NWPX Infrastructure Inc (NWPX) 2018 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.

And now I will turn the meeting over to your host, Scott Montross, you may begin.

Thank you, Jared. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm President & CEO of the company. I'm joined by Robin Gantt, our Chief Financial Officer. As we begin, I'd like to remind everyone that the statements we make in this call that are 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 from continuing operations was $27.8 million, $2.86 per diluted share. Adjusted for the bargain purchase and Houston sale gain and restructuring and acquisition related costs, our adjusted income from continuing operations was $2.1 million or $0.21 per diluted share, compared to a loss from continuing operations at $1.6 million or $0.16 per diluted share in the third quarter of 2017. Sales were $52.5 million in the third quarter of 2018, compared to $38.8 million in the third quarter of 2017. Water transmission gross profit as a percent of sales was 9.9% in the third quarter of 2018, compared to 5.1% in the third quarter of 2017. The Ameron acquisition added about $11.1 million in sales. The remaining increase was due to a 35% increase in selling price per ton, partially offset by 21% decrease in tons produced.

Gross profit as a percent of sales improved with the increases in selling prices per ton. Selling, general and administrative costs increased to $5.3 million in the third quarter of 2018 from $3.4 million in the third quarter of 2017. This increase was due to $1.9 million in acquisition-related costs. We had an income tax benefit rate of 14.2% in the third quarter of 2018, compared to an income tax benefit rate of 2.5% in the third quarter of 2017. In the current quarter, our rate was impacted by the non-taxable bargain purchase gain as well as the estimated changes in our valuation allowance. In the third quarter of 2017, our rate was lower than statutory rates because a significant portion of our net operating losses were subject to a valuation allowance.

In the first 9 months of 2018, cash used by operating activities was about $7.2 million. Depreciation and amortization were $6 million in the first 9 months of 2018 and $5 million in the first 9 months of 2017. Capital expenditures through the third quarter were $3.1 million, which were for ongoing maintenance. We've planned about $5 million in total capital expenditures for 2018, most of which falls under maintenance capital spending. We had restructuring charges related to the Monterrey shutdown of $134,000 for severance and demobilization. We expect to incur minor amounts going forward as we prepare the assets for sale. We sold the Houston real estate for net proceeds of $5.8 million and recorded a gain of $2.8 million. The acquisition of Ameron Water Transmission Group for $38.1 million led to a bargain purchase gain of $21.9 million based on the preliminary fair value of the assets and liabilities. We have consolidated Ameron's results into Northwest Pipe's results. And are pleased to note that, excluding the acquisition-related costs, Ameron has been accretive to Northwest Pipe's income in the third quarter.

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

We are focused on a quick and efficient integration of the Ameron Water Transmission Group. Immediately upon acquisition, all bidding and job decisions were combined under Northwest Pipe's umbrella. We have moved some jobs between locations and we are bidding everything as a combined entity with understanding that job to be produced were it best fits our strategic goals. We may not be able to provide specific variances on sales and income in the future as it will be difficult to tell what is a change due to the acquisition and what is simply a strategic decision. We have made significant progress over the last 3 months, but we expect full integration to take several months.

As of September 30, 2018, our combined backlog including confirmed orders was $201 million, the highest backlog since the third quarter of 2012. The bidding level has remained strong as we have progressed through the second half of the year. The largest bidding quarter of the year will be the fourth quarter, which contains 2 of the major program jobs, Lower Bois d'Arc and Atoka as well as additional segments of the Houston project. The improving demand along with the stable competitive landscape should lead to improving revenues and margins in the fourth quarter, a trend that we expect to continue into 2019.

The following is an outlook of the current and upcoming Water Transmission projects. In the Texas market, the SWIFT program continues to fund major projects and is projected to spend $2.2 billion from 2018 through 2021, supporting programs like the Houston project and Lower Bois d'Arc. The Houston project is a multiyear, multi-agency program with a series of segments projected to represent 90,000 tons of pipe. Production of the 8,000-ton Capers Ridge segment and the 3,000-ton Lake Houston segment of the Houston project were completed in the first half of 2018. Shipments on these projects will continue through year-end. There are additional Houston segments bidding throughout 2018 that could represent an additional 5,000 tons of pipe. Bidding on the remaining Houston project will continue into 2019.

