Northwest Pipe's (NWPX) CEO Scott Montross on Q2 2016 Results - Earnings Call Transcript

| About: Northwest Pipe (NWPX)

Northwest Pipe Company (NASDAQ:NWPX)

Q2 2016 Earnings Conference Call

August 3, 2016 11:00 AM ET

Executives

Scott Montross – President and Chief Executive Officer

Robin Gantt – Chief Financial Officer

Analysts

Roresa Mojo – D.A. Davidson

Operator

Welcome, and thank you all for standing by. At this time, all participants are in listen-only mode until the question-and-answer session of today's call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.

Now, I will turn the meeting over to your host, Mr. Scott Montross, CEO. Sir, you may now begin.

Scott Montross

Thanks, Teresa. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm President and CEO of the company; and I'm joined by Robin Gantt, our Chief Financial Officer.

As we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations.

I will now turn to Robin, who will discuss our second quarter results.

Robin Gantt

Thank you, Scott. Our second quarter loss was $6.2 million or $0.65 per diluted share compared to a loss of $12.1 million or $1.26 per diluted share in the second quarter of 2015. We reported a non-cash goodwill impairment charge of $5.3 million in the second quarter of 2015. Excluding that charge, the adjusted net loss was 6.8 million or $0.71 per diluted share.

Water Transmission sales increased $39.8 million in the second quarter of 2016, from $38.4 million in the second quarter of 2015. Water Transmission gross loss as a percent of sales was negative 3.2% in the second quarter of 2016, from income of 3.3% in the second quarter of 2015. The increase in sales was the result of 123% increase in tons produced offset by a 54% decrease in average selling prices, which includes the impact of a 10% decrease in steel costs per ton.

Although volume was up substantially, the mix of products produced led to lower sales prices. As we have discussed in the last few quarters, gross profit was negatively impacted by competitive pressures and the bidding for water infrastructure projects.

Selling, general and administrative costs decreased to $4.1 million in the second quarter of 2016, from $5.5 million in the second quarter of 2015. This decrease was due to lower wage and benefit expense from lower headcount. We may have some expenses for the Denver shutdown and plant sale in the second half of 2016. Excluding this, our selling, general and administrative costs will run around $17 million in 2016.

Interest expense was $119,000 in the second quarter of 2016, and $286,000 in the second quarter of 2015. Our overall borrowing was smaller this year compared to last year. We had a balance on our line of credit throughout the second quarter of 2015, while we had nothing drawn on the line since October of 2015. We expect that the interest expense in 2016 will be around 800,000 to 900,000 as we start drawing on a credit facility in the second half of 2016 to meet our working capital needs.

Our effective tax benefit rate for the second quarter of 2016 was 2.1% compared to 10.6% in the second quarter of 2015. Our net operating losses in the current quarter are subject to evaluation allowance, which significantly impacted the rate. We expect the rate for 2016 will be around 4%.

In the first six months of 2016, the company generated $1.5 million in cash from operations, mainly through decreases in accounts receivable and inventory. Depreciation was $5 million in the first six months of 2016, and $4.7 million in the first half of 2015.

Capital expenditures were $1.3 million in the first half of 2016, which was for ongoing maintenance capital expenditures. As of the end of June, the balance in fixed assets for Atchison was about $36.7 million, and Houston was about $3.3 million.

We announced that we are shutting down our Denver facility and looking to sell it. As a result, we have classified the related assets as assets held for sale in our balance sheet with a balance of $6.6 million. With the recent change in accounting rules, there is no recoding of discontinued operations, because we are still in this business.

The pre-tax loss for Denver was $1.4 million in the second quarter of 2016 and about 200,000 in the second quarter of 2015. For the first half of 2016, the pre-tax loss was 2.7 million and about 400,000 in the first half of 2015. We expect that we will have some severance and selling cost to sell the facility, but we don't yet know the expense or when they will hit.

Now, I will turn it over to Scott for an update on our business.

Scott Montross

As of June 30 2016, our Water Transmission backlog was approximately 98 million, a decrease from the 140 million at the end of the first quarter. The tons in backlog fell from the first quarter as of few jobs such as IPL segment 10-11 that we were expecting to bid in the second quarter, pushed into the third quarter. In addition, our backlog reduced as we initiated planning for the Denver plant closure and as we turned out focus toward margin over volume. We expect third quarter of 2016 will have somewhat similar revenue and growth margins as the second quarter.

Bidding levels were improving as we moved through 2016 and into 2017 with about 75% of the total bidding volume expected for 2016 coming in the second half of the year. The following is in an outlook of current and upcoming transmission projects.

