Greetings. Welcome to Northwest Pipe Company's Third Quarter 2022 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. At this time, I will now turn the conference over to Scott Montross, CEO. Mr. Montross, you may now begin.

Good morning, and welcome to Northwest Pipe Company's third quarter 2022 earnings conference call. My name is Scott Montross, and I am the 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, November 8, 2022, at approximately 4:00 p.m. Eastern Time. This call is being webcast, and it is available for 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 the year ended December 31, 2021 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 all for joining us today. I'll begin with a review of our third quarter performance. Aaron will then walk you through our financials in greater detail. Consolidated net sales were $123 million, which included a $20.5 million contribution from ParkUSA. The revenue from our steel pressure pipe segment increased 20.5% year-over-year to a very strong $83.7 million. The increase was primarily due to higher production volumes and higher price levels on projects that we have in backlog, given the elevated material costs that we experienced late last year and early in 2022. Compared to the prior quarter, steel pressure pipe revenue increased 8.6% and which exceeded our expectations given the less-than-expected impact from the flooding events that occurred at two of our main steel pressure pipe plants at the beginning of the third quarter. Our steel pressure pipe sales continue to benefit from the stronger…

Thank you, Scott, and good morning, everyone. I'll begin with our third quarter profitability. Consolidated net income was $10 million or $0.99 per diluted share compared to $4.9 million or $0.50 per diluted share in the third quarter of 2021. Our consolidated net income in the third quarter of 2022 included $0.8 million in amortization expense specific to ParkUSA, which added $0.2 million in associated tax expense resulted in adjusted net income of $10.5 million in the third quarter of 2022 or $1.05 per diluted share compared to $5.4 million or $0.54 per diluted share in the third quarter of 2021. Adjusted net income is 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 for each period. Consolidated net sales increased 45.3% to $123 million compared to $84.6 million in the third quarter of 2021. The steel pressure pipe segment sales increased 20.5% to $83.7 million compared to $69.4 million in 2021, driven primarily by a 17% increase in our tons produced mainly due to changes in project timing as well as a 3% increase in our selling price per ton, resulting from changes in product mix. Precast segment sales increased 158.6% and to $39.3 million compared to $15.2 million in the third quarter of 2021, primarily due to $20.5 million contribution from ParkUSA operations. In addition, segment sales benefited from a 24% increase in sales at our pre-existing precast operations resulting from a 49% increase in selling prices on continued strong demand for our concrete products coupled with increased raw material input costs, which were partially offset by a 17% decrease in volume shipped due to changes in product mix. Due to the unique nature of the precast products we manufacture, shipment volumes and…

[Operator Instructions] And our first question is from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Hi, thanks. Good morning, Scott, on the pressure pipe business. I think there was some anticipation that the backlog might sort of shrink here into the second half as you start to ramp up production, but I guess, encouragingly, it picked up. Just wondering maybe what's been the surprise there, whether that was selection on a major program, maybe you didn't anticipate maybe some pull-in bids that you might that might come in later that ultimately fell into the quarter, just some thoughts around that and maybe directionally where you see ahead in the near term?

Yes. I think that's a good question, Brent, because as we originally talked about the backlog at the beginning of the year, we thought that the first quarter was going to end up being the high point in the backlog, right? But we've seen that backlog stay in a relatively tight range for steel pressure pipe. We've had some projects pull into 2022 and due to some of the project timing and specifications and the capabilities that we have, we've had a few more projects that we've won during that time period. And therefore, the backlog has been pretty consistent. And we think that through the end of the year, it's going to travel really at a relatively tight range and sets us up to come into 2023, real strong on the steel pressure pipe side. So I mean that's - it was - and I keep looking at that going, my god, I said we were going to be a high point at the end of the first quarter, but it's just kind of continued on. So we're pretty pleased with the situation on steel pressure pipe.

Yes. Yes. That's good to see. And then it looks like you're still recognizing positive pricing and pressure pipe in the third quarter. When do you think that we start to see the flow through of lower pricing just related to the steel cost declines you talked about? And I guess, Scott, the next question would be I think about the sheer volume of bids, opportunities that are out there. Is that enough to offset what I would anticipate is some pressure on the pricing side of pressure pipe.

