NWPX Infrastructure Inc (NWPX) 2017 Q3 法說會逐字稿

Welcome, and thank you for standing by. (Operator Instructions) This call is also being recorded. if you have any objections, you may disconnect at this time. I would now like to turn the call over to Scott Montross. You may begin.

Thank you, Dale. 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'd like to remind everyone that the statements that 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 filings on Form 10-K for 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 loss from continuing operations was $1.6 million or $0.16 per diluted share compared to income from continuing operations of $1.4 million or $0.15 per diluted share in the third quarter of 2016. As you may recall, our results in the third quarter of 2016 were significantly impacted by the expected taxable gain on the sale of the Denver real property, which caused the reduction and the expected increase in the valuation allowance for 2016. This caused our results in 2016 to swing from a loss before taxes to positive net income. U.S. GAAP required us to consider the impact on evaluation allowance in the third quarter, even though the gain was not realized until the fourth quarter of 2016. Water Transmission sales decreased to $38.8 million in the third quarter of 2017 from $41.1 million in the third quarter of 2016. Water Transmission gross profit as a percent of sales was 4.9% in the third quarter of 2017, a decrease from 7.2% in the third quarter of 2016. The decrease in gross profit was due to a change in product mix and product timing. Sales volume decreased 12%, which was partially offset as selling prices increased 7%. The sales price increase was impacted by an increase in material cost, including steel of 5%.

Selling, general and administrative costs decreased to $3.4 million in the third quarter of 2017 from $3.9 million in the third quarter of 2016. This decrease was due to lower wage and benefit expense from reduced headcount. We expect that our selling, general and administrative cost will run between $14 million and $15 million in 2017.

Interest expense remained low in the third quarter. We expect that the interest expense in 2017 will be about $500,000. Our cash balance has decreased a lot as we increased our working capital to support our increased volume. We may need to borrow small amounts from our credit agreement in the fourth quarter, although we expect these amounts will be relatively small, and that we will have sufficient availability under our credit agreement for our cash needs over the next 12 months.

We had an income from continuing operations tax benefit rate of 2.5% in the third quarter of 2017 compared to an income from continuing operations tax benefit rate of 24.3% in the third quarter of 2016. The rate in third quarter 2017 was lower than statutory rates because our net operating losses were subject to a valuation allowance. A very unusual rate in third quarter of 2016, I discussed about. In the first 9 months of 2017, the company had a net outflow of cash from operations of $13.1 million as our increased backlog and sales caused an increase in our working capital particularly, in receivables and cost and estimated earnings in excess of billing.

Depreciation was $4.7 million in the first 9 months of 2017 and $6.8 million in the first 9 months of 2016. Capital expenditures through the third quarter were $2.1 million, which were for ongoing maintenance. We have classified our assets in assets as held for sale on the balance sheet, and the related expenses in discontinued operations on the income statement, as we believe it is more likely than not that we will complete the sale in the next 12 months. The Houston real estate remains in our fixed assets, and the book value was $3.1 million as of September 30th.

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

As of September 30, 2017, our backlog was approximately $109 million compared to $101 million at the end of the second quarter and $96 million at the end of the third quarter of 2016. We expect that revenue will stay about even in the fourth quarter, while margins will be a little higher. Margin recovery remained slow but steady. Even though pressure from nontraditional supply has subsided, delay related to job push outs and some severe weather have made 2017 a small demand year.

The following is an outlook of current and upcoming Water Transmission projects. The Houston project is a major program with multiple small segments that started bidding in the second quarter of 2016. This is a multiyear series of segments that are expected to represent 90,000 tons of pipe. The first larger segment, the Capers Ridge Phase 2 bid on July 26, and we were the successful bidder. The scope of this project has increased, and it will now exceed 8,000 tons. Production will begin late fourth quarter.

There are several other smaller segments scheduled to bid throughout 2017 that represent an additional 7,000 tons in total. The Lake Houston Inlet project bid in the third quarter, and we have been notified that we are the winning bidder. This represents over 3,000 tons of production for 2018.

