NWPX Infrastructure, Inc. (NWPX) Q3 2013 Earnings Report, Transcript and Summary

Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the conference over to CEO, Scott Montross. Thank you, sir. You may begin.

Thank you, Ashley. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm President and CEO of the company. And I'm joined by Robin Gantt, our Chief Financial Officer. As we begin, I would like to remind everyone that the statements 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 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 net income was $1 million or $0.11 per diluted share in the third quarter of 2013 compared to $3.4 million or $0.36 per diluted share in the third quarter of 2012. Water transmission sales decreased 26.2% to $46.8 million in the third quarter of 2013 from $63.5 million in the third quarter of 2012. Water transmission gross profit as a percent of sales increased to 16.9% in the third quarter of 2013 from 15.2% in the third quarter of 2012. The decrease in sales was due to a 60% decrease in tons produced, which was partially offset by downstream fabrication services on pipe produced in prior periods. The increase in gross profit as a percent of sales was driven by our cost-reduction initiative to reduce man hours per ton and overhead costs, as well as improve quality. Tubular Products sales increased 8.9% to $56.2 million in the third quarter of 2013 from $51.6 million in the third quarter of 2012. Volume increased 20%, which was offset by a 9% decrease in selling prices per ton. We sold 51,400 tons in the third quarter of 2013 compared to 42,900 tons in the third quarter of 2012. Tubular Products gross profit as a percent of sales was 1.6% in the third quarter of 2013 compared to 3.7% in the third quarter of 2012. Gross profit and gross profit as a percent of sales were negatively impacted by increased competition from imports, which exerted significant downward pressure on selling prices and volumes and lower of costs or market inventory adjustments of approximately 800,000. These were partially offset by operational improvements made at all facilities, particularly at Atchison, as a result of our capital investment projects. Selling, general and administrative costs decreased to $6 million in the third quarter of 2013 compared to $7.6 million in the third quarter of 2012, as we continue our overhead reduction efforts. Interest expense was $1 million in the third quarter of 2013 and $1.3 million in the third quarter of 2012. The decrease was the result of lower average borrowings and lower average interest rates. Our effective tax rates were 42.3% in the third quarter of 2013 and 25.3% in the third quarter of 2012. In the first 9 months of 2013, the company generated $21.4 million in cash from operations to support the growth of the business, mainly through our net income and depreciation and the decrease in costs and estimated earnings in excess of billings. These were partially offset by an increase in our trade and other receivables and a decrease in accrued liabilities. Depreciation was $10.1 million in the first 9 months of 2013 and $11.7 million in the first 9 months of 2012. Inventories decreased $6 million in the third quarter of 2013 from the second quarter of 2013 due to a decrease in Tubular Products inventory. We had temporary shutdowns at our Houston and Bossier City, Louisiana locations at the end of June and the first half of July to help decrease the inventory levels. Capital expenditures were $22 million in the first 9 months of 2013, primarily for planned capacity expansions in our Tubular Products plants and the expansion projects at our Saginaw, Texas facility. The remainder was for ongoing maintenance capital expenditures. Now I'll turn it over to Scott for an update on our business.

