Good morning and welcome to the Northwest Pipe Company's Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Scott Montross, President and CEO of the company. Please go ahead.

Good morning and welcome to Northwest Pipe Company's second quarter 2020 earnings conference call. My name is Scott Montross, and I'm President and CEO of the company. I'm joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday, August 4, 2020 at approximately 4 P.M. Eastern Time. This call is being webcast, and it is available for a replay. As we begin, I'd like to remind everyone that statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for year-ended December 31, 2019 and in our SEC filing for a discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward-looking statements. Thank you for joining our call today to discuss our results. I'll begin with a review of our second quarter 2020 performance. Bidding activity has remained strong, which has resulted in an improved second quarter backlog versus first quarter and a strong precast order book. As of June 30th, our backlog including confirmed orders for the Northwest Pipe Legacy business, was 246 million compared to 224 million at the end of the first quarter of 2020 and 276 million at the end of the second quarter of 2019. The current 246 million represents our eighth consecutive quarter of up 200 million and remains very high by historic standards. In addition, our order book for the concrete Pipe and Precast business remains elevated as we progress through the busy time of the year. Second quarter net sales of 70 million benefited from 12.4 million contribution from our acquisition of Geneva Pipe and…

Thank you, Scott and good morning, everyone. I hope you are all staying safe and healthy. Now let's discuss our financial results. Adjusted net income for the second quarter of 2020 was $4.4 million or $0.45 per diluted share compared to adjusted net income of $5.4 million or $0.55 per diluted share for the second quarter of 2019. Adjusted net income excludes unique and unusual items and is provided for comparability purposes. The most significant adjustment was $2.7 million in recoveries on the now-closed insurance claim associated with the fire at our Saginaw facility in April 2019. This was partially offset by $0.5 million in amortization of the intangible assets acquired with Geneva and $0.5 million in estimated tax expense for these items. Our second quarter of 2019 results included $3.2 million in incremental production costs as a result of the fire as well as the associated estimated tax impact of those charges. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a full accounting of the aforementioned items. Our second quarter sales increased 1.1% to 70 million compared to 69.2 million in the second quarter of 2019 due to a 12.4 million contribution from Geneva Pipe and Precast. Legacy revenues declined from the year ago quarter due to a 31% decrease in tons produced, primarily related to short-term project delays and the shutdown of our SLRC Water Infrastructure Manufacturing Facility in Mexico, which was partially offset by 20% increase in selling price per ton. Gross profit increased 57.7% to 13 million or 18.5% of sales compared to 8.2 million or 11.9% of sales in the second quarter of 2019. Both quarters margins were impacted by timing differences caused by the Saginaw fire. The second quarter of 2020 was elevated by 1.8 million in recoveries…

[Operator Instructions]. The first question today comes from Brent Thielman of D.A. Davidson. Please go ahead.

Hey, thank you. Good morning.

Good morning Brent.

You guys generated really nice cash flow this quarter, frankly, through the first half. I didn't see all the details of that. I'm just wondering what's been driven by sort of any sort of working capital windfall from the legacy business that you might have to invest back later versus contributions from Geneva?

Well I guess, I would start on it by saying that as we've talked in the previous calls, Brent we've been pretty focused on collections and AR in the marketplace right now. And our percent current AR is probably more than doubled over the last year and half, which is a big driver when the business is this large. As we start moving forward and we see this cash continue to collect on the balance sheet and as we sit here now, it's actually even higher than what we ended the second quarter with we expect based on the bidding activity and the backlog business to be higher, specifically in the legacy business in the second half of the year. So certainly we would expect some of that additional cash to be pulled into working capital at that point into the current assets. But the way it looks right now, our cash generation should continue as we go forward. It will probably fluctuate based on the size of the legacy business, but I think we are doing a pretty good job of collecting cash and I'll let Aaron talk a little bit about the cash as a result of getting some of the cashback on the Saginaw fire.

Yes. And that actually is going to be a Q3 event. It's good to be clear about that. We did book the amounts for the second or prior to the second quarter, but those aren't affecting cash flows yet. Really, it's been the working capital in addition to the profitability and adjustment for some of those noncash items. We've just had a pretty good start to the first half of this year and we're doing our best to keep things growing. But like Scott said, I haven't seen a fall-off on anything on the AR front and things are kind of humming along right now.

And Aaron, can you remind me that the cash you expect from the Saginaw fire and I guess in 3Q?

Yes, it's about $2.8 million, about $1 million of it will record -- down in the investment section or investing section and the rest will be up in operations. That follows kind of the line of cost of sales versus below the line accounting for this settlement?

Okay, great. And then you guys saw, I mean, a really strong lift in pricing, at least year-on-year this quarter, 20%. How much of that, as you look at that, how much of that is determined by mix, project mix versus steel versus stronger bid margins and maybe more rational competitive behavior? Just trying to parse that out.

