NWPX Infrastructure, Inc.

Good morning and welcome to the Northwest Pipe Company's first quarter 2021 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 a question. To ask a question, you may press star, then one on your touchtone phone. To withdraw your question, please press star, then two. 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 first quarter 2021 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, 2021, at approximately 4 p.m. Eastern Time. This call is being webcast, and it is available for replay. As we begin, I'd 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 31, 2020 and in our other SEC filings for 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 for joining our call today to discuss our results. I'll begin with a review of our first quarter 2021 performance. As of March 31st, our backlog including confirmed orders for the Northwest Pipe legacy business was approximately $210 million compared to $221 million at the end of the fourth quarter of 2020 and $224 million at the end of the first quarter of 2020. Despite the delays in bidding that we've seen over the last several months related to the COVID pandemic, we've been able to continue to maintain a steel pressure pipe backlog over 200 million for the 11th consecutive quarter, which we believe remains strong by historical standards. Over the past 11 quarters, our backlog has fluctuated between 201 million and 276 million. To elaborate further, our steel pressure pipe backlog has continued to be adversely impacted by bidding delays that began in the second half of 2020 related to the pandemic. However, I'd like to reiterate, these are not project cancellations, but simply delays that we believe are temporary in nature. Aside from these delays, the current steel pressure pipe bidding schedule continues to look strong. And it currently appears that project requirements are beginning to build up, which could very well result in an extended period of very strong upcoming demand. In addition, our order book for our precast concrete business remained elevated throughout the first quarter, despite it being a seasonally slower time of year. And since the end of the first quarter, our precast order book has continued to gain strength. Ongoing strong performance in precast concrete contributed to the increase in our revenue during the first quarter as this business is beginning to serve as a stabilizer to offset periods of choppiness in the steel pressure pipe business, especially during the challenging markets we are seeing today. We generated first quarter net sales of $72.3 million, which included a $12.3 million contribution from Geneva. Our first quarter gross margin of 12% is similar to what we saw in the first quarter of 2019 and 2020. Both revenue and gross margin from our legacy steel pressure pipe business were negatively impacted by production delays, which affected both product mix and timing. The production delays were due to customer-driven delays on orders that were already in backlog, Steel market supply and delivery disruptions which postponed the production of orders and adverse nationwide weather events in January and February which resulted in our plant in Saginaw, Texas being shut down for almost five days and portions of our plants in Parkersburg, West Virginia and Portland, Oregon being closed for multiple days. We expect the second quarter of 2021 will remain challenging due to ongoing capacity constraints and supply issues in the steel market, potentially resulting in additional production delays and bidding delays, most of which are attributed to COVID disruptions, but are diminishing as we move through the second quarter. All of that said, the ongoing bidding calendar for steel pressure pipe business continues to look strong. And at the present time, it appears that the recent bidding delays are causing project requirements to pile up, which could indicate an extended period of very strong upcoming demand. In addition, our precast order book remains elevated and is currently continuing to gain strength, which is a very good indication that the precast business will remain strong for the near term. As a result, we continue to be cautiously optimistic that market conditions will begin to stabilize in the second half of 2021. Next, I would like to turn to a discussion on our two-pronged growth strategy. Our primary focus remains on driving growth in the precast concrete market. We reached the first anniversary of our acquisition of Geneva Pipe and Precast in February. and are very pleased with how well the integration process has gone over the course of the past year. Since then, we've benefited from the transactional nature and higher product margin opportunities in the precast concrete business, which has helped offset these current slower periods in our legacy steel pressure pipe business. Our strategy is to continue to grow in this market via acquisitions and potentially through organic growth opportunities at some of our existing facilities across the country. Our acquisition pipeline remains solid with multiple potential targets that we are actively evaluating with a focus on organic growth potential, strong margin characteristics, and cash flow. Building cash on our balance sheet remains a key focus in order to properly execute our strategy. We ended the first quarter with a strong cash balance of $29.9 million, despite using some cash during the first quarter to ensure ample inventory as well as to pay down some debt. The second prong of our strategy is to maximize our core steel pressure pipe water transmission business in order to maximize shareholder value. Over the last three years, we've made significant progress through cost reduction measures and lean manufacturing to drive further efficiencies. And as mentioned on our last call, we are currently working with outside engineering resources to explore opportunities for creating additional efficiencies to drive further cost reductions. Before I review current and upcoming water transmission projects, I'd like to highlight our recent new product launch in the precast concrete space. The perfect pipe and line manhole systems, which we believe have significant organic growth potential, as recently announced, Geneva began manufacturing and distributing reinforced concrete pipe and precast manhole systems within North America in April. We believe the PERFECT system provides superior performance and longevity over sanitary sewer options and is focused on providing municipal wastewater management with a leak and corrosion-proof barrier for use in various applications. We look forward to working with regional engineers and municipalities to demonstrate the PERFECT system and line manhole system as a low-maintenance, long-term, cost-effective sewer management solution. 