NWPX Infrastructure Inc (NWPX) 2015 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Questions will be taken after the presentation. (Operator Instructions). Today's conference call is being recorded. If you have any objections, you may disconnect at this point.

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

Thank you, Dan. Good morning and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm 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.

We've recently issued a press release stating that we were exploring the sale of our energy tubular business to focus our efforts on water transmission. We do not have any additional information on that process that we are able to share this time. In the past, we've focused equally on both sides of the business on these calls. Today we will be focusing primarily on the water transmission business.

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

Thank you, Scott. Our second-quarter loss was $12.1 million or $1.26 per diluted share. This included a $5.3 million non-cash goodwill impairment charge. Excluding this charge, the adjusted loss was $6.8 million or $0.71 per diluted share compared to income of $3.2 million or $0.33 per diluted share in the second quarter of 2014.

Other transmission sales decreased 38% to $38 million in the second quarter of 2015 from $62 million in the second quarter of 2014. Water transmission gross profit as a percent of sales decreased to 3.3% in the second quarter of 2015 from 18.5% in the second quarter of 2014.

Our volume dropped 49%, while our product mix increased our revenue per ton. The mix of jobs produced in the second quarter of 2015 included more downstream fabrication work than the jobs produced in the second quarter of 2014.

Gross profit was negatively impacted by depressed market conditions and the resulting extremely competitive bidding landscapes. Selling, general and administrative costs decreased to $5.5 million in the second quarter of 2015 compared to $5.9 million in the second quarter of 2014. This decrease was due to lower incentive plan expense and decreased traveling entertainment.

We have completed a restructuring plan that decreases our manufacturing and overhead -- excuse me, our manufacturing overhead and G&A by 15%. Interest expense was $286,000 in the second quarter of 2015 and $569,000 in the second quarter of 2014. The decrease was due to lower average borrowings and lower capital lease balances.

We recorded a $5.3 million goodwill impairment charge in the second quarter of 2015. With the recent expected market conditions and water transmission, we were required to assess our goodwill balance. As market conditions have been poor, this led us to conclude that the entire goodwill balance needed to be written down. With this write-down, there is no more goodwill on our balance sheet.

Our effective tax benefit rate was 10.6% in the second quarter of 2015 compared to an effective tax rate of 35.6% in the second quarter of 2014. With our recent history of cumulative tax losses, we recorded a $1.3 million valuation allowance on a portion of our deferred tax assets, primarily related to statement operating loss carry forwards and state credits. We expect the rate will be 17% to 18% for all of 2015.

In the first six months of 2015, the Company generated $41.8 million in cash from operations, mainly through decreases in accounts receivable and inventory. Depreciation was $4.7 million in the first six months of 2015 and $6.1 million in the first six months of 2014.

From the end of 2013, we have decreased our net debt by about $93 million. We generated $35.7 million of free cash flow in the first six months of 2015 and have generated $56.5 million or $5.91 per share since the beginning of 2014. As of market close yesterday, that is equal to about 33% of our market cap.

Inventories decreased $21.6 million from year-end 2014. This was primarily due to a decrease in inventory at Atchison.

Capital expenditures were $6 million in the first half of 2015, which was for ongoing maintenance in capital expenditures. I'll provide a quick summary of the tubular products results.

As of June 30, 2015, the net assets for the tubular business were around $57 million. Sales decreased 61% to $15 million in the second quarter of 2015 from $40 million in the second quarter of 2014. Volume decreased as we sold 17,700 tons in the second quarter of 2015 compared to 40,900 tons in the second quarter of 2014.

Tubular products had a gross loss as a percent of sales of negative 25% in the second quarter of 2015 compared to negative 0.4% in the second quarter of 2014. With our production curtailment in April, we had about $500,000 in severance expense. In addition, pipe pricing, particularly line pipe, continues to fall and is negatively impacted by continued high import levels.

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

As of June 30, 2015, our backlog and water transmission was approximately $109 million, a 24% increase from the $88 million as of March 31, 2015. We expect the third quarter of 2015 to have higher revenue in margins in the second quarter, but it will still be challenging. The backlog and water transmission has increased from the end of the first quarter, but we as are still expecting a very competitive bidding environment.

We expect water transmission's third-quarter revenue to be about 10% to 15% higher than the second quarter with gross margins in the mid-single digits.

