NWPX Infrastructure Inc (NWPX) 2015 Q4 法說會逐字稿

Good morning and thank you for standing by. As a reminder, your lines have been placed on a listen-only mode until the question-and-answer segment of today's conference call.

Today's call is being recorded. If you've any objections, you may disconnect at this time.

I would now like to turn the conference over to Mr. Scott Montross, CEO of Northwest Pipe Company. Thank you, sir, you may begin.

Thank you, Michelle. 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 statements we make 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 filings 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 fourth-quarter and full-year results.

Thank you, Scott. Our fourth-quarter loss was $13.7 million, or $1.43 per diluted share, compared to a loss from continuing operations of $14 million, or $1.47 per diluted share, in the fourth quarter of 2014. We had a non-cash goodwill impairment of $16.1 million in the fourth quarter of 2014. Excluding this charge, adjusted income from continuing operations in the fourth quarter of 2014 was $2.1 million, or $0.21 per diluted share.

Water Transmission sales decreased 31.5% to $39 million in the fourth quarter of 2015 from $56 million in the fourth quarter of 2014. Water Transmission gross loss as a percent of sales was negative 19.2% in the fourth quarter of 2015 from income of 17.5% in the fourth quarter of 2014.

The decrease in sales was the result of a 39% decrease in average selling prices due to mix of the products produced coupled with lower steel costs. These were partially offset by increased production.

Gross profit was negatively impacted by competitive pressure and the bidding for water infrastructure projects. There were some one-time adjustments for low cost or market write-downs in steel and some employee-related costs; however, the competitive bidding environment was the primary reason for the losses.

Selling, general, and administrative costs decreased to $5.1 million in the fourth quarter of 2015 from $6.5 million in the fourth quarter of 2014. This decrease was due to lower wage, benefit, and incentive plan expense and decreased expenses in all categories. Total company inventories decreased by $19.7 million in the fourth quarter from the third quarter of 2015.

Moving on to the full-year results, our loss was $29.4 million, or $3.07 per diluted share, compared to a loss from continuing operations of $6.2 million, or $0.65 per diluted share, in 2014. Both years included non-cash goodwill impairment charges with $5.3 million in 2015 and $16.1 million in 2014. Excluding these charges, the adjusted loss in 2015 was $24.1 million, or $2.52 per diluted share, compared to adjusted income from operations of $9.9 million, or $1.03 per diluted share, in 2014.

Water Transmission sales decreased $173.2 million in 2015 from $238.5 million in 2014. Water Transmission gross profit as a percent of sales decreased to 0.3% in 2015 from 16.6% in 2014. The decrease in sales was due to a 16% decrease in production and a 14% decrease in selling prices.

Sales and gross profit were negatively impacted by significant competition in the bidding environment, along with $1.1 million in lower cost or market steel inventory adjustments.

Selling, general, and administrative costs decreased to $22.3 million in 2015 from $24.3 million in 2014. This decrease was primarily due to lower wage, benefit, and incentive plan expense, and decreased expenses in all categories partially offset by higher professional service expenses. With the cuts we have made in SG&A, we expect we will be between $18 million and $19 million in 2016.

Interest expense was $1.4 million in 2015 and $2.3 million in 2014. Our overall borrowing was smaller this year compared to last year and we ended 2015 with zero drawn on our credit line.

As we noted in our last earnings call, we had about $400,000 in unamortized costs related to our old credit agreement that were expensed when we refinanced our credit agreement on October 26. This contributed almost all of the interest expense recorded in the fourth quarter.

Our effective tax rates for 2015 and 2014 look unusual due to the goodwill impairments we took in each year, which are not deductible for tax purposes. In addition, in 2015 we recorded $2.5 million in research and development tax credits and a $5.2 million valuation allowance on a portion of our deferred tax assets, primarily related to federal and state tax credits and state net operating loss carry forwards.