Production of the fourth segment of IPL segment 14 was completed at the end of the second quarter. IPL segment 10-11 for 12,500 tons was scheduled to bid in late June and is now scheduled to bid in mid August.

IPL segment 17-18 for 16,500 tons is scheduled to bid in late November. We were awarded a portion of this Trinity River Main Stem project. The last part of the Lake Texoma program. Production is currently underway. The Houston job, which has been called the Luce Bayou Interbasin Transfer Project, is a major program with multiple segments that started bidding with some small projects in the second quarter. This is a multi-year series of projects that are expected to represent 90,000 tons of pipe. Major production is not expected to begin until 2017-2018.

The Lower Bois D'arc Reservoir is a pipeline being planned by the North Texas Municipal Water District, which could represents 60,000 tons of pipe requirement starting in late 2017.

The Southeast Oklahoma Raw Water Supply System also known as Atoka Second Pipeline is a 100 mile, 52,000 ton pipeline with bidding expected to start in the third quarter of 2017. We also expect additional opportunities to develop in Texas, from the Swift program; North [indiscernible] County, City of Austin, and San Antonio Water Systems were among several applicants who received funding through the Swift program during the most recent round of awards.

Several other municipalities in the cities also received funding for projects that may materialize into near term opportunities. We continue to monitor the market developments in California very closely. And we've seen a substantial increase in the volume of work bidding. The Fresno surface water program has started bidding. The total project is made up of several segments that represent 20,000 tons of pipe. The final two segments of this project were expected to bid in 2016.

The Cadiz project is still active but still appears to be hampered by railroad Right-of-Way issues. Southern California Reliner program is expected to spend 2.6 billion over the next 20 years relining existing pre-stressed concrete pipelines. This program has started bidding and we were successful on the most recent segment.

The Los Angeles pipeline replacement program will begin to replace large segments of existing trunk lines. This program will runs from 2017 through 2020. The 127-mile Red River Valley Water supply project continues forward with a goal to have design completed in 2018 and construction beginning in 2019.

Currently, the state is concerned with the available funds due to the low oil price environment which could impact project timing. We've planned about 2.5 million of total capital expenditures for 2016, which is lower than our planned depreciation. For the near-term, we will continue to be very cautious in our capital spending. We have a strong balance sheet with a net positive cash position. Even with a very difficult market conditions that we've seen over the previous two years, we have not borrowed from our credit facility in over 10 months.

In tubular products, the Atchison operation is completely shut down. We finished shipping all remaining inventory in May and we've collected all the receivables. As we announced last summer, we're exploring the sale of our remaining energy tubular facility in Atchison, Kansas, and are actively marketing our property in Houston, Texas. This is an ongoing process that has been in [technical difficulty] best conditions in the energy sector.

We continue to look at a wide range of strategic opportunities for our water transmission business. We've not been able to discuss our activity, but we would like to assure you that this is an ongoing and active process.

In closing, the water transmission market has been very challenging for the last two years. Small municipals markets in 2014 and '15 along with additional production capacity that enter the market played havoc with the business. However, more recently, production capacity has been removed from the market. One of our competitors closed their facility in Phoenix, and we've recently announced the closing of our plant in Denver. At the same time, we're seeing a 2016 market that should be significantly larger than either 2014 or 2015, not only because of demand in Texas but because after a long hiatus, demand is returning in California.

As we move forward, Northwest Pipe will be focused on (1), Margin over volume and achieving the market share that best positions the company to optimize long-term profitability. (2), Enhancing the strength and flexibility of the balance sheet by monetizing non-core assets such as the Denver and Houston properties, and the Atchison, Kansas plant. And 3), Continuing to drive efficiencies in cost at our water transmission plants.

Here are some examples of what we've done over the last 18 months. We've reduced the core business head count by 24%. Total man hours to complete light jobs are down by 16%. SG&A head count is down by 34% and SG&A spending is down by 30%. We've been through some of the most difficult market conditions over the last two years which anyone at this company has ever seen. We have experienced a complete collapse of the energy market which resulted in the sale of part of the business and the closure of our remaining plant Atchison, Kansas. And we've seen our core water transmission market hit by very slow municipal demand and at the same time pounded by increased capacity -- production capacity that is.

However, we have weathered these multiple storms and currently have cash on our balance sheet and no debt. Company has one of the strongest balance sheet it has ever had and has the ability to bring additional cash to the balance sheet by monetizing those non-core assets. And, the market as well as the bidding environment is improving.