Thanks, Robin. As of September 30, 2013, our backlog in Water Transmission was approximately $108 million. As of September 30, 2012, our backlog was approximately $241 million. We expect that the fourth quarter will be a challenging quarter for both sides of the business. The backlog in Water Transmission has significantly decreased, as we have completed much of the drought-related emergency work in Texas. We expect Water Transmission sales to be comparable to the third quarter levels, with gross margins in the mid-teens. The following is an outlook on upcoming Water Transmission projects. There's a 22-mile pipeline project in Wyoming that we'll likely bid in the next couple of months. We expect the Tarrant County integrated pipeline job, or IPL, will bid the first segment of about 15 miles in the first quarter of 2014. The earliest IPL revenue would be recognized in the second quarter of 2014. The second segment of IPL is expected to bid in the fourth quarter of 2014. The Odessa Subarea is a 40-mile pipeline project near the Snake River in Washington state that may bid in mid-2014 at the earliest, but we think it could be closer to 2015. The Red River job in North Dakota is approximately 140 miles that will bid in mid- to late 2015. Therefore, as you can see, there's some increase in activity in the projects that are out there, but we still expect that our Water Transmission order book will remain at low levels for at least the next couple of quarters. In Tubular Products, we expect compressed margins to continue into the fourth quarter, as imports have had a negative impact on both volume and margins, and we expect our customers to continue to closely manage their inventory levels. The trade case filed on July addressing the high imports of oil country tubular goods has not yet had a significant impact on sales prices or volumes. The Commerce Department is conducting its investigation and expects to have a preliminary determination by February of 2014. The Double H Line Pipe order announced last week is the largest line pipe order in company history. This order is approximately 36,000 tons of line pipe that is being produced at our Atchison, Kansas plant. We produced approximately 10,000 tons in the third quarter of 2013 and expect to produce the balance through the second quarter of 2014. While this line pipe order is significant, rising coil costs, stagnant pipe prices and still depressed demand continue to put pressure on oil country tubular goods margins. Therefore, we expect margins in the Tubular Products business will be in the low single digits for the fourth quarter. We expect between $26 million and $30 million total capital expenditures for 2013, which includes some investment projects and normal capital maintenance. The biggest investment projects were the previously announced expansion at our Saginaw facility, as well as the continued modernization of our Atchison, Kansas plant. The Saginaw project is complete. The Atchison modernization, which includes the installation of the second accumulator, which was completed in the first quarter. In addition, we're installing a new hydro tester and replacing the existing front end of our 16-inch mill, and we expect that project will be completed in the first quarter of 2014. As previously announced, we're in the process of exploring strategic alternatives for oil country tubular goods business, which could include potential acquisitions, divestitures and joint ventures. No decision has been made at this time to enter into any transaction, and there can be no assurance that an exploration of alternatives will resort in a transaction or as to the terms, conditions or timetable of any such transaction. It is our policy not to comment on any specific discussions or any potential corporate transactions unless and until we enter into a definitive agreement with respect to such transaction. In conclusion, we anticipate a challenging fourth quarter, as we have not yet seen a significant benefit from the trade case on oil county tubular goods. We believe volumes and margins in Tubular Products will remain compressed for the near term. And while there are some larger Water Transmission projects forecasted to start production in the second half of 2014, our order book is expected to remain at low levels for the near term. At this time, we'll be happy to answer any of your questions.

[Operator Instructions] Your first question comes from Scott Graham.

So could you give us an idea of what the bidding activity or, I should say, quoting activity, let's use that word, in Water Transmission? Where does that stand now year-over-year? In the past couple of quarters, you were saying, kind of, down sort of mid-30%. Have you seen any change from that?

Right. I think what we have said in some of the past calls that it's down probably 35% or more we've seen over the last couple of quarters. What we have seen is, in November and December timeframe of this year, a relative pickup in bidding activity, where -- I think there's probably somewhere around the order of some $120 million-or-so of projects that are out there for potential bids in the November and December timeframe, which really would be projects that would probably start late third -- late first quarter of next year and go through next year and into the following year. But we definitely have seen a little bit of an uptick in the activity in the November and December timeframe.

So, Scott, that would be apart from what you laid out for us as known, yes?

Yes. I mean, some of those jobs out there are -- all of those jobs are still to be bid on. And obviously, the bidding process is never a certain process. And while we are after all these jobs, there's many of these jobs that we think that are -- that fit what our plans are. It's never a certain process. So obviously, they're out there, and we'll be bidding and we will be hard after those jobs

Sure. And a lot of that is a break-and-fix plus, I'll call it?

Say that again, Scott.

In other words, there's break-and-fix business out there, and then there's something that would be larger than that. Is that kind of how you characterize that stuff?