In 2015, the Company generated $55.2 million in cash from operations mainly through decreases in accounts receivable and inventories. These were partially offset by decreases in accounts payable.

Depreciation was $9.1 million in 2015 and $13.6 million in 2014. Inventories decreased $43 million in 2015 from 2014. This was primarily due to a $34 million decrease of inventory at Atchison. The decrease in steel costs also contributed to the decrease in inventory value in 2015.

Capital expenditures were $8.5 million in 2015, which was for ongoing maintenance capital expenditures. As we are exploring a sale of our Tubular Products business, I will provide a quick summary of those results.

As of December 2015, the net assets for the Tubular business were around $43 million with $37.5 million in fixed assets. Sales decreased 61.5% to $63 million in 2015 from $165 million in 2014. Volume decreased as we sold 74,000 tons in 2015 compared to 164,600 tons in 2014.

Tubular Products had a gross loss as a percent of sales of negative 20.9% in 2015, compared to a gross profit of 0.6% in 2014. Pipe pricing, particularly line pipe, continues to fall and is negatively impacted by decreased drilling activity and continued high import levels.

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

As of December 31, 2015, our Water Transmission backlog was approximately $116 million, a 15% increase from $101 million at the end of the third quarter. The tons in backlog have increased by 36% for the last quarter. The backlog was about $121 million as of December 31, 2014, and yet the tons in backlog now are almost double, reflecting the impact of falling steel prices and a harsh bidding environment.

We expect the first quarter of 2016 will have lower revenue than the fourth quarter, as we have had several delays impacting our production schedule. And those are project delays.

The following is an outlook of the upcoming Water Transmission projects. The third segment of IPL 15-2 has completed production. We were awarded the fourth segment of IPL, segment 14, which started production in late February.

IPL segment 17, the tunnel portion, is scheduled to bid in mid-April. IPL segment 10/11 is scheduled to bid in late June. IPL segment 17/18 is scheduled to bid in late November. The three IPL segments that bid in 2016 total about 30,000 tons of requirements.

We are awaiting the award of the Trinity River mainstem project, the last part to the Lake Texoma program. Production is scheduled to start in the second quarter. This project has been delayed by a few months due to permitting issues.

The Luce Bayou Interbasin Transfer Project in Houston is a major project with multiple segments that we expect to start bidding in the second quarter of 2016. This is a multi-year project that is expected to represent 90,000 tons of pipe. Major production on this project is not expected to begin until 2017-2018.

The lower Bois d'Arc reservoir is a pipeline being planned by the North Texas Municipal Water District, which could represent 30,000 tons of pipe requirements starting in 2017. The southeast Oklahoma raw water supply system, also known as Atoka's second pipeline, is a 100-mile pipeline with bidding expected to start late 2016, early 2017.

We also expect additional opportunities to develop in Texas from the SWIFT program. We continue to monitor market developments in California very closely. The Fresno surface water program has started bidding and there will be several segments representing 20,000 tons of pipe bidding into 2017. The next major segment of this program is the Kings River section, representing 10,000 tons of bidding on March 15.

The Cadiz project has been hampered due to railroad right-of-way issues. The Southern California reliner program is expected to spend $2.6 billion over the next 20 years relining existing prestressed concrete pipelines. The Los Angeles pipeline replacement program will begin to replace large segments of existing trunk lines. This program will extend through 2020.

The 127-mile Red River Valley Water Supply Project continues to move forward. The goal is to have design completed by 2018 and construction beginning in 2019. We have planned $4 million to $5 million of total capital expenditures for 2016, which is lower than our planned depreciation. We continue to be very cautious on our capital spending due to the current market conditions.

As of December 31, our tangible book value was about $218 million, or approximately $23 a share. As of market close yesterday we are trading at a 55% discount to tangible book value. Obviously, regardless of the current market conditions, we still believe in the long-term prospects of the Water Transmission business.

