NWPX Infrastructure, Inc. (NWPX) Q4 2016 Earnings Report, Transcript and Summary

Welcome and thank you for standing by. At this time, all participants are in listen-only mode, after the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point. Now I’ll turn the meeting over to CEO Scott Montross. Sir, you may begin.

Thank you, Laura. 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. I will now turn to Robin, who will discuss our fourth quarter and full year results.

Thank you, Scott. Our fourth quarter income was $5.8 million or $0.60 per diluted share compared to a loss of $13.7 million or $1.43 per diluted share from the fourth quarter of 2015. Our fourth quarter 2016 net income includes the pre-tax gain on the sale of the Denver facility of $7.9 million. Water transmission sales increased to $39.2 million in the fourth quarter of 2016 from $38.7 million in the fourth quarter of 2015. Water transmission gross profit as a percent of sales was positive 9.6% in the fourth quarter of 2016, a significant improvement from a loss of negative 19.2% in the fourth quarter of 2015. The positive gross profit is due to an improvement in market conditions leading to higher selling prices. Selling, general and administrative cost decreased to $4.6 million in the fourth quarter of 2016 from $5.1 million in the fourth quarter of 2015. This decrease was due to lower wage and benefit expense from lower headcount. Moving on to the full year results our loss was $9.3 million or $0.97 per diluted share, compared to a loss of $29.4 million or $3.07 per diluted share in 2015. Our 2016 net loss includes the pre-tax gain on sale of the Denver, facility of $7.9 million and the 2015 net loss included a non-cash good will impairment charge of $5.3 million. Water Transmission sales decreased to $149.4 million in 2016 from $173.2 million in 2015. Water Transmission gross profit as a percent of sales was negative 0.2% in 2016 compared to a positive 0.3% in 2015. The negative gross profit was due to significant competition on our project bids, particularly earlier in 2016, which led to lower selling prices. Selling, general and administrative cost decreased to $17.2 million, in 2016 from $22.3 million in 2015. This decrease was due to lower wage and benefit expense from lower headcount. We expect that our selling general and administrative costs will run between $16 million and $17 million in 2017. Interest expense was $523,000 in 2016 and $1.4 million in 2015. We had a balance in our line of credit through the third quarter of 2015 while we have drawn nothing on the line since October of 2015. We expect that the interest expense in 2016, will be around $500,000 to $600,000. We do not foresee a need to borrow against our credit agreement for working capital needs in 2017. We had an income tax benefit rate of 33.9% in 2016 compared to an income tax benefit rate of 28.9% in 2015. As we noted in our third quarter call the third and fourth quarter rates were unusual due to the sale of the Denver facility. In 2015, we had a discrete benefit related to the research and development tax credit study. In 2016, the Company generated $1.5 million in cash from operations. Depreciation was $9.4 million in 2016 and $9.1 million in 2015. Capital expenditures were $2.3 million in 2016, which was for ongoing maintenance capital expenditures. As of the end of December, the balance in fixed assets for the assets we are actively selling are $36.4 million for Atchison and $3.2 million for Houston. We had restructuring charges related to the Denver shutdown of $990,000 for severance and demobilization. We expect there will be additional restructuring costs for severance demobilization in the amount of around $700,000 to $800,000 in the first quarter. As we announced and discussed previously, we have sold the Denver real property for $14.4 million. The net proceeds of the sale were $13.9 million and a resulting gain, was $7.9 million, which does not include the restructuring and demobilization charges. The pretax loss for Denver excluding the restructuring cost gained was about $1.1 million in the fourth quarter of 2016, and $2 million in the fourth quarter of 2015. For the entire year the pretax law with the same exclusions was $3.7 million in 2016 and $2.5 million in 2015. In Tubular Products we expect our ongoing expenses to run around to $2 million to $2,5 million annually. We have had some charges Atchison for some clean-up and periodic maintenance related to the shutdown. In addition we have some customer related charges which increased our costs. Now I'll turn it over to Scott for an update on our business.

