NWPX Infrastructure, Inc. (NWPX) Q1 2016 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's conference call. [Operator Instructions] Today's 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, Scott Montross, CEO. Sir, you may now begin.

Thank you, Prima. 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 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 first quarter results.

Thank you, Scott. Our first quarter loss was $9.6 million or $1 per diluted share compared to a loss of $2.1 million or $0.22 per diluted share in the first quarter of 2015. Water Transmission sales decreased 48% to $29.4 million in the first quarter of 2016 from $56.2 million in the first quarter of 2015. Water Transmission gross loss as a percent of sales was negative 19.6% in the first quarter of 2016, from income of 13.4% in the fourth quarter of 2015. The decrease in sales was the results of 52% decrease in average selling prices due to the mix of products produced coupled with 39% decrease in fuel cost per ton. These was partially offset by a 10% increase in production. Consistent with the last few quarters, gross profit was negatively impacted by competitive pressure in the bidding for water infrastructure projects. As been noted in our fourth quarter call, we had several projects delays in the first quarter which negatively impacted our production schedule, sales and margins. Selling, general and administrative costs decreased to $4.6 million in the first quarter of 2016 from $7 million in the first quarter of 2015. This decrease was due to lower wage and benefit expense from lower headcount and decreases in professional fees and travel and entertainment expenses. We continue to review our overhead costs and we expect that by the end of 2016 our selling, general and administrative cost will run at a rate of $16 million to $17 million annually. Interest expense was $119,000 in the first quarter of 2016 and $417,000 in the first quarter of 2015. Our overall borrowing was smaller this year compared to last year. We have a balance our line of credit throughout the first quarter of 2015 while we had nothing drawn on the line for all of the first quarter of 2016. In addition, our capital lease balance was smaller than a year ago. We expect that the interest expense in 2016 will be around $1.5 million to $2 million as we start drawing on the credit facility in the second half of 2016 to meet our working capital needs. Our effective tax benefit rate for the first quarter of 2016 was 5.3% compared to 37.7% in the first quarter of 2015. Our net operating losses in the current quarter are subject to evaluation allowance which significantly impacted the rate. We expect the rate for 2016 to remain around 5.3%. In the first quarter of 2016 the company generated $1.2 million in cash from operations, mainly through decreases in accounts receivable and costs from estimated earnings and expected [ph]. Depreciation was $2.2 million in the first quarter of 2016 and $2.6 million in the first quarter of 2015. We have generated $47 million in free cash flow since the beginning of 2015. Capital expenditures were $736,000 in the first quarter of 2016 which was for ongoing maintenance capital expenditures. As we are exploring the sale of our tubular products business in Atchison, Kansas, I'll provide a quick summary of those results. As of the end of March, the net assets for Atchison were around $40 million with $37.2 million in fixed assets. Sales decreased 84% to $4.6 million in the first quarter of 2016 from $28.6 million in the first quarter of 2015. Tubular products had a small gross profit as a percent of sales of 6.8% in the first quarter of 2016. At the end of 2015, we work on our Atchison inventory to identify estimate of net realizable value. The actual crisis that we are realizing are a little higher resulting in a small gross profit. Our Houston property is also for sale, the net assets as of the end of March were $3.3 million. Now turning over to Scott for an update on our business.

