NWPX Infrastructure, Inc. (NWPX) Q1 2017 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 for today's conference. [Operator Instructions] We'd also like to inform you that this call is being recorded. And if you have any objections, you may disconnect. And now, I'll turn the call over to the host of today's call CEO, Scott Montross. Thank you. And sir, you may begin.

Thank you, Chris. 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 first quarter results.

Thank you, Scott. Our first quarter loss was $3.9 million or $0.40 per diluted share compared to a loss of $9.6 million or $1 per diluted share in the first quarter of 2016. Water transmission sales increased slightly to $29.7 million in the first quarter of 2017 from $29.4 million in the first quarter of 2016. Water transmission gross profit as a percent of sales was positive 3.9% in the first quarter of 2017, a significant improvement from a loss of negative 19.6% in the first quarter of 2016. The positive gross profit was due to an improvement in market conditions leading to higher selling prices. This can be seen in that volume actually decreased 56% and selling prices increased 130%. Selling, general and administrative cost decreased to $3.8 million in the first quarter of 2017 from $4.6 million in the first quarter of 2016. This decrease was due to lower wage and benefits expense from reduced headcount and lower outside professional fees. We expect that our selling general and administrative costs will run between $16 million and $17 million in 2017. Interest expense remained low in the first quarter. We expect that the interest expense in 2017 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 have an income tax benefit rate of 5.4% in the first quarter of 2017 compared to an income tax benefit rate of 5.3% in the first quarter of 2016. Our tax rates in the current quarter were impacted by the accounting standards change for share based payment transaction including income tax consequences. We had $803,000 of excess tax efficiencies from share based compensation in the quarter. Under the overall, that amount would have recorded in equity. Additionally in the current quarter and in the first quarter of 2016, our net operating losses were subject to evaluation allowance, which impacted the rates. In the first quarter of 2017, the company had a net outflow of cash from operations of $282,000. Depreciation was $1.9 million in the first quarter of 2017 and $2.2 million in the first quarter of 2016. Capital expenditures through the first quarter were $529,000, which were for ongoing maintenance. As of the end of March, the balance in fixed assets for Atchison was about $36.3 million, and Houston was about $3.2. We had restructuring charges related to the Denver shutdown of $881,000 for severance and demobilization. We have vacated the property and do not anticipate any further cost related to the Denver property. In Tubular Products, we expect our ongoing expect to around to $2 million to $2.5 million annually. This includes some anticipated charges at Atchison for cleanup and periodic maintenance related to the shutdown. Now, I'll turn it over to Scott for an update on our business.

As of March 31, 2017, our water transmission backlog was approximately $77 million compared to $66 million at the end of the fourth quarter, and $114 million at the end of the first quarter of 2016. We expect that revenue in gross margins will be slightly higher in the second quarter compared to the first. As we have said, due to the current overpopulated supply base, we believe that the recovery will be slower than we've seen traditionally. 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 that are expected to represent 90,000 tons of pipes. 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 for 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 also expected to result an additional near and long-term opportunities. The Southeast Oklahoma raw water supply also known as Atoka second pipeline is a 100-mile 64,000 ton pipeline with bidding expected to start late fourth quarter of 2017 or first quarter of 2018. 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. The Southern California Reliner is expected to continue over the next 20 years and we'll invest $2.6 billion. We were the successful bidder on MWD second lower feeder contract 1 reline project. This project represents approximately 4,500 tons and will start delivery in the second half of the year. MWD will also be bidding smaller sections of the reliner program, which are about 1,000 tons each and our respective to bid later in the second quarter. The San Diego County Water Authority portion of the reliner program is still scheduled to bid in the second quarter of this year. It represents approximately 3,500 tons of pipe. There are several recycled water programs that we are tracking most notably the Santa Clara Valley Water District expedited purification water program. This represents up to 10,000 tons of opportunity in late fourth quarter of 2017 to early fourth quarter - to early first quarter of 2018. The city of San Diego Pure Water Program is a 6,000 ton project that is expected to start bidding in 2018. The Cadiz project is a water conservation supply and storage project in California that will create new dependable water supply for 400,000 people in California. When built this project, we'll create upwards of 5,900 jobs in the region and our Adelanto facility could be a direct beneficiary. This project appears to be clearing the initial BLM hurdles associated with railroad right of way corridor use and we are hopeful that the initial purchase of 25,000 tons of pipe will commence later this year. In the Dakotas, work continues on the 140 miles of 72-inch Red River Valley Water supply project. This project is still in the design and permitting stages and we expect that bidding will begin in 2019. The new administration stance on infrastructure spending has been well publicized and has the potential to result in significant opportunities for both the near and long-term. We have planned about $6 million in total capital expenditures for 2017, most of which falls under maintenance capital spending. We continue to look at a wide range of strategic opportunities for our water transmission business. This is an ongoing and active process and we have nothing further that we can discuss at this point. In closing, the harsh market conditions that we experienced during 2015 and 2016 created a situation where the company was forced to take drastic actions such as idling Energy Tubular assets. Selling underperforming water transmission plants and thereby reducing water transmission production capacity. Slashing our corporate SG&A by 40% and reducing man hours per job by over 16% through lean manufacturing initiatives, but it also forced us to evolve. We began to focus on margin over volume and as a result of our costs reduction programs, we've been able to generate gross profits at significantly lower volumes and revenue. The top market conditions have forced us to become more cost competitive which is open the door to increase margin potential as market conditions normalize. Also during this period, we eliminated our debt and we ended the first quarter of 2017 with about $21 million cash on our balance sheet. And we have additional non-core assets in the Atchison plant and Houston property which we will monetize to bring additional cash to our balance sheet. This puts us in a better position than ever to create growth opportunities for the company. We also believe that with the amount of projects that we see coming through the system, the water transmission business is heading into its normal cyclical upturn. The infrastructure in/by America focus of the administration should enhance this upturn. 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, monetizing non-core assets such as the Acheson plant and the Houston property to create additional balance sheet strength and flexibility; and three, continue to drive cost efficiencies and cost reductions at our production facilities. At this time, we'd be happy to answer any of your questions.

