NWPX Infrastructure Inc (NWPX) 2015 Q1 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 at this point.

I would like to turn this call over to our host, Mr. Scott Montross. Sir, you may begin.

Thank you, Bob. 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 first-quarter results.

Thank you, Scott. Our first-quarter loss from continuing operations was $2.1 million, or $0.22 per diluted share. This included a $1.8 million after-tax lower of cost or market inventory adjustment on our tubular product inventory. Excluding this charge, the adjusted loss from continuing operations in the first quarter of 2015 was $336,000, or $0.04 per diluted share, compared to a loss from continuing operations of $1.2 million, or $0.13 per diluted share, in the first quarter of 2014.

Water Transmission sales increased 31% to $56 million in the first quarter of 2015 from $43 million in the first quarter of 2014. Water Transmission gross profit as a percent of sales increased to 13.4% in the first quarter of 2015 from 3.9% in the first quarter of 2014.

Tubular Products sales from continuing operations decreased 28% to $29 million in the first quarter of 2015 from $40 million in the first quarter of 2014. Volume decreased as we sold 28,300 tons in the first quarter of 2015 compared to 39,000 tons in the first quarter of 2014. Tubular Products had a gross loss as a percent of sales of negative 12.7% in the first quarter of 2015 compared to a positive 6.7% in the first quarter of 2014.

As I noted earlier, we had a lower of cost or market inventory adjustment on our Tubular Products inventory. Before-tax impact of this adjustment was $2.8 million. Excluding this charge, the adjusted gross loss as a percent of sales in the first quarter of 2015 is negative 2.8%. This loss was caused by the decline in world crude oil prices, a declining steel market, and continued high import levels of line pipes.

Selling, general, and administrative costs increased to $7 million in the first quarter of 2015 compared to $5.4 million in the first quarter of 2014. This increase was due primarily to increased professional fees associated with the 2014 audit and a $400,000 environmental reserve on our Houston property.

Interest expense was $417,000 in the first quarter of 2015 from $770,000 in the first quarter of 2014. The decrease was due to lower average borrowings and lower capital lease balances. Our effective tax benefit rate was 37.7% in the first quarter of 2015 compared to 35.5% in the first quarter of 2014.

In the first quarter of 2015, the Company generated $24.6 million in cash from operations to support the growth of the business, mainly through decreases in accounts receivable and inventories. This was partially offset by an increase in costs and estimated earnings in excess of billings on uncompleted contracts.

Depreciation was $2.6 million in the first quarter of 2015 and $3.2 million in the first quarter of 2014. Inventories decreased $11.5 million in the first quarter of 2015 from year-end 2014. This was primarily due to a decrease in inventory at Atchison.

Capital expenditures were $3.7 million in the first quarter of 2015, which was for ongoing maintenance capital expenditures. On April 21 we filed an 8-K noting that we implemented a production curtailment at our Atchison location and anticipated one-time termination expenses of about $500,000. This is a second-quarter event and, therefore, will be included in our second-quarter results.

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

As of March 31, 2015, our backlog in water transmission was approximately $88 million. As of March 31, 2014, our backlog was approximately $148 million. We expect the second quarter of 2015 will continue to present significant challenges.

The backlog in water transmission has decreased significantly from year-end due to the smaller and, therefore, more competitive bidding environment in the last couple of quarters. We expect water transmission second-quarter sales and gross margins to be similar to the first quarter of 2014. However, we expect the near-term market conditions to improve dramatically with approximately $250 million of projects bidding in the second and third quarters of this year.

The following is an outlook of upcoming projects in water transmission.

We have two segments of the San Antonio Water Resources Integration Project, with some production in the first quarter and the rest of the production in the second quarter. The second segment of IPO was mostly completed by the end of the first quarter. The third segment of IPO will bid next week and we expect the bid award sometime in June. The fourth segment of IPL is currently scheduled to bid in the October/November timeframe.