Well, I think a lot of those are break-and-fix jobs, and there may be a little bit of speculative in there. But I mean, when you look at some of the larger things that we see going on in the market, they're along the lines of what we had in the -- obviously, the script. We've talked about the Red River project, which is a project in South Dakota that's potentially a 140-mile project; the Odessa Subarea project, that's a project near the Snake River in Washington, it's a 40-mile-or-so project. Those are the over-and-above projects that, obviously, we're hoping some of those projects come to fruition as we go into 2014, which obviously helps our order books significantly.

Understood. Now over the summer, we had a fairly significant shakedown in some of the bond markets, certainly affecting some of your customers, I would think. I was just kind of wondering what you're hearing on that and funding issues. Has there been any change in the thinking there? Is this truly bidding that's -- or I should say quoting activity that's going to turn to bid or is it potentially that the issues over the summer pushed the actual -- put the bid out further?

I think the issues over the summer, obviously, made the financing of the projects a little more difficult. But I think some of the things that are going on and some of these projects are really -- there are some circumstances where large crops can be affected in certain areas and really have pretty substantial effects on local and state economies, as far as crops are concerned. So I think some of these jobs that we've just talked about are getting a little bit more attention than maybe just speculative. So we're hoping that the issues over the summer with the bonds don't have that impact. But I think the critical nature of some of those projects, I think, tilts the likelihood of those projects happening more towards the happening side.

Interesting. Okay. Two other questions, both on Tubular. Is it possible, Robin, to tell us what the tubular volumes were, excluding Double H?

Excluding Double H. Well, we said there were about 10,000 in the quarter, so that would be about...

Oh, yes, you did. I'm sorry. I apologize. Yes, you did give us that number. So then the last question is more for you, Scott. Can you give us any kind of an -- I know you said you're kind of loathe to comment on it, but we're no longer in the first inning on the strategic alternatives. Could you at least give us maybe kind of where -- if nothing specific, that's fine, but where on the progression of the curve we are right now?

Yes. I don't think that we want to make any comments on that, Scott, at this point in time.

Your next question comes from Brent Thielman. Brent Thielman - D.A. Davidson & Co., Research Division: The Water side sales down 26% of gross margins, significantly above last year. Any help from mix or steel prices this quarter? Or are you feeling more confident that this sort of run rate of sales that you can kind of generate these sorts of margins?

So I think one thing on the steel price is a lot of people are concerned. Steel prices are actually just slowly -- have been slowly moving up from about the second quarter of this year, early second quarter or maybe the late first quarter. So we're really not getting any help on the steel prices. And I think the -- some of the things that we have done on the cost side on the Water Transmission business really starting to show up. The reduction in in-field claims and in-house claims that we've talked about in the recent past, the leveraging of our buying of raw materials and the efficiency of using the raw materials. And then simply, the really hard focus on driving down the man hours per ton in each one of our Water Transmission facilities. And I think those are really the things, Brent, that you're starting to see show up in these margins at this point. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then, on the Tubular side, is there any sort of qualitative comments you can provide around kind of the operating performance at the OCTG assets versus Kansas? The OCTG assets, were they negative this quarter versus Kansas? Any help there?

Well, we don't break the -- those assets out, obviously. But -- and we've said in the past that the Kansas facility has always been a very strong performer for us, and that really hasn't changed in the third quarter. And I think it's -- that's probably as much as we want to say in that. I think that the conditions that are going on related to the imports and really, really little bit of a perfect storm on OCTG with steel prices moving up. And you still have a relatively depressed pipe price and -- as well as demand on the OCTG side really starts to become maybe a little bit more of a drag on the entire Tubular Products business. That kind of, in a roundabout way, answers that questions. Brent Thielman - D.A. Davidson & Co., Research Division: Got it. And then, on the Tubular side, just looking at Q4, are you anticipating sort of that typical seasonal decline in sales versus Q3?