Thank you. And now we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Brent Thielman. Your line is now open.

Hi. Good morning.

Good morning, Brent.

Good morning, Brent.

Maybe just on question the first quarter itself, any impact or slow down your business from some of the weather in California?

No. I don't think the weather in California that up close had an impact in the first quarter. In fact we're actually seeing some pretty strong bidding in California between these Reliner program segments that I discussed. There's also significant bidding activity just outside of California which are California plant Adelanto services. There is a substantial job in Utah that bid a couple weeks ago that I think is going to end up being a very good job for us. So we're seeing a lot of activity in California right now. And I think, Brent, part of it's because there may have been some rain but the requirements built up over a three or four year period and they're absolutely having to do some of these requirements now. So we're seeing pretty good bidding and expect to see pretty good bidding in California for the rest of the year. The real impact on the fourth quarter really is the - was us not choosing to chase the IPO 2017, 2018 project down to the depths of that pricing felt too. And I think one of the things really to note about the first quarter is that even at that really low revenue and volume number with the cost reduction programs that we put in place, we have the ability to actually generate gross profit at pretty low revenue and volume numbers now. So I think there's going to a lot of cost reduction work during this period of time that also helps so.

Absolutely, that's notable. Hey, and then on the second quarter outlook, I mean I guess just sort of marginal improvement, is that just your view of kind of schedule of timing and it sounds like you're actively out there and picking up new work is most of it sort of start to escalate in the second half of the year?

Yeah. We've - as we mentioned when we're going through the script, our backlog has gone up to $77 million. We are - and obviously that's improved, I guess it's about 17% from where we were at the end of the fourth quarter. And that backlog is growing with better margin work and we continue to see that trend at least early in the second quarter. So I think you start seeing the results of that really starting in the second quarter. Plus what we see as for as bidding that's happening later in the second quarter in various areas whether it's the East Coast, whether it's the central region or continuing on the west coast should if the environment continues to maintain the kind of improvement that we've seen in the bidding environment board well for how things develop in those markets as we go forward through the second quarter and into the early third quarter.

Okay. And then when you compile all the work opportunities you discussed out there and things you obviously didn't discuss you in call, I mean it looks like you should start to see even more momentum kind of later in the year and in the 2018 from a bookings backlog perspective, is that got to your interpretation and we spent them scheduled to see today?

