Northwest Pipe's (NWPX) CEO Scott Montross on Q1 2018 Results - Earnings Call Transcript

Northwest Pipe Company (NASDAQ:NWPX) Q1 2018 Earnings Conference Call May 3, 2018 10:00 AM ET

Executives

Scott Montross – President and Chief Executive Officer

Robin Gantt – Chief Financial Officer

Analysts

Brent Thielman – D.A. Davidson & Co

Operator

Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this time.

May I introduce your speaker for today, Scott Montross. Please go ahead.

Scott Montross

Thank you, Ed. 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 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 first quarter results.

Robin Gantt

Thank you, Scott. Our first quarter loss from continuing operations was $2 million or $0.20 per diluted share compared to a loss from continuing operations of $3.5 million or $0.37 per diluted share in the first quarter of 2017. Sales increased slightly to $33.4 million in the first quarter of 2018 from $29.7 million in the first quarter of 2017.

Water Transmission gross profit as a percent of sales was 4% in the first quarter of 2018 compared to 4.2% in the first quarter of 2017. The mix of jobs produced in the first quarter of 2018 led to the minor difference in gross margin.

Selling, general and administrative costs decreased to $3.4 million in the first quarter of 2018 from $3.8 million in the first quarter of 2017. This decrease was due to lower employee compensation cost. We expect that our selling, general and administrative costs will be around $15 million in 2018.

We had an income tax benefit rate of 12.2% in the first quarter of 2018 compared to an income tax benefit rate of 4.4% in the first quarter of 2017. We had a tax windfall from share-based compensation in the first quarter of 2018. In the first quarter 2017, we had an excess tax efficiencies from share-based compensation.

Additionally, in the fourth quarter and in the first quarter of 2017, our net operating losses were subject to evaluation allowance, which impacted the rate. In the first quarter of 2018, the company had a net outflow of cash from operations of $2.3 million. Depreciation was $1.5 million in the first quarter of 2018, and $1.7 million in the first quarter of 2017.

Capital expenditures through the first quarter were $744,000, which were for ongoing maintenance. We have planned about $8 million in total capital expenditures for 2018, most of which fall under maintenance capital spending.

We had restructuring charges related to the Monterrey and Salt Lake City shutdown of $305,000 for severance and demobilization. We expect to incur an additional $800,000 for these activities in 2018.

Now I’ll turn it over to Scott for an update on our business.

Scott Montross

As of March 31, 2018, our backlog, including confirmed orders, was approximately $87 million compared to $88 million at the end of the fourth quarter and $77 million as of March 31, 2017. We experienced a very light bidding period between early fourth quarter of 2017 and mid-March, 2018. It was only in the last 10 days of March, when we saw bidding improve. As a result, we saw small revenue in the first quarter and expect small second quarter.

However, with the recent improvement in the bidding activity and major program scheduled to bid over the next several months, we expect 2018 to be a very strong bidding year. The improving demand, along with a stable competitive landscape should lead to improving revenue and margins in the third and the fourth quarters.

The following is an outlook of current and upcoming Water Transmission projects. In the Texas market, the SWIFT program continues to fund major programs. And it’s projected to spend $2.2 billion from 2018 through 2021 supporting programs like Houston in Lower Bois d'Arc. The Houston project is a major multiyear program with the series of segments projected to represent 90,000 tons of pipe.

Production on the 8000-ton Capers Ridge segment of Houston project was completed in the first quarter. Shipments will continue through the second quarter. Major production on the 3000-ton Lake Houston segment was completed in the first quarter and shipments are ongoing. There are additional segments bidding throughout 2018 that could represent another 12,000 tons of pipe.

Bidding on the entire Houston project will continue into 2019. The Lower Bois d'Arc reservoir is a project being planned by the North Texas Municipal Water District that represents approximately 60,000 tons of pipe. Permitting and funding are in-place and the contract for the dam portion of the project has been awarded, and the major portion of the pipe procurement is expected to start in the third quarter.