We expect an additional $200 million in projects bidding through the end of 2015. The following is an outlook of the upcoming water transmission projects. The third segment of IPL has started production at our Saginaw, Texas facility and will run through the end of 2015. The fourth segment of IPL is currently scheduled to bid in September.

The Trinity River main stem project is expected to bid in mid-September and is an additional piece to the Lake Texoma project. The Luce Bayou also known as Houston MSA is a major project that continues to show progress, and we expect this job to actively start bidding in mid-2016.

We also expect that the Texas SWIFT program will result in additional close end opportunities.

We are beginning to see smaller opportunities in California that are bidding in 2015. We are watching the situation in California very closely, and with the ongoing drought emergency and the passage of Proposition 1, we are anticipating an increase in bidding activity starting in 2016.

The private Cadiz Valley Water Conservation, Recovery & Storage Project is making progress, and production could start on a 43-mile pipeline in Southern California by mid-2016. There are several other major California projects in 2016 and beyond that could be aided by Proposition 1 funding such as the Fresno surface water program, which actually starts bidding some of the smaller sections in 2015, but it is spread out over probably a year and half timeframe.

There's also the California reliner program, as well as the Los Angeles pipeline replacement program.

We have planned approximately $8 million to $9 million of total capital expenditures for 2015, matching our expected depreciation. We are monitoring all capital spending very closely and will quickly adjust as market conditions warrant.

As of June 30, our tangible book value was about $232 million or about $24 per share. As of market close yesterday, we were trading at a 26% discount to tangible book value. Obviously, we believe in the water transmission business as we move to become a pure play water company. Our quality, our nationwide footprint, our cost position and a 45% market share uniquely positions us to thrive as the market improves.

In tubular products, we implemented a production curtailment in mid-April. We are selling and shipping finished products and performing limited manufacturing as needed to fulfill customer orders. We are closely monitoring market conditions and inventory levels, and as the market improves, we will add back employees.

As we mentioned in the past, we are actively pursuing acquisitions and are considering a wide range of strategic opportunities for the water transmission business. It is the bedrock of the Company, and we have many of the experts in the industry on our staff. Our pipe is used in highly engineered systems that are unique for each project, making it a higher value business than the commodity-driven energy tubular business.

As all of you know, it is our policy not to discuss M&A activity on these calls. Therefore, we cannot share any further at this time, but this continues to be the highest priority for Northwest Pipe.

In conclusion, we expect the water transmission competitive landscape to remain tough for the next couple of quarters, but we're focused on improving our market share and driving cost-cutting and driving additional costs out of our business.

Our water transmission market position is very, very strong. We are number one in our market segment with 45% market share, and we set the standard for quality. Our cost position continues to get stronger. We've taken over 15% in man-hours per ton to produce jobs versus jobs that we just produced a couple of years ago. It's 15% less man-hours now than it was just a couple of years ago, and we've taken 15% of the headcount of our total water transmission group out since 2013. And this is attributed to the lean manufacturing and cost reduction initiatives that we have at the Company.

If you look at the recent historical performance of our water transmission business from 2011 through 2014, we generated between $40 million and $46 million of gross profits in those years, in each one of those years.

Our gross profit and 2013 percentage was 21%, and in 2014 our gross profit percentage was 17%, and these were not overly strong markets. This is a result of all the cost reduction work beginning to show up in these margins.

During these challenging market conditions that we've seen over the last several months, we've been able to reduce our debt down to $7 million and generate $56.5 million of free cash flow since the beginning of 2013. We are very well positioned to thrive in the water transmission business as these markets return, and it's not a matter of if it returns, it's when. We believe the Texas SWIFT program and Proposition 1 in California really begin to set the stage.

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

(Operator Instructions) Scott Graham.

So I'm trying to understand a little bit on the water transmission side. You're saying that your sales are down 38%, volume down 49%, I think, Robin, you mentioned or, Scott, you mentioned mix up, the difference. Where does pricing fall within that, though?

So obviously the amount of fabrication on a specific job, as Robin mentioned during the script, has a significant influence over what the price is. Obviously, if your pricing is more dedicated to just producing cylinder pipe, obviously that creates lower pricing levels. The fabrication part of the business, obviously more costs associated with that and generates higher prices.

