Northwest Pipe Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 4 speakers on the call.

Operator

Morning, and welcome to the North West Pipe Company First Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Scott Montrast, President and CEO of Northwest Pipe Company.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to Northwest Pipe Company's Q1 2023 earnings conference call. My name is Scott Montross, and I am 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, 2023, at approximately 4 pm Eastern Time. This call is being webcast and it is available for replay.

Speaker 1

If we begin, I would like to remind everyone that the statements made on this Call regarding our expectations for the future, our forward looking statements and actual results could differ materially. Please refer to our most recent Form 10 ks for the year ended December 31, 2022, 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 Q1 performance and outlook.

Speaker 1

Aaron will then walk you through our financials in greater detail. Our Q1 results came in slightly better than our expectations. We generated revenue of $99,100,000 a decline of 9.4% compared to the prior year quarter. Revenue from our Steel Pressure Pipe segment totaled $63,500,000 reflecting a decrease of 14.9% over the prior year quarter, mainly due to anticipated customer driven delays, which affected the production timing of our projects and backlog, in addition to severe weather events, which led to unscheduled downtime at multiple of our facilities in the Q1. This resulted in relatively flat production volume year over year.

Speaker 1

That said, we ended the quarter with a strong backlog, including confirmed orders near record territory at 370,000,000 which was down marginally from our all time highest 372,000,000 at year end and up from 341,000,000 as of March 31, 2022. We entered 2023 with a very strong backlog from robust bidding in Expect bidding volume to be down moderately in 2023. As a result, backlog in the second quarter may moderate lower, but Updated to still remain high by historical standards. On the pricing side, hot rolled band steel prices have increased fairly rapidly since the start of this year, which in general bodes well for our steel pressure pipe business. Now turning to our Precast segment.

Speaker 1

Precast revenue increased 2.7% from the prior year quarter to $35,600,000 driven primarily by higher selling prices given continued strong demand for our precast products as well as increased raw material input costs. Our sales or partially offset by lost production days resulting from the ongoing ERP implementation project at Park USA as anticipated, as well as severe weather events we experienced in the Q1, our pre cash related order book remains strong. In total, dollars 58,000,000 as of March 31, 2023, despite moderating down from $64,000,000 as of December 31, in Texas as these particular states are within the top 5 fastest growing markets in the U. S. Further, the Park USA products provide unique advantages for growth in the commercial construction market despite near term macroeconomic concerns, highlighting a key benefit of our diversification strategy.

Speaker 1

Our 1st quarter consolidated gross profit increased 12.1% year over year to $16,600,000 resulting in a gross margin of 16.7%, up from 13.5% in the Q1 of 2022. Our steel pressure pipe gross margin of 12.2% improve by approximately 260 basis points over Q1 2022, primarily due to The higher margin quality of projects that we have in backlog as well as improved project pricing, partially offsetting the strength in our steel pressure Gross margin in the Q1 was a negative impact from severe weather events and customer driven production delays that affected our overhead absorption levels. Our precast gross margins improved by approximately 280 basis points over the Q1 of 2022 to 24.7 percent of precast sales. The improvement was predominantly due to improved pricing. Despite some of the ongoing challenges that we continue to face with the ERP implementation, severe weather events that cause unscheduled downtime and the impact of rising interest rates on the residential housing market.

Speaker 1

Next, I would like to provide an update on our growth initiatives to position Northwest Pipe for increased resilience through market cycles. Our first strategic priority is to continue driving growth in the pre cash related space, which we believe has attractive through cycle characteristics. The integration work post our acquisition of Park USA remains ongoing as we continue to assimilate the company into our operations And we are making solid progress toward finalizing the Park ERP implementation project. As we discussed on our last call, We've encountered challenges, which including control deficiencies related to ERP system implementation have required us to take planned downtime at our plants as we work toward achieving optimum system functionality. This downtime reduced both our production levels and shipments adversely affecting both our pre cash revenue and gross margins during the Q1.