Well, we -- there is the Ad Valorem tax in Houston in the fourth quarter, which generally really slows things down in the fourth quarter. The one thing we have seen, and you heard us talk about the line pipe order, the Double H order, obviously, we'll have a little bit of that in the fourth quarter. The majority of that will likely be shipping in the first quarter and into the second quarter of the year. We've also seen a little bit more of a pickup in maybe some of the other line pipe orders. So we are cautiously optimistic right now on what we're seeing in the line pipe backlog. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. And then, just on that last part, I mean, as far as your bid pipeline in Tubular, are you tracking similar opportunities like the Double H you announced last week?

Yes, and I think that really is -- one of the things, Brent, about the announcement was really, "Hey, we've arrived at being able to do these kind of projects now out of our Atchison Facility." It's a large project, and those are the type of things that you focus on going forward to be able to put those kind of large projects on the mill to drive not only the efficiencies of the mill and to really enhance what kind of income you can generate out of those facilities. And really, with the expansion that we're doing at the Atchison facility, it really puts us in more of that mode, where we really want to be going out and finding those kind of projects and really using that as a strong base load for the facility. And I think, really, with some of the -- a lot of the cost work we've done because obviously we focus very hard on driving costs out of that in all of our facilities, that, that kind of work will really start to show up in the margins of the Atchison facility going forward.

Your next question comes from Barry Vogel.

I have a couple of questions. I want to go back to -- the review of the strategic options for a moment. And I know you don't want to comment, but there I have a question. If you were to make acquisitions, what kind of products would that be other than pipe? If you had at least 3 or 4 or 5 product areas?

Well, it's our policy really not to talk about anything with the M&A process, Barry. So I don't really want to speculate on that. I think the one thing I can say, though, that we have talked about in the past on these calls, is that -- and obviously, you all know, is that we're working to move up the value chain in our Tubular Products business. And that really is by working more into the heat-treatment of the business of much larger percentage of total demand on OCTG product is heat-treated, and you've heard us say in the past that we now have a heat-treating arrangement that's very favorable to us as we move forward, where we're not giving away the biggest part of the heat-treat margin to third-party heat-treaters. And it's actually a cost level that is very beneficial to us moving into the heat-treat market as we go forward. And I think that's the one thing that I would say that our focus on OCTG products is really more towards driving more to the heat-treat market, where the market is as well as things that you've heard us talk about before, driving costs out of our business and that's uptime in yield, and the guys in Tubular Products side have done a very good job of focusing on those 2 areas in driving costs out of the business. But we need that next piece, which is heat-treat really to be stronger in the OCTG side of the business.

Now how would you get more involved with heat-treat versus what you're doing now?

Well, we have the heat-treat arrangement that we've talked about, where we actually have the capacity to heat-treat available to us that we didn't have before. So we may have only been able to do -- 30% of our OCTG products is heat-treated before, just a number I'm pulling out. Now that percentage available to us increases significantly. And really, that's where the sweet spot of that market is.

Okay. Now as far as the comment you made about you've arrived with that largest project in the history of your company, the Double H project, what do you mean by arrived? In other words, what is the long-term significance of you being able to pull off this major project?

Well, I think it makes us a viable option for large projects like that going forward. But you always have to start with the first one, right, and you have to perform on the first one. And I think that we're set up with the management on Tubular Products and the management of that facility to have very, very strong performance on that and really to show that we should be in that game with doing those larger projects going forward. That's the significance of it.

And now, going back to the ITC, U.S. Steel, on their conference call last week, suggested, and it's out of character, because they usually don't talk about ITC cases, that there's going to be a vote on December 20, 2013, and they've remarked that if that vote is affirmative and they said the original -- the initial vote was 6-0 to go forward, which is a pretty strong subtle hint that they're going to do something positive for the industry. What do you think -- if they do vote on December 20, what do you -- when do you think you'll see an improvement in tubular orders because of the tariffs?