At this time, we would be happy to answer any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Speakers we have questions. We have one question coming from Roresa Mojo. Your line is now open.

Roresa Mojo

Hi, this is Mojo in for Brent.

Scott Montross

Hi, Roresa. How are you?

Roresa Mojo

I am doing good. So, how are you seeing competitive situation in Water Transmission evolve over the past couple of months?

Scott Montross

I think because of like we talk going through this, we are expecting pretty good size market 2016, and we've only -- we only saw probably about 25% of the market bid in the first two quarters of this year. The third and fourth quarters are pretty large quarters with you know, some private work that's going on in Texas along with a couple segments of IPL and other things happening on the West coast. So, certainly I think we have situation where all of a sudden the competitive pressures on each and every job is starting to ease, which is starting to allow pricing to move up and ultimately the business to improve. I think lot of it has to do with just the large amount of demand we're going to see through the second half of the year.

Roresa Mojo

How would you guys characterize these projects? Are they more because of the geographies, or is it also because of the smaller companies are just unable to compete?

Scott Montross

Well, I think the -- you always have the geographies, and I think for a long time we really through probably three-year period what we've seen is really Texas had been the only state that was busy. But now we have Texas, and a lot of those projects that I talked about at the beginning, along with the IPLs like the Houston program which was called Lose [indiscernible], and it's got a bunch of different segments. And then the Lower Bois D'arc Reservoir, Atoka is in Oklhoma program, but all those are Texas programs, but we also have work that's been developing in California like the Fresno Surface Water program that I mentioned, the Southern California Reliner program along with other things that are going on. In fact, we are seeing a California market that could be as much as three times larger than it was last year. And that's a really good sign for us, because obviously a healthy California market really is a pretty good indicator that certainly there is a little bit of a different level of health in the overall Water Transmission market. So all that stuff together, this is really starting to indicate pretty substantial amount of demand. And quite frankly, we still see relatively good demand out of the East, specifically out of New York City, and work that we are doing out of our Parkersburg facility.

The interesting thing is we've got a couple of different plans other than Texas discuss significant backlog now. When you look at our backlog it looks like it's a little bit down, but the issue is, one, that IPL segment 10/11 hasn't bid yet, and ultimately a lot of the backlog sits at other places. So, there is a lot of positive signs not only from the demand side, but also developing with the demand being what it is, lessening the pressure on each and every job it's going to bid.

Roresa Mojo

And what would guys see being the -- I guess the approximate annual cost savings from the Denver plant closure?

Scott Montross

Well, we are still going through a lot of those details right now. I mean, it's -- obviously we've got some costs associated with -- shared services there and some fixed costs. So I don't know that we are ready to come out with that number specifically yet.

Roresa Mojo

Okay. And any particular update on the marketing of the Houston property?

Scott Montross

Yes, Houston that's ongoing. I mean, obviously we're signed, we signed up with a real estate group down there. The one thing that's going on there is we have to continue to go through some environmental work that is existing down there. We could have anywhere from probably around a year less than getting a no further action from the Texas environmental quality people, but it's probably not a bad situation to be in if you've got to be in that situation at this time, because certainly because of the energy sector that the Houston real estate market has been a little bit pinched. And I think the longer we go, hopefully, we start to see the oil price recovering although it's dipping again this morning. But we see that's start to recover and ultimately those real estate value start to increase again, because certainly I think when you look back to when we shut that facility down, it had a higher value in the marketplace at that point, and it does now simply because of what's going on economically down in Houston at this point.

Roresa Mojo

Thank you. And just to I guess clarify, so there is no more remaining inventory for tubular products to be sold in Q3 and Q4?

Scott Montross

Correct. We sold the remaining inventory at the Atchison, Kansas plant at the beginning of the second quarter. I think we shipped that probably in May. It was completely shipped out. And like we said in that, we collected all the receivables, and the plan is basically -- there was a few people there cycling the equipment waiting for the market to come back. So we can sell that property to somebody who is going to be the business long-term. It's in a great location, and certainly we think that it's got a lot of value, because of its access to the Canadian market and the footprint that it has. So, certainly we think that's going to be pretty valuable going forward.

Roresa Mojo

All right, thank you.

Scott Montross

Sure.

Operator

Thank you. The next question comes from David Rice [ph]. Your line now is open.

Unidentified Analyst

Robin, Scott, good morning

Scott Montross

Hi, David.

Robin Gantt

Good morning, David.

Unidentified Analyst

Robin, couple questions for you first. Now that you're completely out of production, what do you think the quarterly dream from tubular products will be going forward?