As of December 31, 2016, our Water Transmission backlog was approximately $66 million, compared to $96 million at the end of the third quarter and $116 million at the end of 2015. We expect that revenue and gross margins, will be lower in the first quarter of 2017 compared to the fourth quarter. Our bid for Section 17-18 of IPL was not successful. For over a year now we have been prioritizing margin over volume and that project was awarded at a level that was significantly lower than we were willing to accept. The following is an outlook of current and upcoming Water Transmission projects. The Houston project is a major program with multiple segments that started bidding with small projects in the second quarter of 2016 this is a multi-year series of segments, they were expected to represent 90,000 tons of pipe. The next segment Capers Ridge Phase 2 is scheduled to bid in the second quarter of 2017 and represents 6,000 tons. There were several other smaller segments scheduled to bid throughout 2017 that represents an additional 11,500 tons. The first major segment of the Houston project is the surface water supply project Segment A, which is currently scheduled to bid late second quarter of 2018 and could represent 15,000 tons. Bidding on the entire Houston project is expected to occur into 2019. 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 in early 2019. The Swift program in Texas has almost $800 million in projected funding through water projects that have been recommended to begin in 2017. In total, they project spending $1.3 billion over the next several years. The Swift program is expected to result in additional near and long-term opportunities. The Southeast Oklahoma raw water supply also known as the Atoka second pipeline is a 100-mile 64,000 ton pipeline with bidding expected to start in the fourth quarter of 2017. The California market continues to develop. For 2017 there are significant number of projects that are between 1,000 and 6,000 tons each. The following are some of the activities in California. We are participating in the most recent segment of the Southern California Reliner program. These segments are generally between 1,000 and 2,000 tons each. There are two bidding opportunities in the second quarter of 2017 that represent a total of 7,000 tons. This program is expected to spend $2.6 billion over the next 20 years inserting steel pipe liners into existing pre-stressed concrete pipelines that are failing. There are several recycled water programs that we are tracking most notably the Santa Clara Valley Water District’s expedited purification water program. This represents up to 10,000 tons of opportunity in the late fourth quarter of 2017 to early first quarter of 2018. The city of San Diego's pure water program is a 6,000 ton project that is expected to start bidding in 2018. Also in California, the Cadiz project was recently listed in the top 50 infrastructure projects identified by the Trump transition team. We are hopeful that this will provide the necessary momentum for this 25,000 ton project to start construction before the year-end. The major hurdle continues to be disputes related to the use of railroad corridors for the purpose of water conveyance. In North Dakota, work continues on the 127-mile Red River Valley Water supply project. This project is still in the design and permitting stages and we expect that beginning will begin in 2019. The administration stance on infrastructure spending has been well publicized. And has the potential to result in significant opportunities for both the near and the long-term. We have planned about $6 million in total capital expenditures for 2017, which is mainly for maintenance capital expenditures. Throughout 2016, the Company has had a strong balance sheet with a net positive cash position. Even with the very difficult market conditions that we’ve seen over the previous 24 months, we have not borrowed from our credit facility in almost a year and a half. The sale of our non-core assets continues to be a priority. We are actively marketing our Houston property in our idled Atchison, Kansas facility. There has been an uptick in U.S. drilling activity and on January 24, the White House issued a memorandum directing the Commerce Secretary to ensure that all pipelines are produced in the United States. We are hoping that this will lead to more interest in our non-core assets, particularly the Atchison, Kansas facility. However, this could take some time to develop as potential buyers are still feeling the effect of an energy market that was in a deep drop for an extended period of time. We continue to look at a wide range of strategic opportunities for our water transmission business. This is a very active and ongoing process and we have nothing further that we are able to discuss at this time. In closing, the Company's come through a very difficult market situation over the last two years. During that time, we have idled our remaining energy tubular facility in Atchison, Kansas, reduced our water transmission production capacity by 20% to address the changing market, closed our Denver facility and sold the property. Reduced our SG&A spending by 30% and our SG&A headcount by 38% and through cost reductions in lean manufacturing initiatives tons per water transmission employee have increased by over 15%. During that same period, we eliminated our debt and ended 2016 with almost $22 million in cash on our balance sheet. We continue to see market conditions that are improving from both the demand and bidding environment perspective. As a result of the actions that we've taken and the improvement we've seen in the market, our fourth quarter 2016 margins in the water business are the highest in almost two years. But because our market is made up of distinct geographic regions and there are still the issue of an overpopulated supply base. There will be temporary geographic disruptions to the market recovery like what we are seeing in early 2017. And as we have said over the last few quarters, recovery will be slower than we've seen traditionally. However, the factors continue to point to a longer term upward trend in our market. And as I’m sure everyone has heard the new administration is focused on infrastructure spending in/by America, which is a solid indicator for a longer term upward trend in the steel pressure pipe market. As we move forward, we will continue to be focused on: one, margin over volume and achieving the market share that best positions the company to maximize long-term profitability. Two, enhancing the strength and flexibility of the balance sheet by monetizing non-core assets such as the Houston property and the Atchison, Kansas plant and three continuing to drive efficiencies in cost reductions at our production facilities. At this time, we'd be happy to answer any of your questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from David Wright. Your line is now open.

Hi, good morning.

Good morning, David.

Good morning, David.

Hey, congratulations on continuing to move things forward in Northwest Pipe, good work.

Thank you.

A couple of questions, Robin, in your text I just missed. Did you project 500,000 to 600,000 or zero in interest expense for 2017?

