NWPX Infrastructure, Inc.

Thank you for standing by. This is the conference operator. Welcome to the Northwest Pipe Company second quarter 2021 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Scott Montross, President and CEO. Please go ahead.

Good morning, and welcome to Northwest Pipe Company's second quarter 2021 earnings conference call. My name is Scott Montross, and I'm President and CEO of the company, and 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, August 4th, 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 the most recent Form 10-K for year end of December 31st, 2020, and on 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 for joining our call today. I'd like to begin with a review of our second quarter 2021 performance. As of June 30th, our backlog, including confirmed orders, for the Northwest Pike legacy business was approximately $234 million compared to $210 million at the end of the first quarter of 2021 and $246 million at the end of the second quarter of 2020. The increase was driven by improvement in our project bidding that began in the second quarter, which led to an increase in backlog, a trend that we expect to see continue in the second half of 2021. Second quarter marks the 12th consecutive quarter in which we have maintained a steel pressure pipe backlog over 200 million, a level that remains strong by historical standards. This is despite the ongoing bidding delays we've experienced over the course of the past year due to various pandemic-related issues. That said, I'd like to reiterate, these are not project cancellations, only delays. And currently, we see substantial amount of project volume scheduled to bid in the second half of 2021, which should continue to apply upward pressure on our backlog through the remainder of 2021. Our second quarter net sales totaled $73.8 million, which included $15 million from Geneva. Once again, the top line contribution from Geneva enabled us to increase our net sales sequentially and year over year. Our second quarter gross margin of 12.9% improved marginally from the first quarter of 2021. The Geneva precast concrete operations are beginning to serve as a stabilizer to both revenue and gross margin to help offset periods of market choppiness in the steel pressure pipe business, like we have had to navigate over recent quarters. Revenue and gross margin for our steel pressure pipe business were negatively impacted by ongoing production delays in the second quarter, driven by steel market supply and delivery disruptions, which postponed the production of orders, and customer-driven delays on orders that were already in backlog. In addition, the bidding delays experienced over the last three quarters resulted in fewer overall projects to bid on, which led to some panic bidding by our peers in our space. and therefore significantly more bidding pressure on projects that bid during that period, which has had a negative near-term impact on project margins. That said, we did see steel pressure pipe bidding stabilize and begin to improve during the second quarter, indicating an upcoming period of strong demand. As we move into the second half of 2021, we expect bidding for the steel pressure pipe business to continue to strengthen through the rest of the year. However, we expect revenue and corresponding margin recovery for the steel pressure pipe business to be slow in the beginning of the second half of 2021. As ongoing capacity and supply issues in the steel market are expected to linger and continue to delay production, and we will continue to see some customer-driven delays of orders that were already in backlog. Also, the bidding delays experienced over the recent quarters, which resulted in near-term margin pressure, will still have some effects at the beginning of the second half as the affected projects work through production. However, with a large amount of work projected to bid in the second half of 2021, backlog is projected to trend upward for the rest of the year, and the increasing backlog is expected to support improving steel pressure pipe revenue and margins as we move into the latter part of the year and enter 2022. In addition, our precast concrete order book remains at historically elevated levels and is continuing to gain strength. And we expect to see the precast concrete business to remain at strong levels for the remainder of 2021. Next, I would like to turn to a discussion on our two-prong growth strategy. As highlighted over the past several quarters, Our primary focus has been on driving growth in the precast concrete market, which led us to our January 2020 acquisition of Geneva pipe and precast. We are currently in the process of commercializing new innovative lined RCP and manuals for use in corrosive sewer applications, which we believe have significant organic growth potential. Given the success of the Geneva transaction and the broader strength in the water infrastructure market, we have been intently focused on the evaluation of potential acquisition candidates with a keen focus on organic growth potential, strong margin characteristics, and cash flow. In tandem with our efforts, we have been building cash on our balance sheet and recently amended our credit facility to further enhance our liquidity position in order to properly execute our strategy. The second prong of our strategy is to continue to maximize our core steel pressure pipe water transmission business in order to drive shareholder value. We have continued to make progress through cost reduction measures and lead manufacturing to drive further efficiencies. As part of that effort, we've been leveraging outside engineering resources to explore opportunities for creating additional efficiencies to further drive cost reductions in the long run. 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 21,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects representing 21,000 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 on the dam began this year, and the pipeline is expected to begin late in 2022, early in 2023. 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 starting in 2021 and appears to be holding fast to the forecasted timeline. In the Western markets, California's Prop 1 $7.5 billion bond for water infrastructure has created the much needed funding for the projects within the state. According to the California Natural Resources Agency, 97% 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 have identified four sizable projects bidding in the 2021 timeframe representing 8,300 tons. Most recently, Northwest Pipe was selected to supply pipe for the Pure Water San Diego project, a sustainable and environmentally conscious water recycling project. This project will be a phased multi-year program that will provide more than 40% of San Diego's water supply by the end of 2035. thereby reducing the city's dependence on imported water and will require over 3,200 tons of steel for us to manufacture into engineered steel pipeline. In addition, MWD is heading a regional 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 involves 60 plus miles of large diameter pipe. The current demonstration facility has been operating for almost two years. MWD is currently soliciting preliminary design and permitting services and construction of the full-scale treatment and conveyance facilities could begin as early as 2025. The MWD PCCP rehabilitation programs will result in about 5,000 tons annually over the next 10 to 15 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 Sites 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. 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 steel pipe with construction tentatively scheduled for 2024. In North Dakota, progress has been slowed on the 140-mile, 87,000-ton Red River Valley water supply project. The mile and a half demonstration project bid in January of this year and was awarded in Northwest Pike. The bulk of the project is dependent upon a 2023 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 an expected 2021 record of decision by the US 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 Utah, design and permitting continues on the 150 mile, 69 inch Lake Powell pipeline. This pipeline will provide an alternative source of water for southern Utah. In summary, we have continued to execute through a challenging period of pandemic-related disruptions over the last several quarters in the steel pressure pipe business, with significant delays in project bidding, major steel market supply and delivery issues, and customer-driven delays in existing orders. However, we saw things begin to stabilize and improve as we progressed through the second quarter. And we are currently seeing a solid buildup of steel pressure pipe bid requirements for the second half of 2021, which should result in upward pressure on steel pressure pipe backlog and support improved revenue and margins as we move into the latter part of the year and into 2022. In addition, our precast order book continues to gain strength and is currently at an all-time high level. We expect the precast business to remain strong for the near term. We are well positioned for future growth, which we believe will be further supported by the growing infrastructure needs in the United States. Looking ahead, we will remain focused on our top priority of taking every precaution of keeping employees safe through the ongoing pandemic, also identifying strategic opportunities to grow the company, and having a persistent focus on margin over volume and continuing to implement cost reductions and efficiencies at all levels of the company. I'd like to extend my gratitude to all of our employees at Northwest Pipe Company for their commitment to executing our strategy throughout the first half of the year and by doing so safely. I will now turn the call over to Aaron, who will walk through our second quarter financial results in greater detail.