Our strong balance sheet with a net positive cash position puts us on a solid foundation to weather the current storm and our quality, nationwide footprint, cost position, and almost 50% market share put us in a unique position to thrive as the market continues to improve.

In Tubular Products, we shut down the Atchison facility in January and the only activity is selling and shipping the remaining inventory. As we announced last summer, we are exploring the sale of our remaining energy tubular facility in Atchison, Kansas. The process has been slowed by the depressed oil price, unfavorable trade ruling, and declining energy tubular demand. This process is ongoing and we have nothing further that we can discuss at this time.

We are also actively marketing our property in Houston, Texas; however, we do not expect to sell the property until the environmental issues are concluded. This could take another year or so.

As we've mentioned in the past, we are looking at a wide range of strategic opportunities for our water transmission business. It's the bedrock of our company and we have many of the experts of the industry within our company.

Another potential opportunity we have considered is a share buyback. While our new credit agreement allows us to contemplate a share repurchase, we intend to be very cautious with the potential share buyback while market conditions remain depressed. Even though we currently have no borrowings under our credit agreement, as the water transmission market recovers, we will need to build up our working capital to meet the market requirements. We do not want to risk limiting the Company's business opportunities by overextending our credit facility.

As we have said previously, we expect our water transmission business to remain challenging in 2016. The bidding environment remains very competitive with low segment-wide backlogs. We are also seeing nontraditional water players testing the market due to some of the extreme conditions in the energy sector.

All of these factors will continue to make 2016 a very challenging year. But again, as we've said in the past, 2011 through 2014 were four of the best earnings years in a row that the Company has ever seen in the water transmission business. 2015 was a low demand year, which is part of the normal cycle. What makes this latest period more harsh is the additional supply that has entered the market, some of which is nontraditional and driven by a challenging energy environment.

As a result, prices and margins have been severely impacted, but these facts remain. We are the largest player in our market segment, holding almost 50% market share, and we have an extreme focus on driving costs out of our business. We have no debt and a net positive cash position, and there are additional assets in the Houston property and Atchison plant which we can monetize to bring additional cash to our balance sheet.

We are well-positioned to weather the current storm and to address the ongoing massive buildup of water requirements. Finally, as we've said before, due to population growth and drought conditions, water resources will need to be moved from one place to another. That's what we do.

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

(Operator Instructions) Brent Thielman.

Good morning. Scott, can you give us a sense if what you have been booking and putting in backlog in Q4 or even today is at least at better bid margins than six or nine months ago or whatever the kind of low point in the market you saw?

I think, Brent, what we have seen is we saw a market that started in mid-2014 with the current bid environment and that really extended through 2015 and extended -- is extending into 2016. So I think it's a -- one of the things that you have to view is what the market looked like in 2015. It was a relatively low bidding year and it was -- you've heard me say in these earnings calls it was very backend-loaded. So total bidding was pretty low as far as tons are concerned.

So what you have is you have a situation where the backlog across the industry segment is pretty low and every job is pretty hotly contested. On top of that what you have is a situation where you have nontraditional supply coming into the market, which makes that bidding environment even worse. So that has really started to carry into 2016.

But what we are seeing in 2016 is we are actually seeing the tons in the market starting to improve and those improvements are really starting to be centered around California. We're looking at requirements in California that may be 3 times higher than what we saw last year or in the previous year.

But I think part of the issue is, Brent, until people start developing a backlog in the business, it's still the same situation for a period time. The bidding is going to remain very, very harsh and that will extend into 2016.

The other piece is with what we have seen as far as the nontraditional supply coming into the business, some of it being driven by a pretty tough energy sector, how long does the energy sector stay bad? Or how long do they want to keep competing in a market where it's really -- adding one more brick into the bag doesn't really help anything? So we expect this to extend well into 2016.