Okay. So - and what I would say, Brent, is when you look at the backlog, we're already seeing some of that steel price drop in the backlog. It's already in there. But what we have on steel pressure pipe is the backlog right now, that's about 23% higher than it was at the end of the second quarter in tons. So we've got a significant amount of tons in the backlog. And incidentally, we also got a relatively large reinforced concrete pipe job at our Tracy plant. As you remember, we - which is in our backlog, too, Tracy does some reinforced concrete pipe, and they just got another major project there. So that's also adding the backlog. So it's - I think the tons of backlog production levels are improving. We're seeing the prices on steel coming down. So project prices are moderating down. But I think the volume, the sheer volume that's being run is starting to offset that a bit. plus because of the bidding, some of the bidding has some pretty good margins in it just because so much stuff has been bidding. As far as the steel price flowing through I think what we see ultimately is not really an impact on the gross margins but more of an impact on the gross profit dollars because you're really dealing with small - maybe smaller revenue numbers. But right now, I think that it all looks really positive. I think the volume is offsetting some of the price decline, and we're expecting a pretty good fourth quarter on steel pressure pipe, too. And normally, it gets a little dicey in the fourth quarter because of the weather and the holidays, but it's looking pretty solid right now.

Yes, that's great. Maybe just one more. And look, I mean, pre-cash contributions, notwithstanding that ERP challenges are still fantastic. I guess just sort of a 2-part question for me, Scott, we just - it looks like I guess just understanding ParkUSA a little better. I mean would you have expected that business to see a pickup from the second quarter to the third quarter from a revenue perspective? Just to get a sense of this year impact that this implementation was at?

When we've looked at it, when are and I've looked at it, we think that probably the second and third quarters without any impact of the implementation of the ERP system would have probably been pretty similar. So I mean, you can see that, I think what we figured out is it probably affected the revenue somewhere in the area of about $4 million and maybe 500 basis points on the margin. So there was that impact. But it's kind of one of those things we're kind of going through the growing pains with the company, and this stuff is pretty systems-related. So we've got to go through this and get the thing done. But I think the impact was there, and we wanted to call it out. But certainly, the park business is still very strong.

Yes, okay. Well, I appreciate the color, I'll get back in queue.

[Operator Instructions] Our next question is from the line of David Wright with Henry Investment Trust. Please proceed with your question.

Hi, good morning. Scott, Aaron, look at one of the things that you were striving for was to have some continuity in quarter-to-quarter results. And I'd just note that Q2 and Q3 are almost identical in the results that not suggesting you could do that every quarter, but congratulations there.

That's what we strive for, though, David.

Okay. I wanted to ask a question about the press release that came out last week on the San Diego job. So in the press release, you're manufacturing 4,800 tons of engineered steel pipe for a project that's primarily 6.5 miles of parallel 30- and 48-inch pipeline. Is that 4,800 tons then able to translate into 6.5 miles of parallel pipeline?

Yes, roughly, yes. Yes.

And then the other thing I wanted to ask was when you say it's engineered steel pipe with cement mortar lining tape wrap coatings, cement more to over code. Is that sort of like the deluxe package? Or can you do much more to water.

It's all based on the spec that the owner has, right? Cement motor lining obviously, is pretty common lining for steel pressure pipe, probably 70% or 75% of all the jobs we do has that. But when you put the tape coding over it, what they do is put cement more to coating over really to protect the tape and the corrosion responsibility of the tape. So they are - they've been very cautious with that spec in here to tell you they're getting a good product. So...

And that results in a little bit of pricing as well with those extra features.

Oh, yes, yes. Those things, obviously, there - when you're building up an estimate on the job, like that job. And these are large estimates. You go through not only the bar cylinder making, but the cost and relevant per square foot of coating, per square foot of lining. And in this case, you really have two coatings on the things. So those, yes, are additive to all that.

Okay. Well, listen, you guys are doing a great job during the company in this new direction. The results are showing that, good luck with your ERP conversion there in Q4 and talk to you next time.

Thanks, David. Always good to talk to you.

Our next question is a follow-up from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

I'm back. Aaron, is there any way to give us a feel for the portion of the costs related to the ERP implementation that sort of don't repeat as we go into next year. I know it's still that's showing up in SG&A. I'm just trying to get a sense of what's going to be the norm for SG&A as we move into 2023 on a run rate basis? Is that cost base?

Yes, there is a little bit of incremental cost, obviously, with some extra bodies as we try to do some things. Most of those are kind of more on the operational side. We don't have a whole lot of consulting costs going through a little bit - a little bit more was expensed actually in the year prior. As we were doing some planning for the project. Really, what you see with the SG&A, Brent, is just to pick up incentive compensation, in addition to all the stuff we brought on with Park, which is human capital related, we have some incentive compensation that fluctuates with the company's profitability. So that's a lot of the story. We made a little bit of a catch-up on that expense level in Q3 compared to the prior quarter.

Okay. It sounds like this year's run rate is something to build off of in the subsequent years here.

Yes, I think so. I mean I think right now, there's nothing that we see as a real synergy in costs. I mean the amortization is going to stick around, obviously, There'll be some ebbs and flows. But at this point, I think what you're seeing for our SG&A at the current profitability levels are pretty good level for what you see in the future.