Another major segment of the Houston project is the Surface Water Supply Project Segment A, which is currently scheduled to bid late 2018, and could represent 15,000 tons. Bidding on the entire Houston project is expected to continue into 2019.

The Lower Bois d'Arc Reservoir project is a pipeline being planned by the North Texas Municipal Water District, which represents approximately 60,000 tons of pipe. Garney Construction is the manager, and they announced the procurement is anticipated to begin in the summer of 2018 with construction beginning in the spring of 2019.

The Southeast Oklahoma Raw Water Supply, also known as Atoka Second Pipeline, is a 100-mile 64,000-ton pipeline. The time frame for bidding on this project has shifted out, and we are now expecting a third quarter 2018 bid.

The California market continues to develop. The Southern California reline program is expected to continue over the next 20 years and will invest $2.6 billion. The next 2 reline segments are scheduled to bid in the first half of 2018, and represent approximately 8,000 tons of pipe.

There are several recycled water programs that we are tracking. Most notably Santa Clara Valley Water District's expedited purification water program. This represents up to 10,000 tons of opportunity starting in the late fourth quarter of 2018. The city of San Diego's Pure Water Program is a 6,000-ton project that is expected to start bidding in 2018.

The Cadiz Project is a water conservation supply and storage project in California that will create a new dependable water supply for 400,000 people. When built, this project will create upwards of 5,900 jobs in the region, and our Adelanto facility could be a direct beneficiary of this project. A recent BLM decision paves the way for Cadiz to move forward with this project. Although, there is still some headwinds that still exist, we are hopeful that the initial purchase of 25,000 tons of pipe will commence in 2018.

The Navajo-Gallup project, reaches 9 through 11, is a 7,800-ton project in New Mexico that bid in the third quarter. We have been informed we will be a supplier and expect production to begin in the first quarter of 2018.

In North Dakota, work continues on the 140 miles of 72-inch Red River Valley Water Supply Project. This project is still in the design and permitting stages, and we expect that bidding will begin in 2019.

The SWIFT program in Texas has almost $1 billion of projected funding for water projects that have been recommended to begin in 2017. In total, they project $5.6 billion over the next several years. The SWIFT program is expected to continue to result in additional near and long-term opportunities.

In 2018, we're seeing a bidding year that could be larger than we've seen in many years. In 2018, we expect to have 3 major programs in process. The Houston program, the Lower Bois d'Arc and Atoka Second Pipeline. This will be the first time since 2012 that there would be 3 major projects occurring at the same time. As a result, we expect 2018 to be one of the largest bidding years we've experienced in the last several years. And since these 3 projects are multiyear programs, we expect to see strong demand well past 2018.

We have planned about $4 million in total capital expenditures for 2017, most of which falls under maintenance capital spending.

We continue to look at a wide range of strategic opportunities for our Water Transmission business. This is an active and ongoing process, and there is nothing further we're able to discuss at this time.

As we've continued to discuss over the last several quarters, we're seeing a bidding environment that continues to improve in a market that has stabilized. As a result, our backlog has grown from $66 million at the end of 2016 to $109 million at the end of the third quarter of 2017. Due to our focus on margin over volume, both the size and the quality of our backlog have improved. And we've seen these improvements despite a very small demand year in 2017.

Our intense focus on reducing cost in our business over the last 2 to 3 years continues to yield results. We've achieved a 16% reduction in man hours per job; a 26% reduction in plant overhead spending; and at the corporate level, a 38% reduction in SG&A spending.

The focus on cost has created a situation where we're now able to generate gross profit in our water business at very low production levels. This will lead to the opportunity to generate higher-than-historical margins as the market continues to improve. Our balance sheet remains strong. We ended the third quarter with $5 million in cash. And this is lower than the second quarter level, but it's related to increased working capital to support higher second half 2017 demand.

We've not borrowed from our lending institution in over 5 years -- excuse me, over 2 years. We also have additional non-core assets that we're working toward monetizing to bring additional cash and flexibility to our balance sheet. And the company is in a stronger position than ever to create growth opportunities.

In closing, as we've indicated during the past few earnings calls, that recovery in this market will be slow but steady, and that's exactly what we're seeing. And this is demonstrated by the growth in and quality of our backlog.

