Good morning and welcome to Northwest Pipe Company's Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Scott Montross, Chief Executive Officer. Please go ahead.

Good morning and welcome to Northwest Pipe Company's second quarter 2024 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, July 31st, 2024, 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 31st, 2023, 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 second quarter performance and outlook for 2024. Aaron will then walk you through our financials in greater detail. We delivered strong second quarter results, led by growth in our Steel Pressure Pipe business and the residential side of our Precast business. Our consolidated net sales increased 11.3% year-over-year to $129.5 million, the strongest quarterly level we have seen since early 2013. Our profitability significantly improved. And when coupled with the effective working capital management, helped drive strong cash flow during the quarter. To further break down our segment level results, revenue from our SPP segment totaled $89.5 million, an increase of 15.9% year-over-year and the highest quarterly revenue reported in our history. Our performance primarily reflected higher production levels due to changes in project timing, which were reflective of the strong pipeline of bidding opportunities…

Thank you, Scott and good morning everyone. I'll begin with an overview of our second quarter profitability. Consolidated net income for the second quarter was $8.6 million or $0.86 per diluted share compared to $7.4 million or $0.74 per diluted share in the second quarter of 2023. Consolidated net sales increased 11.3% to $129.5 million compared to $116.4 million in the year ago quarter. Steel Pressure Pipe segment sales increased 15.9% to a record $89.5 million compared to $77.3 million in the second quarter of 2023. As Scott highlighted, SPP sales exceeded our expectations, driven by a 56% increase in tons produced, resulting primarily from improved market demand and changes in project timing, which was partially offset by a 26% decrease in selling price per ton, primarily due to lower raw material costs, coupled with changes in product mix. Precast segment sales increased 2.2% to $40 million compared to $39.1 million in the second quarter of 2023 due to a 30% increase in volume shipped, partially offset by a 22% decrease in selling prices stemming from changes in product mix. Our Geneva business continued to benefit from higher shipment volumes in the second quarter on strong demand, while our Park business was slower due to headwinds in the commercial construction market in Texas as a result of the interest rate environment as well as weather delays. As a reminder, the products we manufacture are unique, therefore, shipment volumes in the case of precast, production volumes in the case of steel pressure pipe and the corresponding average sales prices for both segments do not always provide comparable metrics between periods as they are highly dependent on the composition of each segment's product mix. Consolidated gross profit increased 14.8% to $25.8 million or 19.9% of sales compared to $22.5 million or 19.3%…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Julio Romero from Sidoti. Please go ahead with your question.

[Technical Difficulty] Environment for the second half for fuel pressure pipe is expected to be slightly better than the first half. Can you maybe talk to your confidence that, that Steel Pressure Pipe segment strength can be sustained? And then secondly, how long can we expect that strength to kind of sustain itself?

Hey Julio, you were kind of cut out at the beginning. I don't know if we missed the first part of your question. But as to the question on the second half, I mean, obviously, we've looked at these things, and we know what's bidding in the second half of this year, and it's slightly larger than what's bid in the first half of this year. So, obviously, the steel pressure pipe market continues to be very strong. And we're just now starting to see the IIJA money start to trickle in a little bit and start to bolster some of these things. Like there's a Eastern New Mexico Rural Water District project that's got a bunch of the IIJA funding on it. And we don't really expect the mass of the IIJA funding really to hit until like late 2025 or 2026. So, this is quite a period in front of us of strength that we're seeing in the steel pressure pipe side. So, I'm going to let you -- I'm going to pause there for a second and let you ask another question because we missed the first part of what you said.

Yes, I'm sorry about that. I'm sorry if I'm cutting in and out. My question was just really focused, and you kind of hit on it, it's just it sounds like second half 2024 for steel pressure is expected to be better. And it sounds like the long-term IIJA drivers are certainly in place. I'm just trying to think about like the medium term, like 2025 sustainability of SPP. Because I know, in the past, it's been a volatile segment from a from a profit standpoint. Just help us think about like the medium-term sustainability of this segment? Thanks.

Yes. One of the things that's different about this business now that we've seen longer term is there was a significant amount of consolidation in the business. And even when you look at how 2023 turned out, 2023 was a relatively, I guess, small year bidding wise and production-wise in the Steel Pressure Pipe business. And even with that, we were still able to generate a halfway decent gross margin level and profitability level. Well, we're seeing a market that's over 40% larger in 2024. And you're starting to see what the results of a market that's that big has on steel pressure pipe: one overhead absorption; two, the bidding pressure on every job because there's so much more bidding is not as great. So, it also allows the pricing and margins to continue to elevate up. And we don't expect that to change in the mid-term. We expect to go into 2025 with a strong backlog, the way we have the last few years, and kind of glide rate into that timeframe where the IIJA funding really starts to push up the demand in the business. So, we're not really concerned at this point of any violent fluctuations in steel pressure pipe. But even with that, with the consolidation that's happened in the business, even when we have small markets like we had in 2023, it's still not nearly as volatile as what we saw back in 2015, 2016 and 2017 when there were five major players in the market. Now, there's three major players in the market and its consolidated down to a decent level. So, I think that's kind of changed the landscape for probably the longer term, Julio.

