NWPX Infrastructure, Inc. (NWPX) Q2 2015 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. Questions will be taken after the presentation. [Operator Instructions] Today’s conference call is being recorded. If you have any objections, you may disconnect at this point. Now I will turn the meeting over to your host, CEO, Scott Montross. Sir, you may begin.

Thank you, Dan. 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 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. We recently issued a press release stating that we're exploring the sale of our Energy Tubular business to focus our efforts on water transmission. We do not have any additional information on that process that we are able to share at this time. In the past we have focused equally on both sides of the business on these calls, today we will be focusing primarily on the water transmission business. I will now turn to Robin who will discuss our second quarter results.

Thank you, Scott. Our first quarter loss was $12.1 million or $1.26 per diluted share. This included a $5.3 million non-cash goodwill impairment charge. Excluding this charge the adjusted loss was $6.8 million or $0.71 per diluted share, compared to income of $3.2 million or $0.33 per diluted share in the second quarter of 2014. Water transmission sales decrease 38% to $38 million in the second quarter of 2015 from $62 million in the second quarter of 2014. Water transmission gross profit as a percent of sales decreased to 3.3% in the second quarter of 2015 from 18.5% in the second quarter of 2014. Our volume dropped 49% while our product mix increased our revenue per ton. The mix of jobs produced in the second quarter of 2015 included more downstream fabrication work than the jobs produced in the second quarter of 2014. Gross profit was negatively impacted by depressed market conditions and the resulting extremely competitive bidding landscape. Selling, general and administrative costs decreased to $5.5 million in the second quarter of 2015, compared to $5.9 million in the second quarter of 2014. This decrease was due to lower incentive plan expense and decrease travel and entertainment. We have completed the restructuring plan that decreases our manufacturing and overhead, excuse me, our manufacturing overhead and G&A by 15%. Interest expense was $286,000 in the second quarter of 2015 and $569,000 in the second quarter of 2014. The decrease was due to lower average borrowings and lower capital lease balances. We recorded a $5.3 million goodwill impairment charge in the second quarter of 2015. With the recent expected market conditions in water transmission, we were required to assess our goodwill balance. As market conditions have been poor, this let us to conclude that the entire goodwill balance needed to be written down. With this write downs there is no more goodwill on our balance sheet. Our effective tax benefit rate was 10.6% in the second quarter of 2015, compared to an effective tax of 35.6% in the second quarter of 2014. With our history of cumulative tax losses, we recorded $1.3 million valuation allowance and a portion of our deferred tax assets, primarily related to state net operating loss carryforwards and state credits. We expect the rate will be 17% to 18% for all of 2015. In the first six months of 2015, the company generated $41.8 million in cash from operations, mainly through decreases in accounts receivable and inventory. Depreciation was $4.7 million in the first six months of 2015 and $6.1 million in the first six months of 2014. From the end of 2013, we have decreased our net debt by about $93 million. We generated $35.7 million of free cash flow in the first six months of 2015 and have generated $56.5 million or $5.91 per share since the beginning of 2014. As of after market close yesterday that is equal to about 33% of our market cap. Inventories decreased $21.6 million from year end 2014. This was primarily due to a decrease in inventory at Atchison. Capital expenditures were $6 million in the first quarter of 2015, which was for ongoing maintenance capital expenditures. I will provide a quick summary of the Tubular products results. As of June 30, 2015, the net assets for the Tubular business were around $57 million. Sales decreased 61% to $15 million in the second quarter of 2015 from $40 million in the second quarter of 2014. Volume decreased as we sold 17,700 tons in the second quarter of 2015, compared to 40,900 tons in the second quarter of 2014. Tubular products had a gross loss as a percent of sales of negative 25% in the second quarter of 2015, compared to negative 0.4% in the second quarter of 2014. With our production curtailment in April, we had about $500,000 in severance expense. In addition, pipe pricing particularly line pipe continues to fall and is negatively impacted by continued high import levels. Now, let’s turn it to over to Scott for an update on our business.

