NWPX Infrastructure Inc (NWPX) 2016 Q3 法說會逐字稿

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

I would now like to turn the call over to Scott Montross, CEO. Sir, you may begin.

Thank you, Dexter. 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 am 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 third-quarter results.

Thank you, Scott. Our third-quarter income was $727,000 or $0.08 per diluted share compared to a loss of $1.5 million or $0.16 per diluted share in the third quarter of 2015. Water transmission sales increased to $41.1 million in the third quarter of 2016 from $39.8 million in the third quarter of 2015.

Water transmission gross profit as a percent of sales was 7.2% in the third quarter of 2016, an improvement from a loss of negative 1.8% in the third quarter of 2015. The increase in sales was the result of a 7% increase in selling prices, partially offset by a 3% decrease in tons produced. The improved selling prices and positive gross profit was due to an improvement in market conditions and the impact of a favorable product mix.

Selling, general, and administrative cost decreased to $3.9 million in the third quarter of 2016 from $4.8 million in the third quarter of 2015. This decrease was due to lower wage and benefit expense from lower headcount. We expect that our selling, general, and administrative cost will run between $16 million and $17 million in 2016.

Interest expense was $134,000 in the third quarter of 2016 and $195,000 in the third quarter of 2015. Our overall borrowing was smaller this year compared to last year. We had a balance on our line of credit throughout the third quarter of 2015, while we have drawn nothing on the line since October 2015.

We expect that the interest expense for 2016 will be around $500,000 to $600,000. We do not foresee any need to borrow against our credit agreement for the rest of the year. We had an unusual tax benefit rate of about 134% in the third quarter of 2016 compared to a tax benefit rate of about 80% in 2015.

Our shift to positive earnings and, more significantly, the expected taxable gain on the sale of the Denver real property caused a reduction in the expected increase in valuation allowance for 2016. US GAAP required us to consider the impact on the valuation allowance in the third quarter, even though the gain will not be realized until the fourth quarter.

In the third quarter of 2015, we had a discrete benefit related to a research and development tax credit study. We expect the full-year tax benefit rate for 2016 will be around 8%.

In the first 9 months of 2016, the Company generated $4.8 million in cash from operations, mainly through decreases in accounts receivable and inventory. Depreciation was $7.4 million in the first 9 months of 2016 and $6.7 million in the first 9 months of 2015. Capital expenditures were $1.8 million in the first 9 months of 2016, which was for ongoing maintenance capital expenditures.

As of the end of September, the balance in fixed assets for Atchison was about $36.5 million and Houston was about $3.2 million. We have restructuring charges related to the Denver shutdown of $282,000 for severance. We expect there will be additional restructuring costs for severance and the demobilization of the equipment in the amount of about $2 million over the next couple quarters.

As we announced on October 5, we have sold the Denver real property for $14.4 million. We expect the net proceeds of the sale will be around $13.7 million and the resulting gain will be about $7 million to $8 million, which does not include the restructuring charges.

The pre-tax loss for Denver was about $200,000 in the third quarter of 2016 and $900,000 in the third quarter of 2015. For the first 9 months of 2015, the pre-tax loss was $2.9 million and $500,000 in the first 9 months of 2015.

In tubular products, we expect our ongoing expenses to run around $2 million annually. In the third quarter, we had some charges related to the shutdown, which increased our costs.

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

As of September 30, 2016, our water transmission backlog was approximately $96 million compared to $98 million at the end of the second quarter and $101 million at the end of September of 2015. We expect that revenue and gross margins will be slightly better in the fourth quarter of 2016 compared to the third quarter.

The following is an outlook of current and upcoming water transmission projects. We were awarded IPL segment 10-11, as previously announced. This segment consists of 14,900 tons of pipe, and we will begin production in late November. IPL segment 17-18 is scheduled to bid in mid-December and represents 14,500 tons of pipe.

The Houston project is a major program with multiple segments that started bidding with small projects in the second quarter. This is a multi-year series of projects that are expected to represent 90,000 tons of pipe. The first major segment is the surface water supply project segment A, which is scheduled to the bid late second quarter or early third quarter of 2017 and could represent 15,000 tons.