Understood. I appreciate you guys providing the context there. Last one, if I could. You called out that $4.3 million negative impact from sales on the precast side due to the weather impact, I believe. Does that get realized in 3Q? Is that incremental? Just how should we think about that?

I think you're going to see the pickup in Q3 with precast. Although what I will say about Q3, if you remember, the Hurricane Beryl hit the Houston area, which are -- which has our largest ParkUSA plant in it in the beginning of July, and that park plant was down for about a week because there was no power in Houston. 2.5 million people were out of power. But I think that you'll see the third quarter coming in stronger. The weather is still iffy though, they're getting so much rain, but the order book is starting to grow. I think the confidence in the non-residential business is starting to come back, especially when you look at the Dodge Momentum Index, which is something that we follow. If you look at that, I mean, the index is up -- it's 7% higher in June of 2024 than it was in 2023 and the commercial piece is up about 25% from year ago levels. The institutional is off a little bit, that's mainly schools, hospitals and things like that, forward-facing or public-facing things, which we don't see a significant amount of impact on that with our public-facing stuff, which is the steel pressure pipe side because of the IIJA funding. So, I think there's a lot of good things going on. And I think that the Precast business, after what we would consider to be a slow start in the first half of the year, kind of picks up steam as we get into the second part of the year And what I would say is -- about our Precast business is that the business is the residential piece, which was what everyone was worried about, right, because of the interest rate environment and those things is really booming. The business in Geneva, the Geneva locations is very, very strong. The order book is very, very strong, similar to what we saw in 2022 on the Precast side, but with higher revenues. So, I think we're expecting a really big year on the Precast side and a much better second half of the year than what we saw in the first because along with the residential piece that's still booming, especially in the Utah market, we're seeing the commercial side starting to come back. We just had some bumps in the road because of the weather issues in Texas.

Very helpful. I'll pass along. Thanks very much.

Thanks Julio.

Our next question comes from Brent Thielman from D.A. Davidson. Please go ahead with your question.

Hi thanks. Good morning Scott. Hey Scott, it sounds like Precast visibility much improved into the second half of the year. And it sounds like you think margins should improve from here. Is that principally just because of increased contributions from Park? And if that's the case, can you help us recall what the differential in margins is at Park versus Geneva?

Yes, I think the -- it will be, to some extent, from increased contribution from Park. But we've had -- we've already had several price increases on the Geneva side of the business with the precast infrastructure stuff. And the amount of order book continues to go up. The Geneva margins are improving and the Park margins are improving. So it's on both sides of it. And then when you get to the Park piece, that's going to be a bigger piece of the picture as we go -- as we start moving forward when they get back on level ground from the weather stuff and from some of the earlier interest rate impact on the environment. I think that's what pushes them up, but it's both of it. It's increases in both of their margins and the Park side is becoming a bigger piece of it. And ultimately, when you look at the precast for earlier in the year, the first part of the year, you see that the selling price was down, but that's because you're looking at Geneva being a much larger piece of the business, and you're looking at products that are shipping into the market that have good margins, but aren't as high as cost or revenue as what the Park products are. So, all that mixed together, Brent, I think you're going to see a strong second half of the year in Precast.

Okay. And then, Scott, the RCP plant at Geneva, I think it's close to the finish line. Is that a structural change potentially to their margins? Or is that more of a capacity add play?

It's both. I think the biggest thing about the exact 2,500 that we're putting in Salt Lake City is versus the current facility that we have there, which takes about 12 or 13 people to run it. The exact 2,500 is going to take about five or six people to run it. So, you're going to have a better conversion cost profile on that and it should very well lead to higher margins on that and higher level of production capability. So, that's a double-edge sword, right? You got higher margins because you've got a better cost, and then you got better overhead absorption because you have more production capabilities there. So, I think it's both of those things. It's going to create an upward movement in those margins as long as the market stays like it is. And certainly, we're not seeing really any change that we're expecting in the near future in the precast market.

