NWPX Infrastructure, Inc.

Good morning and welcome to the Northwest Pipe Company fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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 Montross. Please go ahead.

Good morning, and welcome to Northwest Pipe Company's fourth quarter and full year 2020 earnings conference call. My name is Scott Montross, and I am the president and CEO of the company. I am 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, March 3, 2021, at approximately 4 p.m. Eastern time. This call is being webcast, and it is available for replay. As we begin, I would like to remind everyone that the 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, 2020 and in our other SEC filings for discussion of 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 today for joining our call to discuss our results. I would like to begin with a review of the year and our 2020 performance. Erin will then walk you through our fourth quarter and full year financials in greater detail. 2020 was a highly challenging year given the ongoing COVID-19 pandemic and the significant impact that it has had on our employees, their families, our society, and the economy at large. At Northwest Pipe Company, we've always taken safety very seriously. The onset of the pandemic solidified that even further as we went to great lengths to ensure the health and safety of all of our employees, their families, and our communities as our top priority. During the past year, we've learned to be even more efficient while at the same time continuing to enable remote working arrangements and additional paid leave for many of our employees. Throughout this trying period, we've experienced operational disruptions related to the virus at our plants in the United States. However, we've been able to work through these issues and continue to produce critical water infrastructure products and ship those products on time to our customers. As you may recall, we also experienced a temporary government mandated closure at our water infrastructure manufacturing facility in San Luis Rio, Colorado, Mexico for the majority of the second quarter due to the pandemic. However, since resuming operations in June, we were able to quickly return to and then exceed pre-COVID production levels. Now turning to our results. As of December 31st, our backlog, including confirmed orders for the Northwest Pipe legacy business was approximately 221 million compared to 231 million at the end of the third quarter of 2020, and 258 million at the end of the fourth quarter of 2019. The fourth quarter marks our 10th consecutive quarter with a backlog exceeding 200 million, which we believe is very strong by historical standards. Over the past 10 quarters, our backlog has fluctuated between 201 million and 276 million. Our backlog was impacted by the bidding delays that we experienced in the second half of 2020 related to the pandemic. These delays will have an effect on early 2021 and have been compounded by the adverse nationwide weather events we've experienced in recent weeks. However, I would like to reiterate these are not project cancellations, but simply delays. We view these disruptions as temporary in nature, as the current steel pressure pipe bidding schedule continues to look strong. In addition, our order book for precast concrete business has remained elevated even during the winter months, which is seasonally the slower time of the year. Despite the current complex environment, continued strong performance in the Geneva precast business has helped increase both our revenue and gross profit dollars. We generated annual net sales of $285.9 million, which included a $44.2 million contribution from Geneva. This represents only 11 months of Geneva revenue as we completed the acquisition on January 31st of 2020. Solid legacy margins and positive contributions from Geneva helped drive a 7.1% year-over-year increase in our gross profit dollars to $50.5 million and a gross margin of 17.7% of 80 basis points from 2019. These positive results demonstrate a key element in our growth and diversification strategy, which I'll elaborate on further momentarily. Revenue from our legacy steel pressure pipe business was negatively impacted by decreased production volumes related to the shifting of job timing out further into 2021. While steel pressure pipe jobs have momentum, the process for permitting, bidding, and engineering projects has been taking longer due to the highly complex and fluid challenges inherent with the current macroeconomic environment. With this as a background, we expect first quarter to be challenging due to volatility and delivery disruptions in the steel market resulting in production delays, the impact of extreme weather conditions in various parts of the country, as well as period-specific effects of bidding delays in the steel pressure pipe business. However, we are currently seeing a strong 2021 bidding calendar for the steel pressure pipe business. as well as a precast concrete order book that is strong even during the seasonally slow time of the year. As a result, we expect market conditions to stabilize as we move through the early part of 2021. Now I'd like to turn to a discussion of our two-pronged growth strategy. First, we are focused on growth in the precast concrete market. We entered this market just over a year ago with the acquisition of Geneva. Since then, the transactional nature of the precast concrete business has helped offset slower periods in our legacy steel pressure pipe business, which is exactly what the strategy was intended to do. Given our expansion and acquisition opportunities are fairly limited in the $450 to $600 million steel pressure pipe market, we've expanded our addressable market in the U.S., to include higher product margin opportunities in the precast concrete space, which, for water-related precast products specifically, is an estimated $3.5 to $5 billion market annually. Our ideal acquisition candidates in