500,000 to 600,000 is related to we do have some capital leases and it’s also amortization of our loan expenses upfront. So we are not anticipating any expense related to the agreement. But we do still have some expense for these other things.

Okay, so that's 417 for capital leases?

Yes.

IPL you just chose to pass on one segment or are you just done with IPL period?

Well, the last segment that David was a Segment 17-18 and that's probably the last major segment on that IPL project that we are going to see for probably until 2021 or 2022. So we’ve gone through the several segments and supplied a significant percentage of the total project it has been done to this date. But we weren’t awarded that project obviously we had an opportunity to get it. But we certainly decided not to change the price to the depths which it fell to. And again our focus has been on margin over volume as we've gone forward over the last probably at least year. So that was the reason for that. But there's a gap in IPL right now, what we're seeing is there's a couple of projects that are really starting to come into play they are going to replace that IPL, one is the Houston project that I mentioned as we were going through the script that starts bidding really in the second quarter of this year with a segment called Capers Ridge then there are some smaller pieces of that total 11,500 tons. But also this big project in Oklahoma, the Atoka second pipeline is 64,000 tons it starts bidding in the fourth quarter. So why you have a gap in – what's going on with IPL certainly there's other things in the near-term that replace it. And certainly in the Texas market based on their Swift program, they've got the intention to spend the significant amount on water infrastructure force an extended period of time.

Okay, I've got one more. But I'll get back in queue. Thanks very much.

No problem.

Thank you. Our next question is from Bhupender Bohra [Jefferies & Company]. Your line is now open.

Hi, good morning, guys.

Good morning, Bhupender.

Good morning, Bhupender.

Scott, so a question on taking down 20% capacity and we're looking at sequential water transmission margins kind of improved here. Can you give us some sense or in terms of utilization rate over cycles actually not the current. But how in terms of your ton capacity in the previous cycle and how that has trended and what kind of a capacity you have and how the utilization rate has trended over time. And any color how we should think about like 2017 as you talk about like more activity on the project side? Thanks.

Yes, I think for a period of time obviously when we had five main water transmission plants, when you can look at each one of those plants of having about 40,000 tons of practical capacity, okay. So during the timeframe from early 2015 really probably through the first quarter of 2016, we were probably averaging somewhere in the area of about 40% is what I would call it. Now that we're down to basically four main water transmission plants and what we're running on a fourth quarter basis, we're probably more in the mid 40s range. So certainly reducing that capacity you're driving more tons across a fewer plants and certainly there is a little bit better spread in the fixed cost and overhead costs at those plants. So I think that's one of the things that has an impact going forward. So and I think as you go through 2017 we see through 2017 is a pretty good bidding end market. 2016 was a market that improved it wasn't as good as everybody would have hoped from the standpoint of bidding environment, simply because as you came out of 2015 there were a significant number of low backlogs in the market. So 2016 being a pick up year, the view is that some of the backlog to started to bend grown a little bit and as 2017 goes forward really the first quarter of the year in 2017 is the lowest bidding quarter. And we're seeing in the area of a total of probably between 190,000 and 20,000 tons we are so bidding in 2017. We are not including that to these project in that yet although we think that potentially has some lakes later in the year. So there are significant amount of volume as we go through this year and certainly enough work to allow us to continue to drive that capacity utilization at the four main plants to where it is currently in the fourth quarter of 2016 and above. As we said the first quarter is going to be a little bit light simply because we don't have that IPL 17-18 in backlog but there's a lot of bidding opportunities going forward not only in Texas but in California.

Okay. So could you – you talked about like a lot of bidding here what kind of a project size we're looking for like in terms of bidding sizes what would be a decent reasonable size product where you would actually in the Northwest Pipe would be doing more sort of bidding here?

Can you hear me, Bhupender?

Yes, I can hear you now.

Okay, so like I said at the beginning we've got a sizable amount of projects that are bidding that are in the 1,000 to 6,000 ton area. And that is in a big way in California, we're also seeing some of those in Texas. For example, I mentioned the Reliner program that we are involved with in California, which is basically taking steel cylinders in relining pre-stressed concrete pipe it's failing. There's two opportunities to bid in the second quarter that 7,000 tons if you look at some of the other things that are going on there's a project down there called River Supply Conduit it's a 3,000 ton project. So I mentioned some of the other ones the Santa Clara water purification that's maybe 10,000 tons. So there's a lot of those jobs in California that are in a nice size range, because obviously we bid all the big jobs and generally we have a large presence on those big jobs. But I think really the guts of the market has to be those jobs and more of those jobs. It is in that, 2,000, 3,000, 5,000 ton range, which is what we're seeing. We're also seeing some of those in Texas this year. As I mentioned at the beginning, this Houston project, which in total is a $90,000 ton project, you know there's Capers Ridge that's part of that, it's bidding in the second quarter. That's like 5,800 to 6,000 tons. There's a couple of segments of that Houston project, or about three segments. Those are 108 inch segments, that are going to bid between the second and third quarter that are another 7,000 tons. Show outside of these large projects, there's a significant number of these projects that are in play that are nice sizes, that are the things that you really like to fill-up the mills with. When you get these big projects, obviously it really helps but the more of those projects that we have 2,000 3,000 4,000 5,000 tons the better off we are and the entire market is.