The next segment, Capers Ridge Phase 2, is scheduled to bid in the fourth quarter of 2017 and represents 6,000 tons. There are several other smaller segments on this program that are scheduled to bid in 2017. Bidding on the entire Houston project is expected to occur into 2019.

The lower Bois d'Arc reservoir is a pipeline being planned by the North Texas Municipal Water District, which could represent 60,000 tons of pipe requirements starting late 2017 to early 2018. The $1.3 billion in Texas SWIFT program funding that is projected to occur over the next several years is expected to result in additional near- and long-term opportunities in Texas.

The Southeast Oklahoma Raw Water Supply System, also known as Atoka's second pipeline, is 100-mile, 64,000-ton pipeline with bidding expected to start in the fourth quarter of 2017.

The California market continues to develop. Although there are no single large volume programs, we are seeing a significant number of projects that are between 1,000 and 6,000 tons each. The Cadiz project is still active, but continues to be hampered by railroad right-of-way issues.

We were successful on the most recent segment of the Southern California reliner program. The next segment will bid in the second quarter of 2017. These segments are generally between 1,000 and 2,000 tons each. This 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 runs from 2017 through 2020. And the 127-mile Red River Valley Water Supply Project continues to progress, albeit slowly. We expect bidding to begin in 2019 or 2020.

We had planned about $2.5 million of total capital expenditures for 2016, which is lower than our planned depreciation. The Company has a strong balance sheet with a net positive cash position. Even with the very difficult market conditions that we've seen over the previous 24 months, we have not borrowed from our credit facility in more than a year. After the sale of Denver, we now have $26 million in cash on our balance sheet.

The sale of our non-core assets continues to be a priority. We are actively marketing our idled Atchison, Kansas, plant and our Houston property. This is an ongoing process that has been hampered by the depressed energy sector.

We continue to look at a wide range of strategic opportunities for our water transmission business. This is an active and ongoing process and we have nothing further that we are able to discuss.

In closing, the Company has been through pretty harsh market conditions in the last two years. During that time, our management team has responded to the challenge strategically and aggressively.

Since the end of 2014, we have focused on cost, reducing SG&A expense by 31% and headcount in our core business by 23%. And we have shuttered 20% of our capacity to rightsize our footprint and market share to maximize profitability.

Today we're in a market that is improving based on continued strength in the Texas market and the emergence of a stronger demand in California. The market improvements and the aggressive actions we have taken are now beginning to show up in our results.

As we move forward, Northwest Pipe will continue to be focused on, one: margin over volume and achieving the market share that best positions the Company to maximize long-term profitability. Two: enhancing the strength and flexibility of the balance sheet by monetizing non-core assets such as the Houston property and the Atchison, Kansas, plant. And three: continuing to drive efficiencies and cost reductions at our production facilities.

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

(Operator Instructions) Brent Thielman.

Scott or Robin, just a question on the water business in terms of profitability this quarter. Would you still have had costs associated with the Denver operations and results this quarter? And could you potentially offer what those were?

In the third quarter, yes, we definitely had some costs that were associated with the Denver operation. Obviously, we're still running product at Denver, Brent, likely for the next few weeks running products. But we will actually be shipping product into the first quarter of 2017. So we have continued operating costs there.

But while we have gone through this whole situation where we're shutting the facility down and obviously have sold the property, we have had additional costs associated with that with severance and things of that nature in the third quarter. And as we expect going forward, we will have some other costs associated in the fourth quarter and likely early into the next year, like demobilization of the equipment and getting the equipment out of the plant and various other things like that. So there are a few more pieces to that as we go forward.

Not including the restructuring. We did have a pre-tax loss at Denver of about $200,000 in the third quarter.

Okay. And did you -- I am sorry; did you say what the restructuring-related costs were there for the quarter?

They were $282,000. They are broken out separately on the face of the income statement and that's for severance.

Got it, okay. And then Scott, on the 7% increase in selling prices, how much did prevailing steel costs influence that? Or can you really chalk this all up to alleviating market pressures?