the precast concrete market would possess good organic growth potential, strong margin characteristics, solid asset efficiency, in a strong cash flow profile. We remain very active in evaluating opportunities with multiple potential targets. As such, we've been intently focused on building our cash on our balance sheet. We ended the year with $37.9 million in cash, exceeding the balance of $31 million on December 31st last year, which was just prior to the Geneva acquisition. As you may recall, we financed the $49.4 million acquisition of Geneva through a combination of cash on hand and a $16 million term loan with our banking partner. Our ability to essentially rebuild our cash reserves from scratch highlights our strong management of current assets. In addition, we are very pleased with how the integration of Geneva has trended over the course of the past year. We are currently in the process of commercializing new innovative RCP and manhole for use in corrosive sewer applications, which we believe have significant organic growth potential. The second part of our strategy is to maximize our core steel pressure pipe water transmission business, which remains key. Our goal is to continue to optimize this business in order to maximize shareholder value And over the last three years, we've made significant progress through cost reduction measures and remanufacturing to drive further efficiencies. And we are currently working with outside engineering resources to explore opportunities for creating additional efficiencies to drive further cost reductions. I will now turn to look at current and upcoming water transmission projects. In the Texas market, The ongoing multi-year, multi-agency Houston surface water program is expected to bid multiple segments in 2021, representing 27,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects representing 25,000 tons beyond next year. The next new reservoir to be built in Texas is Lake Ralph Hall for the Upper Trinity Regional Water District. This is another major program currently in design that includes a new dam and pipeline to move water into the Dallas-Fort Worth Metroplex. The pipeline represents 17,000 tons of pipe. Construction is now expected to begin late 2022, early 2023. There is currently a bid package out for the new dam construction phase. The Alliance Regional Water Authority program in Central Texas is another multi-agency regional water program. This program includes a large pipeline, pump station, and treatment facilities and represents 15,000 tons of pipe. Construction is expected to begin in 2021 and appears to be holding the forecasted timeline. In the Western market, California's Prop 1 $7.5 billion bond for water infrastructure has created much needed funding for projects within the state. According to the California Natural Resources Agency, 95% of those funds have been appropriated for various projects as of the 2020-21 fiscal year. We expect requirements for these projects to stretch out over the next several years. Water reuse programs have generated new opportunities in the California market on which we expect to see bidding activity continue for the next year. We've identified three sizable projects bidding in 2021 representing 6,600 tons. MWD is heading a regional reuse pilot project in conjunction with L.A. Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California. It involves 60 plus miles of large diameter pipe. The current demonstration facility has been operating for six months and construction of the full scale treatment and conveyance facility could begin as early as 2025. The PCCP rehabilitation program will result in about 5,000 tons annually over the next two to three years. We have seen a slowdown in this work this year, which appears to be COVID-related, so the timing of these projects has shifted to later this year. The site's reservoir is a water storage project that has received funding from Prop 1. It will involve over 30 miles of 144-inch pipeline. The project is forecast to begin in 2024-25. The Southern Nevada Water Authority has begun moving forward in earnest with 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-inch pipe with construction tentatively scheduled for 2024. In North Dakota, progress has been slow on the 140-mile, 87,000-ton Red River Valley water supply project. The two-mile demonstration project bid in January of this year and was awarded to Northwest Pipe. The bulk of this project is dependent upon a 2021 legislative session to commit to full funding. We are closely tracking the outcome of further budget approval now in discussion at the State Legislative Assembly. In Colorado, we are tracking a late 2020 record of decision by the U.S. Army Corps of Engineers for the Northern Integrated Supply Project. If favorable, construction of up to 150 miles of pipeline is expected to start in 2023. The project is located 60 miles north of Denver in the Fort Collins area. Our employees have continued to do an excellent job of executing our strategy and doing so as safely as possible throughout a highly challenging year. The structure of our business continues to be strong. The current steel pressure pipe bidding calendar remains healthy despite delays due to broader economic uncertainty. As such, we are cautiously optimistic that 2021 will be a solid year. Lastly, we remain well-positioned to continue to execute our two-pronged growth strategy, giving our strong balance sheet and liquidity position. As we move forward, we will remain focused on our number one priority of taking every precaution to keep our employees safe through the ongoing COVID-19 pandemic. Number two, a persistent focus on margin over volume. Number three, identifying strategic growth opportunities for the company. And number four, continuing to implement cost reductions and efficiencies at all levels of the company. I will now turn the call over to Aaron, who will walk through our fourth quarter and four-year financial results in greater detail.