The Lower Bois d'Arc reservoir project by the North Texas Municipal Water District has begun construction and represents approximately 60,000 tons of pipe. Three segments, representing approximately 35,000 tons of Lower Bois d'Arc project bid in mid-October. We are currently awaiting the results. Pipe procurement is expected to start in the late fourth quarter of this year. Additional segments of Lower Bois d'Arc project representing about 25,000 tons are expected to bid in the first half of 2019.

The Southeast Oklahoma Raw Water Supply, also known as Atoka Second Pipeline project, is a 100-mile 66,000-ton pipeline. Bidding is expected to start in the late fourth quarter, with production and installation spread over 5 to 8-year period. In the California or western market, the $2.6 billion California reline program began in 2017 and will continue over the next 20 years. Northwest Pipe produced 2 segments of the reliner program in 2017. We are currently producing a 2018 reliner program job at our SLRC facility in Mexico, which represents 5,400 tons. A second MWD reliner job, which is recently been secured representing 900 tons will also be produced at our SLRC Mexico facility. The latest 2018 reliner program segment, a San Diego County job for 3,800 tons will be produced at our Adelanto, California plant. 2 to 3 additional reline segments will bid each year, representing 8,000 to 10,000 tons annually.

The Santa Clara Valley Water District's $1 billion pure water program represents 8,500 tons with bidding in the second quarter of 2020. The City of San Diego's $1.7 billion pure water program is a 6,000-ton project that is projected to start bidding in the first quarter of 2019. In North Dakota, work continues on the 140-mile in 87,000-ton Red River Valley Water Supply program. The initial bid is on track for the third quarter of 2019 and is contingent on state legislature approval, which is set for January of 2019.

With a solid backlog coming out of the third quarter, and a large amount of work that has or is scheduled to bid in the fourth quarter, and because a significant portion of the work bidding in the fourth quarter, are multi-year programs we expect to see continued improvement in the backlog, which should result in positive trend for revenue and margins that will continue through the fourth quarter and into 2019.

Our acquisition of the Ameron Water Transmission Group provides Northwest Pipe with significant administrative and operational cost synergies, additional product offerings to better serve our customers, and creates a strong platform, which is expected to have major positive impact on the ongoing earning potentials of the business.

In closing, the significant demand and stable market environment supports continued improvement in the water transmission business through 2018 and beyond. The acquisition of the Ameron Water Transmission Group further strengthens our position in the business. As we move forward, we will focus on: one, the successful integration of the Ameron Water Transmission Group; two, improving the performance of the business by focusing on margin over volume; and three, driving cost reductions and efficiencies at all levels of the Company.

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

Thank you, speakers. We will now begin the question-and-answer session. (Operator Instructions) And our first question is from Brent Thielman. Brent, your line is now open.

Scott, Robin, on the core business, a lot of companies have talked about issues with weather this quarter. I was just curious, did that had any hang up on volumes at all? And I guess would have you expected them to be better, given that?

I would say, obviously, Texas has had some pretty rough weather over the last -- I guess, probably, several weeks, and there has been rough weather in different parts of the country. I think we may have seen some minor delays in various spots, but I don't think anything that looks like it's going to delay some of the larger projects, Brent. It does look like since lower Bois d'Arc bid in mid-October that they're going to be moving forward with that, not saying that once that project awards to the specific participants, that weather issues might not cause delays in certain lay sections of the pipeline, so on and so forth. But we haven't really seen a lot of things delaying for that at this point.

Okay. Great. And then, Scott, the $200 million in backlog, how do we think about the schedules here over the next 12 to 18 months? Do you expect to deliver a vast majority of that over the next 12 months?

I think you have to look at really what the makeup of the backlog is, Brent, because the way we look at, I guess, the conversion rate of backlog is, it generally goes between about 30% to the next quarter, up to about 45% to the next quarter. Meaning that you come out of the third quarter with a couple of hundred thousand tons of backlog, and you're going to confer either up 30% to 45% in the revenue in the next quarter.

The issue with the backlog is, what is the makeup of the backlog. And some of our backlog, right now, has a little bit longer lead project in it, tunneling projects generally have a little bit longer lead. So what we're looking at right now, at least for the upcoming quarter, is probably towards the lower end of the range, converting into revenue. We do think that that percentage will pick up as we move into next year. I think that there's a lot of work it's bidding in Texas that -- quite frankly, Texas and California right now that I think starts to go into backlog as we go through the rest of this year and into early next year, which certainly should, I think, drive higher backlogs, and should result in revenue numbers that are being pushed up.

