Good day and welcome to the Northwest Pipe third quarter 2021 earnings conference call. All participants are in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Scott Montross. Please go ahead.

Good morning and welcome to Northwest Pipe Company's third quarter 2021 earnings conference call. My name is Scott Montross and I am President and CEO of the company and I am 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 November 8, 2021 at approximately 4 p.m. Eastern Time. This call is being webcast and is available for replay. As we begin, I would like to remind everyone that the 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 the year ended December 31, 2020 and in our other SEC filings 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 today. I would like to begin with a review of our third quarter 2021 performance. As of September 30, our backlog including confirmed orders for the Northwest Pipe water transmission business was approximately $273 million, a near record compared to $234 million in the second quarter of 2021 and $231 million in the third quarter of 2020. Our third quarter project volumes, albeit at a slower than expected rate as COVID-related delays continued to push projects out into 2022. Despite the slower improvement in bidding, we still ended the quarter with a near record backlog and the quality of the back wall continues to improve which led to higher third quarter water transmission revenue and upward movement on margins. We expect the upward movement on backlog and margins to continue through year-end and lead to a stronger start to 2022. Our…

Thank you Scott and good morning everyone. I will begin with our third quarter 2021 financial results. Net income was $4.9 million or $0.50 per diluted share compared to $7.3 million or $0.73 per diluted share in the third quarter of 2020. Adjusted net income was $5.4 million or $0.54 diluted share, which included $0.6 million of pretax transaction costs specific to the ParkUSA acquisition. This compared to adjusted net income of $0.74 per diluted share in the third quarter of 2020. Adjusted net income excludes unique and unusual items and we provided for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments. Net sales increased 9% to $84.6 million compared to $77.6 million in the third quarter of 2020. Precast concrete revenues increased 12.6% to $15.2 million in the third quarter of 2021 compared to $12.5 million in the third quarter of 2020, primarily due to improved pricing and increased shipment volumes. As Scott indicated, we currently have strong demand for our concrete products. Steel pressure price revenues increased 7% for the third quarter of 2020 due to a 17% increase in selling price per ton, resulting from increased raw material costs and changes in product mix. This was partially offset by a 9% decrease in tons produced, resulting from changes in project timing. Due to the unique nature of the water and transmission systems we manufacture, production tons and the resulting sales price per ton do not always provide comparable metrics between periods as they are highly dependent on project timing and production mix. Gross profit decreased 20.8% to $12.4 million or 14.6% of sales compared to $15.6 million or 20.1% of sales in the third quarter of 2020. The decrease was primarily due to…

[Operator Instructions] And the first question comes from Zane Karimi with D.A. Davidson. Please go ahead.

Hi. Good morning Scott and congratulations on the solid quarter.

Hi Z. How are you?

Hi Zane. Thanks. How are you?

Doing well. Especially with this. Real quick, ParkUSA. Thinking about that, but how quickly can you pull ParkUSA products into existing Geneva and precast business? And how impactful can that be for you guys over the next 12 months?

I think, first of all, when you look at what we will be involved with over the next several months, it's a big integration push, right. So we are aligning the organizations now and getting people into different functions within the broader company. So it's probably not going to be until we get really early into next year when we are looking at getting this product spread going and you are right. The first peak place we are going to look is obviously where we have precast concrete assets already is at the Geneva locations. So I think you are probably with the kind of things that we have to go through because you are looking at making sure that you can do a product that's made by Park, which is a water control system or an environmental solution system that's within a precast vault. So you have to be able to do that product at Geneva, one, there's got to be some training involved with that, which we are looking at how we get that done now. And then two, there's the idea about how do you administrate that product through the process, product production control, scheduling, shipping, invoicing and all those things. So we are working through those things right now. So it's probably going to be probably what I would say, Zane, probably at least several months before it really picks up steam. Not to say that we are not going to be doing some of it earlier than that and making sure that we are working through that. But when you take a product that's not I would call, that hasn't existed at a plant before, it gets a little bit complex. So we are probably looking at mid next year before we have got an…

No, I appreciate it very much. This next one for you is a two-parter. But are there any projects that you guys have been tracking that you thought would need the infrastructure build funding and now could potentially have it? And how is that you think it is going to impact the competitive bidding environment as these markets seem to be picking up?

