NWPX Infrastructure, Inc.

Greetings. Welcome to the Northwest Pipe Company first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And please note that this conference is being recorded. I would now like to turn the conference over to Scott Montross, CEO. Thank you, sir. You may begin.

Good morning and welcome to Northwest Pipe Company's first quarter 2022 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 4th, 2022 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 31st, 2021 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 all for joining us today. I'll begin with a review of our first quarter performance, and Aaron will walk you through our finances in greater detail. Consolidated net sales were $109.3 million, which included a $19.7 million contribution from our acquisition of ParkUSA. Revenue from our steel pressure pipe segment increased 24.4% year-over-year to $74.7 million. The increase was primarily due to higher steel pricing that we saw throughout 2021, which drove higher project pricing. This was partially offset by decreased production volumes resulting from the very small bidding year that we saw in 2021 related to bidding delays that we experienced throughout the year. These delays put product bidding out into 2022, which is partially why we experienced such a significant amount of project bidding in the first quarter of 2022, leading to the substantial increase in our current backlog. As of March 31st, our backlog, including confirmed orders for the steel pressure pipe segment, was an all-time record of 341 million. compared to our previous record of $290 million as of December 31, 2021. This compares to $210 million as of March 31, 2021. I'd also like to highlight that our record backlog includes a 63% increase in tons versus the fourth quarter of 2021. As anticipated, the strength in our backlog was a direct result of robust steel pressure pipe bidding during the first quarter of 2022. While we project the first quarter will be the largest bidding period of the year, and therefore the high watermark for our steel pressure pipe backlog in 2022, we expect bidding should remain solid throughout the remainder of the year. As such, we expect that our backlog will remain elevated compared to recent historical levels, and the improvement in the overall quality of our backlog should lead to steel pressure pipe margin expansion into the mid-teens in the second quarter of 2022. Sales from our precast segment increased 182.5% year-over-year to $34.6 million, driven by a 22% increase in sales at our Geneva operations, which we acquired in January of 2020. In addition, we benefited from the aforementioned $19.7 million contribution from our Park USA operations, which we acquired on October 5th of 2021. Our precast order book remains at all-time highs and totaled $65.5 million as of March 31st, 2022, compared to $51 million as of December 31st, 2021, in 16.1 million as of March 31st, 2021. I'd also note that our order book as of March 31st last year did not include Park USA. Our consolidated gross profit increased 68.5% year over year to 14.8 million, which resulted in gross margin of 13.5% up 140 basis points from the first quarter of 2021. Our steel pressure pipe margins remain muted in the first quarter as expected as we work through older backlog that was subject to the extremely small bidding market and associated bidding pressures we experienced in 2021. The process of permitting, bidding, and engineering steel pressure pipe project took much longer in 2021 given the highly complex and fluid challenges in the steel pressure pipe market related in part to the pandemic. The resulting reduced production volumes at our steel pressure pipe facilities led to higher levels of underabsorption. This was in addition to a volatile 2021 steel pricing environment with significant delivery disruptions and customer-driven production delays of orders already in backlog, which have since diminished. Additionally, we recorded a discrete charge for a product liability settlement associated with a dispute originating back in 2015 that had a negative impact on our first quarter steel pressure pipe gross profit. Without the settlement charge, our first quarter steel pressure pipe gross margin would have been similar to both the first and fourth quarters of 2021. Positively benefiting our consolidated gross margin in the first quarter was our pre-cast related margins which remains strong throughout the quarter. As a reminder, our growing precast business serves as a stabilizer to both our top line and gross margin during slow periods for the water transmission business. We expect our precast order book will continue to remain strong in the near term, which should facilitate further margin expansion as we progress through what appears to be a very strong precast market in 2022. In general, the steel pressure pipe project bidding environment has been very robust, which should bode well for the remainder of the year, in part due to orders from 2021 moving and sticking in 2022, and since steel supply and delivery related issues have largely abated for our business since the beginning of the year. Steel prices have fallen from the highs we saw late in 2021. However, over the last couple of months, they've recovered a substantial amount of what they lost, especially given the conflict in Ukraine, which has put upward pressure on steel pricing this year. New North American capacity coming online currently appears to be stabilizing hot roll band pricing, which is our primary steel pressure pipe raw material. But steel prices still remain elevated by historical standards. And in general, elevated steel prices are good for our steel pressure pipe business. Next, I would like to turn to a discussion on our two-pronged growth strategy. First, we remain focused on our core objective of driving growth in the precast related space. The integration of Park USA is our top priority, and it remains on schedule. Park USA's operating and commercial structures are in place, and we've aligned their human resources, sales, and operating teams and have implemented and continue to refine both operational and commercial KPIs. As we've discussed previously, we are in the initial stages of implementing our organic growth product spread strategy, which focuses on adding the production of park products at our legacy Northwest pipe plants, and in some cases, products for the existing Northwest pipe facilities may be added to the production at park facilities. We continue to be very excited about the future