Speaker 1

We expect we will To reiterate, we view this project as short term challenge and is necessary to achieving our strategic growth objectives. Next, I would like to turn to our ongoing organic growth strategy for pre cash, which we refer to as product spread. As a reminder, level 1 product spread is focused on building out capacity utilization at our Texas based Park plans to maximize overall production capabilities. The Park sales group has made good progress on growing our sales outside of the state of Texas from the Park facilities with approximately $2,000,000 of orders booked outside the state of Texas in the Q1 and over $8,000,000 in the last 12 months. Our objective remains to continue growing the Level 1 product spread throughout 2023.

Speaker 1

The premise for level 2 product spread is to produce and ship park products out of our other Northwest pipe plants. We are utilizing our pre existing Geneva precast operations as the pilot location for Level 2 product spread activity. We are successfully continuing to bid new projects that are currently being produced and will be produced out of our Geneva plants. So far in 2023, we are in production on 4 part product orders at Geneva with more scheduled to come. Once part products are comfortably established at Geneva locations, we will expand upon the strategy to produce these products at additional Northwest Pipe legacy locations.

Speaker 1

We remain bullish on the long term growth prospects for the Park business. Additionally, part of our organic growth initiatives include reinvesting in our Pre cash locations, particularly in the Geneva operations in order to increase our production capabilities and capacity through expansion and automation. For example, we are continuing work on a $16,000,000 new RCP manhole facility at our Salt Lake City, Utah plant, which is anticipated to become operational in the Q4 of this year. While driving growth in the precast related space remains our top strategic priority, we are also focused on maximizing our steel pressure pipe water transmission business to become as efficient as possible. We currently have about 55% market share in this space with fairly limited acquisition growth opportunities in the market that has been dramatically Consolidated over the years.

Speaker 1

With our nationwide footprint and as an industry leader in the space, we are well positioned to participate in the ever growing amount of water transmission grid infrastructure projects required to support the increasing U. S. Population. And we continue to be fixated on enhancing shareholder value over time. As such, we are focused on opportunities for further cost reduction measures, lean manufacturing and maximizing margin over volume.

Speaker 1

Next, I'd like to discuss project on some current and upcoming water transmission projects that are bidding in the steel pressure pipe market. In the Eastern markets, the ongoing multi year, multi agency Houston surface water program is bidding 3,600 tons of pipe this year across multiple projects with additional sections planned for 2024 for West and North Harris County Regional Water Authorities. The Alliance Regional Water Authority program in Central Texas is another multi The program includes a large pipeline, pump stations and treatment facilities. The final remaining 2,700 tons of pipe is expected to bid this year. Continues on the 140 mile 87,000 ton Red River Valley water supply project.

Speaker 1

The first two segments were awarded to Northwest Pipe and installation is currently underway. We are closely tracking the outcome of further budget approval for future segment construction. In the Western markets, California's Prop 1 $7,500,000,000 bond for water infrastructure has created the much needed funding for projects within the state. The following Prop 1 projects are expected to start construction in the next 5 years. The Sites Reservoir is a water storage project that has received funding from Prop 1.

Speaker 1

It will involve over 30 miles of 144 inches pipeline. Additionally, Sites Reservoir received $30,000,000 in IIJA funding this past quarter. Harvest Water is a program intended to provide recycled wastewater for agricultural use in the Sacramento area. This program includes nearly 25 miles of 30 inches to 66 inches pipeline. The first segments of this program to bid in late 2023.

Speaker 1

Las Vucaros reservoir expansion program provides a substantial capacity improvement to the existing reservoir and conveyance facilities in Northern California. The program includes approximately 22 miles of 48 inches to 96 inches pipe. Willow Springs water bank will create 500,000 acre feet of underground water storage in the Antelope Valley. The project includes approximately 16 miles of 30 to 84 inches pipe. Water reuse programs have generated new opportunities in California market on which we expect to see bidding activity continue for the foreseeable future.

