NWPX Infrastructure, Inc.

Greetings. Welcome to Northwest Pipe Company's third quarter 2022 earnings call. At this time, all participants will be in 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 from your telephone keypad. Please note that this conference is being recorded. At this time, I will now turn the conference over to Scott Montress, CEO. Mr. Montress, you may now begin.

Good morning, and welcome to Northwest Pipe Company's third quarter 2022 earnings conference call. My name is Scott Montross, and I am the 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, November the 8th, 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 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 third quarter performance. Erin will then walk you through our financials in greater detail. Consolidated net sales were $123 million, which included a $20.5 million contribution from Park USA. The revenue from our steel pressure pipe segment increased 20.5% year-over-year to a very strong $83.7 million. The increase was primarily due to higher production volumes and higher price levels on projects that we have in backlog, given the elevated material costs that we experienced late last year and early in 2022. Compared to the prior quarter, steel pressure pipe revenue increased 8.6%, which exceeded our expectations given the less than expected impact from the flooding events that occurred at two of our main steel pressure pipe plants at the beginning of the third quarter. Our steel pressure pipe sales continue to benefit from the stronger bidding environment we've been experiencing in 2022 as compared to last year. And as a result, our backlog has remained in or near record territory throughout 2022. At the end of the third quarter, our backlog, including confirmed orders for steel pressure pipe segment, reached an all-time high of $347 million. This was up from $338 million as of June 30, 2022, and $273 million as of September 30, 2021. we continue to expect the bidding environment to remain healthy throughout the duration of the year, with the resulting backlog projected to remain high compared to historical standards. In regards to steel pricing levels, hot roll band prices steadily declined throughout the quarter, dropping to the low $700 per ton range. While this price level remains slightly elevated by historical standards, Steel prices are still far below the $1,950 per ton point we saw late in 2021. In general, elevated steel prices are positive for our steel pressure pipe business. Now turning to our precast segment. Precast sales increased 158.6% year-over-year to $39.3 million due primarily to the $20.5 million contribution from Park USA. along with another record revenue quarter from our pre-existing precast operations at the Geneva locations. Geneva's third quarter net sales of 18.8 million increased 24% year-over-year, driven by higher selling prices due to a very strong demand for our precast products, as well as increased raw material input costs. While the overwhelming demand has led to continued tight conditions for cement, we believe the bulk of the supply chain challenges are now behind us. Our precast-related order book also remained near all-time highs, totaling $74 million as of September 30, 2022, and down almost slightly from $75 million as of June 30, 2022. and up significantly from $24 million as of September 30, 2021, which did not include Park USA. We continue to believe our precast order book will remain fairly strong for the remainder of the year. Our consolidated gross profit increased 103.2% year-over-year to $25.1 million, which resulted in a gross margin of 20.4%, up approximately 580 basis points from the third quarter of 2021, which as a reminder was negatively impacted by COVID-related production delays and associated bidding pressures. Our steel pressure pipe margins exceeded our expectations by improving 260 basis points over the prior quarter, driven by solid 2022 project bidding levels, which resulted in improvements to the overall quality of our backlog, and thereby contributed to the sequential gross margin increase we saw in the third quarter from higher production levels leading to better overhead absorption, all of which offset the impact of the severe weather events in July that forced temporary shutdowns of two of our steel pressure pipe facilities. Compared to the prior year, our steel pressure pipe margins benefited from the stronger bidding environment as well as better overhead absorption. Our third quarter precast gross margin was once again positively supported by a contribution from the acquisition of Park USA locations. Despite some of the challenges we experienced with the ongoing ERP implementation that I will discuss in a moment. Further, we continue to benefit from improved project pricing in our preexisting precast operations. As we implemented price increases to outpace inflationary pressures, which have driven increased costs for raw materials and transportation. Despite current economic headwinds, including rising interest rates and the potential impact of commercial and residential construction, we are cautiously optimistic a precast business will remain fairly strong for the near term. Next, I'd like to turn to a discussion on our two-pronged growth strategy, which is aimed at diversifying our business to be more resilient through economic cycles. Our primary focus is on driving growth and precast related space. Just last month, we passed the one year mark of our acquisition of Park USA on October 5th, 2021. We have made tremendous strides and we continue to integrate the company into our culture and operations. The last major piece of our integration effort is the ERP implementation, which has been a large undertaking, giving the complex nature of PARCC's products and the sheer volume of transactions relative to our existing operations, which presented us with some challenges during the third quarter. The complexities ultimately led to some unplanned downtime which resulted in reduced production levels and shipments that had a muting effect on both our precast revenues and gross margins for the third quarter. That said, we've continued to make good progress toward achieving full functionality of the PARCC ERP system. However, it is possible we may experience additional downtime in the fourth quarter as we work to achieve full system functionality. Fundamentally, the business at PARCC remains strong. What we are experiencing currently are systems-related growing pains that are necessary to achieve our strategic growth initiatives. For instance, the completion of the