Right, okay. I guess I would have thought that that is just purely mix. So what you're saying, right, is that of the volumes that you're selling, of the tonnage that you are selling, your pricing is stable?

No, I would not say that. I think that the competitive landscape that we've seen really since the middle of 2014 has really placed a lot of downward pressure on the pricing and on all of water transmission and obviously had a substantial impact on what the gross margins are. But what I think is being said is that the jobs that we're seeing and bidding and getting have a significantly higher percentage of fabrication on that, which obviously increases the price, but it also increases the cost.

Understood. But that is, I think, kind of more a mix of your sales because, if the gross margin is down as it was, that would imply that there was negative price affecting the gross margin, do you know what I'm saying? Right?

Correct.

Okay. So I'm going to assume actually that mix was probably a little bit higher than plus [9%] and pricing was probably a little lower what was probably a little negative, would you agree?

Okay.

Fair enough. Okay. Now this 15% reduction in manufacturing and G&A, you are saying that that's done?

Actually, we are always focused on our G&A and making sure that we are rightsizing the G&A for the company and the size of the company and what the company's immediate and long-term needs are. So we'll continue to focus on G&A.

But the 15% I quoted is done.

Done, yes. Okay. Good. You did a really nice recap of what's out there, Scott, project wise. I was hoping that you could maybe distribute the $200 million among the projects. Is it all the first three, the IPL, Trinity River and Houston? Is that the $200 million, or is that just a part of the $200 million?

No, that's a part of the $200 million. When you start looking at it, obviously IPL being the big jobs that are going on right now is a big piece of that.

Also out there, as I mentioned, the Fresno surface water program starts in the middle of August. Bidding is is broken up into several different sections. Trinity River plays into that, along with a myriad of other smaller jobs.

Okay. So could you give us an idea then on what -- the $200 million that you are referring to spend, is that -- are these, let's say, six or seven things that you cited? Is that the preponderance of the $200 million, or obviously we are trying to just get to what a potential modeling situation looks like?

Right. I think that when you look at the major jobs that we talked about, I wouldn't say that they are the preponderance of it. They represent a good portion of it, but there are also a lot of smaller jobs that we're seeing that they are starting to bid.

Fair enough. The last question I have is about the potential sale of tubular. The net asset number you gave, that was very helpful. Is that a number that you guys are kind of circling as what would hopefully be a purchase price? Because obviously you're not going to sell this thing on current EBITDA run rate because it's under earnings significantly. I think people would recognize that.

Is that the $55 million, $60 million level a number that is within a stone's throw of what you would reasonably expect to net?

You know, I would say, Scott, that we can't really comment on what we think the pricing level would be on those assets. Obviously we think that those assets have significant value in the marketplace based on the productive capacity and based on the capabilities there. But I really can't comment on anything associated with pricing of those assets at this point in time.

Yes, that's fair. That's fair. I actually did have one other question, if you don't mind.

Sure.

On the M&A side, you're looking at the wide range of water applications, which is great. I'm assuming that that means that some type of --- that you're not looking at more pipe, that maybe you are looking at things that are maybe more mechanical or otherwise. Is that fair?

You know what I would say is -- and, again, we don't generally discuss M&A on these calls. But what I would say is we're looking at the wide range of opportunities, Scott. And the things that are out there that we see in the water transmission business that are available are really very, very small, like the Permalok acquisition that we made, or very large. But I can't say that we haven't looked at additional pipe, but we've also looked at things like the rehabilitation pipe business. And, quite frankly, we talked about that on these calls before that we like how rehab looks because it adds almost like another leg to the stool of the transmission business.

And theoretically when you're looking at the water transmission business, if there is not municipal spending to drive new pipe installation, if there's issues with lines, the lines have to be dealt with somehow, a lot of times that ends up as rehabilitation. And there's a myriad of rehabilitation products that are out there.

So we've really looked at the range of everything in the water transmission business to find what the best strategic fit is because, obviously, it's got to be a strategic fit for the Company so that we would be adding something that would be the thing that was going to drive increased earnings and better shareholder value. I mean that's the total focus of this.

I'm with you. Thank you.

Brent Thielman.

