Northwest Pipe Company (NWPX) on Q1 2021 Results - Earnings Call Transcript
Operator: Good morning and welcome to the Northwest Pipe Company's First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Scott Montross. Please go ahead.
Scott Montross: Good morning, and welcome to Northwest Pipe Company's first quarter 2021 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, May 3, 2021 at approximately 4:00 p.m. Eastern Time. This call is being webcast and it is available for replay.
Aaron Wilkins: Thank you, Scott, and good morning everyone. I hope all of you and your families remain safe and healthy. I'll begin today with our first quarter results. Our first quarter net income was $2.2 million, or $0.22 per diluted share, compared to $0.6 million, or $0.06 per diluted share in the first quarter of 2020. There were no adjustments to GAAP net income to consider for the first quarter of 2021. Adjusted net income for the first quarter of 2020 was $2.9 million, or $0.30 per diluted share and included $2.8 million of transaction costs and inventory charges associated with our acquisition of Geneva, and $0.4 million of incremental production costs resulting from the fire at our Saginaw facility, which were partially offset by the $0.8 million tax impact associated with these items. Adjusted net income excludes unique and unusual items and we provide it for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments. Our first quarter net sales increased 4.9% to $72.3 million, compared to $68.9 million in the first quarter of 2020. Geneva sales were $12.3 million in the first quarter of 2021, compared to $8 million in the first quarter of 2020. Please note that the prior-year included only two months in Geneva results given that acquisition closed on January 31 of last year. Legacy revenues decreased 1% from the year-ago quarter due to a 2% decrease in selling price per ton resulting from a change in product mix, which was partially offset by a 1% increase in tons produced resulting from changes in project timing. Due to the unique nature of the water transmission systems we manufacture, production tons are not always the best indicator of productivity and comparability of our metrics between periods are highly dependent on project timing and project product mix.
Operator: We will now begin the question-and-answer session. Our first question today will come from Brent Thielman with D.A. Davidson.
Brent Thielman: Hey, good morning, Scott and Aaron.
Scott Montross: Hey, Brent. How are you?
A – Aaron Wilkins: Hello, Brent.
Brent Thielman: Okay. Thank you. Scott, you sounded a bit more confident maybe about the slate of jobs you've been tracking, starting to solidify in terms of schedule. I guess any more discussion around that, are you seeing some jobs that come forward maybe here in the second quarter that might give you a little more comfort that the pushes could swell down? I'm just looking for anything else you can offer there.
Scott Montross: Yes, I think Brent, like we talked about on the last call, I mean, the second-half of 2020 was -- we saw somewhere in the area of about $130 million worth of work, sled out of the second-half of 2020, and out of the first quarter of 2021, somewhere probably in the area of between $40 million and $50 million. And ultimately, when you look out into the future, there's already a pretty good slate of jobs that are bidding out into the future. What we see is those move-outs starting to abate now, and then really slow down, and the jobs are starting to kind of gain attraction in the certain area. And it certainly appears at this point, obviously things can always change, but it certainly appears at this point that things are starting to stack up and we could have a pretty good period of demand here for a while coming up now. You can look at that and say we think that stability starts to come more in line with the jobs, maybe in the second-half of the year, maybe in later second-half of the year. But it certainly appears that things are starting to stabilize a little bit on where the jobs are.
Brent Thielman: Okay, all right. Appreciate that. The order book at Geneva sounds pretty encouraging, I guess any more context where that sits that maybe against the timeframe that that you've owned it. And are any of these new products that you're introducing meaningful to that at this point? Or is it still pretty early on?
Scott Montross: I think when you look at to each of the question on the order book. First, we had a pretty strong order book, even as we proceeded through the first quarter for Geneva, which obviously, as we've talked about is always a slow quarter. As we've come out of that slow quarter, the order book is continued to gain strength. And at this point, I think it's probably as strong as we've seen it since we've had them as part of the company. And look at the new products that are out there, the perfect pipe and the line manhole; unfortunately the pandemics slowed us down a little bit with getting those started. So there's not -- there's some growth in those as we go forward, but we think there's a lot of organic growth potential, because when you look at those products, they are a liners to protect not only reinforced concrete pipe. But liners to protect manholes and troughs and manuals against corrosive sewer application in hydrogen sulfide gas and sewers, which really extend the life of those products significantly longer than what traditional products do providing a very long-term cost effective product to the ultimate end users in municipalities going forward. We think that products got a lot of legs going forward. And we're just starting to get started. Probably somewhere in the area of between 42% and 47% of our businesses RCP and manhole products on the precast concrete side, and obviously, we'd like to liners as many of those as possible. So we're on a pretty heavy marketing campaign with that now, and really working with the end users to get that into the system. So we're really just getting started right now.
Brent Thielman: Okay, understood. And I just get a question it was just, whenever you get some inflation in the market. I would think it get some of the industry participants pricing in the same direction. Is that what you're seeing, at least on the work that is coming to bid right now is pricing irrational in the market. Despite all these delays, and given the movement and cost?
