NWPX Infrastructure, Inc.

Good day and welcome to the Northwest Pipe third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone 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 third 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, November 8, 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 the 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 such risk factors that could cause actual results of different material from our expectations. We undertake no obligation to update any forward looking statements. Thank you for joining today. I'd like to begin with a review of our third quarter 2021 performance. As of September 30th, our backlog, including confirmed orders for the Northwest Pipe water transmission business, was approximately 273 million, a near record compared to 234 million in the second quarter of 2021 and 231 million in the third quarter of 2020. Our third quarter project bidding volumes improved, albeit at a slower than expected rate, as COVID-related delays continue to push projects out into 2022. Despite the slower improvement in bidding, we still ended the quarter with a near record backlog and the quality of the backlog continues to improve, which led to higher third quarter water transmission revenue and upward movement on margins. We expect the upward movement on backlog and margins to continue through year end and lead to a stronger start to 2022. Our third quarter net sales totaled $84.6 million, which included $15.2 million from Geneva. The increase versus the second quarter was primarily due to significantly higher water transmission revenue and precast revenue that was stable but at an elevated level. Our third quarter gross margins of 14.6% improved versus the previous quarter by approximately 169 basis points. In the steel pressure pipe business, we've seen some improvement in the volume of products that are bidding. which have resulted in improvements in the quality of the steel pressure pipe backlog, leading to margins that began to rise at a modest pace. We are still seeing some COVID-related delays of projects that are already in backlog. However, steel supply and delivery-related issues have largely abated, and steel prices, which are still very elevated by historical standards, have come off their recent high points. The precast concrete margins of Geneva showed strong improvement for the third quarter. And the Geneva precast concrete operations have begun to serve as a stabilizer to our top line and gross margin during slow periods for the water transmission business, which is exactly what it was intended to do. Next, I would like to turn to a discussion on our growth strategy, which is two-pronged and focused on, first, driving growth in adjacent water market, in which case we have selected the precast concrete related market, and second, continuing to maximize our core steel pressure pipe water transmission business. We have continued to execute against our top growth strategy of driving growth in an adjacent water market. This ultimately led us to our October 5th acquisition of Park USA. We were very excited about Park USA and what it means for our business moving forward. Through our stringent set of acquisition criteria, we're pleased to have identified this strong M&A opportunity, which checked all of our boxes, including a strong management team, which will remain with the company, a good organic growth potential, strong margin characteristics, solid asset efficiency, a strong cash flow profile, and we expect this acquisition to be accretive to our results in year one. For those that might have missed the acquisition conference call last month, Park USA is a technology leader in the water infrastructure market that develops, manufactures, and distributes engineered water and wastewater control products, as well as other water-related environmental solution products. In addition, the Park assets complement and further diversifies our product mix, as the majority of our engineered water control systems and environmental solutions products are assembled in various sized precast concrete vaults and then delivered to customer job sites already assembled. This significantly increases our participation in the precast related space from a revenue perspective, helping to better balance our product portfolio and offset periods of variability in the steel pressure pipe market. For context and size, Park USA's adjusted EBITDA for the full year ended 2020. was approximately $14 million on $66.5 million in revenues, with strong growth prospects for the future in its home market of Texas. Further, PARC has been successful in achieving strong profit margins from its value-added products, which is particularly exciting given the expansion potential for these products within our existing Northwest Pipe facilities. The integration process is well underway and is expected to take approximately 12 months. Importantly, Park USA employs some of the same capabilities that we have at our existing Northwest Pipe facilities, specifically the production of precast concrete vaults and fabricated steel housings, which serve as containment units for the engineered water control systems and water-related environmental solution products. Since we already produce concrete vaults and steel fabrications at our current Northwest Pipe plants, post-integration we will be focused on bringing the production of Park USA's products into our existing Northwest Pipe locations. This is a process we refer to as product spreading, which we believe will provide solid organic growth potential for the company. Additionally, Park USA's products include engineered environmental solutions for water that will sharpen our focus on driving ESG efforts. An example of these solutions include