Well, I think some of it is steel. Obviously, we've seen steel moderate down now for a period of time. And it appears to be based -- being significantly affected by COVID in the present term. But I think the pricing in most regions has held up pretty well, which ultimately helps positively impact those margins. I think the bidding environment, for the most part, is relatively solid with the competitive landscape. So I think we're in a situation where as we go forward, with the amount of work that we see bidding, not only in the second half of this year but as we look at our three-year plan, 2021, 2022 and 2023, I think it bodes well for even further price raising and increases and further impact on the margin, not only from the perspective of moving price up but the higher levels of production and higher absorption within the plants contributing to the margins too. So I think we're on a good track with what's going on in the marketplace. For a little while, Brent, when the COVID crisis hit, we saw a little bit of panic bidding by a couple of our competitors. That's seeming to subside a little bit based on the amount of jobs that are actually coming at us. So we feel pretty good about pricing levels and a positive impact on margin as we move out for the next several quarters

Okay. That's great. Maybe one more, and I'll pass it on. In Geneva, it seems like housing and kind of nonresidential backdrop at least in those mountain states it's held up really well. And I know you don't have as much of a hard dollar backlog visibility there but can you just talk about, Scott, what those business leaders see for the rest of the year and perhaps even into 2021?

Yes. We've seen, based on, like you said, the housing market in that region, the economic environment not only in Utah but some of the surrounding states like Idaho and Nevada, certainly the housing market has held up better there. Obviously, in total, in the United States we saw a little bit of a dip in housing starts after the January, February time frame, but it seems like it's starting to recover a little bit as we're going into the June time frame. So the feeling is for the Geneva business that we're on a pretty good track for what we thought that business was going to look like when we acquired and when we had the discussion back in January that looks pretty solid. We're currently working on those innovative products that help us stop the corrosion factor on concrete and sanitary sewer applications that we think is going to provide really good organic growth. So I think all those factors in that region point to good rest of 2020. And actually, as we go into 2021 we feel that the innovative products were actually going to add to that organic growth and continue to push both the top line and margins up.

Okay, thank you for all the color. I appreciate it. I will get back in queue.

Thanks.

Your next question comes from Gus Richard of Northland. Please go ahead.

Yes, thanks for taking the question. Just real quickly, you had some delays in Q2, have those projects restarted and what is the environment for your end customers in terms of getting stuff done?

Well yes, we have seen some of them restart. Some of these delays are relatively short, Gus. Part of the issue is it's the same as we see going on across really business environment across the U.S. We've got a lot of people working from home at this point. It's even as far as customers, utilities. And what happens is you get a situation where it slows down, getting the permitting done and things like that. So I think people are getting a little bit more used to working at home and having to go through the process. So it's getting a little bit easier with getting those things done. But the reality is we'll probably continue to see things push around for a period of time. But it looks like it's starting to stabilize and not getting better. So with the amount of work that, like I said before, we see coming at us I think those delays probably get less noticeable as we progress through this year into 2021.

Okay. And just as a follow-up, the funding for problem projects you're working on, that's all solid and don't see any disruption there either?

Yes, we started looking at our three year plan, Gus a few weeks ago, 2021 and -- 2021, 2022 and 2023. And what we found is a significant amount of demand out there over that time frame and what we're seeing right now is their funding mechanisms in place on those probably 75% to 80% of those projects already. So we are seeing funding continue to stay stable and have not seen any issues related to having jobs funding and having jobs get pulled out.

Got it. And then just one housekeeping question for me, what was Geneva's contribution in Q1?

What I would tell you about Geneva is that if you look at the margin profile we've seen most recently in the legacy business we're seeing a range right now of somewhere between 15% and 21% over the last several quarters, depending on delays and things of that nature. And Geneva is toward the high side of that range as we sit right now. And I think it's -- we've talked about it. We see revenue in the second quarter of somewhere in there of about $12.3 million or $12.4 million. I think that probably gives you a really pretty good idea.

Yes, absolutely. And just to follow-up, the revenue contribution in Q1, how much was it, was it only a partial quarter?

Yes. It was a partial quarter, I want to say it was around $8.3 million.

Got it, thank you.

Sure, thanks Gus.

Next question comes from David Wright of Henry Investment Trust. Please go ahead.

Hey Scott and Aaron, good morning. Hey Scott, at the end of your prepared remarks you gave a commentary on tons and jobs, can you -- can I trouble you to repeat those numbers?

Yes. For 2020, we are looking at a total of about 209,000 tons and about 240 jobs. In 2019, we saw about 242 jobs.

And how many tons?

Oh, I want to say it was probably in the area of about 219,000 or 220,000.

Okay. The -- in Geneva where you talk about strong precast order book, can you break that down into actual product areas, like just what was in demand or characterize it in some way?

Yes, the biggest product demand that we see at Geneva is reinforced concrete pipe and manhole applications. Manhole applications, including the manhole basin riser up to the street, really represent a pretty substantial amount of the business that we're doing at Geneva right now. There's a lot of smaller products like cohort [ph] and things like that, that add to the total, but a big piece of our businesses is RCP and manhole.