As of June 30, 2015, our backlog in water transmission was approximately $109 million, a 24% increase from the $88 million as of March 31, 2015. We expect the third quarter of 2015 to have higher revenue in margins in the second quarter but it will still be challenging. Backlog in water transmission has increased from the end of the first quarter but we are still expecting a very competitive bidding environment. We expect water transmission’s third quarter revenue to be about 10% to 15% higher than the second quarter with gross margins in the mid-single digits. We expect an additional $200 million in projects bidding through the end of 2015. The following is an outlook of the upcoming water transmission projects. The third segment of IPL has started production at our Saginaw, Texas facility and will run through the end of 2015. The fourth segment of IPL is currently scheduled to bid in September. The Trinity River Main Stem project is expected to bid in mid-September and is an additional piece to the Lake Texoma project. The [Lush Bayou] [ph] also known as Houston MSA is a major project that continues to show progress and we expect this job to actively start bidding in mid-2016. We also expect that the Texas swept program will result in additional close in opportunities. We are beginning to see some smaller opportunities in California that are bidding in 2015. We’re watching the situation in California very closely and with the ongoing drought emergency in the past of proposition one. We are anticipating an increase in bidding activity starting in 2016. The private cutting water conservation recovery and storage project is making progress and production could start on a 43-mile pipeline in Southern California by mid 2016. There are several other major California projects in ‘16 and beyond that could be aided by proposition one funding such as the Fresno surface water program, which actually starts bidding some of the smaller sections in 2015 but it's a spread out over a probably a year and a half time frame. It is also the California reliner program as well as the Los Angeles pipeline replacement program. We have planned approximately $8 million to $9 million of total capital expenditures for 2015, matching our expected depreciation. We are monitoring all capital spending very closely and will quickly adjust if market conditions warrant. As of June 30th, our tangible book value was about $232 million or about $24 per share. As of market close yesterday, we are trading at 26% discount tangible book value. Obviously we believe in the water transmission business as we move to become a pure play water company. Our quality, our nationwide footprint, our cost position in 45% market share uniquely positions us to thrive as the market improves. In tubular products, we implemented the production curtailment in mid-April. We are selling and shipping finished products and performing limited manufacturing as needed to fulfill customer orders. We’re closely monitoring market conditions and inventory levels and as the market improves, we will add back employees. As we mentioned in the past, we are actively pursuing acquisitions and are considering a wide range of strategic opportunities with the water transmission business. It is the bedrock of the company and we have many of the experts in the industry on our staff. Our pipe is used in highly engineered systems that are unique for each project, making it a higher value business in the commodity driven energy tubular business. As all of you know, it is our policy not to discuss M&A activity on these calls. Therefore we cannot share any further information at this time. But this continues to be the highest priority for Northwest Pipe. In conclusion, we expect water transmission competitive landscape to remain tough for the next couple of quarters. But we are focused on improving our market share and driving cost cutting and driving additional cost out of our business. Our water transmission market position is very, very strong. We're number one in our market segment with 45% market share and we set the standard for quality. Our cost position continues to get stronger. We've taken over 15% in the man-hours of per ton to produce jobs like -- versus jobs that we just produced a couple of years ago. It’s 15% less man-hours now than it was just a couple of years ago. And we’ve taken 15% of the head count of our total water transmission group out since 2013. And this has attributed to the lean manufacturing and cost reduction initiatives that we have at the company. If you look at the recent historical performance of our water transmission business from 2011 through 2014, we generated between $40 million and $46 million of gross profits in those years, in each one of those years. Our gross profit in 2013 percentage was 21% and in 2014 our gross profit percentage was 17%. And these were not overly strong markets. This is a result of all the cost reduction work, beginning to show up in these margins. During this challenging market conditions that we’ve seen over the last several months, we’ve been able to reduce our debt down to $7 million and generate $56.5 million of free cash flow since the beginning of 2014. We are very well positioned to survive in the Water Transmission business as this markets return and it’s not a matter of if it returns, it’s when. We believe the Texas SWIFT program and Proposition 1 in California really begin to set the stage. At this time, we will be happy to answer any of your questions.

[Operator Instructions] Our first question will come from the line of Mr. Scott Graham. Sir, your line is open. Please go ahead.

Hey, Scott. Hey, Robin. How are you?

Hello, Scott.

Good, Scott.

I'm trying to understand a little bit on the Water Transmission side. You're saying that your sales were down 38, volume down 49. I think, Robin you mentioned or Scott, you mentioned mix up, the difference. Where does pricing fall within that belt?

So obviously, the amount of fabrication on a specific job as Robin mentioned during the script, it has a significant influence over what the prices is. Obviously, if your pricing is more dedicated to just producing cylinder pipe, obviously that creates lower pricing levels. The fabrication part of the business, obviously more costs associated with that and generates higher prices.

Right. Okay. I guess I would've thought that is just purely mix in that. So, you're saying right is that -- of the volumes that you're selling, of the tonnage you are selling, your pricing is stable?