We continue to believe that with the amount of projects we see coming through the system, we are heading into a period of high demand. As we head into this period of higher demand, we will continue to be focused on: one, margin over volume and achieving the market share that best positions the company to maximize profitability. Two, monetizing the non-core assets, the Atchison plant and the Houston property to create additional balance sheet strength and flexibility. And three, continuing to drive cost efficiencies and cost reductions at our production facilities.

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

(Operator Instructions) Speakers, we have our first question. This one comes from Brent Thielman.

Scott, Robin, lot of encouraging things here. I guess, first question would be, I know these time lines on jobs can shift around, but as you look at the bid schedule, Scott over the course of '18, is there some seasonality to it? Is the opportunity built the backlog further front-half, back-half loaded? Any thoughts there?

Yes, it is -- we've got the Houston project going on right now, Brent, as I mentioned. We've gotten the Capers Ridge Section. So we've got that going on. And there is another piece of the -- the Houston, the inlet that we discussed in the script, it's another few thousand tons. There's another project, Navajo-Gallup that we've got a big piece of. So that's, obviously, starting to build the backlog. We see the first part of the year being probably a little higher normal bidding than we saw in 2017. Because '17 has developed into a pretty small year with Atoka shifting out with some of the other jobs shifting out, and some severe weather delays that we saw. But so we see the -- a little bit more bidding in the first quarter of 2018 than we did in '17, probably the second quarter is about the same. The third quarter is really large. When you start looking at what's going on with Lower Bois d'Arc in Texas, and also with Atoka. So the third quarter is big. And I would classify the fourth quarter as probably a little bigger than what we saw in 2017. So we're seeing a pretty substantial year coming at us, 2018, I guess, directly to answer your question. It is more scheduled towards the second half of the year. But we're seeing the first half look bigger obviously than what we've seen in 2017. So it's very encouraging. And plus the fact that these programs are multiyear programs, it's encouraging that the demand stays pretty strong out well past 2018. So there's a lot of good signs out there. And we've done lot of visits lately with people talking about these programs. So I think it's pretty encouraging, the things that we're seeing out there right now.

That's great. Lot's changed in terms of the competitive bid environment, I think, over the last 6 months. Scott, I don't think in your comments, you talked much about it. Any thoughts there? I know pricing is getting better as a function of material costs moving higher. But what are you seeing from a, I guess, competitive bid perspective?

Yes, I think, we've had the nontraditional guy that got into the business sometime in 2014. Really get out of the business. So that's really taken a lot of the harsh pressure on some of the projects in the central region of the country off. We also obviously saw some assets change hands from one of the major competitors in Texas to Thompson Pipe. I think that's also been a stabilizing factor to what we're seeing in the central region. So we're starting to kind of get back to a footprint or a supply footprint nationwide that we've seen prior to the, I guess, additional people getting into the business, and the longer run of smaller markets. So it really has stabilized the bidding environment. And it's allowed pricing to continue to move up, which is obviously, a reason why the backlog continues to improve. And the really good thing is, like I said is, we're seeing with the job push outs like Atoka and some of the job delays that are just delays and severe weather delays, we're seeing a pretty small market in 2017, but the really encouraging thing is that we're seeing a very stable market with prices moving in the right direction and also margins moving in the right direction. So that really bodes well as we get into a little bit of a bigger market, that things really start to normalize and get better as we get out into 2018.

Okay. And, Scott, how can we think about the lower-margin work that you've got now filtering out over the next 3 to 4 quarters? I mean, would you be through, I guess, most of that or all of that, by the end of the first half of next year?

Yes, I think, that we're getting through a lot of it now, Brent, in the third quarter and some in the fourth quarter. Part of the issue with the fourth quarter, we've got some nice work in our backlog now with nice margins that were -- we originally thought we're going to be done in the fourth quarter. Obviously, with the delays, some of it gets pushed to the late fourth quarter and into the first quarter. So we think that as we get through the fourth quarter that, that continues to get better with getting into the higher-margin work. And obviously, as we get into next year. I mean, you have quarters that will fluctuate a little bit as the backlog develops. But we expect to continue to see that backlog develop. And as a whole, we expect to continue to see that market -- or margin flow upwards. As the backlogs get better or not -- bigger or not only on our side, but across the industry, obviously, that creates the upward pressure on price, and creates the upward pressure on margins. And that's a lot of what we're starting to see.

