Greetings. Welcome to Northwest Pipe Company Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Scott Montross. You may now begin.

Good morning and welcome to Northwest Pipe Company's fourth quarter and full year 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, March 15th, 2023, at approximately 4:00 P.M. Eastern Time. This call is being webcast and it is available for replay. As I 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 31st, 2022, which will be filed later today 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 2022 performance and outlook. Aaron will then walk you through our financials in greater detail. We generated annual revenue of $457.7 million in 2022, which was up 37.3% year-over-year and included $84.7 million contribution from our acquisition of ParkUSA. Annual revenue from our Steel Pressure Pipe segment increased 18.4% over 2021 to a record high of $307.6 million. Our Steel Pressure Pipe business continued to gain strength throughout 2022, following a slow start to the year. We experienced strong bidding activity in the second half of the year and particularly in the fourth quarter, which allowed us to continue to add to an already strong backlog. We also benefited from higher project pricing in 2022, mainly related to the long lead-time nature of Steel…

Thank you, Scott and good morning everyone. Before I discuss our financial results, I would like to expand on the identified efficiencies related to the system implementation project that Scott alluded to earlier. As will be reported in our 2022 Form 10-K, which will be issued later today, we identified efficiencies in business process controls specific to ParkUSA's sales and cost of sales transactions. As a result of this control weakness, there is a reasonable possibility that a material misstatement in our future interim financial statements could go undetected. Importantly, these deficiencies have not impacted the accuracy of our current or historical financial results. Our remediation plan will emphasize on broader oversight of the execution of these critical business controls. Until our remediation work is complete, expanded monitoring of the ParkUSA sales and cost of sales transactions will be required to ensure continued integrity of our interim financial statements. I will provide additional updates throughout the year with the goal of having this material weakness remediated as soon as possible. Now, I'll turn to the fourth quarter profitability. After that, I will review the full year 2022 performance as well as discuss our cash flow and liquidity. Consolidated net income for the fourth quarter was $8 million or $0.79 per diluted share compared to $2.3 million or $0.23 per diluted share in the fourth quarter 2021. Our consolidated net income in the fourth quarter of 2022 included $0.8 million in amortization expense specific to ParkUSA, which net of $0.2 million in associated tax expense resulted in adjusted net income of $8.5 million in the fourth quarter of 2022 or $0.85 per diluted share. Our consolidated net income in the fourth quarter of 2021 included $2.6 million of acquisition-related transaction costs, $2.3 million of acquisition-related inventory charges, and $0.9 million for…

And at this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Ted Jackson with Northland Securities. Please proceed with your question. And Ted, you are up for question. Make sure your line is not mute.

Sorry about that. I was on mute. Yes, as I said, hi, but you didn't hear that, I actually had about a dozen question presentation. So thorough you kind of answered all. I would like to touch base maybe quickly, on steel in 2022, can you give us some kind of sense in terms of what percentage of your revenue it was?

On projects, Ted, I would say that -- and this is steel pressure pipe pretty much primarily, because that's the main…

That's what I'm talking about.

It's probably somewhere in the area of about 25% to 30%. So it moves the needle. It may be sometimes a little bit higher when steel prices get higher. In 2022, we started the year with really, really high steel prices. Like I guess it was $1,400, $1,500 a ton. It dropped, then went back up and then dropped all the way down to just below $700 a ton at the end of the year. Now it started low this year and it's increasing very, very rapidly right now to the point now where we're -- we've gone from some $700 a ton back up to numbers, we're looking at about $1,200 a ton. So, obviously, that starts to get built into the project pricing and the revenue as we go forward. And usually, it lags by several months, but it starts building into the project pricing. And ultimately, like we said in the script, that's actually good for us. It's positive because, obviously, higher pricing leads to higher gross profit levels, not necessarily higher gross margins, but higher gross profit levels. So we're good with higher steel prices. We just don't like a lot of volatility with steel. As long as we can get what we need, I think that's a great thing for us.

Sorry, I'm kind of multitasking. Then like thinking about 2023 in steel prices, like I do break that out of the model, around $750 a ton. What do you guys see in terms of like an average price per ton of steel? What are you thinking about?

Well, obviously, it started off relatively low, but some of the stuff that we're looking at, it probably continues to travel up for a period of time, and I'm talking really about hot rolled coil prices, but you get past probably the May, June time frame. The current projections are as it starts to drop. So, right now, we're probably somewhere in the area of $1,200 a ton and seeing a lot of price increase announcements from the steel guys. So the rest of the year, it's looking more like $850-ish. So probably average-wise, you're -- I don't know, probably $900, $950 in that area.

And then with regards to your steel suppliers, are they -- I mean, is -- like are your orders still coming through on time? Are you having -- you commented a bit about some issues on the supply side. I mean it's one thing if steel prices go up, but you're still able to get the steel delivered relative to your projects. It's another thing, prices go up. And then the -- they're deferring shipment, you know what I'm saying? Are you seeing some shipment deferrals or delays or anything on that front?