I think that Robin gave some of the information when we were going through the script about in the fourth quarter. Obviously, the fourth quarter -- we had some adjustments in the fourth quarter that were related to employee, things like severance costs and things like that, that we're not going to have going forward. But we still expect the first quarter to be pretty tough, along with the fact that we are seeing lower production levels because of these project delays that we've seen in the Texas market.

So I think that kind of gives you a broad overview of what we're looking at.

Okay, I appreciate that. Scott, are you seeing any evidence at all the strategy depending on your market share is working? Are you seeing any of these problematic participants fold or ease off your core market in all?

One thing you have to realize, Brent, is I know all of our competitors obviously listen to our call, so I want to be a little cautious about what I'm saying. But one of the things that we do know: even in this competitive bidding environment, it is really important to defend your market share. Simply because, when you have nontraditionals that are in the marketplace, if you don't defend your market share, start giving up your market share and allow the nontraditionals to get a foothold him into the marketplace, maybe it makes the current situation last even longer.

So we've been pretty tough on defending the market share. Like I said, we have almost 50% market share and we've continued to defend it. I think a good example of what we've seen in the bidding environment is really what happened on the last IPL segment, segment 14.

If you take a look at that segment, it was roughly the same amount of tons that the first segment was, somewhere between 23,000 and 25,000 tons, but it was well less than half the price of what the first segment. So that gives you a little indication of how this thing is going.

Okay. I know you guys have done a lot on the cost front over the years and it sounds like lower levels of profitability here to stay for a little while longer at least. Are there other major company initiatives planned or moving forward, from a cost perspective, that are going to kind of help offset these pressures?

What I would say, Brent, is we've really been working cost pretty hard since the beginning of 2013 and I would give you an example of -- probably looking at the fourth quarter of 2014 is a good example. Because at that point in time obviously we had divested the OCTG assets, so the people part of the OCTG assets are out of that fourth-quarter 2014 number and the Permalok numbers are in, because we purchased Permalok in late 2013.

In the fourth quarter of 2014 we had 1,034 employees. In the first quarter, or toward the end of the first quarter of 2016, in fact March 1, we had 671 employees. So we reduced the number of employees across the Company by about 35%.

Now you would obviously expect that because we've shut our Atchison facility down, so a big part of that is tubular. But if you look at just the corporate reductions and the reductions that we've had at the water transmission plants, it's 25%-plus.

Just a few more facts about some of the things that we've done on costs. Looking at 2016, we expect to run a relatively large amount of tons in 2016 because, like I said, we are carrying a big backlog into that year, into 2016, into this year. If you look at 2016 and compare it to 2008, where we ran a very similar amount of tons in 2008, we are running those same amount of tons with 45% less people.

Our overhead spending during that period of time is down 32%. And just looking at and going back to the 2014 comparison and the way we metal production in our water transmission plants, our tons per employee -- and this is total employees: salaried, indirect, and direct -- at our water transmission plants are up 31% versus what they were in 2014. So those are efficiencies that are being driven by lean manufacturing and the cost reductions that we've done and the headcount reductions that we've done.

When you look at a similar job that we are doing now versus 2014/2013 timeframe, it's 16% less man-hours for the same amount of job. There's been a lot that has gone on at the plant side, but I don't think you can discount the reductions that we've done on the administrative or SG&A side either.

We ended 2014 at about $24.3 million and we ended 2015 at $22.3 million, but we were on a run rate at the end of 2015 of $20.4 million. And as Robin said when she was going through the script, we expect to be somewhere in the $18 millions once the cuts that we did in December and the cuts that we did in February wash through. Those include cuts that represent 30 employees, which represent four senior-level executives.

We're going to also continue to adjust that spending, SG&A spending as we go forward to beat what the current market conditions are. We have had a pretty solid focus on reducing costs since 2013, but it continues as we go through this very challenging period.

Okay. Thank you, I will turn it over.

Bhupender Bohra.

Good morning, guys. This is Bhupender from Jefferies. Scott, you talked about nontraditional players in the market. Can you give us some color on that? Like I believe you gave some names or some color like last quarter on the call.