And speakers, we show no questions in queue at this time. (Operator Instructions) Brent Thielman just came back in queue.

Scott, there's been a little bit of talk from some of the companies in our coverage about Houston taking a look at some preventative measures, as far as flood prevention. Is that any sense you could potentially participate there? Or is it too early to tell?

I think it's a little too early to tell. I mean, some of it depends on if it's federal programs, and how that comes to pass. One of the problems you see with and you hear that, Brent, and I think that's something that will eventually happen. I think some of the issue is those are probably 2, 3, 4 years out into the future, and we probably don't even see some of that stuff yet. Because it still has to be planned. As you know, from being around us for a long time, some of these things take a while to be planned. So that could only add to what we're seeing. There's a lot of things that could add to what we're seeing over the next few years. That situation, the administration focus on infrastructure, which seems to have become a little bit sidetracked at this point for obvious reasons with many other things going on. But there is also this Cadiz Project in California, and we're very close to the Cadiz people, and we visit with them and have visited with them in the last couple of weeks. And they are clearing a lot of the hurdles that they have. And we don't even have that anywhere in our forecast at this point, where if that shows up, obviously, we believe being in San Bernardino County, where they are -- and which would be benefited by this kind of project. We would be a relatively large participant in that and that could create even more upside. So we're pretty bullish on the upside potentials as we go into next year.

That's great. Maybe one for Tubular. I know you've been talking about monetizing that asset for quite some time. The decision to go, to discontinue this period, suggests you're certainly looking to sell it. I guess, this could we infer that you're starting to court some potential buyers there? Or any thoughts on that?

Yes. What I would say, Brent, is we're in a process right now with that facility. Obviously, it doesn't guarantee that there is a transaction there. But we're in a process. There has been significantly more interest in that facility, especially, since the oil prices have continued to come back, albeit slowly. But there is more interest in that facility. Even with being in a process we still have other people that will continue to contact us and talk about their interest, but obviously we're in a process right now. So we think that there is, obviously, being in discontinued ops, as Robin has continued to school me on is we believe that we're going to sell that in a 12-month period. So I think that -- based on what's going on right now, it looks like it's a decent possibility.

Okay. Great. And may be one or two for Robin. I think, the SG&A side, I think, for the guidance for this year, could we figure that to be relatively fixed into next year even with the pickup in business and then the follow-up, Robin, would be as you guys pick up more work, how do we think about your need to borrow on that revolver as activity picks up? Or do you think you can self-fund a lot of this, this working capital?

Well, G&A even with the pickup in business, we think it should hold steady. The one thing that as the business improves we, of course, hope that -- everyone participates, the shareholders everybody else as well as incentive compensation, which hasn't been in the numbers in the past few years. So we may have some slight increases from that, but we're not looking to add staff or anything like that. So there could be a little bit higher, but that should track with higher profitability. With the availability, borrowing, all that -- our current revolver expires in October of next year. So -- clearly next year at some point, I'll be looking to negotiate a new one. But right now, we may have little periods of needs to borrow with the working capital. But just based on the Water Transmission business alone of what we're looking at, it should generate the cash that we need to continue. Otherwise, of course, the challenge is to worse-case scenarios if we have to borrow because the business really does jump a lot, we'll have plenty of availability, plenty of room, and be able to support that. So it's just looks great, as we go into '18.

And speakers, we show no further questions in the queue. (Operator Instructions)

No other questions, Dale?

We show no other questions at the queue.

Okay. Well, we appreciate everybody's attendance on the call. Next call will be...

It will be about early March.

Early March, so obviously, we are -- we're focused on continuing to make the improvements here. So thank you very much. And we'll talk, again, then. Bye-bye.

That concludes today's conference. So thank you for your participation. You may disconnect at this time.