Well, there's really 2 pieces of this vote, Barry. The December vote is really on the countervailing duty piece. And that's only against 2 countries, the way that we understand it. It's against Turkey and India, I believe, on CVRD [ph] case. So that's relatively limited. The bigger vote that is out there is really the Department of Commerce's vote on making the preliminary determination on anti-dumping duties that happens right around -- I want to say it's February 13 or 14. I can't remember exactly what date. That's against all of the countries involved. So those 2 pieces are really -- what can happen is naturally the first piece of where we can start getting some relief against imports coming into the port because it's affirmative preliminary determination by the Department of Commerce, that means that whatever the preliminary margin is set out to be, our understanding is anything coming into the ports at that point in time would have those margins, whether they are countervailing duty margins or anti-dumping margins, placed against them. So once those happen -- and obviously, we're viewing the February 14 date, I'll call it, as the more serious date simply because it's against all other countries. Once that happens and it becomes real and based on whatever the amount of the margins placed on cargoes coming in, that's when likely you start to see maybe the move up in the pricing and the -- and maybe a stepwise reduction in imports coming into the country. But we think that February 14 is the more critical date in this whole thing.

Yes. They didn't mention February 14 on their call. They mentioned December 20. Thank you for the elaboration. That's helpful.

No problem.

Keep up the terrific work that you guys are doing. I'm looking for -- finally for the cycle both of your segments to blow out on the upside.

So are we. Thank you, Barry.

Thank you, Barry.

And your next question comes from Gerry Sweeney.

Water Transmission, I want to start there. I think, in the past, you've mentioned that in -- sort of, "normal operating margins." You were looking at gross margins of 14% to 17%. And today's -- or yesterday's announcement of 16.9%. I mean, it's clear you've taken a step up in the gross margin category. I mean, is that safe to assume that you're moving into a new realm going forward?

We like to think that the cost work that we're doing on all sides of the Water Transmission business will take us into the next level -- onto the next level of gross profit margins across the Water Transmission business. Obviously, that assumes a relatively normal market condition, and you're seeing the market conditions that we're seeing right now, where there's really low bidding activities and you see what the margin levels are with the low bidding activities. So -- and we think that normal market conditions actually move us to the next plateau of margins.

Yes, I would characterize this as not -- third quarter as not normal operating.

Right. We would also.

Okay. Now I'm looking at your list of several jobs, potential large project bids, Tarrant, Odessa, the Wyoming project. Looking back at the history of some -- of Northwest Pipe and large projects like these, is this an abnormally large amount of large projects, sort of, that are sitting out there on the horizon? Or is this -- have we seen this in the past?

Well, I think we've seen this at different times during the past. And obviously, not all of them happen. And at some of the things that we're looking at now, there are some critical circumstances involved with some of those jobs. So -- and again, that's why we think that some of those circumstances -- like I said, one of those projects is a -- could have a potential detrimental effect on crops in a specific area and later to state and local economies. So we think that those kind of things start to tilt that more towards the idea that those are more likely to happen. Now that could all go away and none of them could happen, but that's what happens with speculative projects like this. We make sure that we're keeping track of them, and our guys on the Water Transmission side do a fabulous job of making sure that they're talking to the people about these projects and making sure that we're on the doorstep of every one of these projects. So if these happen, we'll make sure that we're there to have our best swing at it.

Okay. There is one at Mary Rhodes -- I think Corpus Christi that you didn't mention. Any thoughts on that? It looks like that was getting a little bit of a push as well.

Yes. I think Mary Rhodes is a project down near Corpus Christi. It's a 42-inch project that we'll probably bid in the next several weeks or a couple of weeks, I can't remember the exact timing. But the -- it's 42 inches in diameter, and we are after part of that project. The only problem is the diameter and product may not completely favor what we're doing or what we're looking to do in the fourth quarter. And remember, there is a significant amount of other projects out there. We want to make sure that we're getting our piece of all of those projects, but Mary Rhodes is one that we're watching, but we're not certain on it at this point. That's why we didn't mention it.