No, I wouldn’t say that. I think that the competitive landscape that we’ve seen really since the middle of 2014 is really placed a lot of downward pressure on the pricing on all of Water Transmission and obviously had a substantial impact on what the gross margins are.

Right.

What I think is being said is that the jobs that we are seeing in bidding and giving have a significantly higher percentage of fabrication on that, which obviously increased the price but it also increases the cost.

Understood. That is I think, kind of, more of a mix of yourselves because if the gross margin is down as it was, that would imply that there was negative price affecting the gross margin. Is that right?

Correct.

Okay. Okay. I’m going to assume, actually that mix was probably a little bit higher than plus 9 and pricing was probably a little lower or slightly little negative. Would you agree?

Okay.

Fair enough. Okay. Now this 15% on reduction in manufacturing in G&A, you're saying that that's done.

Actually, we are always focused on our G&A and making sure that we are rightsizing the G&A for the company and the size of the company and what the company's immediate and long-term needs are. So, we will continue to focus on G&A.

But the 13% I quoted is done.

Done. Yeah. Okay. Good. You did a really nice recap of what's out there, Scott, project wise. I was hoping that you could maybe distribute the $200 million among the projects. Is it all the first three, the IPL, Trinity River and Houston? Is that the $200 million or is that just part of the $200 million?

No, that’s part of the $200 million. When you start looking at it, obviously IPL being the big jobs that are going on right now is a big piece of that. Also out there as I mentioned, the fresh Nova surface water program starts in the middle of August. Bidding is broken up in the several different sections. Trinity River plays into that along with the myriad of other smaller jobs.

Okay. So, could you give us an idea then on what -- the $200 million that you are referring to is then, is that -- are these let’s say six or seven things that you cited, is that the preponderance of the $200 million or obviously, we are trying to just get to what a potential modeling situation looks like?

Right. I think that when you look at the major jobs that we talked about, I wouldn't say that they are the preponderance of it. They represent a good portion of it. But there are also a lot of smaller jobs that we are seeing that are starting to bid.

Fair enough. The last question I have is about the potential sale of Tubular. The net asset number you gave that was very helpful. Is that a number that you guys are kind of circling as what would hopefully be a purchase price, because obviously you’re not going to sell this thing on current EBITDA run rate, because it's under earnings significantly? I think people would recognize that. Is that $55 million, $60 million level a number that is within a stones throw of what you would reasonably expect to net?

I would say Scott that we can’t really comment on what we think the pricing levels would be on those assets. Obviously, we think that those assets have significant value in the marketplace based on the productive capacity and based on the capabilities there, but I really can't comment on anything associated with pricing of those assets.

That’s fair. I actually did have one other question if you don’t mind. On the M&A side, you’re looking at the wide range of water applications, which is great. I am assuming did that means that some type of -- that you’re not looking at more pipe, that maybe you’re looking at things that are maybe more mechanical or otherwise. Is that fair?

What I would say is -- and again, we don't generally discuss M&A on these calls. But what I would say is, we’re looking at the wide range of opportunities, Scott. Things that are out there that we see in the Water Transmission businesses available are really very, very small, like the Permalok acquisition that we made were very large. But I can’t say that we haven’t looked at additional pipe, but we've also looked at things like the rehabilitation pipe business. And quite frankly, we’ve talked about that on these calls before that we like how rehab looks, because it adds almost like another late to the stool of the Water Transmission business. And theoretically, when you're looking at Water Transmission business, if there's not diminishable spending to drive new pipe installation, if there's issues with lines, the lines have to be dealt with somehow, a lot of times that ends up is rehabilitation. And there's a mirage of rehabilitation products that are out there. So we’ve really looked at the range of everything in the Water Transmission business to find what the best strategic fit is because obviously it's got to be a big strategic fit for the company. So that we would be adding something that would be a thing was going to drive increased earnings and better shareholder value. I mean, that’s the total focus.

Thank you.

Thank you.

Thank you, Mr. Graham. Our next question will come from the line of Mr. Brent Thielman. Your line is open, sir. Please go ahead.

Hi, good morning.

Hi, Brent.

Good morning, Brent. How are you?

Doing well, thanks. Scott, the $38 million in water revs is slightly worst than the single quarter that I can remember. And when you look back on this quarter and kind of thinking about what you see going forward, I mean do you view this as just sort of the perfect storm in terms of timing of work? Or do you think there is some brighter issues here that kind of should read as to rethink the longer-term earnings power of the business?