The Trinity River mainstem project is expected to bid in mid-September and is an additional piece to the Lake Texoma project that we participated in in 2012 and 2013. (inaudible) Bayou, also known as the Houston MSA project, is a major project that continues to show progress and we expect this job to actively start bidding sometime in mid-2016.

We also expect that the Texas SWIFT program will result in additional close-in opportunities. We believe that the 140-mile Red River project will be delayed due to economic factors. We are also watching the situation in California very closely, and with the ongoing drought emergency and the passage of Proposition 1, we are anticipating increase in bidding activity starting in 2016.

The private Cadiz Water Conservation Recovery and Storage Project is making progress and production could start on a 43-mile pipeline in Southern California as early as the first quarter of 2016. There are several other major California projects in 2016 and beyond that could be aided by Proposition 1 funding. These projects are the Fresno surface water program, the Southern California reliner program, and the Los Angeles pipeline replacement program.

In Tubular Products we have implemented a production curtailment in mid-April. We will continue to shell and ship finished products and perform limited manufacturing, if needed, to fulfill customer orders. We are closely monitoring market conditions and inventory levels and as the market improves we will resume normal operations.

Second-quarter sales and sales prices will be lower than the first quarter and we expect to have a negative mid-single-digit gross margin for the quarter in Tubular Products. As we have discussed before, we are part of an industry take case filed against Korea and Turkey on line pipe. The ITC preliminarily determined that there has been harm and the Commerce Department's preliminary determinations are expected in the next couple of weeks.

We have planned approximately $12 million to $13 million of total capital expenditures for 2015, matching our depreciation. We are monitoring all capital spending and will quickly adjust as market conditions warrant. We also closely manage our balance sheet with a balance on our credit facility of about $18 million at the end of April.

In G&A we have made some cuts in April and will continue to manage these cuts to support the requirements of our business. As we have mentioned in the past, we are actively pursuing acquisitions and are considering a wide range of strategic opportunities. As all of you know, it is our policy not to discuss M&A activity on these calls. We cannot share any further information at this time, but this is of the highest priority for Northwest Pipe.

In conclusion, we expect water transmission results will be weaker in the second quarter as seen by the relatively small backlog. With a big upswing in bidding activity expected in the second and third quarters, we look for better results in the second half of 2015.

In Tubular Products, the production curtailment will likely be in effect for the entire second quarter as the markets are negatively impacted by the decline in crude oil prices, a declining steel market, and extreme levels of low imports -- excuse me, extreme levels of imports.

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

(Operator Instructions) Brent Thielman.

Good morning. The bidding activity you are seeing over the next couple of quarters, you mentioned a number of large programs there, but is this a function of the large order opportunities or is it also a return in the smaller book-and-burn type work?

I think certainly the larger ones play into that because, as I mentioned, Brent, there are two segments of IPL in the rest of this year bidding and obviously you know the kind of size range. Those jobs are 19,000 to 21,000 tons, depending on which segment you are talking about. The Trinity River job is also in that period, but there is a significant number of what I would call $2 million, $3 million, and $5 million projects over that same time period.

We came out of a pretty low bidding environment in the first quarter of this year and really the fourth quarter of last year, but I think what we are seeing is a lot of the bidding that's going to take place in 2015 really crowded into mid second quarter through third quarter and early into the fourth quarter. So I don't know that the total number of jobs when you look at year to year is really up dramatically. I think if you look at it it's still relatively flat with 2014, but all of a sudden we are seeing those larger jobs come into play in the middle of the year.

Okay. And then I know you talked about the competitive landscape before and how difficult it has been on the water side. I look at the $88 million in backlog, 40% decline, is that indicative of the opportunities you've seen this last quarter in the market? Or is it also Northwest Pipe kind of willing to surrender some share to try and protect the margins?

I think one of the things that you look at with backlog is over the last couple of years we have seen backlog within quarters fluctuate down to 80-some-million, up over 100 million, so we have run into spots within quarters where we've gotten down to these kind of levels previously. It just so happens that once we are reporting a quarter we've either got an IPL segment or something like that that kind of props it up. So that's not a number that we haven't seen previously.