Thank you, Scott, and good morning, everyone. I hope you're all staying safe and healthy. I'll begin today with our fourth quarter results. Adjusted net income for the fourth quarter of 2020 was $5.6 million or $0.57 per diluted share compared to adjusted net income of $10.2 million or $1.04 per diluted share in the fourth quarter of 2019. Adjusted net income excludes unique and unusual items and is provided for comparability purposes. The fourth quarter of 2020 excludes $0.4 million in amortization expense of intangible assets acquired with Geneva Pipe and Precast, net of applicable taxes. This compares to $1.9 million of favorable insurance recoveries associated with the Saginaw Fire net of taxes in the fourth quarter of 2019. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for comprehensive accounting of the fourth quarter and full year adjustments. Our fourth quarter net sales decreased 4% to $69.4 million compared to $72.2 million in the fourth quarter of 2019. Geneva sales were $11.3 million in the fourth quarter of 2020. Legacy revenues decreased $14.1 million from the year-ago quarter due to a 31% decrease in tons produced due to changes in project timing. This was partially offset by a 17% increase in selling price per ton due to product mix. Gross profit decreased to 12.4 million or 17.8% of sales compared to 16.9 million or 23.4% of sales in the fourth quarter of 2019. For comparison purposes, gross profit in the fourth quarter of 2019 was elevated by 1.4 million in net insurance recoveries. Excluding this benefit, our gross profit margin for the fourth quarter of 2019 would have been 21.5%. Selling general and administrative expenses were $5.8 million in the fourth quarter of 2020, compared to $4.6 million in the fourth quarter of 2019. The quarterly increase was primarily due to amortization and other costs from the addition of Geneva, including costs we are selectively incurring to further develop our precast business to support future growth. Now turning to our full year results. Adjusted net income was $20.9 million, or $2.12 per diluted share, in 2020 compared to $26.6 million or $2.72 per diluted share in 2019. Our 2020 adjusted net income excludes the following one-time items. $2.6 million of acquisition-related transaction costs, $2.4 million in insurance recoveries resulting from the Saginaw fire, $2.2 million in amortization and other acquisition-related accounting adjustments associated with Geneva, and the associated tax impact of the aforementioned items. This compares to adjusted net income in 2019, which excluded the following, $2.3 million in proceeds related to the favorable legal settlement associated with our former tubular products business, $0.6 million of acquisition-related transaction costs, as well as the corresponding tax impact for these adjustments. Net sales increased 2.4 percent to $285.9 million in 2020 compared to $279.3 million in 2019. The Geneva operations contributed $44.2 million in net sales in 2020. Net sales decreased at legacy facilities primarily due to a 28% decrease in tons produced, which were partially offset by a 20% increase in selling price per ton. The decrease in tons produced would be primarily due to project timing and mix, in addition to mandatory government shutdown of our SLRC facility due to the pandemic in the second quarter of 2020. The increase in selling price per ton is due to changes in product mix. Gross profit increased 7.1 percent to 50.5 million or 17.7 percent of net sales in 2020 compared to 47.2 million or 16.9 percent of net sales in 2019. the increase in gross profit was primarily due to the addition of acquired Geneva operations, which was partially offset by a lower contribution from our legacy business. Our 2019 gross profit was reduced by 1.6 million incremental production costs incurred with the business interruption portion of our insurance claim. Excluding this timing difference, our gross profit margin in 2019 would have been 17.5%. Selling general administrative expenses increased 34.9% to 25 million or 8.7% of net sales in 2020 compared to 18.5 million or 6% of net sales in 2019. The increase in SG&A was primarily due to the addition of Geneva, including higher acquisition-related transaction costs, expenses related from the extended workforce, and amortization expense from acquired intangible assets. In addition, we incurred higher incentive compensation expenses in 2020. For the full year of 2020, we had an income tax rate of 25.7%. Our 2019 tax rate of 14.5% was unusually low due to changes to our valuation allowance. Based on existing tax regulations, we are expecting a 2021 tax rate between 26 and 27%. Now transitioning to our financial condition. our balance sheet remains very strong. At December 31st, total available liquidity exceeded $90 million, consisting of $37.9 million in cash and cash equivalents and approximately $53 million from our line of credit. We had $13.8 million in debt outstanding at the end of 2020. We generated cash flows from operations of $56.1 million in 2020 compared to $42.9 million in 2019. Depreciation and amortization expense was $14.6 million for the year. Our 2020 capital expenditures totaled $14 million. We currently expect our full-year 2021 capital expenditures to be in the range of $12 to $15 million, consisting entirely of maintenance capex. In summary, we are very pleased with our 2020 financial results, especially considering the circumstances in which they were achieved. As Scott highlighted, We have cautious optimism about 2021's prospects, despite some headwinds we are anticipating in the first quarter related to the recent weather events, the volatility in the steel markets, and project delays. I'd like to extend my thanks to all of our employees for their many contributions to the company's 2020 achievements, none more important than their continued commitment to safety. I'd also like to thank our shareholders for their ongoing support of Northwest Light. I will now turn it over to the operator to begin the question and answer session.