than $30 million. And if you look at that versus what the end of 2014 -- or excuse me -- end of 2013, I think we were at about $87 million. So ultimately we are forcing the debt down and looking at cash flow figures, we had cash from operations a little over $35 million and I think that was actually better cash flow than what we saw in 2013 or pretty close to it.

So we expect to continue to keep working on our current assets, Matt. Not only accounts receivable, inventory, we think we have some room to bring those things down, specifically on the Atchison side with the business levels that we are seeing and ultimately continuing to work our debt level down.

So you've done all this hard work to clean up your balance sheet. You sold the OCTG business. Your stock is trading at 80% of book value. I think the enterprise value is pretty much when you add debt to the market cap is as low as it's been since the financial crisis. The number three player in your industry, Hansen, was acquired for a nosebleed multiple a couple of months ago. So it seems to us that your shares are undervalued. Have you considered using your materially improved balance sheet to enhance shareholder value?

As far as -- I am assuming you are talking about share buybacks and things like that. But obviously, Matt, as we have talked before, we are pretty aggressively focused on the M&A drives at this point and we can't talk about a lot of the details but we are certainly working with these strategic firms to understand the places where we have strengths and ultimately leverage that strength into either close tangential areas or areas that are pretty adjacent and that is the current focus on the M&A side.

Just based on your $30 million of debt, how much capacity would you have in an M&A transaction because it seems like with $25 a share, $26 a share of book value, which is just been adjusted with an impairment, plus only $30 million of debt against it, you would have a lot of financial flexibility.

Well, we do. And we are pretty lowly leveraged at this point. I think we are less than a time and a half of leverage so we have a lot of flexibility and again ultimately our focus is on driving an acquisition that ultimately is transformative for the Company and generates the shareholder value.

Do you have a sense of what the biggest size that could be without knowing specifically what you're going to do?

No. We are starting to get into some of the details but we don't really talk about the M&A stuff on the calls. But ultimately all of that is dependent on what the M&A situation is, the total financial structure of the situations. So there's a lot that goes into that and I'd rather not get into more detail on that at this point.

Fair enough. And then just final question, Scott, you spent all this capital to upgrade the Saginaw plant. You've done a lot of work to take costs out of the water business, yet gross margin levels seem to be trending back right to where they were when you began your whole margin improvement journey. Obviously the water municipalities around the country are getting a lot better deal for their pipe but why do you think that shareholders are not seeing the benefit of your cost-cutting work?

Actually I think you are. When you start looking at what our revenue level was in 2014 and looking at a gross margin that is right at around 16%, the last time you were at those kind of revenue levels, you are really in the 2009, 2010 timeframe and our gross margins were more like 7% or 8%. So you are seeing those cost reductions showing up at the lower margin levels or at least the lower revenue levels.

So we do think that is showing up and I think with as low as the business has been ultimately when you look back at how we were running these plants in 2011, 2012 when our topline in the water transmission business was $270 million or so, the margin levels then were 15% or 16%. And at that point, we were running major jobs at our Denver plant. We were running major jobs at our Saginaw plant and we had a Pleasant Grove plant that was running Provo Canal. So we were running the assets pretty full in developing 15% or 16% gross margins.

Right now I would say that we are running really only one plant relatively full and you mentioned that as Saginaw and we are still able to generate those [16%] gross margins, so we think those cost reductions are showing up there in the lower revenue environment and when you look back at 2013, we were coming off of some pretty major jobs in Texoma, we developed around 20%.

So if you look at the trendline, it is certainly moving up and those are certainly related to the cost reduction work that our water transmission people have done.

Have your competitors done similar work, or are they just making -- because it seems like there has been a lot of pressure on the margin side to compete away some of the gains that you've made.

What I would say, Matt, is you have seen one of our competitors, Hansen, who was owned by Heidelberg, exit the business, so you've got a little bit of a look at what they have been doing margin wise and ultimately they decided to exit the business and I'm not sure what kind of work they were doing. But I can't really speculate on what they are doing other than we are still able to maintain what our market share has been in water transmissions between 42% and 45% and even in these low revenue or low market volume situations, we are still able to get to 16% margin because of the cost work.

I think it would be significantly less than that if the guys at the water transmission plants and water transmission management hadn't done all the cost work that they have done.

Great. Thanks so much, Scott.

Bhupinder Bohra.