I think what you see coming out of the second quarter with this bidding activity going on and the number of jobs that we see bidding between second, third, and the beginning of fourth quarter is then you will see that grow and you will see the higher backlog as we come out of these quarters. But the bidding environment, as we have discussed in the past, has certainly been very contentious and competitive because of the low number of jobs. But I think it's pretty safe to say when you look at the entire market we're still getting our pound of flesh and getting our market share of the 42% to 45% of the market share that we have maintained.

The problem is we can't seem to rate now with the way that this water market is going, at least through 2015. It seems like it's fits and starts of bidding activity. You can't seem to put a full year together.

And, ultimately, the thing that gets so exciting about looking at 2016 with the Proposition 1 that has been approved and the Texas SWIFT program is there a lot of potential work as we go into 2016 and forward that fits into those programs with ultimately. Not only the number of jobs, but the tons associated with all those jobs picking up as we go into this timeframe.

So we are pretty happy with what we are seeing as we start looking forward; not only with the bidding activity that we see middle of this year, and I think we mentioned the $250 million or so of bidding activity, but also what we see developing in 2016 and beyond. As I think we have mentioned before, this California market has been way down for the last three or four years, but the things that are starting to bubble up to the top because of this Proposition 1 -- there's another big job out there called the Sites Reservoir that's in Northern California that could be 30,000 tons of pipe. That is one of the things that is listed associated with Proposition 1 right now and I didn't even mention on this list.

So I think we're starting to see a significant amount of work being generated in, one, states that have significant drought issues and all of a sudden that these programs are coming to pass. So I don't think that there has been any limit or shortage of requirements. It's getting these projects to get started and getting them funded. And I think the mechanisms are there to really get this started as we move into 2016.

That's great. One last one if I could. With the Kansas facility, are you looking for something specific to develop in the market before you consider bringing production back on, or are you willing to do it even if these conditions persist in the second half?

We think that as long as the market stabilizes, we could run relatively low production levels at the Atchison facility and still be pretty good, based on the costs that we have now there. The guys that run the plant, the operations, the commercial guys, do a good job in working together and reduce the costs.

I think the biggest thing is and first step is the stabilization of the steel price. Now we have seen the steel price drop some $200 a ton since the end of last year, which certainly puts the -- throws the cold water on especially the distribution buy-in. Well, this morning, for the first time in I don't know how many weeks, we actually saw the CRU or the weekly publication on hot rolled coil prices actually stabilize and move up a dollar. I think that's step one.

I think step two is that no matter what piece of the energy tubular business you look at, there's a significant amount of inventory to be worked through that has come in via the imports. So I think there's probably a couple quarters of working through the inventory that exists in that business and, as you know, we are part of this trade case on the line pipe business. We also think that that starts playing into this as the preliminary determinations are announced by the Commerce Department, which I think is about May 15 or May 17.

So all those things together I think are starting to piece together the story of when you start back up. And right now we're expecting that -- we're still running orders. We're still running where customer requirements exist, but it's relatively small levels of production because we have skeleton crews at that facility.

I think we get through June and we get some impact to the trade case. We get the impact of the coil price stabilizing. Oil prices seem to be moving up a little bit. The issues in Libya may cause that to move up even a little bit more, so there are some positives.

I'm starting to think that the second half really starts to develop there and I think we are well-positioned at Atchison with the product mix. Where we are located and the amount of costs that the guys have taken out of the conversion costs there, once this market stabilizes we are going to be in pretty good shape going forward there.

That's great. Best of luck.

[Michael Hamblet].

Thank you very much. Robin, a question for you regarding book value. At the end of first quarter what do you see the book value of the Company as?

So book value you mean the stockholders' equity? Is that how you are --?

For the total book value?

The total book value of the Company.

You are looking at total book. You know, it kind of fluctuates. Obviously, with the changes in the stock price -- and we look at obviously trailing EBITDA. And the multiples that we are seeing in the marketplace -- because generally we are working on a lot of M&A activity so we get to see the multiples in the marketplace pretty significantly on the things that we are looking at. And those multiples are anywhere between 9 and 10 times of trailing EBITDA.