Okay and then lastly on the competition which you have historically over the last in 2015 and 2016, I think you did mention that there was a lot of competition and you did name some of the competitors out there. And I believe the IPL segment was a loss to one of those competitors. How is that environment playing out, right now. I mean I think you guys are focusing on the margin side of the business, not remaining pretty disciplined here. Have you seen intense competition kind of in those markets which you’d just mentioned like 2000 to 3000, 5000 to 7000 tons, those kind of environment.

I characterize markets as, these markets are geographically distinct markets, because they are, obviously as we've talked once you start getting far away from a mill 500 or 600 miles, Plate starts to play a pretty major factor in a lot of these projects. So we have regions that are pretty geographically distinct. We have the West Coast, region the East Coast, which is we call the Atlantic region. There is this central region, which is Texas and there are some other smaller regions centered around. I would characterize the bidding environment on both coasts as pretty good and continuing to improve. We think that the central market is much slower to improve. As we've seen when we were dealing with the last segment of IPL. Because like I said, when we were looking at IPL that it went to a level that certainly we didn't want that in our backlog. And it didn't make any sense to take it. But I think across most regions really save for that central region we are seeing a much better bidding environment then we saw between the second half of 2015 and the first half of 2016.

Okay, got it thank you so much.

Good.

Our next question is from David Wright, your line is now open.

Is that me David.

Yes, you are on David.

Okay, thank you. The other question that I wanted to ask was The Society of Civil Engineers is supposed to release their once every four years report today. About infrastructure and problems. Is there any part of that to focus on that could potentially be beneficial. Understanding I am seeing the report yet, that could potentially be beneficial to Northwest Pipe.

Well certainly and I think when we've done presentations at various places, we've talked about some of those some of those publications that have happened and that was one of them that we talk about. In a lot of these publications are grading infrastructure like a D level and I think that particularly there's mention in there about some of the Water Infrastructure. In the build up in water requirements that happened really over the last several years. I think that really, you have a situation where what you read is, we loose somewhere between 15% and 25% of our water in transfer between sources and water treatment and places like that. So certainly that water resource is becoming more precious as we've seen drought conditions and things like that spread across the country. So we think that is important in noting the piece of that, that's related to water. But I also think David, when you look at the Trump administration and their focus on infrastructure they have things like that could ease project done. That is a project, that makes a whole lot of sense for California. It's rated number 15 out of 50 and it's getting significantly higher visibility and unfortunately there's been some roadblocks in that project with like I said the use of railroad corridors, but that water project they're thinking can support 400,000 people a year. And can create in support 5,900 jobs. If that water project isn't done, what happens is that water project basically, where the water basically comes out of the Colorado River goes into groundwater and if that isn't harvested it ultimately runs into the ground water into Brine and then it can't be used without a whole bunch of reprocessing. So we also think it's important that the administration is focusing on projects like that and quite frankly, they are looking at not only projects related to energy but projects related to all pipe is being by America which we also think is important because unfortunately I don't think that we’ve seen the fairest trade import especially with imports coming into the United States on energy pipe and to some extent on water pipe. So it's a much lesser extent on water pipe but certainly it affects the West Coast.

Okay, would you say you’ve mentioned before about reviewing all options for the water business. Would you say that your level of focus on it is greater than it has been in the past?

We've been pretty focused on this for a several year period. Several I mean probably more or less three years anyway, looking at the wide range of opportunities and we look at everything from acquisitions, to how do you create a different platform for the Company. So I think the focus is pretty strong as I said at the beginning, there's an overpopulated supply in this market in the steel pipe pressure pipe market. And certainly that's playing into some of the slower recovery. So certainly we're very focused on that, in figuring out how we can do things to create a situation where it drives better value for the shareholder.

All right, great keep up the great job you're doing and thanks for taking my questions.

Thank you David.

[Operator Instructions] At this time speakers there are no questions in queue.

Okay, thank you everybody and we will talk to you again in May. I think we're still coming up with a date with May unless Robin has that already but I think we're still working on that date but thanks for attending and take care. Bye.

That concludes today’s conference thank you for participating. You may now disconnect.