Production is expected to start in 2019. The SWIFT program in Texas continues to fund projects, and is expected to result in additional near-and long-term opportunities. The Southeast Oklahoma Raw Water Supply, also known as Atoka Second Pipeline is a 100-mile 66,000-ton pipeline. Bidding is expected to start in the third quarter with production and installation spread over 5 years.

In the California market, the $2.6 billion California reline program began in 2017 and will continue over the next 20 years. Northwest Pipe produced for 2 segments of the reline program in 2017. Two to three additional reline segments will bid each year, representing 8,000 to 10,000 tons of pipe annually. The Santa Clara Valley Water District’s $1 billion pure water program represents 8,500 tons with bidding in 2019.

The city of San Diego’s $1.7 billion pure water program is a 6,000-ton project that is projected to start bidding in the fourth quarter of 2018. The 25,000-ton Cadiz Project has recently run into new roadblocks that will cause additional delays. In North Dakota, work continues on the 140-mile, 87,000-ton Red River Valley Water Supply Program. The project is in the design phase with initial segment projected to bid in 2019.

With the improving demand that we see in California market, and the 3 major programs in Texas and Oklahoma, we expect 2018 to be a very large, but back-end loaded bidding year. Since these programs are multiyear programs, we expect strong demand to extend over the next few years. Even with the lull in bidding activity that we have seen from the early fourth quarter of 2017, through most of March in 2018, we have seen a stable bidding environment.

The improving bid schedule that we began to see in late March and early April timeframe, and large program jobs that we expect to start bidding in the second half of the year, continue to point to improving revenue and margins as we progress through 2018. We continue our drive to reduce costs at both the plant and corporate levels through our lean manufacturing and cost-reduction initiatives.

In support of that effort, the consolidation of our Permalok Salt Lake City facility into Permalok St. Louis location is on schedule. And as we previously discussed, we are working toward producing the Permalok product at our Adelanto California plant, which will increase the utilization of existing assets as well as give us much better access to the West Coast trenchless market.

As we said in our last earnings call, we are in the process of shutting down with the intention of monetizing our Monterey, Mexico facility. The shutdown process is on schedule. Our balance sheet remains strong. We ended the first quarter with approximately $40 million in cash. And we are working toward monetizing the Houston property as well as the Monterey facility and we are in a solid position to strategically grow our water business.

As a pure-play water company, we are focused on strategic growth opportunities in the water infrastructure business. This is a very active and ongoing process. In closing, we are seeing significant demand in front of us for an extended period in a stable bidding environment. The market opportunities that we see in 2018 and beyond supports continued improvement in our water business.

As we move forward, we will be focused on: one, improving the performance of our existing business by focusing on margin over volume; two, driving cost reductions and efficiencies in all levels of the company; three, monetizing the remaining nonstrategic assets in Houston and Monterrey; and four, finding strategic growth opportunities for our water infrastructure business.

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

Question-and-Answer Session

Operator

[Operator Instructions] And we do have our first question. And our first question is from Brent.

Brent Thielman

Thanks, good morning Scott and Robin.

Scott Montross

Good morning, Brent.

Robin Gantt

Good morning, Brent.

Brent Thielman

Scott, with pipeline, you always worry about schedule sliding a bit. I get that this influx of work that you’re looking to bid in 3Q, do this schedule feel pretty solidified to you at this point, I mean, is the robust concern that the ones you’re most focused on could shift right, and maybe some reasons, why?

Scott Montross

I think, it – obviously, that’s always a concern, but we are starting to get relatively close to these bidding dates on the two major projects that are out there. And certainly, as we discussed on Lower Bois d'Arc, I mean, they have funding and permitting in place, and they may have already left the dam portion of the project. So in our discussions with the people involved with the job, that certainly looks like it’s moving forward at the present time.

I think it’s the same thing with Atoka, Atoka was originally supposed to be bidding in the 2017 fourth quarter – third and fourth quarter timeframe. But that seems to be sticking right where it is at the present time. And with all indications from the owner that, that thing is going forward. We always get concerned about, obviously, things like debt sliding, but what we’re seeing is, these projects are sticking in those days right now, and not being announced that they’re moving out.