Just wanted to get a sense of are these kind of serious players or they are just kind of a shift from oil and gas right now? Those players, like you said, are testing the market here.

Well, I don't like to mention competitors' names during calls, but what I would say is this is specific to a plant in Mississippi that is an API plant that was acquired out of bankruptcy sometime, I guess, in 2014. And I think the acquirer said in that call that they were looking at the water transmission business and obviously we're the only ones that really report the segment.

Seeing the margins that we are generating during this period of time, 2013 had 21.5% gross margin and water. The beginning of 2014 -- in the second quarter of 2014, we had a 22% margin or, excuse me, an 18% margin in the second quarter and a 22% margin in the third quarter. So I think they looked at that and said, well, if we have excess capacity, maybe we will use it for the water transmission market.

So I think those people are pretty hot at looking at bidding water transmission jobs, especially in Texas, based on where they are positioned. Whether they stay or not, it doesn't appear that they have a very good understanding of maybe some of the costs of these jobs in the way that they are bidding. At least right now, they are impacting the market, Bhupender; whether they stay long term, it's hard to determine.

But what I would say is, when you add that one additional competitor to the Texas market, it really changes the dynamics of that market. Hopefully, as they see that dynamic develop over a period of time and see what it's doing to the market, they will make different decisions.

But again, we can't really talk to what their thought process is. All we can talk to are their actions in the market. Not only the traditional -- not only the nontraditional players that we are seeing in the market, but some of the traditional players we're seeing in the market right now with what's going on, we look at as pretty irrational behavior.

Again, we don't really have any control over what they are doing in the marketplace. All we can control is making sure that we continue to grind costs out of our business, which we continue to do, and position us to be able to compete in this marketplace.

One thing I would say, Bhupender, before I let you ask your next question, the expectation is this municipal water market does continue to grow over the next few years. Because of what we are seeing in California, because of a lot of jobs that I mentioned, a lot of them are in Texas, what we are looking at 2015 to 2016, in tons-wise anyway, is probably 9% or so growth year over year from 2015 to 2016, from 2016 to 2017, and 2017 to 2018.

Because, again, we expect California to grow in 2016 and really sustain through the period based on the business or the projects that we see out there for California. Also, there's a lot of projects out there from Texas that are, I think, going to start developing and add to this thing.

Once that thing develops and backlogs start to develop, I think it starts to loosen things up pretty significantly. But right now the issue is there's too much supply in the market.

Right. And your backlog has been pretty, you can say, constant and it grew sequentially in the fourth quarter. How should we think about backlog going into conversion to sales actually in 2016?

Well, obviously the price levels are low still out of 2015, but what I will say is, like I said in the script, we have almost doubled the backlog in 2016 that we had at the end of 2015 and the revenue in backlog is about $4 million less. So you can do your triangulation out of that.

We expect to run a pretty significant amount of tons in 2016. I think the expectations are that the market is improving slightly, so maybe the revenue improves a little bit, but I think it's still going to be a pretty tough market situation through most of the year.

Right. You did actually give some bidding timelines for the IPL segment here for mid-April, late June, and late November. Now we have this -- like you said, the competition is pretty high and the IPL segments which are in front of you and some of the other projects, do you see your market share which you try to maintain sacrificing pricing here, let's say -- just wanted to get your view over the next three years, if we see some of this nontraditional competition come into the markets, looking at the project pipeline, what you see? They are seeing the same thing here.

How do you actually retain your market share and what do you do? Are we expecting gross margins at the levels or pretty low levels here for the next two years or three years? Or [what should be] the inflection point for the margins to improve here if the market (multiple speakers)?

As you know, Bhupender, we don't give forward guidance.

Yes, just your view, overall view from the market. Not from Northwest Pipe, but just the --.

Right now there's too much supply in the marketplace, a lot of it driven by some of the nontraditional supply that we are seeing.

