NWPX Infrastructure, Inc. (NWPX) Q4 2017 Earnings Report, Transcript and Summary

Welcome, and thank you all for standing by. [Operator Instructions]. As a reminder, this 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, Chief Executive Officer, Scott Montross. You may now begin.

Thank you, Messie. Good morning, and welcome to Northwest Pipe's Conference Call. My name is Scott Montross. 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 net loss from continuing operations was $1.8 million or $0.20 per diluted share compared to net income of $6.8 million or $0.70 per diluted share in the fourth quarter of 2016. Our fourth quarter 2016 net income included the pretax gain on the sale of our Denver facility of $7.9 million. Sales decreased to $35.6 million in the fourth quarter of 2017 from $39.2 million in the fourth quarter of 2016. Gross profit as a percent of sales was 5.8% in the fourth quarter of 2017 compared to 9.6% in the fourth quarter of 2016. Our worker's compensation administrator revised our estimate of our reserves in the fourth quarter of 2017 adding a onetime $1.2 million of expense and thereby reducing our gross profit. Selling, general and administrative costs decreased to $3.3 million in the fourth quarter of 2017 from $4.6 million in the fourth quarter of 2016. This decrease was due to lower wage and benefit expense from lower headcount. Moving on to the full year results. Our loss from continuing operations was $8.4 million or $0.88 per diluted share compared to a loss of $6.7 million or $0.71 per diluted share in 2016. We did have several onetime adjustments in 2016 and 2017 that impacted results, including the change in worker's compensation reserves, a gain on the sale of our Denver facility and restructuring expenses. When we adjust the results for these onetime items, net of tax using our statutory rate, our adjusted net loss from continuing operations was $7.1 million or $0.74 per diluted share in 2017 compared to an adjusted net loss of $11 million or $1.15 per diluted share in 2016. Sales decreased to $132.8 million in 2017 from $149.4 million in 2016. Gross profit as a percent of sales was positive 4.4% in 2017 compared to a negative 0.2% in 2016. Beginning with our bidding in 2016 and realized in revenue and income during 2017, we are now pursuing projects that do not meet our gross profit goal. This initiative led to a decrease in our sales volume and backlog, but it has improved our profitability. Selling, general and administrative costs decreased to $14.1 million in 2017 from $16.9 million in 2016. This decrease was due to lower professional fees and lower wage and benefit expense from lower headcount. We had an income tax benefit rate of 11.6% in 2017 compared to an income tax benefit rate of 37.8% in 2016. Our 2017 rate was lower than statutory rates as our losses are subject to evaluation allowance, along with approximately $900,000 from the Tax Cuts and Jobs Act of 2017 that was recorded in the fourth quarter, as well as approximately $800,000 from excess tax efficiencies related to stock compensation that was recorded in the first quarter. In 2017, the company used $5.8 million in cash from continuing operations. Depreciation from continuing operations was $6.1 million in 2017 and $8.8 million in 2016. Capital expenditures were $2.9 million in 2017, which were for ongoing maintenance capital expenditures. Now I'll turn it over to Scott for an update on our business.