growth prospects of this business. Another key focus of ours includes the expansion of our Geneva operations to increase our production capabilities, and capacity. As previously announced, we committed over $18 million in new capital improvement projects, of which $4 million was already spent. The projects are scheduled for completion in the first quarter of 2023 at the Geneva plants and will include facility expansions, automation, and equipment upgrades to meet the growing market demand for reinforced concrete pipe and other concrete products. We believe these investments will be beneficial for both our top line and margin profile over time. In following the successful integration of Park USA, our goal remains for our precast related business to grow to a similar size as our steel pressure pipe business within three years, supported by the increasing infrastructure needs in the United States. The second prong of our growth strategy is focused on continuing to maximize our steel pressure pipe water transmission business to drive shareholder value. We remain intensely focused on margin over volume, lean manufacturing, and cost reductions to drive efficiencies at all levels of the company. And we will continue to explore investment projects that help us reduce costs and maximize margins. I will now turn to a look at current and upcoming water transmission projects. This is typically the point in the call where I discuss upcoming projects that are bidding in the steel pressure pipe market. The program work that we continue to talk about is fairly similar on each call because many of them are multi-year programs. Therefore, we're going to be very abbreviated in our earnings call moving forward and are providing a different avenue by which you can review the jobs. In the West, we expect bidding to be healthy as California's Proposition 1 $7.5 billion bond is expected to fund projects for the next several years. There are multiple ongoing programs in California, such as San Diego Pure Water Program and the PCCP Rehabilitation Program. The site's reservoir water storage is a major project scheduled to start in 2024 in the state of California. There are also other active programs in the West, such as Navajo Gallup Supply Program in New Mexico. In the central region, which includes Texas and the central part of the country, we expect bidding to remain active with programs like the Houston Surface Water Program, the Alliance Regional Water Authority Program, and the ongoing Red River Water Supply Program in the Dakotas, in which we were awarded the contract for the first section to manufacture over 7,500 tons or 8 miles of engineered steel pipeline system to be delivered to the job site this summer. For more information on our current and upcoming water transmission projects, please review our investor presentation, which can be found on the investor tab of our website within the events and presentation section. Before I conclude, I'd like to highlight some of the recent executive leadership changes. Most recently, we appointed Mike Ray, our Senior Vice President and General Manager of our Precast Infrastructure and Engineered Systems business as a Corporate Officer just last month. Mike has led the Precast business since we acquired Geneva in January of 2020 and has been instrumental in leading the integration efforts of our most recent acquisition of Park USA, which was acquired on October 5th of 2021. Additionally, Eric Stokes was appointed to the position of Senior Vice President and General Manager of Engineered Steel Pressure Pipe and became a corporate officer in March of 2020. Prior to his appointment, Eric served as our Senior Vice President of Sales and Marketing for our Engineered Steel Pressure Pipe business. He's now responsible for all commercial and operating activity for our Engineered Steel Pressure Pipe group and has been involved in securing several of the largest orders in our company's history. In addition, we appointed Megan Kendrick, our vice president of human resources, a corporate officer in 2021. Megan has held a variety of positions with increasing responsibility in both accounting and human resources since joining our company in 2008 and has been instrumental in developing the organization as our company has continued to grow. And last but not least, I'd like to congratulate Bill Smith, our former executive vice president, of engineered steel pressure pipe on his retirement last month after 12 years of service with Northwest Pipe, over 14 years with Ameron, a company that we acquired in 2018, and more than 40 years in the business. I'd like to thank Bill for his many contributions and dedication to the company as a key part of our management team, which will continue even into his retirement as he stays on as an independent consultant. Bill is succeeded by Miles Britton who has been with our company since 2013 and spent the last year working very closely with Bill as Executive Vice President. I've worked with Miles for the better part of 35 years and we are confident that Miles will help continue to position our steel pressure pipe and precast businesses for continued future growth and success moving forward. In summary, We're very pleased to see the record level strength we experienced in both our steel pressure pipe backlog and our precast order book continuing to 2022. We are maintaining a very positive outlook for the remainder of the year based on robust bidding activity that we experienced in the first quarter, which should position us well for steel pressure pipe margin expansion into the mid-teens in the second quarter. We currently estimate bidding activity could be approximately 50% higher for 2022 compared to 2021 levels. Further, we believe the strength of our precast order book will continue throughout the year. Looking ahead, we will remain focused on our top priority of taking every precaution to keep our employees safe through the ongoing pandemic. Number two, integrating Park USA as quickly and efficiently as possible. Number three, a persistent focus on margin over volume. Number four, continuing to implement cost reductions and efficiencies at all levels of the company. And lastly, continuing to identify strategic opportunities to grow the company once we have completed the integration work with Park USA. Thank you to all of our Northwest Pipe employees for your dedication to strong operational execution and your commitment to working safely. I will now turn the call over to Aaron, who will walk through our financial results in greater detail.

