NWPX Infrastructure, Inc. (NWPX) Q2 2019 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. [Operator instructions] This call is being recorded, if you have any objections, you may disconnect at this time. May I introduce your speaker for today, Scott Montross. Please go ahead.

Thank you, Helena. Good morning and welcome to Northwest Pipe's conference call. My name is Scott Montross. I am President and CEO of the company. I'm joined by Robin Gantt, our Chief Financial Officer. As we begin, I would like to remind everyone that the statements that we make in this call about our expectations for the future are forward-looking statements and the 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'll discuss our second-quarter results.

Thank you, Scott. Our second quarter net income was $3 million or $0.31 per diluted share compared to an adjusted net loss of $5.7 million or $0.59 per diluted share in the second quarter of 2018. Sales were $69.2 million in the quarter of 2019 compared to $28.8 million in the second quarter of 2018. Gross profit as percent of sales was 11.9% in the second quarter of 2019 compared to a loss of 4.3% in the second quarter of 2018. The sales increase was due to a significant increase in tons produced. The Ameron acquisition added about $13.8 million in sales. Gross profit as a percent of sales improved with the increases in production volume, partially offset by $3.2 million in cost related to the fire at our Saginaw facility. These additional costs were incurred as we shifted production in order to meet our commitments and we are working with our insurance company to recover these amounts. If we hadn't incurred these costs in the second quarter, our gross profit as a percent of sales would have been 16.5%, which is the best quarter since 2014. Selling, general and administrative cost increased to $4.7 million in the second quarter of 2019 from $3.8 million in the second quarter of 2018. This increase was primarily due to higher incentive compensation expense as we returned to positive income. We had an income tax expense rate of 13.1% in the second quarter of 2019 compared to an income tax benefit rate of 1.9% in the second quarter of 2018. Our 2019 rate was impacted by the estimated changes in the valuation allowance and by the issuance of final Section 965 regulations in June, related to certain foreign tax credit aspects of the transition tax. In the first quarter of 2019, the company provided $17.3 million in cash from continuing operations. Depreciation and amortization were $5.9 million in the first half of 2019 and $3.4 million in the first half of 2018. Capital expenditures were $2.6 million in the first half of 2019, which were for ongoing maintenance capital expenditures. We've planned about $12 million in total capital expenditures for 2019, most of which falls under maintenance capital spending and includes the replacement building and equipment in Saginaw. Now, I'll turn it over to Scott for an update on our business.