So, it certainly looks like those projects are moving forward on the large project side. When you look at other stuff, I think the things that are going on in the west are very interesting. And it’s not just California now, we’re seeing additional work in certain parts of Colorado. We’re seeing work in Arizona, bidding in – so certainly, if we look at the western market, the way it’s coming out this year it’s – those jobs are sticking in and bidding as we go through time, and we’ve seen a relatively small western market for the last few years.

And this year, the western market alone is looking like it’s over 60,000 tons. So right now, Brent, it certainly looks very positive with the way that these projects are lining up. And the way that these things are going, and I think that even with the big projects, the – it looks like you’re going to see certain amount of bidding taking place in 2017 and certain amount in 2018. So the schedules are starting to solidify.

For example, on Lower Bois d'Arc, our latest information says, well, it looks like about 37,000 tons or so of that project is going to be bidding in 2018, and the rest is likely at the beginning of 2019, really, early, first quarter to mid first quarter. So they’ve got – the schedules are starting to solidify at this point, which definitely gives us a lot more optimism that these things are going to happen this year. I think that when we look at this year, and the way it’s lining up.

Obviously, we said in the script that we saw a really slow bidding in the late fourth quarter, really through almost the whole first quarter, except for late March, right. On the last earnings call, we expected that. Now we got into the first quarter of the year and some things slid out a little bit, but it’s – these jobs aren’t dissolving. They are just moving to dates, whether it’s permitting issues or engineering items. And they’re trying to get these things in the queue, so these things can get done. So I think it’s looking pretty positive right now Brent.

Brent Thielman

Okay.

Scott Montross

A lot more – I would say, probably, a lot more positive, then we’ve been about some of the jobs that we’ve looked at in the past, right. You see these jobs and say, you know they’re saying, it’s bidding then, but there is – and this is what they’re saying. So that’s what we have to go to. So there’s always a thought that it can slide. But these are looking pretty positive. Not saying that it can’t slide, but they’re certainly looking more positive at the present time.

Brent Thielman

And Scott, maybe after those comments, when you look at the total market opportunity over the next year, 2 years in terms of tons. Is it, I guess, one, when you, particularly, related to last cycle, is it more dominated by large programs or less? And maybe, as that opportunity is potentially growing, are you seeing more smaller jobs showing up?

Scott Montross

Well, we are seeing more smaller jobs showing up and more middle-sized jobs showing up. Now I think the California reline job, you’re getting 2 or 3 of those bidding a year, and that’s totaling 8,000 to 10,000 tons, in some cases, even little bit more. I think the one thing when you look back to when we had relatively large markets like 2011, 2012, probably early 2013.

One of the overriding factors on those markets were that there were multiple large programs going on at once. If you think back it is and you probably remember some of the names like Texoma, Southern Delivery, Provo Canal, you had multiple large projects going on. What we saw going through the – really through late 2014, and through quite frankly, most of 2017, is there was only really 1 major program going on that was significant steel program and that was the – it is case with IPL. Okay, so it was cut up in several different segments.

Now what we have is, we have a situation where the Houston project is ongoing over a several year period, right. We look at that now and say, well, it looks like the total project is about 90,000 tons, but some of the segments are 2,000 or 3,000 tons, some of them are 5,000 or 6,000 tons. So that goes on, over – a several year period, at least a few year period.

When you look at Atoka, that’s likely over a 5-year period, that 60-some-thousand tons is going to spread over a 5-year period, and Bois d'Arc certainly, goes out over a couple of year period. So we are again in a situation, where we have multiple projects going on that are starting to prop up the market. And I think when we’ve seen bigger markets before, we’ve had those multiple projects going on. So I think that’s a good indicator that all these things are heading in the right direction in this marketplace.

Brent Thielman

Okay. And Scott, for better or worse, you’re the only public player in this market. So we can see the financials. I guess, I’m curious, over the last few quarters or however you want to look at it, as you enter this kind of potentially really robust bidding period, I mean, do you expect to see the usual players in the market chasing after them? Or are you sort of taking a step back from the market and waiting for this larger project work to show up? I’m just kind of curious what that competitive landscape might look like, or if at all it changes, you kind of go after some of these big jobs?