Just a question on Permalok, actually. How much did that acquisition bring in this quarter in terms of revenue?

We don't break that out specifically, Bhu, but it was somewhat less than 10% of the total topline for water transmission.

Okay. On an annual basis, right?

Yes, on annual basis. The business was -- actually the topline has grown from the average trend of what we saw from the company that we purchased and we are really starting to get our feet under us in the micro tunneling business. I think the sales group is doing a pretty good job of starting to move the levels up and the revenue that we are seeing the levels and just starting to get really into the guts of the cost reduction work at those plants.

So a lot of R&D work going on with those facilities. We think that there's a lot of possibilities to be able to do things with that proprietary connection and expect some pretty good things from that going forward.

Okay. And the other question on the outlook for first-quarter water transformation, now you expect revenue levels to be at par or similar to 4Q and your margins are actually coming down I think you expect like low to mid teens compared to like the fourth quarter? Can you just explain -- bridge that gap, what is driving margins down?

Well, I think actually when we did the last earnings announcement that we did back in November, for the third quarter, I think we used for the third quarter the projections of low to mid teens. So I think you are kind of looking at a pretty similar area that we have seen. I think it is still the same competitive environment that we are seeing where we see periods of time where the bidding activity seems to pick up, the smaller jobs pick up, the number of smaller jobs pick up, but it doesn't ever seem to sustain for a year or so that the total number of jobs are moving up from the year. So we are seeing the level for 2014, that level of jobs really continuing into 2015.

So what we do know is, what we are looking at from the bidding side in 2015 is in the second half of the year, we expect to bid somewhere in the area of about $250 million worth of work. So bidding starts to pick up as we get toward the second half of the year. You've got another segment, a third segment of IPL that bids in the April, May timeframe and will ultimately start to impact the second half of the year. When you have another segment -- the fourth segment of IPL that bids later in the year along with some additional work that are $8 million to $10 million projects that are out there that should have a pretty decent bidding environment for the second half of the year.

Of the $8 million to $10 million, is that different from IPL? You are talking about those other smaller ones?

Yes. Smaller jobs. The IPL -- the segments that we are looking at, the first two segments that we did were in the area of -- we got all of the first segment, which was about 22,000 tons. We got half of the 23,000 tons. We got half of the next segment, which was about half of that value, about 12,000 or 13,000 tons. So we expect the next two segments that we are looking at to be somewhere in the area of that 22,000 or 23,000 tons.

Okay. Now you did actually mention in your release about lower oil prices impacting [PP] segment. Can you just walk us through if there was any impact in 4Q and how -- we are seeing capital spending declines out there like in North America by like 25%, 30% numbers. How is that -- is built into your expectation for 1Q and maybe if you can just give us some color on 2015, first-half and second-half?

Right, I think it was a little bit of a perfect storm energy tubular in the second half of the year. As you mentioned, we went from having a just under $100 a barrel oil price to drop into half of that in a period of only five or six months. During that time, especially the E&P companies and a lot of the end-users started to say hey we are cutting our capital budgets by 30% to 40%. So that was going on and at the same time that started to go on, we also started to see the hot roll coil price start to drop and the hot roll coil price started in the middle of the year at probably $680 a ton and now it has dropped almost $200 a ton less than that at this point.

So you had the perfect storm in that back half part of the year. Through the middle part of the year, you had all the compression going on between the sales price and the higher coil price but then as we moved into the fourth quarter, all those things that were announced and the coil price falling, basically started to freeze a lot of the line pipe buyers, especially distribution from buying.

So the order intake through the last few four or five months has been significantly slower than it was previous to that. So that is why as we look into the first quarter, we are saying the order intake in the first quarter is going to stay like that. Related to what I mentioned before, if the coil price is still falling, which it has and it may, we don't think that there is going to be a lot of distribution buying going on on the line pipe side simply because the last buyer is you bought too high, correct? They want to get that at the bottom of the market.

So it has frozen everybody from placing orders. So I think volumes in the first quarter certainly are going to be impacted. That along with the falling coil price and that coil price at this point starting to drag the line pipe pricing down even with the small amount of (inaudible) going on out there, has an impact on the first quarter.