As of December 31, 2017, our backlog, including confirmed orders, was approximately $88 million compared to $109 million at the end of the third quarter and $66 million at the end of 2016. As we've mentioned previously, we saw some major project delays in 2017, which have suppressed the year-end backlog. However, as projects have pushed out, the bidding volume for 2018 has become substantial. Also, due to job delays in resulting low year-end 2017 bidding levels, we expect first quarter revenues to be slightly lower than the fourth quarter, but with margins that continue to show slow but steady improvement. Following is an outlook of current and upcoming Water Transmission projects. In the Texas market, the SWIFT program had almost $1 billion of committed funding in 2017, supporting programs like the Houston project in the Lower Bois d'Arc. The Houston project is a major multiyear program with a series of segments that are projected to represent 90,000 tons of pipe. Production on the 8,000-ton Capers Ridge segment of the Houston project started in the fourth quarter and will continue into the first quarter of 2018. Our production on the 3,000 tons of Lake Houston segment will begin in the March time frame. There'll be several additional segments that bid throughout 2018 that could represent an additional 27,000 tons of pipe. Bidding on the entire Houston project is expected to continue into 2019. The Lower Bois d'Arc reservoir is a project being planned by the North Texas Municipal Water District and represents approximately 60,000 tons of pipe. The construction manager has received permitting and funding with a major portion of pipe procurement expected to start in the summer of 2018. In total, the SWIFT program in Texas anticipates spending $5.6 billion over the next several years and is expected to result in additional near- and long-term opportunities. The Southeast Oklahoma Raw Water Supply project, also known as Atoka Second Pipeline, is a 100-mile 64,000-ton pipeline. Bidding is expected to start in the third quarter of 2018, with production and installation spread over five years. In the California market, the $2.6 billion California reline program began in 2017 and will continue over the next 20 years. Northwest Pipe produced pipe for two segments of the reliner program in 2017. Three additional segments will bid in 2018 and represent approximately 9,000 tons of pipe. The Santa Clara Valley Water District's pure water program represents 8,500 tons with bidding in the fourth 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 the fourth quarter of 2018. The 25,000-ton Cadiz Project continues to make slow progress and is currently seeking final approvals to work forward. In North Dakota, work continues on the 140-mile, 72-inch Red River Valley Water Supply Project. The project is in the design phase, with an initial 28-mile section projected to bid in 2019. With 3 major programs in Texas and Oklahoma and the increasing demand that we're seeing from California, we are expecting 2018 to be a very large bidding year. In addition, since these projects are multiyear programs, we expect to see strong demand well past 2018. As we previously discussed, we are seeing a bidding environment that continues to improve in the market that is stabilized. Even with the bidding market in 2017, that was fairly small due to project delays. Based upon the amount of volume we're seeing bidding in 2018, we expect the market to support further improvement. We continue to drive to reduce cost at both the plant and corporate levels through our lean manufacturing and cost reduction initiatives. In support of that effort, as planned when we acquired Permalok, we are closing our leased Permalok production facility in Salt Lake City and moving the production to the Permalok St. Louis location, which will eliminate duplicate overhead and increased production flexibility in St. Louis. In addition, we will begin producing Permalok product at our Adelanto California location. This will increase utilization of existing assets and give us better access to the West Coast trenchless market. Additionally, we will shut down and monetize our plant in Monterey, Mexico, and focus on growing our core water business platform. This is a very small plant and is nonessential to our ongoing water business. Operations will cease early in the second quarter. We have planned about $8 million in total capital expenditures for 2018, most of which fall under maintenance capital spending. Our balance sheet remains strong. We ended the fourth quarter with $43.6 million in cash. The sale of the Atchison facility has brought additional cash resources to the balance sheet, and we will also be working to monetize both the Houston property and the Monterey facility. With no debt and the additional cash from the Atchison transaction, we are well positioned to strategically grow our water business. As a pure play water company, we are looking at a wide range of strategic growth opportunities in the water infrastructure business. This process is active, and we're unable to discuss anything further at this time. In closing, we continue to see an improving bidding environment, demonstrated by the quality of our backlog. The market opportunities that we see in 2018 and beyond support continued improvement in our water business. As we move into this period of higher demand, we will focus on, one, improving the performance of the existing business by continuing our focus on margin over volume; two, continuing to push cost reductions and efficiencies at all levels of the company; three, monetizing the remaining nonstrategic assets in Houston and Monterey; and four, the exploration of strategic growth opportunities for the company. At this time, we'll be happy to answer any of your questions.

[Operator Instructions]. Our first question is from the line of Zane Karimi.

This is Zane Karimi on for Brent Thielman. It sounds like there is a lot to be encouraged about here. But I was wondering if you could also talk a bit about how you're going to manage through this deal price increases? And any change in strategy from a purchasing perspective, if deal tariffs come into effect?

Zane, I think the view we have is that we've seen steel prices increase dramatically over the last two months. In anticipation of 232, we've seen extended lead times and steel is a little bit more difficult to get quickly. So we've really already seen some of the impact based on the anticipation. For us, it makes the job a little bit more difficult to bid with having to have shorter quote validity because the steel price is changing so quickly. So the bidding is a little bit more difficult. It's going to force our customers to really start getting their orders in a little bit faster or the steel prices going to change and it will ultimately change what the quote looks like. So we still don't know exactly what the 232 is going to look like, although we hear this morning that both the steel and aluminum guys are heading to Washington, D.C. to meet with President, and we're unsure if they're talking about alternatives or if they're getting ready to making an announcement. But I think the reality is that if either the 24% across-the-board increase that they've talked about sticks or the 53% increase from the 12 countries, which represents a big amount of the imports into the country, it's going to increase the price of steel further, but it's also going to increase the pipe prices we think relatively dramatically. The last time we had pricing levels of this nature, and I would probably call back to the 2007 or 2008 time frame when steel prices were hot-rolled bands were somewhere in the area of $1,200 a ton. We had some of the highest revenue that the company has ever had. Obviously that gets passed through to the customer and ultimately becomes a part of the revenue. So as far as giving steel, like I said, it's been a little bit more difficult to get it quickly, but we're managing through with our suppliers and getting the steel that we need at this point.

And then the follow-up on that. You were talking about the bidding environment. I was wondering if you could talk a little bit about how much higher do you see the backlog continue to move as the year develops? And are there any jobs you're looking at more back half weighting?

Yes. What I'll say about the backlog is, obviously, as we mentioned in the script, bidding is -- bidding was relatively slow later in 2017. It was very low. And quite frankly, bidding is slow in the January and February time frame. We see a significant part of the first quarter bidding happening in March. So certainly as that bidding starts in the March time frame and continues on to the second quarter, it will improve the backlog. The big part of the bidding for 2018 is really in the third quarter, when you have bidding scheduled for the Lower Bois d'Arc project as well as the Atoka project. Now through this whole year, you're going to have the Houston project going on. So that should help as these segments bid in a word, but we certainly, with this kind of demand, which we expect to be, what I would call, well in excess of 200,000 tons of pipe demand for 2018, we expect the backlog to continue to pick up as we go through the year. So I think it's getting through this period of relatively low bidding at the end of the fourth quarter and early first quarter and then getting to the jobs and getting the jobs awarded. Now Zane, there was a second part to your question. I'm not sure that I answered the whole thing.