Okay. And understanding on SPP, you're going to have quarter-to-quarter variability in margin for mix or whatever. But with this environment that you're characterizing, Scott, I mean it sounds pretty healthy here for at least the next couple of years. As you sort of think of the margins from an annual trajectory, do you think there's obviously some opportunity to continue to improve on them in the forthcoming years? I'm not asking for quarter-to-quarter, but this market tightens up, presumably there's a trajectory higher over the next few years. Is that fair?

Absolutely. And Brent, as we've talked about in the past, I think one of the keys in the Steel Pressure Pipe business is backlog, which we've had historically high backlog now for the last few years and multiple strong years of bidding in a row. And I would characterize 2024 as a pretty decent sized bidding year. But I think what we see going forward with IIJA funding are even bigger years. So, ultimately, when you start getting to those things multiple years in a row, you start seeing gross margin levels that start with a two on the Steel Pressure Pipe side versus 16, 17, 18, and where we are now is 19% in the second quarter. So, we're starting to kind of get into that territory at this point. But then like you said, you have fluctuations within quarters, and one of the things about the third quarter is that it's hard for me to sit here and predict two record quarters in a row, but we do expect the third quarter to be a pretty strong quarter for Steel Pressure Pipe. So, I think we've got a strong backlog, and we've got upward momentum on the gross margins as we move forward just because of the strength of the market over the next few years.

Okay, good. Thank Scott, thanks Aaron.

Absolutely.

Our next question comes from Ted Jackson from Northland Securities. Please go ahead with your question.

Thank you very much. And I want to begin with not just congratulating you on the quarter, which was fabulous, but also the execution in terms of the work on controlling working capital and cash flow, it's something you set forth as a strategy for the management team, and you can see it in the results, and it's great to see. So, congrats on that, too.

Ted.

In terms of my questions, a lot of them have been hit, but I'm going to circle around to a few. And one is just regarding Precast and ParkUSA, if I'm understanding what you're saying is the business that did not happen during the second quarter because of weather, we should see in the third quarter? And so we should see a good uptick in your Precast sales in third quarter. Is that a little bit, because it's kind of a timing issue, kind of a pig in the python when we should see a, say, not that fourth quarter is weak, but a stronger third quarter than fourth quarter because you're picking up volume that really should have happened in the second quarter?

Yes, I would say, Ted, that we are expecting a stronger third quarter. And like I said, the Geneva business is really, really strong. But the Park business just is starting to begin to pick up. I mean the -- we lost like, for example, in Houston, nine production days in the second quarter; in Ferris, we lost four production days; and we lost one in San Antonio, but we also lost shipping days. We lost probably half of the shipping days in the month at Houston and Ferris because of how bad the weather was. But it also affected order placement because people couldn't get into work because of the flooding and people -- the power was out. So, it may be a little bit more back-end loaded this year, like you said, just because the orders are now starting to get placed and filling up the order books. And you can kind of see some of that in our order book for the end of the second quarter because we were at just over $60 million in orders for the order book in Precast again. And that's both sides of the business starting to pick up. But it's really -- Park is just now starting to pick back up again.

So, some of this -- these weather issues, it might not -- you might not clear it all in the third quarter, we could see some kind of trail into the fourth quarter as well?

Yes, maybe not. If I were to guess at this point, Ted, I would say that the fourth quarter as far as like Geneva, because all of a sudden, it starts to get cold in Utah and starts to snow. So, it slows down the contractors getting in the field and doing the installs and things like that. But in Texas, I think you're going to have -- the issues from this weather stuff, you're going to have a little bit of pent-up demand on orders that didn't get placed. So, we may end up seeing a fourth quarter that's a little bit larger than we normally do.

Okay. Shifting over to the SPP business, and you did bring it up. I mean, steel pricing has come down quite a bit. And you're -- just the fact that you're putting up the revenue numbers that you're putting up says how strong your business is. And the fact that you're looking for third quarter, let's call it, second half of the year to remain strong, and given how your business works, my sense would be that the average price of steel for you in the second half of 2024 would be lower than the first half of 2024, again, begets to the strength. When I think about steel pressure -- steel pricing, where do you think this is going to -- it's going to play out as we roll through 2025? Do you think we're going to stay in that kind of $600 to $700 per ton range? And I'm saying that, I mean, because it's not really about the bottom line. It's really just kind of about the top line with you guys because it's kind of a pass-through for you anyway. But you know what I mean, like when I think about my model and such, kind of what's in your kind of pricing deck for the -- as you guys manage your business?