Now we are hitting a relatively low point in the business because of how slow the water transmission business is, so when you are looking at those book values for us -- I look at our trailing EBITDA of $40 million to $45 million in a normal market situation and you look at the multiples that are out there between 9 and 10 times.

Okay, but what would you calculate the book value to be? The shareholder equity over the outstanding shares?

That would be just stockholders' equity at the end of March is in the press release; that was $244 million.

And how many million share -- is it 9.5 million?

Yes.

All right, so it's around $25.50 a share? You referenced, Scott, the cuts in G&A. Do you have a percentage that you are trying to get to that you want to (multiple speakers)?

Yes, yes. We certainly do have a percentage that we are working on. Obviously, I don't want to talk about it on this call for a lot of different reasons, but suffice it to say we are trying to work very diligently and quickly to match that to the requirements of the business.

Okay. And you did say that you are actively pursuing acquisitions. What is the major motivation for the acquisitions?

Well, one of the things is we don't really comment on M&A activity in these calls. All I can say is ultimately what we have done is we've taken a look -- we took our OCTG business out of the mix at the beginning of 2014 and, ultimately, we are in a situation where our debt on our balance sheet is very, very low and the motivation for us is to grow the Company and to grow the return on invested capital for the shareholders.

So ultimately that is the motivation, but it is -- what I would say is in the water business there are a lot of potentials out there. There are a lot of either very small potentials or relatively large potentials out there and there's not a lot in between. And the timing on what is actionable is what makes it more difficult.

So what we are doing is we're making sure that we are looking at things to acquire that have -- are the best strategic fit for the Company and allow us to grow the Company and increase the profitability. That is the motivation.

Okay. So with the stock trading below book I can't see you using your stock as currency in any sort of transaction.

We're not going to discuss that on these calls.

I'm just saying common sense-wise. If anything, I think there has been no or very little or nothing that I have seen with regarding management's activity in market buying, considering now you are probably in a blackout period.

But as a shareholder I would like to see management step forward and invest. I think that these are compelling levels and the story that you are telling me is -- you are echoing that yourself. It would be something that -- a welcome sight that I would like to see.

Now with regard to the California contracts and you have the -- you mentioned the Texas contracts. Outside of the US what types of opportunities are ahead for 2015 through 2020 one would say for the Company?

Can you hold on for one second? We have some kind of a malfunction in the equipment in the background. Hold on for one second. Okay, would you repeat that question?

Sure. I just want to find out from you, outside of the US, where are the opportunities in the coming years or even certainly the near term?

Are you speaking specifically of the water business?

Yes.

Well, one of the things you have with the water business is that it's relatively regional and a lot of the pipe that we produce is relatively large and ultimately it doesn't ship long distance. Everything ships by truck because it's lined and coatings, so it's not really conducive to shipping it very long distances.

We have participated in some offshore programs in the past. We continuously look at programs in Mexico, but we are not finding anything to any great extent at this point.

All right, that covers it for now. Thank you very much.

Matt Sherwood.

Just had a quick question for you. You sort of laid out a case that, based on current M&A multiples in the marketplace and your normalized EBITDA, the stock should be $40 to $45 a share now. And also, if you look at your previous goals to get that EBITDA meaningfully higher, it could be even higher than that. It's trading at $24 and you've taken debt from $85 million to $25 million.

I guess can you talk about your interest in maybe buying back some stock at a discounted valuation versus M&A?

Yes, we are certainly looking at that along with the M&A right now, Matt. So it is something that we have looked at and we will continue to look at.

Do you think you could do both potentially, or do you think one is mutually exclusive of the other?

Well, our balance sheet is in pretty good shape right now in relation to the debt load we are carrying. We are carrying very little debt, so ultimately I think what it starts to do is it starts to get to the point where, when some of this business starts to come online and the EBITDA generation starts to get back to relatively normal levels, I think it makes it a little bit easier to talk about doing a wide variety of things.