I think -- obviously, steel prices, they've been fluctuating around pretty substantially over the last probably several months. From the end of 2015, it ran up $250 a ton, and now over the last several weeks, it has run down $100 a ton. I really think obviously a little of the selling price increase is related to steel, but it has been jumping all over so much that I don't know how much of it you can actually attribute to steel.

I think what you are seeing more than anything is the increased demand that we've actually seen in the third quarter of the year is actually starting to relieve bidding pressure on each and every job. Obviously, as we stated before in some of our earnings calls, every job had had some bidding pressure.

But when you start to see a municipal market that is around a couple hundred thousand tons, that starts to alleviate the pressure on all the other jobs. And it also lets some backlog start to develop around the industry, which will also pull pressure off the jobs and lets prices move up.

I think one of the issues we had previously, Brent, with the price moving up the way it did as we got into early this year, the pipe price for a small time wasn't moving up even though steel price was because of the way the bidding environment had gone. And obviously, the first quarter of this year was actually relatively low bidding level for 2016.

As that bidding level started to pick up, obviously the pricing level was pushed forward a little bit and certainly started to move up. I don't attribute a lot of it to steel, though, that this point.

Okay. And then as a follow-up to that on this competitive bid environment that you are seeing now, is there a way to characterize or quantify how that has evolved since the low point in the market? In other words, maybe half or more of the projects you are pursuing have a list of competitors you are, I guess, traditionally more used to seeing?

Yes, I would say characterizing it because of the demand increases that we saw specifically heading into the third quarter, and we are seeing pretty good demand in the fourth quarter of 2016, that I think you still see the same competitors show up, but there is a little bit less pressure on each job.

Because likely those competitors that are out there have gotten some other jobs through this process, and it is not like every job becomes a must-win for every competitor. So it has really loosened up the pressure on each job and actually allowed the prices to move up.

Okay. And then Scott, thanks for running through those jobs. Are you seeing any more urgency for projects maybe you haven't discussed before that now are maybe looking a little more realistic?

I think the biggest thing, Brent, is that the stuff that we are seeing in Texas and have talked about is real. Obviously, we have got another segment of IPL segment 17-18 that bids in December and that's a real segment.

The Houston program that I talked to is a pretty big program. And when you look at some of the SWIFT funding and things like that, they are starting to get mentioned. So Houston is a real program. The Atoka program is a real program. Everything we are seeing in Texas is demand either continuing like it has been over the last few years or actually getting a little bit larger.

And the really good thing as we go through this is that when you look at the SWIFT funding, they have got $1.3 billion laid out for project spending over the next several years. That's everything from distribution to conservation to treatment, so this program in Texas looks like it's going to continue for a significant amount of time.

The other piece that we are seeing right now -- and this Texas thing has been going on for a while, right? The other thing that we are seeing is the California work. Obviously, they did Proposition 1 in California at the end of 2014, and that is out there. And it is a little bit difficult to follow the money around on Proposition 1. We think that the Fresno surface water program had some Proposition 1 money into it.

But what we are seeing in California is a lot of projects that are starting to come into the bidding process or the near-term bidding process that are 2,000, 3,000, 4,000 tons that continue through this year and well into 2018 and forward. So we don't just have that one market in Texas that is busy, we also have the California market with all these projects.

And I think I said before: the California market looks like in 2016 it is about tonnage wise about three times as large as it was in 2015. And we expect that volume level of bidding to continue into 2018 and actually beyond because there's a little bit of a buildup of work.

The other thing with this is I think that I have mentioned in the past: New York City work continues to be very constant in the east for our Parkersburg, West Virginia, plant. So instead of really having just one facility that is busy, when you look at what we have going forward, particularly in the fourth quarter and heading into 2017, we have got obviously IPL going on at the Saginaw facility, but we have pretty high production levels at our Adelanto facility and production levels that are on the upswing into 2017 on our Parkersburg facility. So I think that's the really kind of the story of the improvements that we are seeing going forward in demand.

Okay. And then just one more. Was the recent IPO leg you announced included in backlog this quarter?

Yes, yes.