Okay. And Scott, with the backlog, I mean it sounds like another big quarter in terms of bookings opportunities. Do you think that -- I guess, if you see schedules out in the first half of next year, does it take a little bit of a breather after this quarter or does it look as appealing as we get into the first half of '19?

I think that when you look at 2018, this is really turning out to be a pretty huge bidding year. What we're seeing is somewhere still in the area of about 200,000 tons of bidding for the year. And I think the biggest staying with that is, a significant part of that is bidding in the fourth quarter. So when you look at -- as I mentioned, 35,000 tons of Bois d'Arc that's bid in mid-October, when you look at the Atoka program at 66,000 tons, it's bidding sometime in the late fourth quarter, it's a huge quarter, which I think what happens is the backlog probably continues to have upward pressure and the -- obviously, that should result in better revenues and margins as we move into 2019.

I do think that to expect another year, just like we are having in 2018, with total demand of 250,000 is probably not a reasonable thing. I do think that demand based on what we're seeing as we're putting our 2019 planning cycle together is going to be strong in 2019. I think that there is a little bit more strength in the Western United States as we're looking at 2019. So certainly, it may not be as big, but I think it's strong in the right places, if you know what I mean.

Yes. Appreciate that. And then, I guess Scott, could you -- with the acceleration in activity, could you talk about how the bid environment has evolved in the last few months since things seem to be tightening up?

Yes, I think the biggest thing with how things are is, what's going on with the industry-wide backlog, right. Because I think with the bidding activities that we see now, everybody's backlog is moving up in the industry, right. So when backlogs start to move up like that, pricing starts to move up. I think that result in better margins, obviously, production levels at the producing plants start to improve, and you've got better overhead absorption, and the plants do better on the margin side. I think what I would characterize the bidding to look like right now, Brent, is that we see a pretty good stability across all the markets in steel pressure pipe side of the business. I think one of the things is that you had 2 nontraditionals that have left the business. And I think with the players that are in the business right now, there is a more long-term approach to the markets and we're disciplined approach to the market, and things have just really stabilized at a time when the volumes were up, which really is a positive for the business.

Okay. Great. And I guess, are there any -- as you're digesting and integrating Ameron, are there any sizable assets, land or equipment or otherwise, you think you might monetize?

I wouldn't say, at this point, that we'd be looking at monetizing anything as we're digesting the Ameron Water Transmission Group assets. We are in the process of working on selling our Monterey property that we talked about shutting down probably 2 or maybe 3 or so calls ago. We're in the process of working on selling that. But outside of that, we really don't -- we don't really have anything else.

I think, as we look at our operating configuration and the plants that we have in our operating configuration for what we have in front of us right now it looks like a reasonable configuration, but I think the thing is, we've shown over the last several years that we don't have any issue with shutting the plant down if it's underperforming or it makes sense to do that in monetizing that. So we're always looking at those things, Brent, and we'll continue to look at it, but at this point, we don't see anything that shows us that we'd be shutting any plants down.

(Operator Instructions) Our next question is from [Tom Spiro].

[Tom Spiro, Spiro Capital]. Good morning. We had an election a day or 2 ago, Scott, and I was curious as you look across your markets whether any legislative initiatives, propositions or and such that may have passed a couple of days ago or did not pass that you took note of?

Well, the biggest one that we were -- we had a little bit of a look at was Proposition 3 in California, that was $9 billion general obligation bond that they were trying to get passed that was for water-related projects and I think they probably had a couple of billion dollars down for water supply projects, which could mean storage and stuff like that. But that one appears to have been voted down. The interesting thing about California, Tom, is that, I guess, Robin, probably 4 years ago, they did Prop 1, which is a $7.2 billion general obligation bond that passed and it's really kind of difficult to tell where that money is going because we don't see it like we see, for example, money going out of the SWIFT program in Texas and different publications. But what we do know is that the California business is growing. So we think that probably proposition 1 maybe having some influence on that.

As far as other other propositions outside of that, I think that I haven't really seen anything that's going to affect us different than that. And what you're looking at Tom, is when you're looking at things that are going on, kind of in that realm, you're looking at things that are probably maybe 3, 4, 5 years down the road, because these projects have significant planning cycles. All the stuff that we -- the huge amount of work that we see coming at us right now in the fourth quarter, a lot of those things have been on the drawing board for a number of years. I do think it's interesting to look at that when you look at some of the things that are said to probably be in the offing about converting to way the Democratic-controlled House, one of the things that they said is that ultimately there is going to be significant focus on infrastructure programs, which I think that's something that they may be able to get bipartisan support behind. So I think that's interesting.