engineered products designed for removing hydrocarbons and other hazardous materials from stormwater before it can get into streams, rivers, or lakes. And finally, the acquisition of PARCS supports our longer-term goal to grow our precast related business to a similar size as our steel pressure pipe business within the next three years. We look forward to updating you on our progress as we continue to integrate this business and benefit from its unique value proposition. In regard to our Geneva business, we are currently in the process of commercializing new innovative lined RCP and manholes for use in corrosive sewer applications. In addition to these products having significant organic growth potential, we believe that some of these products can also be part of product spreading and have the capability to be produced and sold out of our Park USA locations. The second prong of our growth strategy is to continue to maximize our core steel pressure pipe water transmission business to drive shareholder value. We are making progress through our cost reduction measures and lean manufacturing to drive further cost reduction efficiencies. As part of that effort, we will continue to work with outside engineering resources to explore opportunities for creating additional reduction measures in the longer term. I will now turn to a look at current and upcoming water transmission projects. In the east of the Rocky Mountains region, the ongoing multi-year, multi-agency Houston surface water program is expected to dig multiple segments in 2021 to 2022, representing 21,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects representing 28,000 tons through next year. The next new reservoir to be built in Texas is the 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 and construction on the dam began this year and the pipeline is expected to begin late in 2022 or early 2023. The Alliance Regional Water Authority program in Central Texas is is another multi-agency regional water program. The program includes a large pipeline, pump stations, and treatment facilities. Construction on the project has begun with approximately 12,000 tons remaining in the bid. In North Dakota, progress is being made on the 140-mile, 87,000-ton Red River Valley water supply project. The 1.5-mile demonstration project was awarded to Northwest Pipe in January and is nearing completion. Significant drought has now engulfed the state, and as part of the special legislative session beginning November 8th, acceleration of the Red River Valley Water Project will be considered, with completion potentially targeted within six years. Funding for the project acceleration will be allocated in part from federal funds received under the American Rescue Plan Act. We are closely tracking the outcome of further budget approval that may come from the state. In Colorado, we are tracking an expected 2021 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 the west of the Rocky Mountains region, the California 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, 97% of those funds have been appropriated for various projects as of the 2021 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, in which we expect to see bidding activity continue for the next year. The City of San Diego anticipates bidding the three major remaining phases of the Pure Water program in the next 12 months. These phases include 8,600 tons of steel pipe. 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 almost two years. MWD is currently soliciting preliminary design and permitting service and construction of full-scale treatment and conveyance facilities could begin as early as 2025. MWD secured a $224 million lethal loan in October of 2021, which will fund nearly 50% of the anticipated construction costs. The MWD PCCP Rehabilitation Program 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 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 2024-2025. 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 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. Construction is proceeding in earnest in New Mexico on the U.S. Bureau of Reclamation's Navajo Gallup supply project. The final major phase of the pipeline construction for this program is expected to bid mid-2022 and includes 4,700 tons of steel pipe. In summary, we are pleased to see our steel pressure pipe backlog gain momentum during the third quarter following the highly challenging period of pandemically related disruptions over the course of the past year and a half. We are optimistic this should help us set the stage for a stronger start to 2022. In addition, our precast concrete order book remains at an all-time high level and should continue to gain strength in the near term. With the addition of Park USA, we believe we are very well positioned for future organic growth that will be further supported by the growing infrastructure needs in the U.S. in upcoming water transmission projects. Looking ahead, we will remain focused on our top priority of taking every precaution to keep our employees safe through the ongoing pandemic, integrating Park USA as quickly and as efficiently as possible, a persistent focus on margin over volume, continuing to implement cost reductions and efficiencies at all levels of the company, and continuing to identify strategic opportunities to grow the company once we've completed the integration work with Park USA. Thank you very much to all of our employees at Northwest Pipe Company for your dedication to executing our strategy and by doing so safely. I'd also like to thank our customers, suppliers, and shareholders for your continued support of the business. I will now turn the call over to Aaron, who will walk through our third quarter financial results in greater detail.