Speaker 1

MWD is heading a regional water reuse pilot project in conjunction with LA Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California and involve 60 plus miles of large diameter pipe. The current demonstration facility has been in operation for 2 years. Preliminary design and permitting is ongoing and construction of the full scale treatment and conveyance facilities could begin as early as 2025. MWD secured a $224,000,000 WIFA loan in October of 2021, which will fund nearly 50% of the anticipated cost.

Speaker 1

SNWA, a Las Vegas water wholesaler and Colorado River water user has also played significant financial support for this program. The MWD PCCP rehabilitation programs will result in about 5,000 tons annually over the next 10 to 15 years. This program includes approximately 81 miles of pipe from 75 to 120 inches Southern Nevada Water Authority has begun moving forward in earnest with the expansion of the southern part of their water delivery system. This program, which has recently started preliminary design activity, will include approximately 25 miles of 78 inches steel pipe with construction tentatively scheduled for 2025. In Utah, design and permitting continues on 150 mile 69 inches Lake Powell Pipeline.

Speaker 1

This pipeline will provide an alternative source of water for Southern Utah. Construction is proceeding on in earnest in New Mexico on the U. S. Bureau of Reclamation's Navajo Gallop Supply Program. The final major phase of this pipeline construction for this program as advertised to bid in early 2024 and includes 2,800 tons of steel pipe.

Speaker 1

New Mexico Governor Grisham recently announced $160,000,000 in IIJA funding for the completion of the Eastern New Mexico Rural Water System. Remaining pipeline segments include 15,000 tons of steel pipe to convey water from the Ute reservoir in Northern New Mexico South to water users in the Greater Clovis area. Before I conclude, I'd like to summarize our outlook. Our outlook for 2023 remains positive. Aside from the challenging Q1 that had many of the same issues we experienced in the comparable period last year, we carried a robust near record territory backlog into 2023, which we believe will set the pace for a strong year despite anticipated moderation in the amount of tons bidding in 2023.

Speaker 1

In regard to the Q2, our steel pressure pipe business, we anticipate similar production levels as to what we saw in the Q2 of last year, given the same strength that we've been maintaining in our backlog, which should fuel improved gross profit and margins. In our precast business, We remain cautiously optimistic. Demand will remain fairly strong for the near term despite current macroeconomic uncertainty surrounding the residential housing market and current rate environment. That said, we expect we'll be able to maintain strong business levels and margins in the Q2 even with a slight moderation in our order book resulting from macroeconomic factors. The Precast business is expected to have a solid 2023 off only modestly from what many to consider to be an all time record year in 2022.

Speaker 1

In summary, we are pleased with our solid start to the year, which surpassed our expectations. We remain bullish on our growth initiatives to increase our precast related business to a similar size as our steel pressure pipe business. Continued by strong demand for our high quality precast products and growing infrastructure needs in the United States. Looking ahead, we will remain focused on finalizing the integration of Park USA as quickly and efficiently as possible. Number 2, persistently focused on margin over volume number 3, continuing to implement cost reductions and efficiencies at all levels of the company and number 4, continuing to identify strategic opportunities to grow the company once we've completed the integration work with Park USA.

Speaker 1

Thank you our dedicated team at Northwest Pipe for your commitment to the excellence and for operational safety. I will now turn the call over to Aaron, who will walk through our financial results in greater detail.

Speaker 2

Thank you, Scott, and good morning, everyone. I'll begin today with an overview of our profitability. Consolidated net income for the Q1 was 2,400,000 or $0.23 per diluted share compared to $3,600,000 or $0.36 per diluted share in the Q1 of 2022. Consolidated net sales decreased 9.4 percent to $99,100,000 compared to 109 $300,000 in the Q1 of 2022. SPP segment sales decreased 14.9% to $63,500,000 compared to $74,700,000 in the Q1 of 2022, driven primarily by a 4% decrease in our tons produced mainly due to changes in project timing and an 11% decrease in our selling price per ton due to decreased raw material input costs.