Okay, okay, great. Well, thank you.

Bhupender Bohra.

My question is around the market share position. Scott, you have talked in the previous call how with the closure of Denver facility now taking on 20% capacity. Can you size the market and what your market share position would be right now and how do you think that progress is going into 2017? Thank you.

Yes, I think that's an evolving situation. I think the fact that we have sold our Denver property and are closing our Denver plant obviously creates a situation where our market share contracts a little bit through that period time. But whether we are 35% to 40% market share or 40% to 45% market share that we have been in the past, our drive with the market share is getting to a market share that provides the best long-term profitability for the Company.

And as I said, this market is still evolving. And what we are seeing is questions around the long-term viability of some of the recent entrants and players in the market, which we think over time, even with having one plant out of the mix, will allow that market share to continue to inch up over time as the market starts to shake out with who the participants are going forward.

Because even with the Denver plant gone, we still have more than enough capacity to cover the 40% to 45% market share that we have had historically. But what I would say is this is an evolving situation and it is likely to be somewhat lower than that for at least a period of time.

Okay. So does that imply that if we have some excess capacity here and the project outlook, what you see right now in the pipelines with all the projects you mentioned going into 2017 and 2018, is there a probability that some more capacity needs to come out from your end or from some of the competitors out there?

Well, I think that there is -- obviously, when you look across the business, there is, as we have talked about, there is a little bit of excess capacity still in the business. Certainly, we have done part of the heavy lifting with closing Denver, but I do think that as you look across all of the market and participants in our market, you are seeing that there is probably some additional rationalization that certainly is going to happen.

But I also think that the idea of consolidation is probably out there somewhere in the mix. So I think the idea of rationalization and consolidation at some point probably rationalizes at least some of that capacity that is an overhang still out.

But I think us taking approximately 20% of our capacity out is a good start and a good leadership position with us obviously having a leadership position in the steel pressure pipe market. And we are taking a little bit of a leadership role there in the marketplace.

Okay, got it. A last question around IPL. Now, you have the one more segment, which is going to be bid in late December. Now how do we see that? Is IPL done post December bid or do we have any more segments which will come up in 2017? And what are some of the big projects which you think you can actually bid and get those projects in 2017?

We don't -- IPL 17-18 is the IPL project that is the next one. We don't see any other IPL projects that are bidding in 2017. But understand that the IPL 10-11 that we have right now that we plan on starting production on in November, production on that will likely carry us into April of this year, okay? So obviously we have got a pretty sharp eye on the next IPL project 17-18, which would provide significant amount of production through the balance of the year.

Now, again, like I said, we don't see any additional IPL segments that are major segments in 2017, but what is starting to come forward is the Houston program that I mentioned in the script. The surface water program is part of Houston and that is the Surface Water A program. That is 15,000 tons that is scheduled to bid in the third quarter of 2017, and then there is another several thousand tons of Capers Ridge that is bid in the fourth quarter.

So what we are looking at right now is a situation in Texas that likely the work in Houston probably starts to take the place of what IPL was doing. And at the same time, you have lower Bois d'Arc reservoir, which is another major project that is 50,000 or so tons in North Texas that is scheduled to start bidding in the fourth quarter of 2017. So while there may not be any additional IPL segments that we see right now in 2017 that are major, there are other things that are starting to come forward to replace it.

But like we also said in the script when we were talking about this, this $1.3 billion of SWIFT funding that is out there right now is likely to develop into other near-term and longer-term opportunities in Texas as we go through the period of time.

And even now, we have several projects in Texas besides IPL that are good-sized projects, projects before the end of the year that are bidding. Projects that are 1,500 tons, 2000 tons, and those are good meat-of-the-order-book type projects. So I think that gives you a little bit of a view of how we see Texas coming forward.

Okay. Just one more question. When you look at the project sizes in terms of tons, I believe 1,000 to 5,000 or 6,000 tons would be the smaller size, right? That will be a small size for you guys?

I think those are good-sized projects.

Okay.

Obviously, when you -- the ones that you guys hear about all the time are the project like Lake Texoma or the IPL projects that are 15,000 or 20,000 tons and in some cases are even bigger. The problem is those projects don't come along every day.