As of March 31, 2016 our water transmission backlog was approximately $114 million, a slight decrease from the $116 million at the end of 2015 which contained all of IPL Segment 14. Tons in backlog are at similar levels to the last quarter. We expect the second quarter of 2016 will have higher revenue and smaller gross loss than the first quarter as the increased volume includes our fixed cost absorption. However, we will still be working our way through the backlog that was generated during the harsh bidding conditions in the second half of 2015. Bidding levels are improving as we move through 2016 and into 2017 with many of the major programs that we have discussed starting to take shape. The following is an outlook of the current and upcoming water transmission projects. The production of the four segment of IPL Segment 14 will be complete at the end of the second quarter. IPL Segment 17, a tunnel section, 3,500 tons is scheduled to begin next week. IPL Segment 10-11, for 12,500 tons is scheduled to bid in late June. IPL Segment 17-18 is 16,500 tons which is scheduled to bid in late November. We were awarded the Trinity River Mainstem Project in the last part of the Lake Texoma project is what this represents. Production is scheduled to start in June. The Luce Bayou Interbasin Transfer Project in Houston is a major project with multiple segments that we expect to start bidding in the second quarter of 2016. This is a multi-year project that is expected to represent 90,000 tons of pipe, major production on this project is not expected to begin until 2017-2018. The Lower Bois D'arc Reservoir is a pipeline being planned by the North Texas Municipal Water District which could represent 60,000 tons of pipe requirements, starting as early as 2017. The Southeast Oklahoma Raw Water Supply system, also known as Atoka 2 pipeline is a 100-mile 30,000 ton pipeline with bidding expected to start in 2017. We also expect additional opportunities to develop in Texas from the Swift program. Northwest County and San Antonio Water Systems were among several applicants who received funding through the Swift program during this last round of planning. Several other municipalities and cities also receive funding for projects that may materialize in the near-term opportunities. We continue to monitor market developments in California closely and we've seen an increase in the volume of work bidding. The Fresno surface water program has started bidding and there will be several Segments representing 20,000 tons of pipe bidding into 2017. The next major Segment of this program is the Phase 2 regional transmission main Segment A1 bidding in June. The Cadiz project is still active but continues to be hampered by railroad Right-of-Way issues. The Southern California Reliner program is expected to spend $2.6 billion over the next 20-years relining existing pre-stressed concrete pipelines. This program has started bidding and the next segment is expected to bid in mid-June. The Los Angeles pipeline replacement program will begin to replace large segments of existing trunk lines, this program runs from 2017 to 2020. The 127-mile Red River Valley Water supply project continues to move forward with the goal to have design completed in 2018 and construction beginning in 2019. However, currently the state is concerned with the available funds due to the current low oil price environment which could impact project timing. We have planned about $3 million of total capital expenditures for 2016 which is lower than our planned depreciation. We continue to be very cautious in our capital spending due to the current market conditions. We have a strong balance sheet with a net cash positive position. Even with the current market conditions we have not borrowed from our credit facility in over seven months. In fact, we currently have more cash on our balance sheet than we had at the end of the fourth quarter. In tubular products, we shut down the Atchison facility in January and the only activity is selling and shipping the remaining inventory which was less than $3 million at the end of March. As we announced last summer, we are exploring the sale of our remaining energy tubular facility in Atchison, Kansas, and we are actively marketing our property in Houston, Texas. There is no change from our update in the last conference call. This process is ongoing and we have nothing further that we can discuss at this time. As we have mentioned the past, we are looking at a wide range of strategic opportunities for our water transmission business. We've not been able to discuss our activity but we wish to assure everyone that this is an ongoing process. In closing, our water transmission business has been very challenging over the last several quarters. However, market conditions are improving with additional volumes bidding in industry backlogs beginning to grow. However, the additional capacity that is coming to the market some of which is non-traditional will make the recovery process slower than what we've seen traditionally. As we move forward, we will be focused on; one, achieving the market share that maximizes margins in best positions for the company to optimize long-term profitability. Two, enhancing the strength of the balance sheet by monetizing stranded assets such as the Houston property and the Atchison, Kansas plant. And three, continuing to drive efficiencies and cost reductions at our water transmission plants. And here are few of the examples of what we've done so far on the side of costs reduction. We plan to produce the same amount of tones this year as we did in 2008 with 45% less people. Since 2014, our tons per employee at our water transmission plants are up by 32%. Also since 2014 our total man hours on like jobs are down by over 16%. And we expect to be on a run rate for SG&A spending by the end of 2016 between $16 million and $17 million, a reduction of about 32% from the end of 2014. And our intensity on driving cost out of our business will continue. Finally, we believe in the long-term prospects of the water transmission business. Our nationwide footprint, cost position and quality put us in an excellent position to thrive as the water transmission market continues to improve. And we have said before, due to population growth and drought conditions water resources will need to be moved from one place to another. And that's what we do. At this time, we'd be happy to answer any of your questions.

Thank you. [Operator Instructions] The first question comes from Brent Thielman. Sir, your line is now open.

Good morning, Scott, Robin. Scott, can you talk through the implications of increases in steel prices we're seeing, how we should think about that in terms of being back to water transmission?

Yes, I think Brent that when you look at steel prices, historically steel prices have led to higher profits for the company and obviously, you can look through back -- back to recent history, really back through 2004 and see what prior steel prices have done and look at the profit levels -- the total gross profit levels the company has generated. I don't think it leads to historically a higher gross margin percentages because they seem to gravitate around their relative range or norm but it's certainly leads to higher gross profit levels and obviously, when you're looking at steel price, that's a relatively large component of the cost. And looking at total gross profit, 15%, 18%, 20% of $300 million is obviously higher than 15% or 20% of $200 million. So I do think for a while as this market recovers, I think steel will be more or less of a pass-through. I think eventually it does lead to higher gross profits. And we don't mind higher steel prices, in fact, we are in favor of higher steel prices but the issue is the volatility; when it goes up and down as fast as it has over the last -- at least few years, it certainly creates issues with, with not only inventory values but how you bid jobs going forward. But for us we certainly see it as a positive thing.