Thank you, Scott, and good morning, everyone. I'll begin with our third quarter 2021 financial results. Net income was $4.9 million, or $0.50 per diluted share, compared to $7.3 million, or $0.73 per diluted share, in the third quarter of 2020. Adjusted net income was $5.4 million, or $0.54 per litre of share, which included $0.6 million of pre-tax transaction costs specific to the Park USA acquisition. This compared to adjusted net income of $0.74 per litre of share in the third quarter of 2020. 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. Net sales increased 9% to $84.6 million compared to $77.6 million in the third quarter of 2020. Precast concrete revenues increased 12.6% to $15.2 million in the third quarter of 2021 compared to $12.5 million in the third quarter of 2020, primarily due to improved pricing and increased shipment volumes. As Scott indicated, we currently have strong demand for our precast concrete products. Fuel pressure product revenues increased 7% for the third quarter of 2020 due to a 17% increase in selling price per ton resulting from increased raw material costs and changes in product mix. This was partially offset by a 9% decrease in tons produced resulting from changes in project timing. Due to the unique nature of the water and 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 20.8% to $12.4 million, or 14.6% of sales, compared to $15.6 million, or 20.1% of sales in the third quarter of 2020. The decrease was primarily due to the combination of lower volumes and the impact from project pricing realized on steel pressure pipe, partly offset by the increased gross profit on on higher selling prices and volumes for precast concrete. Selling general and administrative expenses decreased 1.7% to $5.6 million compared to $5.7 million in the third quarter of 2020. The decrease was primarily due to lower compensation-related expense and professional fees, partially offset by higher acquisition-related transaction costs associated with ParksUSA. We expect to complete the pro forma financial statement filings for Park USA in the middle of December, at which point we will have greater visibility into gross margins and SG&A expenses for the new business. In addition to P&L classification, we will also complete a preliminary purchase price allocation, providing the incremental non-cash expenses, including depreciation and amortization. As this work is currently ongoing, it is difficult to quantify total projected SG&A expenses at this time. However, what I will point out is that we have incurred a one-time charge of $2 million in the fourth quarter for investment banking fees associated with the ParkUSA transaction. Full-year operating margins at Park have approximately 20%, and they typically have some downward pressure in the first and fourth quarters due to weather-related seasonality. In addition to the purchase price allocation items previously mentioned, we will incur future integration expenses which I expect will be most significant over the next nine months. Depreciation and amortization for the quarter was $2.9 million. Our income tax rate in the third quarter was 27.9% compared to 26.6% in the third quarter of 2020. We are expecting a full year 2021 income tax rate of approximately 26.5%. Now we will transition to our cash flows and financial conditions. We used $18.7 million in net cash from operating activities during the third quarter. This compared with $14.6 million of net cash provided by operating activities in the third quarter of 2020. The difference was due primarily to fluctuations in steel pricing and its corresponding effect on working capital needs for our steel pressure pipe business. As of September 30, 2021, we had $3.2 million in cash and cash equivalents and $2.2 million of outstanding bonds in our credit facility. After considering outstanding letters of credit, our quarter end borrowing capacity was approximately $96 million before considering our $87 million acquisition of Park USA, which closed on October 5th. Our pro forma availability, had the Park USA acquisition and the related credit facility amendment been completed in the third quarter, would have been approximately $34 million. As noted on our Park USA conference call last month, We continue to diligently manage our working capital and believe our available borrowing capacity is sufficient to navigate our near-term liquidity needs. Further, we expect to repay the loan aggressively through the improving cash flow profile of the newly combined company and as inflationary pressures in our steel pressure pipe business stabilize in the coming quarters. Our capital expenditures for the quarter totaled $3.3 million. Strains on labor markets and supply chain issues have resulted in slower capital spending, which we project to come in between $11 and $12 million for the year. General economic forces, coupled with some slowing and steel pressure pipe bidding, have created challenges for our business this year. But we are very pleased with the efforts of all of our employees that have led to the sequential quarter improvements in revenue and gross profit margins. I want to congratulate Geneva for their financial success and achieving record performance in the third quarter, and express my gratitude for all the knowledge that we have gained from them to this point. They are one of several important teams that will be influential in the successful integration of Park USA, which we believe has the potential to be an equally compelling piece of the growth strategy that we continue to execute. Finally, and most importantly, I want to encourage continued engagement and focus on our safety programs, which are critical for all our employees, including those old and new to the company. I will now turn it over to our operator to begin the question and answer session.