I think the meat of the order book is when you can get projects that are 1,000, 1,500 tons, 2,000 tons, 3,000 tons, 4,000-ton projects. When you start getting more of those projects, that becomes, I think, a healthier order book for us for sure.

And I think that what it does is make for healthier backlogs throughout the industry, right? Because when you look at one of these major projects, if you are after one of those major projects and you miss it and there is nothing else coming forward like these what I would call medium-sized projects, then it becomes a pretty significant situation with the production at any specific plant or at the company. These midsized projects really become a big part of the order book when you're looking at what goes on in any specific production facility.

And the interesting thing about as we look at the jobs that we see going into 2017, we are starting to see the same kind of a trend with a number of jobs that we have seen. But what we are seeing is it looks like that the average tons on each job are increasing quite nicely as we go into 2017, which from our perspective creates a healthier order book and, quite frankly, should help create healthier backlogs across the industry, which leads to less pressure on each job and ultimately the upward pressure on price and positive impacts on margins.

Right, exactly. Lastly, on the balance sheet, now you did mention that after your Denver divestiture, I think you have $26 million in cash. Any thinking on how of uses of cash post the Denver thing?

What I would say is when you look at the last several quarters, I would say, is that we have come through pretty rough time. And I think we have come through pretty rough time with a really good balance sheet, obviously a strong cash position.

We are going to be careful before we start doing too much with the cash on our balance sheet. Obviously, we expect business to pick up, and as our business picks up, obviously working capital levels will go up and ultimately consume a little bit more of that cash.

But we are going to be a little bit cautious right now. We have come through a tough time and we want to get some decent quarters behind us before we start considering doing anything besides running the business day to day.

Okay, thank you.

(Operator Instructions) David Wright.

Okay, three questions. The first is, Robin, in your prepared remarks near the end, you talk about what I think were the carrying values of the idled assets, but I missed them. $36.5 million, three point -- can you read that again?

Sure. Atchison is about $36.5 million and Houston is about $3.2 million.

Okay. The second question -- I think earlier in the year, you might have said that 2016 would be the largest tons shipped year in maybe 10 years; wouldn't be the largest revenue year because of lower pricing in the marketplace. In terms of the tons shipped, would that still be correct?

I think the -- I would have to look back at what we said. I think one of the things that we said on this, David, is that the bidding volume in 2016 was going to be a relatively large year, up around 200,000 tons.

We did expect to ship larger tons. I think we have throttled that back a little bit as we have actually closed the Denver facility, because we didn't have the Denver facility being close at that point. And certainly we haven't been taking additional work for Denver. So that number has come down a little bit. But it is still going to be a pretty good size production and shipping year.

Okay. And then lastly, are there business opportunities for the Company that you see in Nevada?

Yes. Actually, there is some southern Nevada projects that are going on right now that are decent-sized projects. In fact, we are tracking one right now that I think we -- if my memory recalls, because I can't remember every one of these projects. I think it is something that we are working through right now.

We also see some other business coming forward in Nevada. Nothing big like the pipeline that they originally talked about, the Southern Nevada Water Authority, from those reservoirs in northern Nevada, in Utah, and taking water down into Las Vegas.

They were originally talking about a pipeline that could be 250 miles long or something along that lines. That has been back burnered. Obviously, a lot of that depends on the water level in Lake Mead. And some of what is going on out there, which is still Nevada work, is they are putting lower level intakes in in Lake Mead to be able to extract water out of Lake Mead at lower levels so they can continue the water flow.

So there are projects that are going on in Nevada, but nothing big like was originally being talked about with the southern Nevada project.

Okay. Well, thanks for answering my questions. And you have been doing a great job, given the environment. It looks like the environment is getting a little bit better, so keep up the good work.

Thanks, David. Thanks for the comments.

(Operator Instructions) At this time, speakers, we don't have any questions on queue.

Okay. I'd like to thank everybody for your attendance on the call. And look forward to talking to you again in early March time frame, and thank you very much. Take care.

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