Well, over the last, I'd say, three or four years, the steel price fluctuate a lot, and we've continued to be on an upward trajectory on revenue for steel pressure pipe. So, we've seen it back in 2020 down in the below $500 a ton. And back in 2022, it was $1,200 a ton and then dropped to $690 a ton by the end of the year. And so it's the same thing. It's just kind of fluctuating around. The one thing I would say, our expectations are as we go forward that it's going to probably revolve around a mean that's probably between $800 and $850 a ton as we go forward. But you're going to see highs and lows. And like, for example, now, we've seen the steel price go down for the last several weeks, and it seems to have bottomed out at about $650 a ton. And this week in the market, the price has started to move back up a little bit again. So, it's kind of an interesting way that this thing cycles now. Because once the steel guys start getting below about $700 a ton, they start having a little bit more difficult time making money. And ultimately, they start taking off production capacity and so on and so forth. So, I think you're going to still see it revolving around that $800 to $850 a ton number, Ted, as we go forward into the future.

Okay. And then sticking on steel, I mean, I know you're not going to give me the exact, but can you give me a sense of what percentage of your COGS was steel for the quarter?

I think, right now, we're probably around 30%-ish.

Okay. And then just kind of keeping over on this side of the world, and you did actually say it, that you're having a better bidding environment, better bidding environment means better margins. So, it's fair to assume that implicit within the guidance that you're bringing for the second half of the year, we should expect to see the margin structure for SPP to be similar to what we just saw in the second quarter if everything.

Well, this I think it's going to -- yes, I think it will line up like similar to that, Ted. The one thing is, is you have differences in production on the number of jobs you've taken. We've gotten -- I mean, the steel pressure pipe guys have done a great job of getting a lot of work in and these jobs fluctuate and ultimately, a little bit of it now comes to what are the jobs? And based on the jobs that you're running in a specific time frame, what is your overall production level? And how does that fit into your overhead absorption profile? And that's what will probably cause things to fluctuate a little bit in the quarter. So, I do think, though, that we're going to remain on an upward trajectory as we go through this year. But remember, the fourth quarter is always a little bit rough on the steel pressure pipe side too, simply because you have -- you start having weather issues, where we have our steel pressure pipe plants, and then you have the quarters that have two major holidays of the year in them. So, ultimately, it will fluctuate around. But I think you look at it on a longer-term basis from where we've come from, I think that you see a year last year where you had a steel pressure pipe margin that was 14%, 15% for the average in 2023. You're going to see a year this year that probably averages out probably a couple of hundred or a few hundred basis points higher than that. And if the demand continues to move like we think it's going to continue to move in the future, as you get out into 2025 and the IIJA funding really starts to kick in, I think you're going to see higher production levels and ultimately, margins that start with a two in Steel Pressure Pipe.

That is exciting. I got two more questions, and then I'm done with you. M&A pipeline, no one's really kind of brought this up yet. I know it's an important thing. I know you guys are shaking the bushes, looking at opportunity. Can you give me a sense in terms of kind of what's the activity there? Is there anything that you think is -- you know what I'm saying? Like is there anything that's kind of we could -- is there something? Could we expect some action here before the end -- if not the end of this year, maybe at the end of next year is probably a better way to think about it?

We're always looking. I mean we've got a couple of things that we're interested in right now that we're doing a deeper dive into. So, we are -- it's hard to get them done real quickly, right? So, especially when you're dealing with companies that aren't public companies and you could be dealing with family businesses and things like that, so those have a tendency to drag on a little bit longer. So, I would say that it is a pretty good chance that you'll see some action from us by 2025 because it's -- we're going on three years since we did the last acquisition. And there's been a lot of integration going on and getting Park up to speed and cultural stuff. And we're getting to the point now where we're getting ready to do that. And you can tell that just by the focus on cash flow and getting the credit facility paid down where we dropped it from about $90 million down to about $75 million in the end of the second quarter. So, we expect that trend to continue through the end of this year and position us well to get this next thing done. But we -- I would say that there are things that are out there, and I expect something to be imminent by 2025.

Okay. Actually, you know what? I'm not -- my last question's kind of not even worth asking. Again, congrats on the quarter, super, super job very, very -- I hope you're proud of it too. Thanks.

Yes. Good.

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

Scott, Aaron, good morning.

Good morning.

Good morning.

Hey, great report, and I'm glad to see SPP firing on all cylinders, so a lot of great questions from the analysts here previously in the call. I want to ask a little larger question, looking at your slide deck, where you have this chart of the EPA pie charge. And would you consider water transmission pipe to fall in the category of source or distribution transmission?

It would be more distribution transmission.