Okay. And then I mean, it does look like you were able to buy down a little bit of debt this quarter. It seems like production is going to stay at pretty high levels here over the near term. Just wondering if you think you'll still be in a position to see some loosening up in working capital in the fourth quarter as you tend to see and ultimately bring in some more cash to lower debt. Just curious kind of how you see that playing out over the next three, six months?

Yes. I think I see some in the fourth quarter less than what we were able to realize in the third quarter with free cash flow of about $12 million. I think we'll see a little bit in the fourth quarter. I think it does kind of come through a little bit of a bigger wave in the first quarter. What we're looking at right now is a little bit of a counterbalance steel prices are starting to come down. They're not really coming in into the numbers that we've seen for the third quarter yet. They will come in as we progress into the fourth quarter and the first quarter of next year. But then we're also ramping up production levels, right? So there's a little bit of a counterbalance there that we're not quite getting the benefits of through working capital and that release of the really big buildup that really occurred back in 2021. So some of that's released this year, but we should still see a little bit more of that into 2023, especially prices for steel come down to the levels that they were early 2021 or 2021, I guess, right, which is probably the $600 range.

Okay. Okay. And just one more on the precast side. I think Geneva tends to have a little more exposure to new housing construction. I know this isn't a question yet. But I mean, the precast order book still looks awfully healthy. I assume that includes - looks like that includes Geneva. I don't know, any feedback from the field in terms of the impacts you're seeing from that market on the business.

These are - we're having some pretty interesting discussions around the impacts on obviously, the residential market, which is - that's where Geneva is squarely centered. When you start looking at what some of the publications are saying like the National Association of Homebuilders and the housing market index, obviously, they've turned pretty negative sentiment over the last several months here. But the customers that we're talking to aren't really doing gloom there, Brent. They're being cautious, but we're still seeing really, really low unemployment rates, really, especially in the markets that we serve and labor is not getting any easier to get into those markets in those markets. And I think one of the things that we're starting to recognize is that there's this massive bubble of people that are 20-something to 30 years old that are going to be looking for housing over the next two to three years. And I think what you start to see maybe is a little bit of a transition in how the builders are looking at things. They may have to start looking at, hey, we may have to take lower margins to offset the interest rate increases are actually focused on building houses that are $400,000 to $500,000 houses versus $800,000, $900,000 houses. So I think what you we're looking at going out into the future, we're probably going to see a slowdown for a period of time related to all of this. But people are still going to need a place to live is what the sentiment is. And maybe because of the interest rates, the multifamily housing or apartments become more prevalent during that period of time. For example, in Utah, I think Utah has like the highest - the third highest metro rental rate in the country. So…

Yes, yes. No, all really helpful. Appreciate it guys.

Thank you. At this time, we've reached the end of the question-and-answer session. And I'll turn the call over to Scott Montross for closing remarks.

Yes. I think just a couple of points to be made. Like we were just talking about with Brent's questions, I think that the precast infrastructure, the residential side of the business, has some short-term challenges because of the interest rate impacts on the residential housing. But I think as we get out past that short term, it's - there's still - the fundamentals remain strong in that business. And we expect on the park side, which is the control system, it looks like it's going to remain strong with the growth in the nonresidential side, especially since a lot of the Park right now is based in Texas, we're looking at oil prices that are starting the $85 to $90 a barrel. So that looks pretty solid going forward. And I think steel pressure pipe with the backlog at record levels, and the strong bidding activity that we're actually even seeing as we go through the last part of this year, we've got - there's all kinds of stuff fitting between now and the end of the year. We expect to carry a strong backlog into 2023. And ultimately, if we do see a little bit of a slowdown in the residential impact on Geneva, we believe that we can absorb a little bit of that with the strength in the steel pressure pipe business, which is a little bit of a reversal of what we've been seeing. So just to leave you with those things, but I'd like to thank everybody again by joining the call today. Obviously, it's - there's a lot of things going on. I think there's a lot of great things going on for the company. I think that it can be said that despite macroeconomic headwinds, we expect the precast business to remain fairly strong for the near term. And despite the ERP challenges, Park is continuing to be strong, and it's really kind of setting up with the product spread for the future, we see really good growth - organic growth opportunities there. So - and we just talked about steel pressure pipe. That's probably as solid as I've seen it as a positioning going into the next year since I've been here and it's been 12 years. So a lot of good things going on for the company. I think it's a lot of positives. And I'd just like to thank everybody for their time and attention today and look forward to speaking to you again early next year about the fourth quarter. So thanks very much, and we appreciate your time.

This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.