Scott Montross: What I would say is when you get a situation, like we saw in the second-half of '20, and for that matter what we saw in the first quarter of 2021, where you get all these projects that start to move out to later in the year. You get a little bit of panic bidding that goes on, that it starts to affect the margins for a little bit of a period of time. But as we've talked about that that certainly appears as it starting to diminish as we go through the second quarter, and what we're seeing is that panic bidding diminish along with it, because I think there's people in the market looking out there with everything that's starting to come forward with jobs out there right now, both near-term and mid-term and potentially longer-term. And so I think things were starting to get a little bit more rational with that right now. And I would say that would the steel thing. And as you know, my first 25 years was in the steel business running steel plants and selling steel. The steel prices changed very, very rapidly. So I believe in most cases that the project pricing is keeping up with that. In some cases, it's changed so rapidly that -- and I think these are few cases that you just couldn't completely keep up with, but in most cases it is. So, I think that's pushing the project pricing higher as we go forward. And one of the things I would say is what we're seeing out of steel right now is really the tip of the iceberg. When you look at what average steel pricing was in any publication at the end of the fourth quarter for the fourth quarter of 2020 it was like 782 for hot rolled band. That's just FOB the mill-based hot rolled band. When you look at the end of the first quarter it's about $1200 a time, and where we see it now is somewhere in the area $1400 a ton. So I think we're just starting to see the tip of the iceberg with what it's doing the pricing on projects, as far as pushing the pricing up.
Brent Thielman: Okay, just last one. Scott, I guess a lot in the news about infrastructure bill and a lot of different numbers driven around that are big numbers. Anything you take from what you've seen so far that we could think about in the context of your business?
Scott Montross: Yes, I think it's all very positive. We're obviously excited that we've got an amendment to extend the Safe Drinking Water Act, which sets aside about $35 billion for State Revolving funds. And it's generally leaked into the State Revolving funds, somewhere about $2 billion to $3 billion a year. So that's been extended, I think is as far as the major infrastructure package or the $2 trillion package that's being talked about at this point. It looks like right now there's about $111 billion, that's over a relatively long period of time, slated for water it. Part of that somewhere in the area of about $45 billion looks like it's try -- it's to remove lead pipes from the portable water system. So there is no exposure like that happened in Flint, Michigan. So, that leaves somewhere in the area of about $56 billion for other water projects over that period of time, which we're pretty excited about in resulting in some other major projects coming through the system. So I think that just kind of adds to demand as we look out into the future.
Brent Thielman: Okay, great. Well, thanks for taking the question, Scott.
Scott Montross: Absolutely, Brent.
Operator: Our next question comes from Gus Richard with Northland.
Gus Richard: Yes, thanks for taking the question.
Scott Montross: Hi, Gus.
Gus Richard: Hi, guys. The environment is pretty dynamic. Things are kind of stacking up. Fuel prices are going crazy. Can you give us a sense at least qualitatively what -- the puts and takes on gross margin over the next three or four quarters?
Scott Montross: I think that like we talked about in the call. I think the second quarter remains pretty challenging. Gus. I think we have in the second quarter is a situation where you had the big delays continuing to happen in the first quarter. Like I said, somewhere between $40 million and $50 million worth of work and some of that would have likely run in the second quarter of this year. When you look at the steel mill market supply demand and delivery issues probably the height of this is going to be the second quarter, because one we're in the middle of the pricing moving up and things of that nature. But in the second quarter, they're also having facilities outages, where we have a few blast furnaces down for relying that it's going to happen in the second quarter. So that probably takes somewhere in the area of about another million tons availability to the market out. So we believe that we could continue to see delivery issues and things in the quarter related to steel supply. As we get into the second-half of the year, I think that as I've said, we're starting to see the jobs delaying into the future starting to diminish. So that starts to normalize, I mean the steel prices are going to remain high in the second-half of the year. But I think the availability starts to improve a little bit, and we've got some additional capacity, new capacity starting up later in the year, and I think some of the mergers that have taken place in the steel industry get their legs under them and really start to be able to supply to the market a little bit better. And I think if the, the jobs continue to stack up like we see in the demand remains where we see, we're going to go into an area of relatively strong demand show. So if that happens in jobs, don't continue to move around. I think you see upward pressure on the margin from here as you go through the rest of the year.
Gus Richard: Got it. That's very helpful. And then just on the Texas market, you've got a new competitor there, and I'm sure they need to sell their plant. You use the pricing pressure from that abated or it sounds like it is, but I just want to make sure?
Scott Montross: I think what you're going to have when you get a new entrance into the market. What you have is a situation where at least for a period of times, if you've indicated where prices and margins come under a little bit of pressure in this situation, it's probably more like the margins come under a little bit of pressure because the steel price is certainly forcing the project pricing up. You know, I think you see that for a period of time that could stretch out for several months, maybe a little bit longer, but when you see the strong demand that we see coming forward and continuing to come forward in Texas, I think that levels out after a period of time, as the industry wide backlogs start to improve. And then the margin levels in that specific region recover and start normalizing a bit. And the people down there with a new plan have been in the business a long time. And they definitely they know the market, so certainly we think things seemed normalized after several months or so with that going on, as long as the demand continues to remain strong down there.