Well, having come from the steel industry, those -- some of those delays in late shipments are just inherent in the business. But we certainly -- we see those every once in a while, but we're certainly not seeing them as often as we saw them like in 2021 when steel was really, really tough to get. So, I would say at this point, it's not really that much of an issue. As the prices go up and demand goes up, it could get a little bit tighter, but I think we're pretty well positioned with multiple steel suppliers to be able to handle any kind of steel requirements that we have, and especially with what we see in front of us. So -- and everything in the backlog, Ted, the 372 million tons of backlog, we have commitments on steel for that already. So ultimately, that's in good shape. It's just the near-term stuff when you get orders. If it gets really busy, the deliveries can start to jump around a little bit, but we really haven't seen much of that to this point at all.

When you look at your first quarter and the challenges that you have, I recognize it's mainly weather-related. It's not a different side. But what are your thoughts with regards to what the revenue picture is going to look like in the fourth quarter or the first quarter of 2021…?

What I would say, obviously, is we don't give guidance on revenue or anything of that nature on these calls. But we're having weather issues, but we've also had some project delays that are customer-driven with really near-term projects. So the revenue is going to be down a bit in the first quarter. But those things actually get made up in the rest of the year. The issue is they don't get made up in a quarter in steel pressure pipe. So after -- what I would tell you is after a slow first quarter, we think we're pretty much on the same trajectory revenue wise that we were in 2023 for steel pressure pipe with what's in our backlog, and the really good thing about this is like we said in the script, the quality of the margin that we have in backlog is pretty solid too. So, I think we're looking forward to a pretty good second half of -- or the last three quarters of 2023 in regards to steel pressure pipe really on a pretty similar trajectory based on the backlog that we have now, same projectors as we saw in 2022.

Well, I got to say, when I look at your backlog number and I try to make adjustments to take it down to a tons level, it seems like the backlog, you've got a lot of visibility.

Yes.

Anyway, I'm going to step out of line so other people can ask questions, and I might go back.

Okay. Sounds good. Thanks, Ted.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Hey, thanks. Good morning. Can you guys hear me okay?

Yes. We hear you great. Good morning, Brent.

Okay. Great. Thanks. Hey -- Aaron, thanks for all the detail. I wanted to come back to Park, because I mean you put up pretty significant contributions in precast despite the fact you had some of these headwinds with the ERP implementation. Just wondering, can you parse out what impact that actually had here in the quarter?

Brent, on the impact on the fourth quarter for ParkUSA specifically?

Yes.

Okay. So it's -- when you're looking at that we had obviously multiple days down. And you're probably looking at something that's a couple of million or better in revenue. And with the margin potential on that, generally, the margin potential, as you see, those margins are like high 20s to running up to 30% range. So you can do the math on what we missed out on those. So there was a little bit of miss, but I mean we still -- the interesting thing is that when we acquired Park in 2021, they were about, I guess, about $71 million in revenue. And this year, they finished at almost $85 million even with those delays, and obviously, added a ton of gross profit to our business. So it's just a matter of getting this thing stabilized. And Aaron's going to talk about the ERP system, but there was the concern right up front. During the acquisition, Aaron turned to me and said, man, I'll tell you, this is going to be a hard one because of the complexity of the product, and he wasn't wrong. So we spent a lot of time on that, but I think the facilities are operating very well. And I'm going to just add on to a little bit that you didn't ask. The one thing we're seeing with the Park business is that really has not slowed down at all. To this point, the non-residential business in Texas is very strong and we've got a lot of people moving to Texas, and every school and hospital and multifamily housing uses Park products, whether it's meter vault or backflow preventers. So we're seeing a -- in fact, if you look at the Park order backlog last year 2021 December versus this year 2022 December, it's significantly higher. So the Park business is very strong right now.

Yes. I mean, despite the issues, the transaction has been usually accretive for you?

Yes.

I guess -- and understanding that, you're going to have some lingering stuff to work through in the first quarter, got -- I mean the business precast overall, it looks like ex these issues is doing close to 30% or above in gross margins. How do you think about the precast? Or how should we think about the precast margins overall in 2023? Should they abate from those levels? Or can you sustain that?