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 DFW 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 dam construction phase. The Alliance Regional Water Authority program in Central Texas is another multi-agency regional water program. The program includes a large pipeline, pump stations, 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 the 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 California market on which we expect to see bidding activity continue for the next year. We have identified three sizable projects bidding in 2021 representing 6,600 tons. MWD is heading a regional reuse pilot project in conjunction with the LA Sanitation District This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California and involves 60 plus miles of large diameter pipe. The current demonstration facility has been operating for six months and construction of full-scale treatment and conveyance facilities 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 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 forecasted to begin in 2024-2025. The Southern Nevada Water Authority has begun moving forward in earnest with an 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 slowed 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 the Northwest Pipe. The bulk of the project is dependent upon 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. In summary, despite some of the current challenges in the steel pressure pipe market, The near-term bidding schedule for steel pressure pipe remains solid. We continue to believe that we are the supplier of choice in steel pressure pipe market with the widest range of capabilities of anyone in the business. The project bidding delays that we've seen seem to be causing project requirements to pile up, which could result in an extended period of very strong upcoming demand. and the need to replace an aging water transmission grid system to meet the growing infrastructure needs in the U.S. remains critical. In addition, the continued momentum of our precast order book suggests that this part of our business will be strong for the near future. All of this, when combined with our strong balance sheet and liquidity, positions us well to execute our two-pronged growth strategy. I'd like to sincerely thank all of our employees for maintaining their strong operational execution throughout the complexities of the first quarter and for doing so safely. We remain cautiously optimistic that conditions will stabilize in the second half of 2021 and the year will finish strong. Looking ahead, we will remain focused on, number one, our top priority of taking every precaution to keep our employees safe throughout the ongoing pandemic. Number two, a persistent focus on margin over volume. Number three, identifying strategic opportunities to grow the company. And last but certainly not least, 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 first quarter financial results in greater detail.

Thank you, Scott, and good morning, everyone. We 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 22 cents per diluted share compared to 0.6 million or six cents per diluted share in the first quarter of 2020. There were no adjustments to get 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 of Geneva results given that acquisition closed on January 31st 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 times are not always the best indicator of productivity and comparability of our metrics between periods are highly dependent on project timing and product mix. Gross profit decreased to 8.8 million or 12.1% of sales compared to 9.6 million or 13.9% of sales in the first quarter of 2020, primarily due to changes in product mix for steel pressure pipe. This was partially offset by the extra month of margin contribution from Geneva. For comparison purposes, gross profit in the first quarter of 2020 was reduced by $0.4 million of incremental production costs for the Saginaw Fire and $0.3 million in acquisition-related inventory charges. Excluding these items, our gross profit margin for the first quarter of 2020 would have been 14.9%. Selling general administrative expenses decreased 26.6% to $5.8 million in the first quarter of 2021 compared to $7.9 million in the first quarter of 2020. The decline was primarily due to lower acquisition-related transaction costs that were incurred in the first quarter of 2020 with the addition of Geneva and partially offset by $0.4 million in higher compensation-related expenses in the first quarter of 2021. Barring anything transactional in nature, we expect selling general and administrative expenses to be approximately $23 million for the full year of 2021. Our income tax rate in the first quarter was 21.7%. compared to 45.6% in the first quarter of 2020. The first quarter 2021 rate is less than the 26.5% we were expecting for the full year due to the combination of a windfall benefit on stock-based compensation that vested during the quarter, which was pronounced by a relatively low pre-tax book income earned to this point in the year. The unusually high effective income tax rate in the first quarter of 2020 was impacted by non-deductible expenses associated with the acquisition of Geneva. Now transitioning to our cash flows and financial condition. We used $0.6 million in net cash from operating activities during the quarter due to increased working capital funding requirements. This compared to $15 million in net cash provided by operating activities in the first quarter of 2020, which was largely due to favorable swings in working capital. As Scott mentioned, we have experienced challenges from volatile steel markets, and inventories and contract assets are expected to increase through 2021 as recent increase in market prices become fully reflected. Depending on steel availability and other factors through the balance of the year, we expect the effect of steel prices could add upwards of $20 million in additional working capital requirements for the business. Thankfully, our balance sheet and liquidity remains well positioned to manage this market challenge in addition to financing our growth strategy. At March 31st, our total available equity was nearly $82 million, consisting of $29.9 million in cash and cash equivalents and approximately $52 million from our line of credit. We had $8.4 million in debt outstanding at the end of the quarter. Depreciation and amortization was $3 million in the first quarter and expected to be in the range of $12 to $14 million for the full year, depending on production levels. Our first quarter 2021 capital expenditures totaled $1.9 million. We expect the pace of capex spending to pick up, which will result in full year spending between $12 and $15 million, consisting entirely of maintenance capex. In summary, we were very pleased with the first quarter 2021 financial results especially considering the challenging macroeconomic climate given supply chain constraints and the ongoing pandemic. I'd like to extend my thanks to all of our dedicated employees and our loyal shareholders for their ongoing support of Northwest Pike. I will now turn it over to the operator to begin the question and answer session.