Scott, you know, the $38 million in water revs is probably the worst in a single quarter that I can remember. And when you look back on this quarter and kind of thinking about what you see going forward, I mean do you view this as just sort of the perfect storm in terms of timing of work, or do you think there's some broader issues here that kind of lead us to rethink the longer-term earnings power of the business?

No, I think one of the things that we saw is it is twofold. One, we're seeing the results of pretty low bidding activity mid-to-late 2014, and this is really where that work starts to show up. We are seeing a quarter where there was really no major job production in that quarter. There really wasn't much of IPL in that quarter at all, and plus there are cases where jobs have a tendency to push and don't end up in the quarter.

One of the other things affecting the top line in this business is what's happened with the steel price over and above the pressure that the competitive bidding environment has placed on the top line. Steel prices, when you look at them versus last year just on hotrolled bands, are in excess of $200 a ton lower. So that obviously impacts the top line as you go through this period of time. But I wouldn't say that what the top line of the second quarter was is representative of what we expect going forward.

Scott, do you think that the volatility in steel prices is having any impact in kind of the timing of bidding out there?

Yes, I mean I think maybe just a little bit, but generally when these jobs are going on, these things are being planned for several years. And what we are seeing from steel pricing now is it's really starting to stabilize. If you look at over the last several weeks, it's been in the $460 million to $470 million and really hasn't moved around significantly. So I think we are entering a period of significantly more stability in the steel prices.

Yeah, you know, I think that that may affect a little bit of the timing on some of those projects. But I think a lot of these things are so far planned out that when they are going, they're going, and the steel price just becomes part of the project pricing.

Okay. And then, you know, I understand the mid single-digit gross margin expectation for water is kind of a function of the tough bidding environment in prior quarters. You know with things maybe at least getting a little bit better out there, how long can this level of profitability spill into kind of future quarters beyond Q3?

I think that as we said in the conclusion, that it certainly has an impact in Q3 and likely an impact in Q4. One of the things that we're seeing is, even with increased bidding activity that we are seeing in the second half of the year and obviously the larger increases in bidding activity that we see in 2016 and 2017 because right now, if you look at it tonnage wise, you would almost have to look at it tonnage wise because of the volatility of the pricing with steel, we expect it to be up 20% in 2016 and another 20% in 2017.

So I think that the biggest issue is that you've got all the competitors in our business, in our business segment, that are at this point in time low on backlog and at least for the near future that the bidding level and the bidding situation is still going to be contentious until the backlog in general starts to develop in our business.

And then just I guess just from a modeling standpoint going forward and with the plans for the tubular products business, are you going to be including this in discontinued operations or still going to be consolidated in the business?

Right. That's an accounting determination. We believe it will be in Q3 based on the accounting regulars just changed the rules a little bit, but we do believe it will be.

Practically speaking, I think it is pretty easy to kind of break it out, but we were going to consider doing that for the third quarter.

Okay. Thank you.

Matt Sherwood.

Good job on the cash generation in a tough environment, and I think it's good to hear you know you guys laid out the story here.

Just had a quick question. You talked a lot about M&A, but oth with $7 million of debt and the potential for sale, that could net just if you got book value, I know you can't comment on that, but $55 million to $60 million. Is share repurchase on the radar screen as well? Because I mean you are trading at less than 3 times water segment EBITDA for the last four years on average. It just seems like you are not going to be able to buy anything anywhere near that valuation or below book. So would that be a consideration as well?

Absolutely and we would look at the wide range of things, and obviously when you start talking about share repurchase, you're basically saying with the funds that you have, you're not able to go out and buy something that is going to return something than buying the shares back.

But what we were doing and what we've been doing is looking at the wide range of what we might do if and when we conclude a transaction with the Atchison proceeds. And one of those things is looking at a share buyback, as well as looking at what things that we could actually add to this company that would drive better shareholder return. So it's something that we've had discussions on, and we will continue to have discussions on.

That's great. And then, you know, in terms of the bidding volume disclosures that you laid out with the potential for 20% increases, do you think that that will get the market more into balance? While it's clearly going to take a couple of quarters, do you think that that will help with capacity utilization sort of industrywide?

I do think that it starts to balance a little bit and starts to take some of the pressure off of the pricing levels as not only our competitors but we start to get and generate a bigger backlog. So certainly that would be a big thing in really reducing what the pressure is on each one of these jobs.