Gus Richard: Got it. And then last one for me, you talked a little bit about continuing to work on manufacturing efficiencies, cost reductions, et cetera. Can you have any targets on what you can do in order to bring your cost structure down, any guidance there?
Scott Montross: Yes, what we try to do is target the man hours for specific jobs and the reduction in man hours or hours per specific job on an annual basis, measuring it from year to year. And we're normally targeting anywhere from about a percent to 2% on that on an annualized basis.
Gus Richard: Got it.
Scott Montross: -- when you start looking at the lean manufacturing pieces and porch inefficiencies with mean there's a home other level of costs that we were looking at taking out, and we're looking at -- we've got an outside firm helping us with efficiencies now, looking at things like automation and things like that to continue to drive efficiencies at our plant. So cost reduction work never ever stops so.
Gus Richard: Got it, okay. All right, very good. Thanks so much. That's it for me.
Operator: Our next question comes from Mike Morales with Walthausen & Company.
Mike Morales: Hi, good morning Scott and Aaron. Hope we're staying safe, and while I appreciate you taking the questions.
Scott Montross: Hi, Mike.
Aaron Wilkins: Hi, Mike.
Mike Morales: Hi, folks. So I want to circle back really quickly again to the comment that you had in the release and in the prepared remarks about project requirements stacking up, just to make sure that I fully understand this and have a sense of what it means. So Scott, if I understand correctly, are you saying that all of these programs that didn't bid and they weren't canceled are, that bidding pressure is alleviating and potentially they're going to bid and enter production sometime here in the second-half, and that should help your utilization and margins going along with it, is my timeline, right? Am I thinking about things the right way there?
Aaron Wilkins: I think what you see is approximately $130 million might get pushed out of that second-half of 2020 and $40 to $50 million that pushed out of the first quarter, pushed out in some of that, we believe starts to take place in the second-half of the year, but some of it could also leak into 2020. So it just depends where it stops, but what we're seeing right now, and Mike, you've been around this for a while too, how these projects can move around. We really can affect how they move around, but it does appear that the moving around is starting to diminish and the projects are starting to get footholds in certain places. And we think that could be taking hold in the second-half of this year. But again, some of it could be out into 2022 too.
Mike Morales: Sure. And I hesitate to use this phrase and it kind of sounds like there's a little bit of a coiled spring as it relates to the bidding that's been put off for now in the business that you guys have the opportunity of winning and just from an earnings perspective that seems like it could be a pretty compelling story over the next year or two, as things kind of catch up. You know, you touched on I guess the real wrench in all of that is the raw materials and what's going on there. And I know Northwest has always said the high steel prices don't bother you guys, but volatile prices to do. One thing that a lot of companies have been talking about is labor. How are you guys managing on labor? Are there any headwinds that you can call out there? Is that not as big a deal for you guys as it is for some others?
Aaron Wilkins: No, we are constantly working on hiring people especially people in the plants where we're labor is getting a little bit harder to get. We've actually put some full-time resources on that mic because it's been such an issue since the beginning of the pandemic. And we continue to work our way through that, but I think everybody is seeing a very similar issue that the amount of potential workforce that's out there is a little bit slim right now. And it's got you be a constant focus to make sure that your replacing or hiring people that you need for every one of the points.
Mike Morales: Right. From a capacity standpoint, is there any need for you folks to add capacity in the legacy business to take advantage of any of this strong bidding environment that you find yourself then?
Aaron Wilkins: No, I think we probably as far as looking at what our rated capacity is, Mike, we probably have somewhere in the area of about 180,000 tons of rated capacity at the plant. So we have plenty of open capacity to run additional work. If all this work that appears to be stacking up right now happens, then certainly the capacity that we have we'll handle it.
Mike Morales: Fantastic. Scott and Aaron, I appreciate the color as always. Be well, thank you.
Aaron Wilkins: Thanks, Mike.
Operator: This concludes our question-and-answer session. I'd like to turn the call back over to Scott Montross for any closing remarks.
Scott Montross: Thank you. And thanks again to everybody for joining the call today. I'd like to conclude by reiterating our cautious optimism on the outlook for the remainder of the year. I think despite the bidding delays that continued in 2021, we continue to believe that the structure of our business remains strong and the need for critical water infrastructure in the United States remains critical. I think the need is evident based on our backlog, which surpassed 200 million mark for the 11th consecutive quarter that even with jobs that are continuing to shift around. The demand environment remains healthy and we're optimistic that we'll continue to grow and expand our precast operations with the support of our strong balance sheet and healthy liquidity position. Thank you again to all of our loyal employees, suppliers, customers, and stockholders for your continued dedication to Northwest Pipe Company. We look forward to speaking with you all again on our second quarter call in August. So, thank you and be well.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