Speaker 2

Free cash segment sales increased 2.7% to $35,600,000 Compared to $34,600,000 in the Q1 of 2022, primarily due to an increase in selling prices resulting from the high demand for our concrete products in addition to increased material costs. Consolidated gross profit increased 12.1 percent to $16,600,000 or 16.7% of sales compared to $14,800,000 or 13.5% of sales in the Q1 of 2022. Steel pressure pipe gross profit increased 8.2 percent to $7,800,000 or 12.2 percent of segment sales. This compared to gross profit of $7,200,000 or 9.6 percent of segment sales in the Q1 of 2022. As a reminder, our SDP gross margin in the Q1 of 2022 included a $2,000,000 charge for Without this, our gross margins would have been $9,200,000 or 12.3 percent of segment sales in the Q1 of 2022.

Speaker 2

Precast gross profit increased 15.8% to

Speaker 1

$8,800,000 or

Speaker 2

24.7 percent of precast sales from $7,600,000 or 21.9 percent of segment sales in 0.7% to $11,900,000 or 11.9 percent of sales compared to $9,400,000 in the Q1 of 2022 for 8.5 percent of sales. The increase was primarily due to $1,000,000 in higher incentive based compensation expenses, $900,000 higher salaries and related benefits to support the growing business as well as smaller increases in professional services and For the full year of 2023, we now expect our consolidated selling, general and administrative expenses to be in the range of $43,000,000 to $46,000,000 Company wide depreciation and amortization expense In the Q1 of 2023, it was $3,900,000 compared to $4,100,000 in the year ago quarter. For the full year of 2023, we continue to expect depreciation and amortization to be in the range of $17,000,000 to 19,000,000 Our non cash incentive compensation expenses were $1,000,000 $600,000 in the first quarters of 2023 and 2022 respectively. Interest expense increased to $1,400,000 in the Q1 of 2023 compared to $600,000 in 2022. We expect interest expense of approximately $5,000,000 in 2023.

Speaker 2

However, that could vary with interest rate movements and variability in working capital needs for our steel pressure pipe business. Our first quarter income tax expense was $1,000,000 resulting in an effective income tax rate of 28.7% compared to $1,300,000 in 2022 or an effective income tax rate of 27.4%. Our tax rates for the 1st quarters of 20232022 were impacted by non deductible permanent differences. We continue to expect our tax rate for full year 2023 to range between 24% to 26%. Now I'll transition to our financial condition.

Speaker 2

We generated net cash provided by operating activities of 26 $300,000 in the Q1 of 2023 compared to $1,600,000 in the Q1 of 2022 due to favorable changes in working capital. Our capital expenditures totaled $4,400,000 in the Q1 of 2023, which was flat with the prior year quarter. We continue to anticipate our total CapEx to be in the range of $24,000,000 to $28,000,000 for full year 2023, which includes approximately $3,000,000 in remaining investment CapEx for our new reinforced concrete pipe machine as Before I conclude, I'd like to summarize our progress on the ERP implementation and material weakness remediation projects. We are in the early stages of executing our plan to remediate the material weakness recently identified and discussed in our Q4 earnings call. Our focus at this point has been concentrated on employee training and oversight.

Speaker 2

We have also restricted certain access within the system, The internal controlled efficiencies identified have not impacted the accuracy of our current or historical financial results. We have also initiated a consulting project to assist with the refinement of our business processes and material master data for the Park USA ERP system. This project's objectives are to improve overall transactional integrity as well as to automate some of the more laborious system activities. We expect this project to achieve incremental improvements throughout this project's obtained from this project is critical for both our Park USA business and also for our longer term execution of our 2 pronged growth strategy. In closing, I am very pleased with all the work our team has done to position us well for another strong year in 2023.

Speaker 2

I would like to thank our employees for their dedication to operational excellence and workplace safety as well as our stockholders for their continued confidence in Northwest Pipe. I will now turn it over to the operator to begin the question and answer session.

Operator

The first question comes from David Wright with Henry Investment Trust. Please go ahead.