As of June 30, 2019, our backlog, including confirmed orders was a record $276 million compared to $242 million in the first quarter and $122 million in the second quarter of 2018. Based on the current bidding calendar, we expect backlog to remain elevated as we progress through 2019. The fire-related rebuild of the Saginaw coating facility is progressing according to schedule. Despite the significant cost impact from the fire at our Saginaw coating facility, the strong demand levels, elevated backlog and competitive landscape, which is very stable at this time have led to a second quarter that's shown solid improvement in revenue, gross profit and gross profit margins. We expect third quarter revenues to be similar, but with margin levels that continue to improve. And as we said in our previous earnings calls, the next couple quarters could have margin anomalies related to the timing of expenses and insurance coverage from the fire at the Saginaw coating plant. The following is a look at current and upcoming water transmission projects. In the Texas market, the SWIFT program has funded over $8 billion in projects over the last six years. SWIFT is expected to continue to fund major programs, like the Houston project and Bois d'Arc Lake well into the future. The Houston surface water project is a major multi-year, multi-agency program, with a series of segments representing 90,000 tons of pipes. Northwest Pipe has been the successful bidder on multiple Houston segments representing over 15,000 tons of pipes. The production of the individual segments are in various stages from pre-manufacturing to ship-complete. There are additional segments of the Houston project that will bid throughout 2019 and 2020 that represent about 35,000 tons. The Bois d'Arc Lake project by the North Texas Municipal Water District has begun construction and represents 60,000 tons of pipes. Northwest Pipe was a successful bidder on the portion of the Raw Water line for the Bois d'Arc lake project in the fourth quarter of 2018. The segments that we are awarded represent approximately 25,000 tons of pipe, which are currently in various stages of production. The finished water line representing 22,000 tons of this project, bid recently in June of 2019. And we have been notified that we are the successful bidder. Production on this project is scheduled to begin late this year. In the Western market, California's prop 1 $7.1 billion bond for water infrastructure has created the much-needed funding for projects within the state. According to the California Natural Resources Agency, 86% of the funds have been appropriated for various projects as of 2017/2018 fiscal year. We expect requirements for these projects to stretch out over the next several years. Water reuse programs have generated new opportunities in California market on which we expect to see bidding activity continue for the next year, representing 8,000 tons. The PCCP rehabilitation relined programs will result in about 10,000 tons annually over the next two to three years. The site's reservoir is a water storage project that has received funding from prop 1. It will involve over 30 miles of 144-inch pipeline and is projected to begin in 2024. In North Dakota progress had slowed on 140-mile 87,000 ton Red River Valley Water Supply Project, as it is competing for funding with an urgent flood diversion project, which appears to be taking priority. We're hopeful that bidding on this project will start sometime within the next year. Through the second quarter of 2019, we've seen a solid bidding year in terms of volume and a stable bidding environment in the backlog that has remained in record territory. For the second half of 2019, we expected our backlog will remain elevated and relatively stable. As a result, we expect strong revenues and margins that should continue to improve as we progress through the rest of the year and because a substantial portion of the work is currently bidding our multiyear programs, we expect to see continued strength in backlog for the medium term, which should translate into positive business conditions beyond 2019. As we move forward, we remain focused on improving the performance of the business by focusing on margin over volume, the fast, cost-efficient and safe repair and restart of our Saginaw coating facility, driving cost reductions and efficiencies at all levels of the company and finding strategic growth opportunities for our water infrastructure business. At this time, we'll be happy to answer any of your questions.

We will now begin the question-and-answer session. [Operator instructions] We have a question from Zane Karimi. Your line is now open.

Hey, good morning, Robin and Scott.

Hi, Zane.

Good morning, Zane.

So my first question kind of comes with regards to other insurance claims. And if you guys have any more color on may be timing of those, or how they're going to be working with regards to, do you have to acquire the cost and then you sort of climb in? Or is it going to be all at once or a piecemeal process?

So there's different portions of the claim. We have the property and equipment loss and that's different from the cost that we incurred in the quarter to help keep our commitments in order to keep the jobs going. So, the property and equipment that's going on right now, we have received some monies toward that. None of those expenses are in the income statement. However, the $3.2 million, those are costs that we incurred to ship products around additional cost of coding, things like that. And that's going to take a bit longer to receive. Right now, we planned that we'll be done by the end of the year. So, the fourth quarter will be done and up and running. And hopefully, the insurance monies will be in by then. But, we're working with them all the time and trying to see how quickly we can get it done.

Thank you for that. Awesome. Thank you for that. And then you guys also talked about -- I'm going to a transition up because that sounds good. And then talking about backlog and bidding opportunities, on the prior quarter and earlier today, you mentioned a multiyear program that will be stretching from 2H and into 2020. How it is progressing? And how are the bidding environments developing, like with regards to environment capacity constraints?

Yes. I would say that this is probably the strongest and best bidding environment that we've seen in many, many years, not only from the perspective of jobs bidding, because we're seeing Zane, we're seeing some of the bigger jobs, bidding like the Bois d'Arc Lake project that have had a couple of different bids on those, it represents 60,000 tons. But, I think the biggest thing is we're seeing a whole lot of jobs bidding and getting into backlog that are somewhere from $3 million to $7 million or $8 million at a time, which is really helping buoy that backlog and keep it up at record levels. And certainly, as we look at what the bidding program looks like through the rest of this year, we're expecting, as we said earlier in the year that backlog to remain high and relatively stable as we get all the way through this year and actually moving into next year. So when you look at some of those multiyear projects, that you asked in your I guess the initial question, was this Bois d'Arc Lake project goes over a substantial period of time, it's broken really into two sections: One is the raw water line, which is the first piece that was bid that represented 25,000 tons for us. We're going to be running that really through this year and probably into early next year. The second piece of it is the treated water line, which is another 22,000 tons. We'll likely start running that late in the year, probably late November, early December timeframe. And that'll continue well into next year. But, there's also these Houston groundwater projects that are little bit hard to probably quantify because this thing is bidding like $7 million, $8 million, $9 million at a time. So it keeps getting pieced in, but we're going to see those bidding opportunities continue well into next year, which gives probably a pretty good base in the bidding load. But, we're not only seeing those multiyear projects going on, but the expectations that next year bidding is going to be a very solid bidding year after coming off of a very strong 2018 and a very solid 2019. The expectation of 2020 as a solid bidding year really bodes well for with the backlog is in the strength of the business as we go out into 2020 and beyond.