Yes. Okay. So, that's two-thirds of the pie, and they've got the 20-year needs -- they've got the near 20 near year -- 20-year need, excuse me, at $420 billion. And then I'm looking at the funnel that you have for appropriations and not very much of it has actually made it out into the market. And you've said in the call kind of a couple of years out, okay, that you'll start to see it more in your business. And when you talk about Northwest Pipe's market share in water transmission, you put that market at $450 million to $600 million and you put your share at around half. So isn't it reasonable to think that, particularly since you don't use all of your capacity and your two competitors, I don't know how much of their capacity they use, but isn't it reasonable to think that the overall market for steel pressure pipe should be larger a few years down the road than $450 million to $600 million a year?

Especially with the IIJA-funded stuff, David, for sure. That's what our expectation is. Yes. So, ultimately, we had a pretty good capacity utilization in the second quarter. I think we're about 74% of practical capacity at steel pressure pipe. So, we still have a lot more that we can do, right? So, ultimately, if that market is there, and it's going to boom like we think it's going to boom, I think you'll see some pretty good results on the Steel Pressure Pipe side.

Right, right, right. So, I mean you can talk about good bidding years and average bidding years. But it seems to me that the bidding years should just get better and better and larger.

Yes.

So, even though -- and your margins are better. So, even though you're pursuing precast, if this growth in water transmission pipe happens, it's still going to be a big part of the company in the years ahead. And so I think it's great. You've got the footprint, you've got the capacity, you've got the reputation in the market and just keep on doing a great job.

Thanks David. Appreciate that. Yes, we've got some big years in front of us. And as you mentioned, and we have the funnel up on the screen, really not much of that IIJA money has come to the market at this point. And we're just starting to see it in some of the jobs. I mean, there's some -- the job in California, the site's reservoir job, which is the source -- will be sourced, but there's other big reservoir jobs that are going on. We just saw a thing come out in -- about the State of Texas, where the SWIFT fund and the State Water Infrastructure Fund in Texas just allocated $3 billion to some additional projects. And one of those projects was a Braz [ph] Port water supply project, which is a -- that project alone is going to get about $750 million. But that's an off-channel reservoir project to basically triple the capacity of storage down there, and they're going to have to transmit that. Then there's another big project going on down there in Corpus Christi that's a seawater desalinization project plant that's going in for just over $0.5 billion. So, there's all kinds of stuff out there on the horizon right now that really makes some of the pain that we've gone through in the past years like 2015, 2016, and 2017, it starts to relieve some of those memories a little bit. So, -- and I'd say really since 2019, Steel Pressure Pipe business has been on a relatively decent pace. Even with a slow year in 2023 in bidding and production, we still managed to put together a pretty good year based on us being one of the big consolidators in the market. So, I think that's kind of changed the dynamics here and big years are going to get really big. And -- but you'll have periods of time it'll slow down. It's just how the projects are sequenced and bid and when they get produced. But we see a pretty good upward trend over the next -- really through about 2028 right now on projects in Steel Pressure Pipe because of this IIJA funding.

Well, you're pretty close to $0.5 billion in revenue. I mean maybe you will not quite make it this year, but I mean that's really significant. So, again, congratulations. Great work.

Thanks David. Appreciate it.

Thanks David.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to Scott Montross for any closing remarks.

Just a few key takeaways before closing. One, I think the expectations for the bidding in 2024 are pretty much coming to pass and the second half is still very strong. So, we're expecting the Steel Pressure Pipe business to have a very strong year this year. Same thing with the Precast, I mean after a slow first quarter because of the -- some of headwinds with weather and some of the issues related to the interest rate environment, we're expecting the second half to be significantly stronger. And the -- a couple of things to mention. It's in our growth strategy. Part of that was centered around stabilizing our Steel Pressure Pipe business and when you look at where we are now versus where we were in 2017, our revenues have more than doubled. And with adding the Precast side of the business to this, the company has more than tripled over the last timeframe. So, ultimately, the things that we're doing on the growth of the company are working. And we continue to be on the track for acquisitions and organic growth on the Precast side, not only from product spread, but potentially doing precast at some of our different plants. And I think longer term, we're in a great spot to be well positioned from these infrastructure projects that are due to the increasing population, and we're in a great spot going well into the future. I think the biggest takeaway is the business diversification strategy that we've implemented is working. Even with a big part of our business being severely impacted by weather in the second quarter, we were able to put together a fairly decent quarter from our perspective. And imagine, you can do the numbers and see what it would have looked like without the weather impact and what it should look like going forward. So, ultimately, these things are working and we really appreciate today your attention and the time you take to be on our call and look forward again to speaking with you in the November timeframe. So, thank you.

And ladies and gentlemen, with that, we'll be concluding today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.