Okay, thanks. And then lastly, just in the press release you talk about the backlog and with the bidding -- the progress of bidding opportunities, was there any delay as a result of COVID, was it harder to get bids submitted or were less bids requested, etcetera?

I think that there's some delay in the bidding as a result of COVID. And I think it's similar to what we talked about a little bit earlier. It's the fact that we have a good deal of -- a good amount of people in this business working remotely. And a lot of times, it will slow down the permitting process and ultimately getting the job to where it's shovel ready. And that's really what we're seeing in delays. We're really not seeing anything with people saying, well, there's COVID going on, and we're just going to push this job way out into 2022. We haven't seen that. We've seen that these jobs have funding in place and momentum behind them. And the jobs that we see now going through here, we expect this momentum even with the COVID situation to carry out the next 18 months to three years. And that doesn't even include any kind of a bump up in the business that we would see with an infrastructure package, which looks like it's starting to get more legs under it, especially related to the Army Corps of Engineer projects in reservoirs and things like that. So we see a pretty significant amount of work coming for the next few years.

Well, that’s great. A very good quarter. Thanks so much.

Thank you.

The next question is a follow-up from Brent Thielman of D.A. Davidson. Please go ahead.

Hey guys, thanks for taking my follow-up. Scott, to try and put kind of a commentary around 2021 and 2022 in sort of context if you sat here a year ago in August, would you feel like you had that similar level of visibility looking out this year? I'm just trying to kind of think about how the next couple of years look for you based on what you can see today relative to maybe some points in time in the past?

Yes. I don't think it's any less visibility. I think that the COVID thing -- COVID virus, COVID-19 makes it a little bit more variable in nature, not meaning that jobs are going to get canceled, but meaning that they can actually move around. So what we're seeing as we've looked at this next three year plan is pretty large levels of demand in some of the traditional markets that we've seen large levels of demand in. And then some growing demand in some of the other markets. And it's -- certainly, as we look at it we try to throttle back our enthusiasm for the amount of work that we see coming at us that we've all been talking about for a number of years. But the demand across multiple regions looks to be substantial in the 2021, 2022 and 2023 time period. The central region, the northeast region, the western region all seem to have substantial demand as we go forward.

Got it. And then on SLRC, understanding there's some cost advantages to that facility. Can you kind of quantify or at least qualitatively talk about the profitability profile of that asset, maybe relative to the rest of the legacy platform?

Yes, it's as good as the rest of the legacy platform is profitability-wise. In some cases, it's a little bit better. Some of the -- one of the advantages of SLRC, Brent, that I think you and I have talked about before is the ability to really work on some of the -- some of the smaller diameter projects that before we had SLRC, we wouldn't have had really a good shot at. So I think that adds a big piece to it. So we've actually seen some quarters where SLRC margins are significantly higher than what we see in some of our legacy business. But it fluctuates around based on the mix and what we see in the products.

Okay, great, thank you for taking the follow-up.

No problem.

Next question comes from Tom Spiro of Spiro Capital. Please go ahead.

Tom Spiro, Spiro Capital. Good morning.

Good morning Tom, how are you?

I am well, I am well. Thank you, hope you are too. Just one question with the -- Scott, with the weakness in the oil patch, oil and gas price is so low, do you see any effort by some of the energy pipe guys to try to get into your business or do you anticipate that?

We haven't seen any of that since the last real downturn in the oil business. I think there was some lessons learned by the people from the energy business and getting into this it's a significantly different business. Obviously, when you're looking at a large diameter oil and gas pipe transmission lines, you're looking at running 6,000, 10,000, 12,000, 15,000 tons at a time and putting together 50 car unit trains to ship and not all the businesses like that in the water transmission side. Yes, we do have projects that are 20,000, 22,000, 24,000 tons, but there's a lot of 3,000 ton projects, 600 ton projects. So it's a significantly different business with a lot of different testing requirements. The hydro testing for the API products is significantly different than what we do in the water products. And in the water products there's a lot of fabrication that has to be done when we build out one of these engineered systems like we do in this business, which the energy guys don't do that kind of fabrication. So I think that the people that moved into that business before learned some lessons and right now, we don't see anybody picking at getting into the business. It doesn't mean that somebody won't eventually try. But I think it's a lot different business and I think the view of the marketplace is a lot different. So I think there's more caution going forward in the future before doing something like that.

Well, that’s kind of helpful. Many thanks, thank you.

Thanks Tom.

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Montross for any closing remarks.

Thank you again for everybody joining the call today. I'd like to conclude also by thanking all of our employees for their dedication and commitment to making Northwest Pipe Company a safe place to work. We're pleased now to be operating all of our production facilities through the pandemic. In addition, bidding activity has remained strong resulting in improved backlog in precast order book. Due to the complex nature of the impact of COVID-19 on the economy, it's difficult to make forward-looking projections on our revenue and margins at this time, though we firmly believe the structure of our business remains solid. We ended the quarter with our eighth consecutive quarter of continued strong backlog over 200 million. A trend that we expect to continue through the balance of the year. We look forward to speaking with you again on our third quarter call in November. Until then, everyone stay safe. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.