Thank you for the outlook provided there. That's really significant. I will jump back in queue.

You bet.

Thank you. Our next question is from [David Wright] [ph]. Your line is now open.

Robin, Scott, good morning.

Hi, David.

Good morning, David.

Robin, you said in your remarks that if you added back again the insurance set aside, that you have a gross profit of -- I think you said 16.5%. Just back of the envelope from the press release, it looks like you're putting that back in dollar for dollar, the whole $3.2 million on top of...

Yes, yes, if you were to use the tax rate that we had in the quarter, EPS would have been around $0.59.

So, you're going -- but just for the gross profit, you're doing the $8.2 million, that's on the income statement you're adding back the whole $3.2 million?

That is correct.

Okay. And that's the amount that you hope to recover fully from the insurance reimbursement?

Yes.

Okay. If earlier in the year, around the first quarter, I think, we did $60 million or $61 million in revenues and maybe the thinking was -- we were kind of on $60 million a quarter run rate. And now, it seems like you're around kind of a $70 million quarterly run rate. Since you have the production schedules laid out well in advance and the contract prices are basically fixed, I'm just wondering where's this extra hump come from.

I would say it's the smaller jobs that are $3 million, $4 million, $5 million, $7 million, David. And probably getting a few more of those than what we expected to get over this period of time. I think the bidding environment is very stable and solid as we move forward and stable as I've seen it, since I've been here. So, we're getting more of those in the backlog. And I think that the reality is, some of the pricing levels on some of the projects are even higher than what we would have expected. So, that's adding a little bit more to the backlog as far as the value is concerned. So, we expect to see this going to continue on through the rest of the year. And as Robin said, if you look at that $3 million, $3.2 million, dollar for dollar, it's about 16.5% gross profit for the second quarter, if we didn't have the fire-related issues. Well, that kind of moves us like we've talked about multiple times back into the realm of where the historic margins are for the company. But as we said, we continue to see those margins improve as we go forward because what we've looked at going forward as far as margins that we should be able to achieve into a solid market like this is what we saw really kind of in 2013, where the margin levels got to be above 20%. So, I think there's a lot of good things lining up with the market, not only the demand, but I think the bidding environments, the pricing. I think that when you look at the steel prices, the steel prices have regulated downward. We really haven't seen any kind -- any fall off in the pricing of the projects related to steel. So, those margins should be expanding as we go forward.

Okay. Just to follow-up briefly on these smaller jobs that you commented about. Are these shorter order faster turnaround things that come in and get out the door within a quarter or two?

No. Not always. Some of them are that can be. But, I think that they kind of fall into a pretty normal cadence with the rest of the business. You bid on one of these projects and maybe 30 days or so, maybe up to 60 days, you get notification that you're the winner, you can buy steel. And maybe the production on the project can start because of the steel lead times, maybe another 45 to 60 days after that. Some of them are relatively short lead, but the ability to do short lead really lines up with what the steel lead times are. But these are kind of jobs that we're outbidding and they were just chunking into the backlog, which is why that backlog is up to $276 million. Now winning that second piece of the Bois d'Arc Lake project, its 22,000 tons, was a big piece of that. But, we produced almost $70 million in the second quarter. So, you can imagine our backlog I think went up from quarter-to-quarter about $26 million, $28 million in that area. So, there's a lot of stuff if you do that math going into backlog.

Yes. I'm just pressing here because it's generally just the two of us asking questions. Just real quickly, any update comment on the Ameron integration during the second quarter?