We believe, however, that once this coil price bottoms out and certainly we think it does bottom out -- we think a number that when Frank was asking the question earlier was about $470 that we were using, we think it is going to be there. Once that bottoms out and starts to move back up all the publications and everybody we've talked to talk about pent-up demand on line pipe that existed in 2014, simply because there wasn't enough skilled labor to get the lines installed in 2014. Even when you look at publications like Preston, Preston believes the gathering line segment, the 16-inch and under is going to have similar volumes to what we had in 2014.

I think part of the problem is while this coil price is still down like that, none of that is going on. But once that coil price bottoms out and starts to head back up, we think that there's a possibility -- a pretty good possibility -- that some of that demand starts coming back.

Now unfortunately, I think it really is going to be timed with the coil pricing and it really is more of a second-half phenomenon.

Now part of that also is going to be impacted by the trade case. We have a trade case out there against Korea and Turkey that we think as an industry based on what's going on with the import penetration in this market, that there should be a pretty favorable ruling and if you use the ruling that was associated with the OCTG business, you can get a flavor for maybe how that whole thing ends up.

So we think that the back half of the year demand comes back a little bit but some of that may be impacted by inventories and things like that but we do think demand comes back on line pipe at some point during this year.

Okay. Thanks a lot, guys.

Thank you. (Operator Instructions). Frank Haflich.

One further question on sale. What about your own purchases? How competitive do you find imports now of coil and can you take advantage of them or are the leadtimes discouraging versus domestic, etc.?

Well, I think that we certainly have the ability to take advantage of imports on some of the longer lead time projects that we have. Water Transmission, we consistently look at what the import market looks like, so we do have the ability to use imports and quite frankly have used imports in the recent past.

I think that when you start looking at import pricing versus what domestic pricing is, they are starting to get somewhat closer together and ultimately I think as they get closer together the idea of buying imports and speculating on imports gets to be a little bit more I guess what I would call distressing.

So everybody gets locked out of wanting to speculate but I do think that it is certainly going to act as a mechanism to hold what the steel prices can rise to domestically. So ultimately there is a lot of things in play here but imports are a credible option for us. I think that as an industry, as a steel consuming industry, they get less and less competitive as the steel price goes down and ultimately starts to balance more with what the prices are in the world markets.

Right. Percentagewise, can you say how much imports you bought last year versus 2013?

I'd rather not talk about percentages but I would say, Frank, that normally we buy the majority of our steel domestically.

Okay.

And would rather do that.

And still represents what 60%, 70% of your costs? What is a rough rule of thumb?

Well it is different for both sides of the business. When you look at tubular and especially when we saw the steel price run up in 2014, it represented closer to 85% to 90% of the cost at one point because it had run up so much. When you look at our Water Transmission business, it is less. It is probably more like 40% to 45% of our costs.

And today it is less than 85% to 90% for tubular I would assume also?

Well, that's assuming the pricing stays the same in line pipe. One of the phenomenons that we see in the businesses is that ultimately as steel prices are dropping on the tubular side and obviously we have seen for years on the structural tubing side what the phenomenon is now that it starts to drive the line pipe price down a bit.

Okay. Thank you.

(Operator Instructions). We don't have any further questions on queue at this time, sir.

No further questions to do say, Elle?

Yes, sir. No further questions on queue at this time.

Okay. I think I'd just like to say a couple of things. Obviously we are seeing a couple pretty challenging markets. I think when you look at the positioning of the Company, on Tubular Products we are going through a very similar situation everybody else in this business is going through. You see companies like US Steel laying off and closing plants, [TNK], Tenaris, and we think on the Tubular Products business with the modernization project we have taken large chunks of costs out of that business and we are going to be positioned pretty well when that business returns. And it's just going to be a tough market for a while.

When we look at Water Transmissions, I think it was addressed a little bit when Matt Sherwood was asking his questions, the 16% margins in 2014 compared to what we saw the 7%, 8% margins in 2009 and 2010, that's where the cost reductions are showing up and even in tough market conditions we are able to develop those kind of margins in Water Transmissions.

So we think that we are on a pretty solid track with the things that we are doing organically in this in not only the business but managing the balance sheet and managing the cash the way we are managing it that leads into looking at aggressively seeking M&A opportunities.

We think that is the thing, those are the things that are going to continue to help us transform the Company. So I think it is just kind of a little bit of a summary of the things that we've talked about but certainly important to note.

So with that I guess our next call is in early May and we will talk to everybody then. Thank you.

Thank you.

Thank you, speakers. And that concludes today's call. Thank you, everyone, for joining. You may now disconnect.