Obviously right now, being at a low level in the marketplace, it's a little tough to do both. You look at the things that really -- what you are saying is if you are going to do a stock buyback, you have got no other better place to spend your money to generate. So that doesn't really grow the Company. I am not saying we are not looking at it, but we are looking more intensely at the M&A activity than just doing the stock buyback at this point.

But I guess, just by definition, if you buy something in M&A you're paying whatever the buyer says and you are capturing some synergies, which is the real upside. But you basically suggested that even on a normalized basis your stock is trading at 60% of what it would be worth in an M&A transaction. I just don't see how that's not a very compelling opportunity.

We think you're right. Obviously, we think we are in a situation right now with where the market -- actually both markets are at this point. We are in a low EBITDA generation environment. And as you mentioned, if you look at those Water Transmission multiples that we see on an ongoing basis in the marketplace, it gives you a feel for, when you look at our trailing EBITDA, what the stock price should likely be. So --.

Great. Then I guess just final question. The debt is at $25 million. Do you see an opportunity to work that down further, at least until the restart of Atchison?

The debt? Absolutely. I think we've got probably about 18 out of our credit facility and we have some leases in -- so we are below 20 at this point as we sit. And as we continue to bring the Atchison inventory down, we will continue to reduce that debt.

Great, thanks so much.

We see it going down significantly in the second quarter.

Great, thanks so much.

At this time we have no further questions. (Operator Instructions)

Bhupender Bohra.

Good afternoon, guys. Just wanted to ask Scott if you can clarify on the outlook here for the Water Transmission business. I believe you said the top line and the gross margin line would be similar to last year's second quarter, right?

Last year's first quarter.

Last year's first quarter, okay. So we are looking at margins of about 4% on the gross margin line?

We are looking at likely mid-single-digit margins in the second quarter.

Okay, got it. That's all I had, thank you.

At this time we have no further questions on the phone.

Just to wrap up, just to say a couple things. Obviously the first quarter has been a rough first quarter and we are expecting to see the tough second quarter like we've indicated here. I think, obviously, water is in a low period of demand. We've talked about that. We have talked about the strained bidding environment and everybody knows what's going on in the energy business, but certainly there's a lot of bright spots to look at going forward in this business.

You know, the line pipe trade case. It's going to take a while to work through, but we really haven't seen a stable market on the energy tubular side in the last three years. And we think that we are very well positioned with Atchison, once this market stabilizes, and it will, to take advantage of the marketplace, especially since we have driven 25% to 30% out of the conversion costs and we have the expanded market products that we did with the modernization project.

We certainly, as I have indicated, see a lot of bright spots on the water transmission business. Not only the increased bidding activity that we see in the second quarter and the third quarter, but we believe that this Texas SWIFT program and Proposition 1 and some of the private work that is starting to show up certainly has a big effect on us as we go forward.

We've seen pretty low levels of bidding really over the last three years in the Water Transmission business. And if you go back a few years and look at 2011 we were running three plants hard in 2011 and running them really high top line and n developing a 16% margin. In 2014, we were only running one plant hard and that was the Saginaw, Texas, plant and still developed a 16% gross margin.

I think that is an indication of the work that is being done on the cost side at every one of those plants, not only lean manufacturing but day-to-day cost reduction. So you can see what the margin potential is as this water market continues to return to where it has been and where we think it's going.

And also the work that's being done on the M&A activity; I certainly don't want to forget to mention that. A lot of work is being done there and it will ultimately pay off as we go forward because we think things will continue to develop there. They're slower developing than I would like to see, but we certainly think that they develop as we move forward over the next several months.

So I guess our next earnings call is in August and annual shareholder meeting at the end of May, right?

On June 4.

On June 4, excuse me. So anybody that shows up at the annual shareholder meeting, we will see you there and anybody that doesn't, we will talk again in August. Thank you.

That concludes today's conference. Thank you for participating. You may now disconnect.