Robin Gantt

We expect it will be about $500,000 this quarter and that will be the total cost the cash cost will be a less than that.

Unidentified Analyst

Okay. And you commented on the net assets of the balance sheet for tubular $36.7 million and also pointed out that Denver and assets held for sale at $6.6 million. Does that mean that you are marketing the Denver facility in advance of shutting it down?

Robin Gantt

Yes, so I mean we're in the process of shutting it down right now, and it is being marketed is a little further down the path I mean Atchison where those markets are its pretty much right now, but Denver has really hot real estate market. So it's more indications of what will think happen first.

Scott Montross

David when - water transmission plans and where this business is end of having a little bit of a long tail with backlog that could be from as much seven or eight ago. So, our plan is certainly to run that inventory out and ship that inventory while we're going through the marketing program with the property and then hopefully wind up shipping out the inventory sometime at the end of the first quarter of next year.

Unidentified Analyst

And thanks for pointing out there pretax loss her down versus last year at West Denver one of the company's less profitable facilities.

Scott Montross

Yes, I think one of the issues that we saw with Denver was at one that was a pretty small regional demand obviously all of our facilities are regional markets there - there is a reason it there in those markets certainly there is over time water transmission business that are in those markets. What we saw coming forward coming with Denver into the three and four year time frame past that wasn't a significant amount of business.

So that along with the significant amount of competition that exist in that market some of which some of the new capacity came online that I mentioned entered into that market. And it's really even now with a little bit of a different bidding environment pound some of those projects pretty hard. It still wasn't doing good very well, when you start getting your position where you were sure running up against your fixed cost or your fixed loss associated with the plant when it was shut down and that's how it doing and obviously we start looking at making those decisions and naturally the things that we looked at.

Unidentified Analyst

Okay, couple more quickly. Has the strengthening and steel prices been at all helpful to you presently?

Scott Montross

I would say that what we see historically is that basically higher steel prices ultimately lead to higher total gross profit levels. Maybe not higher gross margin percentages, but gross profit levels in total obviously your selling prices of the pipe gets pushed up quite a ways when steel price moves up. I think though for a while as the market recovers steel price is going to just be a pass through. Eventuality if it stays up. I think we lead to higher gross profit levels. The problem we have rate now which steel isn't the higher steel price. It's the volatility because if you look at it from the beginning of the year where I guess your average fuel price is probably about 360 or 370 per ton on a hot rolled band to where you have gone through June were all of sudden it's 620 or 630. That kind of volatility doesn't help us because it makes it difficult to bid projects and those type of things. But certainly long-term -- and this is a longwinded answer, David, to your question; long-term higher steel prices help us, short-term the volatility is not an easy thing to deal with though.

Unidentified Analyst

Okay. And then lastly, to the extent you can generalize and maybe you can't, what's the lag time between when a particular segment of a project that you're the successful bidder on goes into production and shipment?

Scott Montross

Well, what you have is if you bid on project, we'll look at kind of a major project. When you're looking at projects that are 12,000 or 15,000 tons, you have a bid, and ultimately if all things go perfect, you get an award maybe in a couple of weeks, okay? Then you have to order steel. Depending on the steel market, you could be dealing with hot roll band, lead times anywhere between four and six weeks, okay? Depending on what the market is, I think you are probably getting closure to four weeks again right now because the lead time is starting to scrunch in.

Then you get into production on that, and you may be in production for depending on the size of the project, for just say four, five, or six months. Well, as we go through the production on the project as we start making cylinders, we start recognizing revenue because we are 1% [ph] complete. So you could probably start recognizing revenue anywhere from about 2.5 months to 4.5 months out, and then it goes out depending on how large the job is, or how long you would actually get that revenue.

Unidentified Analyst

Great. That's awful helpful as a generalization. I appreciate all of the information that you put out here in the call. And I want to commend you again on just keeping the ship together and really having yourself in a very good position financially as you wait for the markets to turn around. Thanks for taking my questions.

Scott Montross

Thanks, David. We appreciate the comments.

Operator

Thank you. As of this time, there are no questions in the queue. [Operator Instructions] Speakers as of this time, there are no further questions in the queue.

Scott Montross

Okay. Thank you, Teresa. Obviously, we appreciate everybody attending the call. Our next call is going to be …

Operator

The early November.

Scott Montross

Early November. And obviously, hopefully, you can secure a little bit of excitement in our voices as we look forward to continuing improvement in this water transmission market as we move forward. So, thank you everybody and we'll talk again in November.

Operator

Thank you, participants. And that concludes today's conference call. Thank you all for joining. You may now discount.

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