Thank you, Scott, and good morning, everyone. I'll start with our financial results. Consolidated net income was $3.6 million, or $0.36 per alluded share, compared to $2.2 million, or $0.22 per alluded share, in the first quarter of 2021. Our consolidated net income in the first quarter of 2022 included $0.9 million in amortization and other transaction costs specific to Park USA, which were partially offset by $0.2 million in associated tax expenses for these items. Adjusted net income, excluding the aforementioned items, was $4.2 million in the first quarter of 2022, or 42 cents per diluted share, compared to $2.3 million, or 23 cents per diluted share, in the first quarter of 2021. Adjusted net income is provided for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments for each period. Consolidated net sales increased 51.2% to $109.3 million compared to $72.3 million in the first quarter of 2021. Steel pressure pipe segment sales increased 24.4% to 74.7 million compared to 60.1 million in 2021 due to an 85% increase in selling price per ton resulting from increased steel costs along with changes in product mix, which was partially offset by a 33% decrease in tons produced resulting from changes in project timing. Precast segment sales increased 182.5% to 34.6 million compared to $12.3 million in the first quarter of 2021, primarily due to $19.7 million contribution from the recently acquired Park USA operations, which Scott discussed earlier. This is in addition to a 22% increase in sales at our pre-existing precast operations, resulting from a 35% increase in selling prices, partially offset by a 10% decrease in shipments. Consolidated gross profit increased 68.5% to 14.8 million, or 13.5% of sales, compared to 8.8 million, or 12.1% of sales in the first quarter of 2021. SPP gross profit remained relatively flat at 7.2 million between the first quarter of 2022 and the corresponding quarter of 2021. Resulting gross margin was 9.6% of segment sales in the first quarter of 2022 compared to 11.9% in the first quarter of 2021. In the first quarter of 2022, we recorded a reserve for a product liability claim, which Scott discussed earlier. Given the settlement process is not quite complete, we are not in a position to go into detail surrounding this pending legal matter at this time. Excluding this reserve, The SPP segment's gross margin would have approximated the margins realized in the first quarter of 2021 as well as those that were realized in the preceding quarter. I would also note that product claims of this magnitude are unusual and infrequent. Precast gross profit increased 368.7% to $7.6 million or 21.9% of precast sales from $1.6 million or 13.2% of segment sales in the first quarter of 2021, primarily due to the contribution from Park USA, as well as higher prices at our pre-existing pretest operations. Selling general administrative expenses increased 60.7% to 9.4 million, compared to 5.8 million in the first quarter of 2021. The increase was primarily due to the addition of Park USA, which added $1.5 million in costs that are primarily compensation-related in nature, along with $0.8 million in higher amortization expense. We also realized higher labor expenses and professional fees compared to the year-ago quarter. For the full year of 2022, we expect our consolidated selling general and administrative expenses to be in the range of $36 to $39 million. Company-wide depreciation and amortization expense was $4.1 million in the first quarter of 2022 compared to $3 million in the first quarter of 2021. We expect depreciation and amortization to be in the range of $16 and $19 million for full year 2022. Interest expense increased to $0.6 million in the first quarter of 2022 compared to $0.2 million in the first quarter of 2021. As we move through 2022, we expect our interest costs to vary with working capital needs for the steel pressure pipe business and with tightening to the current rate environment. In addition, we have limited nearly half of our current exposure to variable interest rates with an interest rate swap contract initiated in April. Our 2022 first quarter income tax expense was $1.3 million, resulting in an effective income tax rate 27.4% compared to 0.6 million in the first quarter of 2021 for an effective income tax rate of 21.7%. The effective income tax rate for the first quarter of 2022 was impacted by non-deductible permanent differences, while the rate for the first quarter of 2021 was impacted by tax windfalls recognized upon the vesting of equity awards. We believe our full year 2022 tax rate will approximate 2021's effective income tax rate. Now, transitioning to our financial condition. Net cash provided by operating activities in the first quarter of 2022 was $1.6 million, compared to cash used in operating activities of $0.6 million in the first quarter of 2021, primarily due to improved profitability net of higher non-cash amortization expense in the first quarter of 2022. As of March 31, 2022, we had approximately $90 million of outstanding borrowings on our credit facility, leaving approximately $34 million in additional borrowing capacity. We are diligently managing our working capital and believe our available borrowing capacity is sufficient to meet our near-term liquidity needs. Our capital expenditures for the first quarter totaled $4.4 million, compared to $1.9 million in the first quarter of 2021. We continue to project our total CapEx to be in the range of 26 and 30 million for full year 2022, which includes approximately 13 million in investment CapEx for the new reinforced concrete pipe mill, with the remainder to be used primarily for standard capital replacement projects. We expect the timing of our 2022 CapEx spending will continue to depend on broader economic forces. In summary, We are very pleased with our first quarter results and the prospects for the balance of the year. Thank you to all the employees for your hard work so far this year, and most importantly, for your ongoing focus on safety. I will now turn it over to the operator to begin the question and answer session.