ERP implementation will lay the foundation for our organic growth product spread strategy. As a reminder, by product spread, we are referring to our initiative to add the production of park products to our legacy Northwest Pipe plants, and in some cases, adds products from existing Northwest Pipe facilities to park facilities in order to expand our production and maximize overall efficiencies. During the third quarter, we made our first sales and shipments of park products out of our Geneva locations in Utah. Through the end of the quarter, our bookings outside of Texas were up 27% year-over-year. We remain very excited about the growth potential for the park business. Alongside the park integration work, we also are focused on expanding and automating our Geneva operations to increase production capabilities and capacity to satisfy the growing market demand for our concrete products. We have committed approximately $15 million for a new RCP manhole facility at our Salt Lake City Utah plant. The original construction timeline for this project has been extended as a result of building construction delays and extended lead times. We currently expect the project to be completed in the second half of 2023. The second prong of our growth strategy is to continue maximizing our steel pressure pipe water transmission business to drive enhanced shareholder value. Our third quarter results demonstrate our continuous effort toward maximizing steel pressure pipe business. Keys to this effort are cost reductions, lean manufacturing, and a focus on margin over volume. In addition, we are continuing to explore other opportunities to further reduce costs, maximize margins, and to become as efficient as possible. Before I conclude, I would like to discuss progress on some current and upcoming water transmission projects that are bidding in the steel pressure pipe market. Money from the HR 3684 Infrastructure Investment and Jobs Act, IIJA, signed into law in November 2021, has made its way down to the project level and is helping to provide a reliable stream of bidding activity. The law included $55 billion in federal funding for relevant water transmission infrastructure projects over the next five years. In the eastern markets, the ongoing multi-year, multi-agency Houston surface water program is bidding 12,000 tons of pipe this month and is expected to bid multiple segments in 2023, representing 4,100 tons for the West and North Harris County regional water authorities. The next new reservoir being built in Texas is Lake Ralph Hall for the Upper Trinity Regional Water District. This is another major program currently in construction that includes a new dam and pipeline to move water into the Dallas-Fort Worth Metroplex. The pipeline is currently bidding and includes 17,000 tons of pipe. Construction on the pipeline will begin 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 is currently bidding 2,700 tons of pipe, with an additional 2,000 tons remaining on future segments. In North Dakota, progress continues on the 140-mile, 87,000-ton Red River Valley water supply project. The first two segments were awarded the Northwest Pipe, and installation is currently underway. We are closely tracking the outcome of further budget approval for future segment construction. In the Western markets, California's Prop 1 $7.5 billion bond for water infrastructure has created the much needed funding for projects within the state. The following four Prop 1 projects are expected to start construction in the next five years. First, 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. Additionally, site's reservoir received $30 million in IIJA funding this past quarter. Second, Harvest Water is a program intended to provide recycled water wastewater for agricultural use in Sacramento. This program includes nearly 25 miles of 30 to 66-inch pipeline. Third, Las Vecaras Reservoir Expansion Program provides a substantial capacity improvement to the existing reservoir and conveyance facilities in Northern California. The program includes approximately 22 miles of 48 to 96-inch pipe. And fourth, Willow Springs Water Bank will create 500,000 acre feet of underground water storage in the Antelope Valley. The project includes approximately 16 miles of 30 inch to 84 inch pipe. Other water reuse programs have generated new opportunities in the California market on which we expect to see bidding activity continue for the foreseeable future. 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 two years. Preliminary design and permitting is ongoing and construction of the full scale treatment and conveyance facilities could begin as early as 2025. MWD secured a $224 million WIFA loan in October of 2021, which will fund nearly 50% of the anticipated construction costs. Southern Nevada Water Authority is a Las Vegas water wholesaler and Colorado River water user that has also pledged funding significant financial support for this program. The MWD PCCP rehabilitation program will result in about 5,000 tons annually over the next 10 to 15 years. This program includes 81 miles of pipe from 75 to 120 inches in diameter. 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 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 Program. The final major phase of the pipeline construction for this program is advertised to bid this December and includes 3,800 tons of steel pipe. In New Mexico, Governor Grisham recently announced $160 million IIJA funding for the Eastern New Mexico Rural Water System. This 20,000-ton program would convey water via steel pipe from the Ute Reservoir in northern New Mexico south to water users in the greater Clovis area. In summary, we're very pleased with our teamwork and operational execution against our strategic plan in the third quarter, which resulted in a strong financial performance. Supported by the strength that we've seen in the steel pressure pipe bidding activity, as well as continued strong demand for our high-quality, precast concrete products. Our outlook for the remainder of 2022 remains positive, aside from the typical fourth quarter seasonality we experienced due to weather and holiday related closures. Underlying demand is projected to remain fairly strong for the near term. As such, we expect fourth quarter steel pressure pipe margins to be relatively in line with the third quarter of 2022, and our fourth quarter precast margins to be directionally flat to slightly down from the third quarter levels as we enter into the traditionally slower time of the year for precast infrastructure products at Geneva. We continue to anticipate steel