Okay. So let me address the first part first. The idea of the infrastructure package, really two pieces in the infrastructure package, right. There's the $50 billion piece for water, which there's going to be a substantial amount of that for getting lead pipe out of the systems, out of the water grid around major metropolitan areas. So that probably takes $15 billion or $20 billion of that piece. So what's left, that $30 billion or $35 billion, you will have some other things associated with that. We do think that that will probably spun some additional projects that maybe you are more speculative right now that really aren't on our radar because they are in a speculative form. But I think the other piece that's important, Zane, is the resiliency piece, which I think its resiliency piece is what they call it, is another $50 billion that is really focused more on drought situations and things of that nature. And as you know, I mean, we have a very serious drought situation in the western United States. When we talk about the jobs list, I mean we talked about the Red River Valley Water Supply job in North Dakota that they are involved in a drought now. I mean I think those funds probably start moving around to help some of the drought situation and they may start speeding up jobs like, for example and these are just examples like the site's reservoir job in California that's out a few years or the Red River Valley Water Supply job that's gotten pretty urgent as it is, I think those kind of things are going to be subject to that money coming from the resiliency piece. So there's really two parts that are going to affect us from this infrastructure package and we are pretty confident that we are going to see additional work related to this infrastructure package. But generally, if you are looking at speculative work, those kind of things are going to be maybe two or three years out into the future. But if some of these ones can get to fund these projects more quickly that are out there right now that could have a much more immediate effect, like I said, on the Red River Valley Water Supply project or things like that, California is in significant drought. So there's a lot of places I think that that's going to be able to go into play and create new projects going forward for the steel pressure pipe business. I also think that the infrastructure package with the transportation piece lends itself to even greater demand than what we are seeing right now on the precast concrete side because precast has a tendency to be a little bit more related to Department of Transportation stuff. So there's multiple fronts here and we are pretty excited about the infrastructure package.

Okay. Great. And then just on the second part, kind of how is the competitive bidding now that the markets are picking up? And how are your thoughts on the backlog into 4Q, both on size or relative margin there?

Yes. What I would say, Zane, is this year is actually, we expected the second half to pick up a lot more than it did in bidding. We expected a really big second half. I know it improved versus what we saw in the first half, but it didn't improve as much as we thought it was going to. So when you look at 2021, it's a relatively small bidding year. All of a sudden, we have backlogs that are starting to grow industry-wide based on the bidding that has happened. And what we are seeing right now, I think, is a more reasonable bidding landscape as we were going through the end of the year. And we are expecting that the second half is still going to be a little bit bigger, quite a little, I would say, somewhat bigger than what we saw in the first half. And I think that, as we said in the script and even in the earnings release, we expect to see the upward movement of, not only the backlog, but the continued upward movement of margins as we come out of a pretty low demand period and expect to really kind of hit the 2022 running pretty hard. And I think you asked a little bit of a question on the fourth quarter and how that looks. What I would say about the fourth quarter is that it's the time of the year that is and you have got two major holidays in the fourth quarter and it's the time of the year that at least in recent years has been pretty significantly impacted by weather situations. So we are being a little bit cautious with the fourth quarter right now, just because of that. The third quarter was relatively strong. And I think we are talking about, especially on the steel pressure pipe side, the fourth quarter being down a little bit and that's just with concern over weather things that we are seeing out there than we have normally seen. So ultimately, we still think that the fourth quarter is a quarter that's going to be relatively strong as we go in the slow part of the year for not only the water transmission piece because, like I said, the holidays and the inclement weather, but the precast business has continued to remain pretty strong all throughout the year. When you look at where we were last year with precast in the fourth quarter, we expect that to be a bit stronger this year in the fourth quarter even than what we saw last year. So we expect fourth quarter to look pretty good.