Okay. Got it. And then, just real quick on the tubular side, I mean, you've spoken about Atchison making a lot of improvements, the front end, the accumulator, the hydro tester and Double H project win, I mean, definitely highlights that investment. And you had mentioned in the past that doing all those CapEx was going to broaden your market. Is there any way you can quantify some of the opportunities you're seeing out there? Are there multiple Double H projects out there? Obviously, the shale play of getting oil to the market is a big issue. Would you be able to give any more granularity on that front?

Yes. I mean, I don't really want to comment too much on the projects that are out there that are being looked at, at this point in time, simply, for competitive reasons.

Your next question comes from Thomas Buskirk. Tom Van Buskirk - Sidoti & Company, LLC: I wanted to actually start on the competitive situation and whether the landscape has changed for you at all, particularly on the Water Transmission side. I'm trying to understand how we can think about what makes you win a project versus not win a project, like KWA which sounded promising, but for whatever reason, I guess, whether it was price or something else, didn't happen. How should we think about that and how you guys are positioned going forward, how that's changing?

Well, I think the biggest thing with the competitive landscape is the small amount of bids that's been out there. But that small amount of bids that are out there, you're not -- you're really dealing with every potential competitor bidding on jobs. So the competitive landscape becomes a little bit less well defined versus when you're, what I'll call, in market conditions where demand is a little bit better and people are being filled up, and you know where jobs are and have a better view of who you're competing with on specific jobs. At this point in time, we're competing with everybody up to and including some smaller people on smaller jobs that may not even make their own pipe. They buy pipe out, have it coated lines, fabricated outside and are really nipping at the heels of smaller jobs in this market. So it really -- a lot depends on the strength of the market itself. But in this landscape right now, when you're seeing a relatively low bidding activity that we've seen over the last couple of quarters, everybody is a competitor and it's very much less well defined. As things pick up and people have larger jobs and their plants are up operating at higher capacity utilizations, the bidding becomes a little bit more predictable. But at this point, it's a little bit difficult to predict because everybody is a competitor that's in the market at this point. Tom Van Buskirk - Sidoti & Company, LLC: Got it. The other piece in Water Transmission that I'm a little curious about is, you kind of suggested that steel is becoming a little bit more of a pressure on the margin in Water Transmission. I'm guessing it's a little tougher to recoup the steel cost increases on some of your business. This kind of sort of baseline maintenance business that you have going on right now, not the big orders, but the kind of thing that's sort of generally in your backlog from quarter-to-quarter, what ability do you have to recoup increases in steel prices on that business?

Steel prices are -- on the Water Transmission side are a little bit less of the total cost than they are, say, on the tubular side. But steel pricing moving up does have an impact. I mean, how you bid jobs, your competitiveness with bidding jobs. And right now, I would say, the increases in steel price are -- I would characterize as a little bit more difficult to completely recoup versus when the market is stronger.

Your next question comes from Matthew Sherwood.

Just had a quick question -- first off, on -- in terms of the Tubular business, you referred to the investments you're making in Q1 and also, assuming you're still in the OCTG business, the heat-treating capacity that will come on line for you, sort of, around Q2 of next year, is there any way we can dimensionalize this -- the sort of profitability enhancement that could bring for 2014, given the amount that you've spent on Atchison and just the desire to understand returns on investment?

Yes. I think we -- as we've stated before in calls, our drive is that it gets towards the double-digit margins on this. And I think that the investments that we've made on the Atchison side, the market that it opens up to us, I mean, we've talked about it before, basically, it doubles the available market on line pipe to us, as well as having the heat-treating that we do now -- where we will now have access to going forward in the second quarter, along with the cost work the guys are doing at the Tubular Products level on implementing lean manufacturing and just generally driving costs out of conversion, making sure that they're implementing the maintenance programs to drive uptime and better yields, I think those things, as we go into 2014, if there's a normalized market situation that is not stressed by the amount of imports that we get towards those double-digit margins. Now again, and I've said this in the past, we cannot count on trade cases to -- for the long-term viability of this business. So that's why we have made the investments in things and we're working on driving costs out of this business that market-in or market-out, whether there's imports or not imports, that our focus is on getting towards double-digit -- on getting to double-digit margins on -- in Tubular Products Group.