But, Tom, I think the things that they're talking about are probably 3, 4, 5 years out maybe a little bit longer and getting into play. A lot of the stuff that we're seeing right now is stuff that just coming at us with buildup in requirements and stuff that's been on the drawing board for a long time that's just coming to pass now.

Secondly, could you update us on the steel costs, and in particular these days, labor cost? I'm curious whether you see labor availability or labor cost is beginning to move.

Well, I will say that we always see labor costs moving before I talk about steel, obviously, especially when you're talking about skilled labor, like welders or millwrights and things like that, because it seems to be a little bit of professions that are going extinct a little bit and people getting into those professions so it's harder to find them. So you really have to work to keep the ones that you have and try to put apprentice programs together to train those.

So it is, we do see labor costs, that will be moving up. I think as far as the steel is concerned, obviously the 232s, the tariffs that have been put on, the products coming in from various countries, really has an impact on what's going on with steel pricing. When you effectively cut off imports for a period of time, you're certainly going to cause steel pricing to move up and really that's what's happened. And we've seen steel prices that have increased probably as it stands right now about 35% from a year ago. Now that's actually down and I'm talking about steel coil pricing that's down a little bit from where it was mid this year, but it's still up about 35% year-over-year.

And I think, that's really kind of what happens when you start shutting off imports coming into the country, especially from places like Mexico and Canada with the tariffs. I think the thing is, is that we like high steel prices, but we like stable steel prices because obviously, it's much easier for us to bid jobs in and make sure that we are -- we were squared up with pricing levels on steel, which is a large input for us when the pricing is stable. Plate pricing has gone up pretty significantly and it's not coming -- it hasn't come down quite in the way that coil has, because coil is standing at about $820, $825 a ton, plate prices now are about $1,000 a ton.

So generally, there's an upward moving movement in those costs year-over-year and while the things that are in place right now remain in place, we'd expect steel prices to remain high for a period of time.

Do you hear much scuttle about the potential projects being deferred on the theory that the tariffs are temporary matter and the deal, it will be a lot cheaper, if we just wait a year?

We've heard people talking about that. I think, we've seen -- I guess, there's media report and it was somewhere out of -- I think it might have been in Wisconsin, about a project. It wasn't a deferment of a project, it was the change of the project into a different product versus steel. But when you read the information, it was a small enough diameter product that it probably wouldn't have been steel anyway.

So we really haven't seen on the steel pressure pipe side a whole lot of projects that have been delayed related to steel pricing. I think there some timelines that are on some of these projects that have to be met. So things are really delaying in that. I think when you look at some of the -- maybe some of the other projects that aren't related to steel pressure pipe, projects that are maybe even more sensitive to steel cost when you look at things like piling and potentially tunneling pipe, microtunneling pipe, you might see some of those projects delaying because certainly, I think the steel cost is a larger percentage. But on the Water Transmission side, we really haven't seen anything happening to that any extent like that at this point.

We were worried about Lower Bois d'Arc, we were worried about the Atoka program, but those seem to be moving forward, and the Houston program is moving forward. And we're still doing work for the reliner program in California. So certainly, the increase in pricing hasn't slowed everything down quite yet.

And lastly, I saw not long ago, you signed a new credit deal as I recall, it's an aggregate facility of $60 million, which I think is actually slightly smaller than you once had. I think the earlier one was $60 million with an accordion up to $100 million. And I guess, given that we are facing more demand better backlogs, more business and we've completed the acquisition of a new facility, I guess I was a little surprised that we took a credit agreement that sort of flat to down in size and availability from what we once had.

It actually is $60 million with an accordion to $100 million. In many ways, it's very similar to what we had before. So in that case, it is exactly the same. It is a 100-plus-page document. So maybe more than a clause is in there but we do have the option to accordion that.

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

Okay, Jared. Is there any more questions? Are there any more questions?

At this point, speakers, we don't have any more questions on queue.

Okay. Then, I would like to thank everybody for attending our call and we look forward to talking to you in...

Early March.

Early March about fourth quarter results. So thank you and take care.

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