Okay. Thank you. And last one for me, if I can. Where are you seeing margins going fourth quarter or through the new 2022 with the business picking up? And how are you managing through areas outside of steel with regards to supply chain constraints?

Yes. I would say that we are continuing to see the upward movement on margins now. I will break this down into the pieces. With the steel pressure pipe piece, we have seen the margin just starting to pick up. It's moving up relatively slowly. And remember, we are coming out of a pretty slow period for the last year in steel pressure pipe bidding and there was a lot of pressure on bids really from the third quarter of 2020 through the second quarter of 2021. So now that pressure is abating a little bit. So we believe that, that margin increase is going to be relatively slow as we go through the fourth quarter and into the first quarter, but it should continue to gain ground as we go over that period of time. When we look at the precast business and really looking at the Geneva piece, the precast business for Geneva has been very strong this year. It actually has grown this year to a stronger CAGR than we thought even when we did the earnings call or the conference call after the acquisition. So that margin has grown to and we have tried to characterize that in relation to the water transmission business. That margin has grown to the very high side of what we see in the water transmission business and it appears to continue to be moving upward. Our orderbook at the Geneva facilities is what I would call pretty much at all-time high of what we are seeing as far as orderbooks. And then the other piece of that is looking at Park, the Park margins when you are thinking of those, they are probably a little bit past where we see Geneva in relation to the water transmission margins. And they also have a backlog right now as we are coming through the fourth quarter that is at a historically high number. So we expect the margins on all of the precast and precast-related to continue to improve as we go through the fourth quarter and into early next year. So with big orderbooks, big backlogs and really upward movement on margins in each one of the cases.

It sounds like 2022 is really shaping up to be a solid year. Congratulations there.

There was one more piece of that. Did I miss one piece of that?

You have touched a little bit on it. Yes. Yes. You touched a little bit, but on any other supply chain constraints outside of steel?

Yes. I would say, like we said in the script, steel is abating. Steel is come off its highs. When I am looking at steel right now, I don't think steel drops through the floor, okay. And you will hear a lot of people say, Oh, it's going to drop below $1,000 a ton. I think it may be $1,500, $1,400, something like that. It's going to drop quite a bit. But I don't think it's going to drop through the floor. So I think steel-wise, we are okay. I think the transportation issues are out there with trucking. Obviously, that's widely publicized in the media across the United States. So there's a little bit more of an issue being able to ship products when you need to be able to ship them. But we have been able to get through that. We have got our own trucks at the Park location or at the Geneva locations and some of our own trucks at the Park locations. So really the ones where we have a little bit of an issue is on the steel pressure pipe side. But as far as other products, maybe a little bit of a slowdown in being able to get cement deliveries for the precast business, but nothing major. We are not seeing prices go out of whack. So we really haven't seen too much besides the transportation piece right now with the supply chain as it sits. So I can't say. And I think one of the things, though, I would say with that, Zane, is when you look at jobs delaying in bidding that we are still seeing in the third quarter and delaying out into 2022, I think a lot of those are COVID-related. I think some of those are supply chain related, if you include labor issues and being able to get equipment to different spots. So I think the effect on us isn't really direct. It's more indirect with the jobs moving out in relation to those things, if that makes sense.

Yes. It does. Thank you for the color.

Absolutely.

The next question comes from Gus Richard with Northland. Please go ahead.

Yes. Thanks for taking the question. Just following up on the gross margins in the current quarter and there was a couple of moving pieces. I was wondering if you could talk on the pressure pipe business? How much of the strength in gross margins was from mix and how much of it was from steel prices moderating and utilization for that matter?