pressure pipe bidding activity should be approximately 50% higher for 2022 compared to 2021 levels. Looking ahead, we will remain focused on finalizing the integration of Park USA as quickly and efficiently as possible, persistently focusing 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 have completed the integration work with Clark USA. Thank you to all of our Northwest Pipe employees for your strong performance during the quarter and your commitment to work 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 begin with our third quarter profitability. Consolidated net income was $10 million, or $0.99 per alluded share, compared to $4.9 million, or $0.50 per alluded share, in the third quarter of 2021. Our consolidated net income in the third quarter of 2022 included $0.8 million in amortization expense specific to Park USA, which, added $0.2 million in associated tax expense, resulted in an adjusted net income of $10.5 million in the third quarter of 2022, or $1.05 per diluted share, compared to $5.4 million, or $0.54 per diluted share, in the third 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 45.3% to $123 million compared to $84.6 million in the third quarter of 2021. Deal pressure pipe segment sales increased 20.5% to $83.7 million compared to $69.4 million in 2021, driven primarily by a 17% increase in our tons produced, mainly due to changes in project timing, as well as a 3% increase in our selling price per ton, resulting from changes in product mix. Precast segment sales increased 158.6% to $39.3 million compared to $15.2 million in the third quarter of 2021, primarily due to 20.5 million contribution from Park USA operations. In addition, segment sales benefited from a 24% increase in sales at our pre-existing precast operations, resulting from a 49% increase in selling prices on continued strong demand for our concrete products, coupled with increased raw material input costs. which were partially offset by a 17% decrease in volume shipped due to changes in product mix. Due to the unique nature of the precast products we manufacture, shipment volumes and corresponding sales prices do not always provide comparable metrics between periods as they are highly dependent on the composition of the mix of products shipped. Consolidated gross profit increased 103.2% to $25.1 million or 20.4% of sales compared to $12.4 million or 14.6% of sales in the third quarter of 2021. Steel pressure pipe gross profit increased 60.5% to $14.2 million or 17% of segment sales largely due to increased production volume as well as higher selling prices This compared to a gross profit of $8.8 million or 12.7% of SPT sales in the third quarter of 2021. Precast growth profit increased 210.4% to $10.9 million or 27.8% of precast sales from $3.5 million or 23.1% of segment sales in the third quarter of 2021, primarily due to the contribution from Park USA as well as higher selling prices realized at our pre-existing precast operations. As Scott mentioned, our Park USA business was negatively impacted during the quarter by the ongoing ERP system implementation project. As the implementation continues to improve, we expect to see a lesser degree of inefficiencies resulting from this project in the fourth quarter. Selling general and administrative expenses increased 91.5% 8.7% of sales compared to 5.6 million or 6.6% of sales in the third quarter of 2021. The increase was primarily due to the addition of PARC USA, which added $1.5 million in primarily compensation-related costs along with $0.8 million in higher amortization expense. We also incurred an additional $3.1 million in other company-wide compensation-related expense, as well as $0.2 million in higher travel costs, which were partially offset by $0.5 million in mobile professional fees compared to the third quarter of 2021. For the full year 2022, we now expect our consolidated selling general and administrative expenses will be in the range of $41 to $42 million. Company-wide depreciation and amortization expense was $4.3 million in the third quarter of 2022 compared to $2.9 million in the year-ago quarter. We expect depreciation and amortization will be in the range of $17 to $18 million for full year 2022. Interest expense increased to $1 million in the third quarter of 2022 compared to $0.1 million in the third quarter of 2021. As of September 30, 2022, approximately 57% of total debt was susceptible to variable interest rate risk. Our 2022 third quarter income tax expense was $3.6 million, resulting in an effective income tax rate of 26.3%, compared to $1.9 million in the third quarter of 2021, or an income tax rate of 27.9%. The effective income tax rate for both quarters were primarily impacted by non-deductible permanent differences. We expect our full year 2022 tax rate will approximate 26%. Now, transition to our financial condition. Our improved profitability helped us generate net cash provided by operating activities of $15.3 million during the quarter, compared to net cash used in operating activities of $18.7 million in the third quarter of 2021. Capital expenditures totaled $3.3 million in both the third quarter of 2022 and 2021. We currently anticipate our total CapEx to be in the range of $25 to $26 million for full year 2022, which includes approximately $10 million in investment CapEx for a new reinforced concrete pipe mill, as well as other standard capital replacement projects. As of September 30, 2022, We had $71.8 million of outstanding borrowings at our credit facility, leaving approximately $52 million in additional borrowing capacity. We also initiated $3.5 million in new borrowings in August on an interim funding agreement. The interim funding is anticipated to convert to a term loan upon the final delivery and commissioning of our new reinforced concrete pipe mill. The debt is currently classified as a short-term liability. However, the balance sheet classification will be reevaluated upon final loan funding. In summary, I'm very pleased with our recent financial results, specifically what has been achieved over the last two quarters. Regardless of a slower start to 2022, we have not had a year like this one since 2008. We were a significantly different company then, and I would like to thank all of our employees who have seen the company through that dramatic transformation. I'd also like to thank our shareholders for their continued support. We remain committed to driving long-term growth and enhanced shareholder value for the remainder of this year and beyond. I will now turn it over to the operator to begin the question and answer session.