Speaker 3

A lot to digest there. Lots of good information and thanks for all of it. Scott Steele, SPP. Q2 and Q3 last year were really strong years for the company, really strong quarters, excuse me. Your commentary suggests that Q2 this year could be close to as good as last year's, did I hear that correctly?

Speaker 1

David, after a pretty slow Q1, right, because of weather and Lot of different things. We're actually carrying a backlog right now in tons. It's about 12% higher at the end of the Q1 this year than it was last year. So we're set up to really get back on a pretty similar revenue Trajectory that we saw in steel pressure pipe in the rest of the quarters this year, but with improved margins because The big bidding activity that we saw at the end of 2022. So we're pretty excited about the way that steel Pressure pipe is looking for the rest of the year.

Speaker 3

So then the kind of the variance in year over year comparisons for the next couple Quarters will depend more on what Precast does.

Speaker 1

Yes, I think so. But the interesting thing about Precast, David, is We are in 2 of the very, very hot markets in this country. 1, Utah, which has really low unemployment and a significant net migration rate into the state of Utah and a significant requirement for housing builds. And We still have a little bit of pent up demand from the supply chain issues in Utah during the pandemic. So really what we're seeing along that part of our business with Geneva is we're seeing a market right now that's a little bit skittish and people are holding on to their quotes a little bit longer.

Speaker 1

And there's certain products that may be down a little bit, but some of the major products are still very strong. Our lead times are a little bit shorter than they were last year, but last year, like we said in some of the calls, we got a little bit overbooked, But we're still seeing Utah is being pretty busy. And in Texas, on the park side anyway, which is obviously Geneva is mostly residential. There's probably 85% residential for Geneva or 80% residential for Geneva anyway, but Park is about 85% non residential. And we're still seeing a very, very strong non residential market in the state of Texas and really seeing the park business not having dropped off at all.

Speaker 1

So that's why we said during the call, we're seeing strong steel pressure pipe for the rest of the year and we're seeing a precast market It's really down only modestly at this point from what a lot of people consider to be an all time record year in 2022, but with margins that are in line with what we saw last year. So it really feels like we're setting up for another strong year in 2023.

Speaker 3

Okay. And then my other question, you talked about California Proposition 1 and all the different pretty large projects that could lead to over the next, you said, the next 5 years. Just kind of big picture and obviously not everything happens at the same time, but big Sure. Does the contracting capacity exist in California for multiple projects like that to be going on at the same time?

Speaker 1

Yes. I would say, David, that all the major contractors that we deal with have multiple locations. And especially in the locations or the markets that are traditionally really strong steel pressure pipe markets And really those are California and Texas. So, yes, I would say that the contracting capacity it is likely more than enough to handle those big projects as we go forward into the next 3 or 4 years.

Speaker 3

Okay, thanks. Thanks for taking my questions.

Speaker 1

Absolutely.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Scott Montross or any closing remarks.

Speaker 1

Yes. Just a few things as we close. I'd like to thank everybody for joining the call today. But again, As we get through the Q1, we ended the Q1 with a backlog in tons. It's up 12% versus what we were last year Q1 and really kind of positions us to really have a really a solid steel pressure pipe year for the rest of this year.

Speaker 1

But like I said before, with improved margins and precast, Like we said a little bit earlier with David's questions, even with the headwinds in residential housing, we're in 2 of the best markets And we're expecting to see a precast and precast related market that is only modestly off of what we saw in 2022. And I think the last thing I'd like to say is if you look at where the company's come from in the last 5 years, in 2017, The company had about $132,000,000 in revenue and about $5,000,000 of gross profit and really de minimis EBITDA. We finished 2022 with $458,000,000 in revenue and in the mid-80s of gross profit in the low to mid 60s of EBITDA. So we've come a long way in the last 5 years and we feel like we are just getting started on that growth path to continuing to grow and become more profitable and to become a better holding for our shareholders. So thanks everybody again for joining the call today and we'll talk to you again in a few months in August, right, August timeframe.

Speaker 1

So thank you very much.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Northwest Pipe Q1 2023
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