I think, Gus, on the price improvements on steel pressure pipe, it was more related to the bidding environment that's going on. I mean we are starting to see backlogs that have started to improve at our major competitors. And as a result, there's not as much pressure on bidding. So the margin is starting to move up a little bit. I think it would be moving up quite a bit more if everything that we thought was originally going to bid in the second half of the year actually was bidding and not delaying out into 2022. I think it would be moving significantly faster because, like I said, I think that the bidding ended up being a pretty ho-hum bidding year this year. So I don't think it's steel price-related. Especially on the gross margin percentage, I think it's definitely more of the bidding environment and the way backlogs are starting to look industry-wide. But I would say that the improvement in that steel pressure pipe margin, while it's going to continue, is going to continue at a relatively slow pace.

Got it. Very helpful. And then just looking at working capital needs, inventories and receivables went up sequentially quite a bit. And I am wondering cash conversion, will those balances come down and sort of spin off some cash? Or how is that working? Any help there?

Yes. I think for a spell, probably the next couple of quarters, Gus, we are probably going to be staying at relatively elevated levels on contract assets just due to what you are seeing with steel pricing. Our average steel price consumed is starting to grow and get closer to where we are currently buying that, which is just under $2,000 a ton. I think our trade receivables, we are doing very good on that. We actively manage our trade receivables and all our working capital for that matter have a very good current percentage on our trade receivables right now. Inventories are probably where I am a little conscious of just kind of the lumpiness that could occur with the buy. Obviously, we got a big backlog right now on the steel pressure pipe side, have some orders to fulfill, expecting potential for some lumpiness as it relates to the buy side for steel as we get out into the first quarter. I think we are pretty steady on the fourth quarter. But overall, I mean I am thinking we are at a very good level on the credit facility. And I think we are nearing the top of the cycle as it relates to getting some of these higher steel prices through our contract asset balance and we should be kind of leveling off on that sort of stuff. So I think we have got a good position for liquidity as we manage working capital in the near future here.

The other thing, Gus, is the steel price starting to, it's crested and starting to come down. As it drops and like I said, I think it's going to drop relatively slowly into probably the $1,400, $1,500 range. That's going to bring cash to the balance sheet because it topped out at relatively close to $2,000 a ton. So you are going to see, I think, that cash come back to the balance sheet over probably the next several months is what we are looking at, probably several, maybe a year. So I think that's something that's going to happen too.

Okay. And just to be clear though, your borrowing capacity is, I think, $32 million currently. And do you think you will be cash flow positive in the fourth quarter or no?

Yes. I think we are going to be, outside of the one unique item that we have for the fourth quarter, which I talked about, which was the Jefferies investment banking fee, yes, I think we are going to be cash flow positive. I think, like I said, our working capital has leveled off and the profitability from the combined business is going to get us over the hump for the quarter and then beyond that too, Gus. I think we obviously have burned through a lot of working capital and seeing the effects of that on our cash in this year. I think holistically, that's a better position to be in for 2022 because we are already kind of at the top of the cycle. So yes, I think even beyond the fourth quarter, cash flows are going to be improving for this business.

Got it. Perfect. And then just a follow-on for me on the ParkUSA business and you have probably already touched on this. But the seasonality of that business and sort of what you think the growth rate might be for 2022 for that business, just ballpark?

I would say the seasonality is a little bit slower in the fourth quarter. Obviously, weather events, lots of rain, normally, not generally like freeze like we saw, I think, last year, earlier this year, but heavy rain that slowed things down. So if you think about it and think about Park's business and last year, they were about $67 million. And divide it into four quarters, you would lap a little bit off of probably the first quarter and probably a little bit more in the fourth quarter generally because I think that the weather effects happens and plus you have the holidays and the slower shipping rate during that quarter. So you do have a little bit of seasonality in that.

Got it. And then just any color on what you think the growth rate might be for that business next year?

Yes. I think if you look at the business right now and I hesitate to give any growth rate based on the organic growth that we are going to work on driving with spreading the product. But just as a general rule, I think looking at that business growing at about a CAGR that's about 3.5% to 4% is probably in line, similar to what we talked about when we acquired Geneva, Gus.

Perfect.

But I think the organic growth in the product spread, probably what I would say, may expedite that a little bit.

Got it. That's perfect. Thanks you so much. Great quarter.