As far as the segments of IPL are concerned, you asked several questions in there, so I can't remember all of them. I do think there is going to be continued pressure on the IPL segments because, like I said, as long as industry-wide backlogs remain relatively low -- and we had over 50% of the market in 2015. As long as they remain relatively low, I think bidding is going to remain pretty tough.

Like I said before, one of the issues you have with -- if you don't defend your market share and you have nontraditionals that are moving into the market, if they do get a foothold into the market, maybe they are there and it changes from supply to a capacity addition in the market. So certainly, for the near future, we expect to defend what our market share is.

Okay, thanks a lot.

(Operator Instructions) Brent Thielman.

Appreciate all the color on the various market and project opportunities out there. Texas has been and looks pretty good. It sounds like California is turning.

But my question is: do you see the market developing broadly enough over the next few years that maintaining this footprint, which is obviously the largest in the industry, still make sense from your perspective?

Obviously, we see California and Texas, and depending on the amount of work that you have in Texas, you may have to deploy additional assets. For example, on the Lake Texoma project that we had in 2012 and 2013, we had the majority of the production coming out of our Saginaw facility. We also had some production coming out of Denver and, believe it or not, we had some coming out of our Parkersburg, West Virginia facility.

So depending on how much of this stuff hits at once, you could need to deploy more than one facility to be able to support those jobs. But like I said, Brent, we see Texas as pretty good going forward. In fact, if all this work hits in Texas, there's a lot of work that is coming.

We see California being good, but we also see the East Coast market in New York City being pretty good, too. And that has been okay, even during 2015, when everything else was a little bit rougher.

So the nationwide footprint still makes sense, because when you start looking at the nationwide footprint -- we do all the time and obviously we evaluate these assets all the time. If we didn't have a plant in Texas, we wouldn't have been able to participate in all the Texas work. If we didn't plan to Denver, Colorado, we wouldn't have been able to participate in all the work going on in southern delivery in Colorado, which was somewhere between $80 million and $100 million.

We've seen lots of work in the past in California. If we didn't have a plant in California, you wouldn't be able to do that. So I think we are careful looking at the assets, but obviously we are always doing that and making sure that we have the right thing that supports the market that we see going forward.

But again, like I said, we are seeing California, we are seeing Texas, we still see a relatively busy East Coast, and quite frankly, we see a market that with Dodge numbers and looking at water construction projects, it's growing 9% year over year. But we also all know about the massive buildup of water projects that are out there on the docket. And it is a massive buildup of projects.

I think at some point water becomes a very, very precious resource and it is going to have to be moved from one place to another. Really that's widespread across the Western United States. When you start looking at the East, which you are dealing with some older infrastructure, you're looking at some more replacement. We do think that the footprint that we have right now makes sense as this market continues to grow.

Okay, appreciate that. Thank you.

(Operator Instructions) Sir, at this time I'm showing no further questions.

What I would say to end is that obviously we are dealing with a pretty challenging market condition and you really can't do anything about irrational behavior, whether it's by nontraditional or traditional competitors. But what we can do is keep positioning ourselves with our costs: reducing our costs at the plant, making the efficiencies more in line with lean manufacturing, and reducing our costs to produce these things.

That in line with managing our costs -- we have zero debt and a net positive cash position and we don't have any kind of bond payments that are due out in the future, unlike a lot of people that are in the current market situation right now. And you see that across the steel market. You see that across the energy tubular market. You see that across the energy business.

So I think that we are pretty well positioned to weather this storm. As this market continues to improve, with our cost reductions, we are in a pretty good position to thrive as this thing grows and builds. Because, at some point, we expect that there is going to be an explosion of water requirements.

Thank you for attending our call. Our next call is in --

Early May.

-- early May and, hopefully, we continue to see improving market conditions and things continuing to get better. Thank you and have a good day.

Thank you, sir. This does conclude today's conference call. You may go ahead and disconnect at this time.