No, I think one of the things that we saw is twofold. One, we’re seeing the results a pretty low bidding activity in mid-to-late 2014. This is really where that work starts to show up. We're seeing a quarter where there was really no major job production in that quarter. There wasn't really much of IPO in that quarter at all. And plus, there are cases where jobs have a tendency to push and don't end up in the quarter. One of the other things affecting the topline in this business is what's happened with steel price. Over and above, the pressure that the competitive bidding environment has placed on the topline. Steel prices, when you look at them versus last year just on hot-rolled bands are in excess of $200 a ton lower. So that obviously impacts the topline as you go through this period of time. But I wouldn't say that with the topline that the second quarter was representative of what we expect going forward.

Scott, do you think the volatility in steel prices is having any impact in kind of the timing of bidding out there?

Yes. I mean, I think maybe just a little bit. But generally when these jobs are going on, these things are being planned for several years. And what we’re seeing from steel pricing now is, it’s really starting to stabilize. If you look at over the last several weeks, it's been in the 460 to 470 range and really hasn't moved around significantly. So I think we’re entering a period of significantly more stability in the steel prices. I think that that may affect a little bit of the timing on some of those projects. But I think a lot of these things are show for a planned out that when they are going, they are going and the steel price just becomes part of the project pricing.

Okay. And then I understand the mid-single-digit gross margin expectation for water is kind of the function of the tough bidding environment in prior quarters. With things maybe we see it a little bit better out there, how long can this level of profitability spell into kind of future quarters beyond Q3?

I think that as we said in the conclusion that it certainly has an impact in Q3 and likely an impact in Q4. One of the things that we’re seeing is even with increased bidding activity that we’re seeing in the second half of the year. And obviously, the large increases in bidding activity that we see in ’16 and ’17, because right now if you look at it tonnage wise, you almost have to look at it tonnage wise because of the volatility of the pricing with steel. We expect it to be up 20% in ’16 and another 20% in ’17. So I think that the biggest issue is that you’ve got all the competitors in our business and our business segment that are at this point in time low on backlog and at least for the near future that the bidding level and the bidding situation is still going to be contentious until the backlog in general starts to develop in our business.

Okay. And then just I guess from a modeling standpoint going forward and with the plans for the Tubular Products business, are you going to be including this in discontinued operations or still going to be consolidated in the business?

Right. That’s an accounting determination. We believe it will be in Q3 based on the accounting regulators just changed the rules a little bit, but we do believe it will be. Practically speaking, I think it is pretty easy to kind of break it out, but we’re going to consider doing that for the third quarter.

Okay. Thank you.

Thanks, Brent.

Thank you. Next question will be from [Mr. Matt Sherwood] [ph] [indiscernible]. Please go ahead. Hi, guys.

Hey Matt. How are you?

Hi, Matt. Good. Good job on cash generation in a tough environment. And I think it’s good to hear that you guys laid out the story here. Just had a quick question. You talked a lot about M&A. But with $7 million of debt and the potential for sale that couldn’t -- just if you got book value, I know you can’t comment on that, the $55 million to $60 million. Is share repurchase on the radar screen as well, because, I mean, you’re trading at less than three times Water segment EBITDA for the last four years on average? It just seems like you’re not going to able to buy anything, anywhere near that valuation or below book. So would that be a consideration as well?

Absolutely. And we would look at the wide range of things. And obviously, when you start talking about share repurchase, you’re basically saying with the funds that you have, you’re not able to go out and buy something that is going to return something better than buying the shares back. But what we’re doing and what we’ve been doing is looking at the wide range of what we might do, if and when we conclude the transaction with the adjacent proceeds. And one of those things is looking at a share buyback as well as looking at what things that we could actually add to this company that would drive the better shareholder return. So it’s something that we’ve had discussions on and we will continue to have discussions on. That’s great. And then, in terms of the bidding volume disclosures that you laid out with the potential for 20% increases, do you think that that will get the market more into balance? While it’s clearly going to take a couple of quarters, do you think that that will top with capacity utilization sort of industry wise?