Good to talk to you, Gus.

Thanks Gus.

[Operator Instructions] Your next question comes from David Wright with Henry Investment Trust. Please go ahead.

Hi. Good morning.

Hi David.

Good morning David.

Remind me, what did you pay for Geneva EBITDA multiple?

It was 7.4. Yes, 7.4.

Right. So then you paid 6.25 times for ParkUSA. Does that sound right?

Right.

That seems like an awful good buy because it seems that Park may be higher, what I am going to call, technology component to it than the Geneva business. Am I thinking about that the right way?

Yes. I think you are definitely thinking about it the right way, David, because I mean, these are engineered water control systems inside these precast vaults in environmental solutions. So these are really engineered systems. So you are talking about a company that has multiple patents, a significant amount of trademarks, obviously, intellectual property that goes along with all of that and a relatively, what I would say, robust engineering effort to be able to continue to create and improve these products. So you are thinking about that the right way. And obviously, we think we got a pretty good buy with this.

Well, yes. I mean it's exciting. I mean you are not going to be like a Badger Meter or something, but it's really is a lot sexier than the original steel water pipe business. And second question, thanks for detailing all of the different potential jobs that could be coming up for bid. And one that you mentioned was Fort Collins, which I think you said was related to a Core of Engineers project, is that correct?

Absolutely yes.

Yes. Can you talk about that a little more? 150 miles of pipeline sounds pretty exciting.

Well, obviously, there's a whole bunch of development that has to go on with the Army Corps of Engineers. I think it's one that we are going to keep our eyes on. I think Colorado, when you look at the amount of projects that we have done there over the years and obviously we used to have a facility in Denver and then things slowed down for a number of years, but there were some really, really big projects there. And probably from about 2008 through about 2011 that probably used, I don't know, 100 miles of pipe, I can't remember exactly the name of the project. Some of it was before I came onboard, but there were a lot of projects there. And I think what they are seeing is the same kind of situation, David, with the droughts, the fires, those kind of things. And it's not only that project. I think that project is getting steam but also we had Red River Valley Water Supply project that is in the Dakotas. That's one that seems to really be picking up steam. And like I said before, I think that those kind of projects get a little bit of momentum potentially from the resiliency part of the infrastructure package. So ultimately, those are still things that we are watching very closely because the Fort Collins project is a 2023 project right now. So a lot of things can happen between now and then. But we do think that the infrastructure package potentially could help those. And again, we are looking at demand over the next couple of years in the water infrastructure business. It looks like it continues to improve. And these just will add to it.

Which will help pricing probably as well?

Which will help pricing and will help production levels and will help absorption and will help margins.

Well, listen, great report and best wishes to both of you for the upcoming holiday season.

Same to you. David. It was really good to talk to you. Good to hear from you.

Thanks very much.

This concludes our question-and-answer session. I will now turn the conference back over to management for any closing remarks.

Okay. Thank you. And I would like to thank everybody again today for joining the call. Before we close the call, I want to leave you with a few key takeaways. I think what we are seeing right now is we are seeing a water transmission backlog that is exciting and it's really starting to move as we go through the end of this year and really is putting us in a pretty strong position as we enter 2022. We are going to enter 2022, we believe, in a much stronger position than we did 2021 definitely due to the backlog. Again, the Geneva business has been strong. It remains strong. Margins continue to be very strong. And as I said before, the orderbook is at a really high level historically. And again, we are very excited to have closed on the acquisition of ParkUSA. We think that aligns really well with the strategy and we are excited to the things that can happen post the acquisition and with the idea of product spreading and all the other attributes they have with a faster cash cycle, with a higher velocity, orderbook, all those kind of things. And what we are seeing from them is also a situation where they have a very high orderbook and margins that are strong. And like the steel pressure pipe business, we expect to enter 2022 in the precast pipe-related business with some pretty significant momentum. So I would like to thank everybody again for their attention today and we look forward to speaking with you all again on our fourth quarter call early in 2022. So thank you very much.

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