No worries. I was just asking along the lines of are the jobs you're looking at back half weighted?

Yes. I would say that -- we're looking at -- I would look at it and view it as pretty decent demand in the first and second quarter because what we're seeing is probably somewhere in the area of between 40,000 and 45,000 tons of pipe demand in each one of the quarters. As I said in the first quarter, it's heavily weighted to March. In second quarter, it seemed more evenly spread throughout the quarter. The third quarter is a big quarter, which should be well in excess of 100,000 tons based on what we see coming at us right now. And then the fourth quarter starts dropping back to really more toward and maybe a little bit below what the first and second quarters were.

Got you. And then a follow-up on that. Does the margin profile on new orders continue to improve relative to the 9.3% gross margin you posted earlier?

Yes. Well, we have a backlog that -- and I mentioned the word quality of the backlog when we're going through the script that has a improving margin profile as wily gone through time. What we've had is a situation, where production is relatively small because of the amount of bidding that's going on. So the absorption -- overhead absorption at the plants become more of an issue, which kind of -- which obviously holds the margin down. As we get into these months and quarters with higher demand and we get more production on the mill, obviously, the absorption of the fixed costs becomes much better and certainly, the margins we see them continuing to improve throughout the rest of the year.

Great. And then one final question. Any financial expectations for 2018 you could articulate at a quantitative or qualitative for 2018 in terms of revenue and margins or earnings? And do you expect to see a material improvement in financial performance? And what are the primary concerns you have at this point with the overall target?

Yes. I would say that with the amount of work that we see bidding that we didn't have coming at us in 2018. Certainly, as -- if these projects all bid the way that they are set up now and the way that they're viewing, okay, the revenue is going to continue to increase certainly fast, what we saw in 2017. And as I mentioned, as we have a better margin in the backlog, as we continue to put working backlog with this, what I would call, stable bidding environment, that margin should continue to improve. And with the higher production volumes, the overhead absorption at the plants just improves it more as we go, especially if all these projects hit the way that they look like right now.

Our next question is from the line of Mr. David Wright.

Commend you on your continued excellent stewardship of the company's balance sheet. Robin, I know you'll have your K out before very long, but with the NOL now be around $50 million kind of $40 million plus $10 million?

So our valuation allowance is actually about $10.4 million.

Why do I sense that you had a $40 million NOL at the end of '16?

I don't know. It was $8.2 million.

Okay. Well, then I'm very mistaken. I apologize. I must have eaten too many weedies this morning. Scott, on -- to the prior question, when you were talking about tons of demand sequentially through the quarters this year, was that tons of demand in your capturable market or is that tons of demand that you're going to capture all of?

No. It's within the capturable market. The way we look at it right now, David, is again this year looks like a year that's going to be in excess of 200,000 tons, which is what we view as a good year with all these major projects coming, it's -- and they're coming now. Certainly, the volume that we're seeing in 2018 is significantly higher. When we look at our share of those, as we've said recently we're probably 35% or more, I would suggest, we're probably going to be getting more toward about 40% of the market share as we get through 2018. The one thing I caution is, it's worked its bidding in 2018, which doesn't necessarily translate to revenue in 2018, especially since a lot of it's backend loaded. What it does is it will translate into revenue really more so in 2019.

Right, right. Is Cadiz in that tonnage, the sequential quarterly tonnage number you were citing?

No.

So that would be a plus if something happened there?

Yes, it would be a plus. We are optimistic about the progress. I think that Scott Slater is making Cadiz -- I think he is pressing all the right buttons. He still faces some political headwinds of getting some things done. But I think he is clearing all the necessary hurdles to push this project forward. It's just very difficult to predict what the timing is going to be, which is why we really don’t consider it in the tons that we're bidding. The fact that it's a project that is going to be a San Bernardino County project and we have the plant in San Bernardino County in a relatively good relationship with those guys, we think that we would certainly be a participant in that project.

Okay. And then just to your emphasis on margin over volume, emphasizing margin over volume should lead to black ink at what point?

Well, if the margin -- if the demand in the bidding happens like we see it happening, we kind of crossover that point sometime as we get into the second half of the year.

Okay. And then do you have any sense for what 2019 shapes up in terms of the bid size of the market?

Yes. When we look at -- and we look at a three-year plan every year, David, we're -- it does look like 2018 is the biggest year, but it looks like that 2019 and 2020 right now based on the projects that we see in our project tracking system, each look like they could be 200,000 tons or maybe slightly more.

At this point, we do not have any questions on queue. [Operator Instructions]. Speakers, we still don't have any questions on queue. You may continue.

Okay. Well, we appreciate everybody attending the call. We have our next call, I believe, at the beginning of May, correct Robin? And we'll talk to everybody again, and thank you very much. Goodbye.

Thank you so much speakers. And that concludes today's conference. Thank you all for participating. You may disconnect your lines at this time.