Yes. We think that the Ameron integration is going very well. And as Robin said, they're adding revenue to the top-line, the margins are starting to develop at those plants, starting to come in line with where our legacy Northwest Pipe plants are. I think the biggest thing, David, is our estimating program is where -- when we're going out and bidding on a job, there could be estimates that are 30 and 50 pages long, getting that estimated program completely in sync with what the legacy plants have so that we understand the costing and I think we're doing that. That's a big piece of what we've had to get through at the beginning, when we've gone through some of these jobs, Robin's group has done a lot of the heavy lifting with some of the jobs that we got -- may had margins that were a little bit different than we thought when we were getting them because of the estimating program, but I think all that's coming into line with what the Northwest Pipe program is at this point. So, do you want to make any comments on the integration, Robin?

Oh, just the fact that it'll take a little time of course. Integrations always do take longer. But, concerning were a year and just over from when we actually bought it on July 27 of last year, everything is going very well. They are absolutely accretive to the bottom-line. Some of those jobs that, as Scott said, that we inherited the margins. And we knew that, they weren't fabulous. So, those have worked their way through. But, they are accretive. And I would have to say that the acquisition has gone extremely well and we're very pleased.

Great report and thanks very much.

Thanks, David.

Thank you. Our next question is from Mike Morales. Your line is now open. Excuse me, Mike Morales, your line is now open for question and answer.

Sorry about that. Can you guys hear me?

Yes, Mike.

Hey, Mike.

All right. Good morning, Scott. Good Morning, Robin. Thank you for taking my question. And congratulations on the strong execution of the quarter. In light of the good outlook for the second half and the good execution on the quarter, can you just give us an update on how you are thinking about capital allocation as you look into the medium term now?

Yes. We're just starting to get back into our strategic planning cycle. Certainly, we've had a pretty low capital investment in the legacy plants over the last few years as we saw a pretty tough market situations. But, I think if you start looking at capital in terms of what the amount of depreciation is that should give you a pretty good indication of what our capital is going to be over a longer period of time.

Okay. And thinking about from -- I know that you're doing work on integrating the Ameron acquisition now. From an M&A standpoint, is there anything out there that is in the pipeline now that you'd be willing to talk about or any update that you can give us there?

I think, Mike, that we've been pretty strong on the M&A front for a long time. As we've gone through these earnings calls, we've been pretty transparent as we started to work on these things. And yes, we are definitely looking very hard on M&A front. We've got some interesting things out there that we're pursuing. But it's always going on. And as you pursue these things, you mainly go through three or four of them and three or four of them may drop out and then you get one that's kind of interesting. But, we're certainly in the mode right now. We've taken the company and kind of torn it down to the studs with taking away and monetizing the energy tubular business several years ago and some of the underperforming assets. And then, we added Ameron, which is obviously a big boost to our water transmission infrastructure business. But now it's okay. What is the next piece of this and just overstating the obvious a little bit, we're looking at something that's going to drive better shareholder values as we go forward. When we look at our cash cycle right now, we're looking at a cash cycle that's relatively long on the water transmission side of the business. We're looking at stuff that maybe more OpEx instead of CapEx that is a shorter cash cycle that helps buoy the cash flow of the business. And the things that we're looking at, Mike stretches outside of what we're doing. I think there are things that are very tangent to the business that we're in now and it is a very active process and we continue to work that process as we go forward because the intention is to grow the company and to position the company to drive much better shareholder values as we go forward.

Sure. That commentary was very helpful, Scott. Thank you. Congratulations again on the strong results and keep up the good work.

Thanks, Mike.

Thanks.

There are no questions in queue at this time. [Operator instructions] We show no further questions at this time.

Okay. I'd like to thank everybody for attending the call. But, I think it's important to say that we're very excited about the business. It's in the situation and a condition now that we've kind of long hoped for with the demand, the stable market situation, the values and projects going up to where they should be. So we're looking forward to better and better results as we move through this time period. So, we just got to keep going through this and working on the things that we need to work on like focusing on margin over value or margin over volume and reducing the cost of the company. I think the margin side of this over with the volume has been a very important approach for us and working on the cost position just helps us. So, we look forward to better quarters and thank you for attending the call.

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