Yes. It's interesting that when you look at things like that, Brent, because obviously, the Park business is really, really strong. And we haven't seen much impact on those margins yet. Now, the interest rate environment, if it stays like it is, could have a little impact on the margins in the Park side, the non-residential side. But in our forecast, we haven't built a lot into it. Like you said, those margins are approaching 30%. In some cases, they're a little bit above 30%. So they could end up being off a couple of hundred basis points just because of the interest rate environment and the cautiousness on the Park side of the business. What I would tell you about the Geneva side of the business is that, obviously, there's a lot of negativity right now around residential housing, but we are still seeing very, very high quote volume at Geneva. Like we saw last year, they're just not turning into orders as quickly. And I think that the reality of it is customers are being cautious because, obviously, the residential market has slowed in Utah and across the country but we don't see any doom and gloom. When we look at our Geneva backlog fourth quarter this year to fourth quarter last year, it's only down about 2% right now. And I think that there's a lot of strength in that Utah market, and a lot of momentum still based on what we saw with delays in the supply chain in 2020 and 2021. So there's momentum buildup. And we think that even you see a little bit of a slow period in that marketplace, it's going to come back relatively quickly. And right now, even with what's going on, to answer your initial question on maybe being it a little bit slower, we're not seeing any deterioration on the pricing side.

Okay. That's helpful, Scott. And on pressure pipe, when you look at the bidding pipeline, what's sort of to come over the course of the next 12 months, Scott, is there an argument that the pressure pipe business can kind of hold in that 300 plus or minus revenue level for the next couple of years? There's enough out there to support that kind of volume?

Well, what I would tell you with that, Brent, is there's a lot of that depends on the backlog you carry into the next year, right? And this big backlog really is the biggest one, I've ever seen here. But I think that is the key going into 2023. When you look at overall bidding in 2023, we're expecting it to be a little bit lower than it was in 2022, but then again higher in 2024. So could you be 300 or near 300 area over that period of time? I think, especially with what steel prices are doing because, quite frankly, right now, steel prices are moving a little bit beyond what we thought they were going to in our forecast, I think that's a pretty good possibility.

All right. Great. And then just the last one, I know you've got some pretty big CapEx plans and probably a little exhausted from tidying up the ERP system with the ParkUSA acquisition, but maybe you're just your plan to the balance sheet over the next few quarters here?

Yes. We're going to be focused on paying down the debt. We were, quite frankly, a little disappointed in our fourth quarter free cash. And I think we have a couple of things that just kind of slid out of the larger items that slipped out that hopefully will transact in the first quarter, and we'll see that kind of come down. But that's really our focus, Brent. We're really trying to reload things and get the debt pay down as fast as possible. So that's -- in addition to just kind of, obviously, finishing things up on the reinforced concrete pipe machine and normal maintenance CapEx. So we don't think that's really our focus for 2023.

Okay. Thanks, guys. Appreciate it.

Thanks, Brent.

Thanks, Brent.

And our next question comes from the line of David Wright with Henry Investment Trust. Please proceed with your question.

Hey, good morning, guys.

Good morning, David.

Good morning, David.

A question, did you notice any tension on the standard municipal bid pipeline versus municipalities maybe putting those things on hold, trying to figure out what to do with all of their new infrastructure build money?

No. Not -- I mean, we would -- that wouldn't actually happen near term, David. When you -- things like that with our backlog and what's in front of us, those things are ready to go. Some of the delays that we may see maybe labor-related or getting equipment moved related permitting-related sometimes weather related. That's why we see delays in those. The things that you're talking about, I think, with the IIJA, the infrastructure package would be things that would be a couple of years out. Like the site's reservoir, stuff that we talked about or the project that we talked about in the script, those are the things that, that would likely affect. But the near-term stuff generally wouldn't have any impact on that. There's a little bit of IIJA money right now that's in the market on an Eastern New Mexico job that I talked about in the script, but we're expecting more as we go and that funding mechanism to start to impact probably some other projects that's on the drawing board three, probably three years into the future. But no tension on that right now.

Okay. So that's not slowing anything down. People aren't getting distracted?

No. Not that we can see.

Great. That's my only question. Thanks very much.

Absolutely. Thanks, David.

And we have -- the end of the question-and-answer session. I'll turn the call back over to Scott Montross for closing remarks.

Okay. I'd like to -- I'd just like to thank everybody for joining our call today and before we close the call, just to leave you with a few key takeaways. I think the strong second half bidding that we saw last year in steel pressure pipe has really positioned us with really strong momentum going into 2023. Despite the first quarter, we like I said had lot of the same issues that we saw last year in the first quarter. And indications are that, we should continue to be able to carry a relatively strong backlog by historical standards through 2003 -- or 2023, excuse me. The precast business, again, is expected to remain fairly strong near term within the Utah market and in the precast related engineered systems market in Texas. And I think the other thing that, we've talked a little bit about on the call is while we expect the precast gross margins may be temporarily impacted by seasonality, severe weather and short-term ERP-related challenges and the impact on the production levels, we continue to believe that, this business is a very strong business as we move into 2023 and beyond. So, I think it's the reality of it is, is the near-term goals for us continue to be to grow our precast business within the next few years to be the same size as what our steel pressure pipe business is. So I think we have a -- after a slow first quarter, a 2023 that looks pretty good. So, I'd like to thank everybody for joining the call. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.