Thank you, Scott, and good morning, everyone. Thank you for joining us today on our second quarter 2021 earnings conference call. I'll begin with our second quarter financial results. Net income was 2.1 million or 21 cents per diluted chair compared to 6 million or 61 cents per diluted chair in the second quarter of 2020. There were no adjustments to gap net income to consider for the second quarter of 2021. Adjusted net income for the second quarter of 2020 was 4 million or 41 cents per diluted chair. Adjustments of 2 million net of taxes primarily consisted of favorable insurance recoveries associated with the Saginaw fire. Adjustment income excludes unique and unusual items and we provide it for comparability purposes. Please refer to the reconciliation of non gap financial measures in our earnings release for a comprehensive schedule detailing the adjustments. Our second quarter net sales increased 5.5% to 73.8 million compared to 70 million in the second quarter of 2020. Geneva's revenues increased to 15 million in the second quarter of 2021 compared to 12.4 million in the second quarter of 2020. primarily due to increased shipment volumes on very strong demand for precast concrete products. Steel pressure pipe revenues increased 2% from the year-ago quarter due to a 7% increase in selling price per ton resulting from rising steel input costs, which was partially offset by a 5% decrease in tons produced resulting from changes in project timing. Due to the unique nature of the water transmission systems we manufacture, Production tons and the resulting sales price per ton do not always provide comparable metrics between periods as they are highly dependent on project timing and production mix. Gross profit decreased 26.4% to $9.5 million, or 12.9% of sales, compared to $13 million, or 18.5% of sales in the second quarter of 2020. The decrease was primarily due to changes in product mix and pressure on project pricing realized on steel pressure pipe, partially offset by increased gross profit at Geneva. Gross profit in the second quarter of 2020 was elevated by $1.8 million associated with the business interruption portion of our insurance claim for the Saginaw fire. Excluding this item, our gross profit margin for the second quarter of 2020 would have been 16%. Selling general administrative expenses increased 13.5% to $6.3 million in the second quarter of 2021, compared to $5.6 million in the second quarter of 2020. The increase was primarily due to higher compensation-related expense and professional fees, along with higher travel expenses compared to 2020, given the global pandemic. In addition, I am updating our guidance for selling general and administrative expenses to now approximate $24 million for the full year of 2021. Our income tax rate in the second quarter was 26.1%, compared to 26.7% in the second quarter of 2020. both of which approximated statutory rates. I'm expecting full year 2021 income tax to be approximately 26.5%. Now we'll transition to our cash flows and financial condition. We generated cash flows from operations of 5.7 million during the second quarter, compared to 13.8 million during the prior year period. This decline was primarily due to the decrease in net income adjusted for non-cash items. The company has increased its available liquidity through the refinance of our credit facility with our financing partner, Wells Fargo. The new $100 million cash flow loan provides flexibility to be upsized to accommodate the company's strategic growth objectives, including an optional $25 million accordion feature. All outstanding debt under the former credit agreement, including long-term debt, has been retained. This is the company's strongest financial condition in recent years, with total available liquidity of approximately $121 million as of June 30, 2021, comprised of $23.2 million in cash and cash equivalents and approximately $98 million available from our new line of credit. Depreciation and amortization was $3.4 million in the second quarter of 2021, while our capital expenditures totaled $2.9 million. We expect the pace of CapEx spending to pick up. which will result in spending for the full year to be between 12 and 14 million, consisting entirely of maintenance capex. In summary, we were pleased with our solid second quarter 2021 financial results, despite ongoing macroeconomic pressures, including labor, transportation, and raw material shortages, which have resulted in temporary disruptions to operations. We look forward to benefiting from the improved demand as our steel pressure pipe market continues to stabilize. I'd like to extend my thanks to all of our dedicated employees and our loyal shareholders for their ongoing support of Northwest Pipe Company. I will now turn it over to the operator to begin the question and answer session.