Just to sort of follow up on that theme, I know that the trade case would probably affect the supply-demand balance in the OCTG market, but there's really no reason to believe it will affect the supply-demand balance in the line pipe market off the bat. And you said that, in general, you want to be sort of agnostic to the market environment. Does a double-digit level in line pipe, is that sort of -- that should be -- that doesn't really matter what the market environment looks like?

I think we have a plant in the Atchison facility, which is why we chose to invest the additional capital in Atchison. That's got a platform to really compete in any market. We've got a good location, a strong infrastructure, a strong management group. And I think that Atchison facility competes market-in and market-out.

Right. I mean, if you look at your blended margin though in the current quarter now -- and I understand that the accumulator will help the market position of the line pipe facility, but it's sort of -- doesn't appear like you're on track for double-digit markets -- margins, given that you're in the low-single digits. Is it just because there's new projects that's going to bring you there? Or is it that there are some other stuff that's masking it given the high levels of imports?

I think when we kind of danced around maybe a little bit at the beginning. The Atchison facility has always been a really strong performer for Northwest Pipe, and that hasn't changed in the second quarter or the third quarter. I think what we're seeing on the OCTG side is, like I said before, the increase in coil prices along with the continued depressed pipe prices on the OCTG side and the depressed demand that we're still seeing continues to be maybe even a greater drag on that at this point. I think once we get to the point where we have heat treating that is basically captive heat-treating, it allows us to keep a much larger percent of the margin which is now going out as costs versus what we're doing now with the outside third-party heat-treating. So with Atchison doing what they're doing and improving on what they're doing based on the modernization project, and we fully expect that the modernization project to have stepwise improvements in their margins, we think that what we're doing cost-wise on OCTG and specifically the availability of devoted heat-treating to our facilities now really puts us in that mode to get towards those double-digit margins. We haven't had that's kind of heat-treating. And when you look at -- when you -- you can look at double-digit margins on heat-treating project -- or heat-treating products, heat-treats at $1,500 or to $1,600 a ton and you realize that all of that heat-treat cost is going to a third-party processor and there's no advantage from us from that third-party processor. What we're going to do -- we'll be able to do going forward is, in heat-treating, we will -- we don't have nearly as much costs. So we can keep significantly more of that costs as margin going forward. So I think those are the things to get us towards the double-digit margins and things that you can't, on the surface, see at this point.

Okay. Just one last one here. As you look at what you just said here, where you have visibility to materially higher margins on both the tubular and the OCTG side based on things you can point to where -- that are structural in nature, does that reduce the sort of the way the potential participants in the strategic alternative process for OCTG will look at your business with or without the trade case? Or is the trade case still an important determinant in how the strategic alternatives progress there?

No. I think the trade case is more of a -- it's happening. It's an anomaly over a period of time. We -- like I said, we cannot run the future of our business on any product based on a trade case. We've got to make sure that we are controlling our costs. And the one thing -- the main thing that we're doing besides all the work on uptime and yields in these plants, especially on the OCTG side, is having that advantageous heat-treating agreement, and it really hasn't -- it doesn't have anything to do with the imports. The imports is a temporary relief, a temporary item. Really, it's getting more control over the costs. And we think that, that heat-treating arrangement allows us to do that in a significant way on the OCTG side.

[Operator Instructions] And I am showing no more further questions at this time.

Okay. Well, I guess, we'd like to thank everybody for attending our call, and I think the next time we get together is March, Robin?

Yes.

March...

We'll set the year end results in March.

So until then. Thanks everybody, and see you later. Thank you.

Thank you.

Thank you for participating in today's conference call. You may disconnect at this time.