Okay, great. And then as far as -- you've forgot some backlog left at relatively lower margins. Do you feel like you've hit an inflection point already or is that coming soon in terms of sort of this lower price, lower margin backlog?

Yes, I would say that certainly we saw the results of the harsh bidding environment in the first quarter and I think we're still working our way through it but that stuff is starting to -- the amount of that stuff in the backlog is starting to wane. So what we're seeing recently is, with an uptick in demand we've seen specifically in California where we're starting to see the backlog starting to grow a little bit industry-wide and as a result of that, a little less pressure on the bidding of each one of the jobs. So we're certainly seeing some positive signs that the conditions are starting to improve, really because of the increased demand and the pressure that comes to bear on the job as they are bid.

Okay, great. And then, Scott, I appreciate all the color on the projects. When you kind of sum it all up and maybe even also thinking about some of the smaller jobs out there, what is sort of a total tonnage bid opportunity look like in '16 versus '15 and as you look into '17 versus '16.

Well certainly Brent we see higher than what we saw in 2015 because the municipal full markets were probably somewhere in the area of 125,000 to 130,000 tons of requirements in 2015. And what we've said from the beginning -- we're seeing increases probably 15% over there is the potential with some of the things going on with some work that especially might hit in the third quarter that could make that number significantly higher which was obviously as you go through this market, this continues to relieve the bidding pressure off every single jobs and certainly would lead to enhanced pricing and margin going forward.

That's great to hear, I'll get back in queue.

Okay.

Thank you. The next question comes from David Wright [ph]. Sir, your line is now open.

Hi, good morning. Robin, on the line of credit the aggregate draw and the interest rate please?

So right now we can draw about $20 million on it. The interest rate is -- it would be about 2.5% but we're not drawing anything on it right now. But that's the total availability. We take that with a cash of about $10 million that we had at the end of March, so that gives us about $30 million of availability.

And you indicated that you expect $1.5 million to $2 million of interest expense for the year?

Right, and that will be in the second half of the year. We right now don't project meeting to hit the line until the third quarter.

Okay, great. Scott, on the list of projects that you were reciting. I missed -- could you repeat the project after you were talking about Trinity River, and then you talked about 250,000 ton project and I just couldn't keep up with it.

250,000 ton, I don't know that we have one that's that big when we look back onto the notes.

Like before Southeast Oklahoma.

Okay, it's the Lower Bois D'arc Reservoir. And that's a pipeline in North Texas that represents about 60,000 tons of pipe requirements.

I'm sorry to get anybody excited about 250,000 tons which isn't right.

Yes, well, you got me excited, 250,000 would be pretty substantial.

Scott, it sounds like from your comments that a bottom is getting to an end here. Is there any geography where you're noticing less competitive pressure than you had previously?

Well, I do think David because of the bidding activity and some of the backlogs starting to grow that when you look at the markets that have been relatively robust over the last couple of years, really over the last couple years it's only been Texas. And Texas continues to have work, as I mentioned there are three IPL Segments bidding this year which represent by itself probably 32,000 tons and the possibility of more near-term stuff coming with the Texas Swift program. But I think the important development is occurring really in California where -- California has historically been a very large market for the company and for the last three to four years the California market has been pretty substantially. So we recognized just in -- some of this major things that are bidding right now that the market increase has been -- it's been quite nice this year. So I think that allows the competition in California really to start developing a little bit better backlog. And again, it lessens the bidding pressure on each one of the jobs. So California is developing but we also see the East Coast being pretty busy with work from New York City, especially as we get later in the year towards the second half of 2016, it looks like New York City will be -- I guess what I would say blossoming in the bidding side and that's been okay for the last couple years. So when you're looking at those, you're really looking at the better part of four regions that all of a sudden you're seeing some decent signs that things are starting to come up the other side of the trough, if you will.

Right. I mean what's happened to the company in the last -- I mean the top line over the last five or six quarters to the most recent quarter, it's dropped by two-thirds, that's stunning. Great job keeping the balance sheet together and getting the productivity up in that environment. But it must -- even for the non-traditional entrants, I mean their top line must have been impacted in an equally stunning way. So it's good to hear things are bottoming out.

Yes, and I think that's all true David. And thank you for your comments.

Thank you for taking my questions.

Absolutely.

Thank you, David.

Thank you. [Operator Instructions] It appears at this time there are no questions on queue.

Okay, we appreciate everybody's attendance on the call. Our next call is in early August, Robin tells me. So obviously, we're looking very much forward to what we see right now is market conditions that are starting to improve so. So thank you again, and we'll see you on the next call.

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