Scott Montross

Well, I mean, I think, it’s – Brent, the competitive landscape is stabilized. I mean, I think, what you can say is that there is – we’re a couple of players that were nontraditional players that no longer participating in this segment of the market, which is kind of allowing things to start to normalize. I mean, every job is impounded.

And the really – the big key behind markets and – really raising prices and improving margins is the development of a industry-wide backlog, which if you look over the last 2 to 3 years, anyway, because like you said, we’re the only one that’s public. You can see those backlogs have been pretty low on our side. And I think that, for the most part, they are representative of what the industry-wide backlogs look like.

When these backlogs and these projects that are bidding now start to pick up, those backlogs improve. Every job gets less pressure because the industry players have bigger backlogs. And I think, with what’s going on in the market because we are certainly seeing pricing improve, not only because of the increase in steel prices, which have been relatively dramatic over the last few months.

But also, with the stability of the bidding environment, I think that competitive landscape, the way it looks right now, it’s kind of normalized to what we were seeing really back in mid-2014 and before. So it certainly sets up like it’s – It’s very stable as we go forward. We expect the normal traditional players to take place in the bidding. But again, as backlogs improve and prices increase because of improved backlogs, just like it does in any business like the steel business. I think certainly, everything heads in the right direction. Hopefully, that’s kind of a long-winded answer on this, and I don’t know if I got to the root of your question, but

Brent Thielman

No, I think, I get it. Maybe a shorter term question just with the moving steel prices, maybe just by somewhat luck, even the industry is a little bit slower right now and there is a lot of business to do, should we think there is some – maybe some margin pressure and as a consequence steel moving up or do you think you can kind of hold these gross margin levels in the next quarter?

Scott Montross

You always worry about that when things are moving up. Certainly, when you have a competitive landscape like we saw really prior to – probably early 2017, you would worry about that. I think the landscape has changed a little bit. And certainly, we’ve seen pricing levels, especially, as we’re booking out in – first up in the third and fourth quarters projects, moving up with steel, and certainly, getting pass through.

I don’t think you can really see much of those kind of price increases in the first quarter because you’re still dealing with stuff from what was really done late last year, and steel prices have really increased a lot. I mean, you’re looking at coil prices that where mid-600s or so, up to coil prices that mid-900s, and maybe a little bit beyond at this point.

And because the bidding was so slow, you really don’t see it in the second quarter. I think, where that starts to become more evident is, the third and the fourth quarters. When we went through the fourth quarter of 2014, and – or excuse me, the fourth quarter of 2017, and then the first quarter of 2018, we really didn’t see much bidding at all, in that period of time. It was really just the latter part of March, where all of a sudden, we put someplace in the area of $25-or-so million dollars into our backlog, which allowed us to end the back – the quarter pretty much where we were in previous quarters.

Otherwise, it was – it was pretty small a backlog. But certainly, those things have started, what I would say about that bidding. It’s a little choppy, as we go through the month of May. Later in May, it really starts to pick up with not the big projects, but a lot of smaller and what I’ll call medium-size projects. And then, we get toward the bigger ones as we get into the third quarter. So I think, there is a lot of stuff going on there. But it’s certainly headed in the right direction.

Brent Thielman

Okay. Sounds good. Sounds like the calm before the storm. So looking forward to

Scott Montross

Yes, we are pushing that hard.

Brent Thielman

Correct, thanks.

Operator

We show no questions at this time. [Operator Instructions] We show no questions at this time.

Scott Montross

Okay. Thank you, everybody, for attending the call. And we will see you, I guess, in

Robin Gantt

Early August.

Scott Montross

Early August. So thank you very much, and obviously, we’re here thinking that we are going to be looking at some different things going on as we’re moving forward. So thanks, again, and goodbye.

Operator

That concludes today’s conference. Thank you for your participation. You may now disconnect.