I do think that it starts to balance a little bit and starts to take some of the pressure off of the pricing levels as not only our competitors but we start to get and generate a better backlog. So, certainly, that would be a big thing in really reducing what the pressure is on each one of these jobs okay. The other thing we don’t see, Matt, is we’re looking at the results of the Texas SWIFT program, which everybody knows about that and we’ve talked about almost $4 billion that they have planned for the next 10 years for water type projects. One, continuing the funding of the IPL sections and this big [Lush Bayou] [ph] job is out there which is also a huge amount of pipe, probably 80,000 plus tons, all those things are starting to develop with that. And the California program is just -- is really just starting to pickup steam. But as you know, there are drought situations in other parts of the country too and we do think that that’s going to come into play at some point in time. And ultimately like we’ve talked about, near-term we think it’s a drought situations are really what starts to drive the spending, because it really becomes emergency spending and Taxes is really the lead off for that, right. We saw that start a couple of years ago and it just continues on. And they’ve committed significant amount of funding to the water side of these two to not only deal with the population growth but the drought situation, same thing in California, right. The big thing in California is the agriculture. The agricultural environment uses about 80% of the water in California. Everything from broccoli to avocados to almonds and the population centers needed so. It is really setting the stage. Like I said it’s not if the water business is going to comeback hard, it’s when. And it sets the stage at some point a significant explosion in the market requirements. That’s great. And then just one last one, it’s more technical the 15% G&A, what’s the base that you are talking about? Like, what is the dollar savings you think you could generate there?

So, we did -- we looked at about 25 million base. About the level we are at in 2014 for the reductions that come from there. That’s great. So, that’s real money. Great. Well, look you are doing a great job, balancing the tough environment, I think, positioning the company well for really good future just what we’d like to see with all capital return to shareholders year on top of anything you look at that from M&A?

We hear you Matt. Thanks.

Thank you. And our next question will be from the line of Mr. Glenn Leyrer. Your line is open sir. Please proceed.

All right. Thank you. As far as the asset component of the contribution to operating cash flow. When do you see that beginning to rain?

Probably as the jobs, the bidding activity particular in water picks up in the second half of the year. And -- Glenn, I’m sorry, I didn’t quite catch your name or where you are from?

Glenn Leyrer, U.S. Bank.

Okay. Thank you. So, yes, so I would expect the second half of 2015 probably more into the fourth quarter starts building up their working capital a little bit more, but we’ve been really working on keeping the working capital on debt levels at a fairly low level.

Glenn, our current assets has been really a constant area of focus. Really, since the end of 2013 and the beginning of 2014 which is why you see the most $57 million of free cash flow generation during that period of time. And as we go through this process and are exploring the idea of selling the Exxon facility and going through that old process, we’ll continue to work down the current assets there as we go through time. So, I think that there is a little bit more to harvest there on that piece. But as Robin said, as the Water Transmission business goes up, ultimately, it creates an increase in working capital and obviously starts to slow the free cash flow a little.

Okay. Thank you.

Thank you. At this time, we don’t have further question in queue. [Operator Instructions] No further questions. Oh, we actually have one more. It will be from the line of [Ms. Diane Zaget] [ph]. Ma’am, your line is open. Please go ahead.

Thank you. Scott, can you talk about your Water Transmission footprint, I think you have maybe six facilities, is that right?

Well, actually, we have five main Water Transmission plans. We have two Permalok facilities, which is basically casing carrier pipe for micro tunneling and HDD. And then we have a plan in Monterrey, Mexico, that is associated with doing fabrication work for the business. And as we said through the script, Diane, we are the only one of our competitors that have a nationwide footprint. And ultimately that provides a very significant advantage of been able to address jobs in any market situations and like we said, we think it positions us very well with the cost work that we’ve done and the experts that we have in the business to really drive as this business comes back, because this business is being generating $40 million to $46 million of gross profit from 2011 to 2015 -- to 201. And 2015 is really a cyclical down year that’s not really out of the norm. If you look back at 2009 and 2010, you can see kind of those cyclical swings. But that nationwide footprint is the thing that really helps us to have an advantage of being able to attack any market across the country.

Okay. Keep up the good fight. Thank you.

Thanks, Diane.

At this time speakers, we don’t have further questions in queue. I’d like to hand the call back to you.

Okay. Thank you. And again, I would just like to reiterate our positioning going forward as this market improves. I think we are well positioned for our Water Transmission to thrive -- our Water Transmission business to thrive. And obviously, with the -- looking at the sale of the Exxon facility, we are going through some transformative events with this company. And expect that to start bearing fruit as the Water Transmission business starts to redevelop. So, thank you and we’ll talk to you again in November.

Thank you, everyone.

Thank you. And that concludes today's conference call. Thank you all for participating. You may now disconnect.