Yeah. I think that when you look at later in the year, you've got this Atoka program which is obviously a pretty major program in the second half of the year, but you also have all this work that's going on in Houston along with this other the other work. So when we looked at Atoka, we've always view that as a fourth quarter bid and it doesn't end up being revenue until 2018. But certainly we see momentum continue as we come out of 2017 and 2018. The issue as it is kind of Brent, where exactly the jobs end up right, because you can talk about it in the fourth quarter, okay, they're the early first quarter, so it's just a matter of the timing and how you go through the bidding period and when they actually hit. But we certainly as we mentioned in the script see this buildup of major projects that aren't really wish list projects anymore, they are projects that are starting to happen. So obviously after such a long period of time in this business with being in really low market levels, there's a lot of buildup in work that needs to be done to service the population centers as well as agricultural requirements. And that's the same for this Cadiz project that we're seeing down in Southern California right now. When you've heard us talk about this for a number of years, this is a major project that was on the new administration's priority list and actually came out as number 15 on the new administration's priority list. And they've been forced to - Cadiz been forced to clear a lot of hurdles that have been thrown up by various political groups in how you look at being able to use railroad wide right of ways for water conveyance and rules kind of got changed in. There were memos put out, well, all of that looks like it's starting to be cleared now. There's a little bit more work that has to be done. But I mean that's a major project that creates a whole lot of jobs for San Bernardino County. It creates water and water storage that it can serve 400,000 people annually and it just makes a lot of sense rather than the waste that water that really comes from the Colorado River, flows through groundwater and goes into brine eventually. So there's a lot of these things are actually that we've talked about over the last few years are actually starting to become real. And I think that Cadiz project is one point that I would point to that certainly we hope that we get through some of these hurdles and they commence buying the 25,000 tons of pipe sometime later this year.

That's great. One more if I could sneak in. Scoot, outside of this latest lag of IPL and I know you mentioned it was very competitive. I mean how - would you characterize the environment is still on demand and pricing is getting a little more rational out there?

Yeah. I would say that most of the regions in the country are certainly on demand and continuing to improve. And we still have a little bit of an issue in one of our regions obviously you can tell by what region that would be with IPL, but certainly with the amount of work coming forward that you know should start to continue to repair itself as we go forward. I mean even what we're seeing down there is better than what we saw during the depths of you know what we would call the market issues that were going on in 2015 and 2016 even the pricing we saw in the last IPO was an improvement from there. But it still didn't make any sense to us with the level that we saw it at based on the size of the project. But I would say Brent overall when you look at these markets, the bidding environment is kind of stabilized and if it continues to improve.

Okay, great. Thank you.

Absolutely.

Our next question comes from David Wright [ph] your lines now open.

Scott and Robin, good morning.

Good morning David.

Good morning David.

Hi, picking up on the very last question asked your great improvement in pricing in the first quarter, I guess was more your specific mix versus that much overall improvement in pricing in the entire market?

I would say that some of which mix related, but you know certainly in most of the country, we have seen a bidding environment that's continued to improve, part of it's just more work coming through the system David, that everybody is not completely starving for work in - I guess what I would say is, you're also seeing a backlog that's developing for us that actually has increased and has margin in it. I think that it still can be said that there's at least one region that's problematic, but overall the pricing across the whole environment has continued to improve because the bidding environment. I don't think it's what I would call it is back to even close to normal, but it's significantly better than what we saw during 2015 and midway through 2016. You make sure that for us, we're obviously focused on margin over volume, so we're being much more cautious on the jobs that we take and how those jobs actually run across to our facilities. So I think it's really all of those things together. But I do think the bidding environment is changed to where pricing is moving in a much more positive direction than we've seen quite some time.

Still though I mean 130% increase year-over-year is you know it's impressive where that then in further maybe competitor he might have been up 70% and competitor be 85%, give me some context to your improvement in pricing versus everybody else's?

Yeah, I would tell you in most regions that obviously we see the results of bids that are published by the owners. So I would tell you in most regions of the country you know say for the one that IPO came from that everybody's levels of pricing that we see on the bids anyway are moving up. So what percentage you know I would say that there are probably approaching the price percentages we're seeing, because David during 2015 and 2016 we saw some pretty ugly price levels for a period of time. So it doesn't take much to show significant recovery from those levels got.

Hopefully everyone will remain rational going forward on their pricing. One other question, when you look at the business possibilities over the next two or three years, do you have a sense of if you were to have a substantial success rate winning the jobs you're interested in, how that would translate into overall capacity utilization at Northwest given the fact that you've downsized your footprint?

Yeah, I think when you look at those kind of numbers in you - you're going to take a view on how that would be over a number of years, you're probably looking at capacity utilizations that are somewhere probably edging up towards 50% or over 50% capacity utilization in water. And for a long time when we got over 40% that was a pretty good number. Okay, so the one thing that's a little bit different about these facilities, David is are giant job shops, right as we've talked about before. So you can select some of the cost structure and those job shops you can depending on how busy to plan is you take direct out, you put direct in. So certainly we like to shoot for something that's 50% plus percent capacity utilization, and I think that gives it to some pretty good numbers.

Okay. Well, I hope you get there, and keep up the good work. Thanks so much.

Thanks David. Thanks for your comments.

And we're showing no questions at this time. [Operator Instructions] And we're showing no questions for this time sir.

Okay. We appreciate everybody's attendance to the call. Thank you, we look forward to talking again in early August, and obviously we look forward to continued improvement in this market. So thanks very much. And have a great day.

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