The other thing we don't see, Matt, is we're looking at the results of the Texas SWIFT program, which everybody knows about that. We talked about the almost $4 billion that they have planned for the next 10 years for watertight projects. One, continuing the funding of the IPL sections and this big Luce Bayou job that is out there, which is also a huge amount of pipe, probably 80,000 plus tons, all those things are starting to develop with that. And the California program is really just starting to pick up steam.

But, as you know, there's drought situations in other parts of the country, too, and we do think that that's going to come into play at some point in time. And ultimately like we've talked about near-term, we think that the drought situations are really what starts to drive the spending because it really becomes emergency spending. And Texas is really the leadoff for that, right? We saw that start a couple of years ago, and it just continues on, and they've committed significant amount of funding to the waterside of this to not only deal with the population growth but the drought situation.

Same thing in California, right? The big thing in California is the agriculture. The agriculture and environmental uses about 80% of the water in California. Everything from broccoli to avocadoes to almonds and the population centers need it. So it is really setting the stage.

Like I said, it's not if the water business is going to come back hard, it's when, and it sets the stage for at some point a significant explosion in the market requirements.

That's great. And then just one last one, more technical. The 15% G&A, what's a base that you're talking about? Like what is the dollar savings you think you could generate there?

So we did, we looked at about $25 million base, about the level we were at in 2014. So the reduction will come from there.

That's great. So that's real money. Great. Well, look, you're doing a great job with a good balance sheet in a tough environment. I think positioning the company well for a really good future and just like to see a little capital return to shareholders on top of anything you're looking at for M&A.

We hear you, Matt. Thanks.

[Glenn Learer].

As far as the asset component of the contribution to operating cash flow, when do you see that beginning to wane?

Probably as the jobs, the bidding activity, particularly in water, picks up in the second half of the year. And Glenn, I'm sorry I didn't quite catch your name or where you're from?

Glenn Learer, US Bank.

Okay. Thank you. But yes, so I would expect the second half of 2015 probably more into the fourth-quarter starts building up that working capital alittle bit more, but we've been really working on keeping the working capital that levels at a fairly low level.

Glenn, our current assets have been really a constant area of focus really since the end of 2013, the beginning of 2014, which is why you just see the almost $57 million of free cash flow generation during that period of time. And as we go through this process and are exploring the idea of selling the accent facility and going through that whole process, we'll continue to work down the current assets there as we go through time.

So I think that there's a little bit more to harvest there on that piece, but as Robin said, as the water transmission business goes up, ultimately it creates an increase in working capital and obviously starts to slow the free cash flow a little.

Okay. Thank you.

Thank you. At this time, we don't have further questions in the queue. (Operator Instructions) We actually have one more. It will be from the line of [Ms. Dianne Decat]. Ma'am, your line is open. Please go ahead.

Thank you. Scott, can you talk about your water transmission footprint? I think you have maybe six facilities, is that right?

Well, actually we have five main water transmission plants. We have two Permalok facilities, which is basically casing carrier pipe for microtunneling and HDD, and then we have a plant in Monterrey, Mexico that is associated with doing fabrication work for the business.

And as we said through the script, Dianne, we are the only one of our competitors that has a nationwide footprint, and ultimately that provides a very significant advantage in being able to address jobs in any market situation. And like we said, we think it positions us very well with the cost work that we've done and the experts that we have in the business to really drive as this business comes back. Because this business has been generating $40 million to $46 million of gross profit from 2011 to 2014.

And 2015 is really a cyclical down year that's not really out of the norm. If you look back in 2009 and 2010, you can see kind of those cyclical swings. But that nationwide footprint is the thing that really helps us have an advantage of being able to attack any market across the country.

Okay. Keep up the good fight. Thank you.

Thanks, Dianne.

At this time, speakers, we don't have any further questions in queue. I would like to hand the call back to you.

Okay. Thank you and again I would just like to reiterate our positioning going forward as this market improves. I think we're well positioned for our water transmission to thrive -- our water transmission business to thrive, and obviously with the looking at the sale of the Atchison facility, we are going through some transformative events with this company and expect that to start bearing fruit as the water transmission business starts to redevelop.

So thank you and we'll talk to you again in November.

Thank you, everyone.

Thank you. That does conclude today's conference call. Thank you all for participating. You may now disconnect.