NWPX Infrastructure, Inc.

Good day and welcome to the Northwest Pipe Company second quarter 2023 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 questions. To ask a question, you may press star and then one on your 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, President and CEO. Please go ahead.

Good morning and welcome to Northwest Pipe Company's second quarter 2023 earnings conference call. My name is Scott Montross and I am President and CEO of the company. I am 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 2nd, 2023, at approximately 4 p.m. Eastern Time. This call is being webcast, and it is available for replay. As I 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, 2022, and in our other SEC filings for a discussion of such risk factors that could cause actual results that 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 second quarter performance and outlook, and Aaron will then walk you through our financials in greater detail. We entered the year with a strong backlog, positioning us well for a solid 2023, despite the slow first quarter. Our second quarter results came in relatively in line with our expectations, with revenues of $116.4 million, improving 17.4% over the first quarter and declining by only 1.8% compared to the prior year quarter. Revenue from our SPP segment rebounded to 77.3 million following a slow first quarter, which was up slightly from the prior year quarter due to higher selling prices, which were partially offset by a decrease in tons produced, resulting primarily from changes in product mix. The SPP backlog, including confirmed order, was 343 million at June 30th, which remains strong by historical standards. This reflected a decline in our backlog from the near record $370 million we saw at March 31, 2023, though it was up from $338 million as of June 30, 2022. While bidding activity is projected to be lower in 2023 versus last year's level, we are currently awaiting the potential award of multiple projects that have recently bid and that could stabilize the near-term backlog. Prices of hot roll band steel moderated in the second quarter, remaining fairly high by historic standards, but were down 20% compared to the second quarter of 2022. In general, higher steel prices are a positive for our SPP business. Now turning to our precast segment. Precast revenue decreased 5.6% from the prior year quarter to $39.1 million. primarily due to reduced shipments resulting from the current interest rate environment impacting the U.S. construction market, which were partially offset by higher selling prices given higher raw material input costs. As anticipated, our sales have continued to be impacted by the rising interest rate environment, which has persisted for more than a year and just increased again last week. Our precast related order book remains strong and totaled $58 million as of June 30, 2023, which was consistent with our order book as of March 31, 2023, and down from $75 million as of June 30, 2022. Our second quarter consolidated gross profit decreased 6.6% year-over-year to $22.5 million, resulting in a gross margin of 19.3%, down from 20.3% in the second quarter of 2022. Our SPP gross margin of 16.3% improved by approximately 190 basis points over the second quarter of 2022, primarily due to the strong project bidding environment we experienced in the second half of 2022, which resulted in improved project pricing and led to higher margin quality of projects that we have in backlog. Precast gross margin of 25.3% of precast sales in the second quarter of 2023 decreased by approximately 600 basis points from the record highs experienced in the second quarter of 2022. The decline was predominantly due to higher production costs related to lower levels of production and associated underabsorption, given the impact of rising interest rates on commercial construction in the residential housing markets. The lingering effect of higher raw material costs further contributed to the decline in our precast gross margin. Next, I would like to provide an update on our growth initiatives. While driving growth in the precast related space remains our top strategic priority, we remain highly focused on maximizing our steel pressure pipe water transmission business to become as efficient as possible while retaining our market leading position at 55% market share. As many of you are aware, the SPP market has significantly consolidated over the years and acquisition opportunities remain very limited. As such, our priorities for the SPP business are centered on driving enhanced shareholder value through identifying opportunities for incremental cost reduction measures at the plant level and focusing on lean manufacturing as well as maximizing margin over volume. I'd also like to add that we remain encouraged by the amount of activity we're seeing in our current and upcoming water transmission projects. With our nationwide footprint and as an industry leader in the space, we are well positioned to participate in the increasing amount of water transmission grid infrastructure projects required to support the increasing United States population. For a more complete view of these projects, please review our investor presentation, which can be found on the investor tab of our website within the events and presentation section. I'll now turn to a discussion on our precast strategy to further diversify our business with a goal of improving our resiliency through economic cycles and driving long-term consistently profitable growth. We've made tremendous strides in our progress to integrate the acquisition of Park USA, which remains ongoing. As part of that effort, we have been continuing to execute on our organic growth product spread strategy. As a reminder, our level one product spread effort is geared toward building out capacity utilization at our Texas-based Park USA plants to maximize efficiency and production. Through the second quarter of 2023, the Park team bid on over $27 million worth of projects outside of the state of Texas, predominantly in the western region of the United States. Of that, the team has booked approximately $4.5 million worth of orders outside of Texas, up from $2 million in the first quarter. Over the last 12 months, we've successfully booked over $8 million in projects. Our objective remains to continue growing the Level 1 product spread throughout the remainder of the year and beyond, which leads us to Level 2 product spread aimed at producing and shipping park products at our legacy Northwest pipe plants. As previously discussed, the pre-existing Geneva precast locations have been serving as the pilot location for Level 2 product spread activity, which has been progressing quite well as we continue to bid and produce new projects. Year-to-date in 2023, as of June 30, 2023, we have produced several projects at Geneva. We are currently in production on six park product orders at Geneva, with more scheduled to come. We plan to expand on this strategy once park products are more comfortably established at the Geneva locations, at which point we'll begin to produce the park products at additional Northwest Pipe legacy locations. In addition, we have dedicated resources to reinvest in our precast locations to drive increased production capabilities and capacity improvements. An example of this is our $16 million new RCP manhole facility at our Salt Lake City, Utah plant. Despite the short-term challenges affecting the precast business, we believe in the long-term value proposition of this business and the investments we are making to drive profitable growth. Before I conclude, I'd like to summarize our outlook for the remainder of the year. Aside from some of the shorter-term challenges we are working through, such as our ERP implementation, in addition to the continued pressure we're seeing in the interest rate environment, our outlook for the second half of 2023 remains positive. We entered 2023 with a robust FPP backlog near record territory, which we believe will carry us through into 2024 and lead to a strong finish to 2023, despite the lower level of project bidding in 2023. For the third quarter of 2023, in our FPP business, we anticipate similar revenue levels compared to the third quarter of last year, driven by continued strength in our backlog. even when considering an expected downward moderation in bidding volume in the resulting backlog in the second half of 2023. We expect SPP revenue to remain at a higher level, similar to 2022 levels, but with improved gross margins. In our precast business, we anticipate macroeconomic factors to continue to weigh on our volume and associated revenue in the third quarter, which could result in some additional downward pressure on our margins in the quarter. Aside from these challenges, we remain cautiously optimistic demand will remain solid for the remainder of the year, with 2023 off only modestly from what many consider to be a record year in 2022. We continue to believe we are well positioned to benefit longer term, giving the significant level of pent-up demand specifically for residential housing, a growing need for infrastructure spending in the United States, and our strong market position and our presence in key areas such as Utah and Texas, which are among the top five fastest-growing markets in the U.S. In summary, we are very pleased with the strides we've made to execute our strategy to drive enhanced shareholder value and long-term profitable growth. We remain bullish on our goal for our pre-cash-related business to grow to a similar size as our SPP business, supported by the strength we've been maintaining in our SPP bidding activity. Looking ahead, we remain focused on, one, finalizing the integration of Park USA as quickly and efficiently as possible. Two, persistently focused on margin over volume. Three, continuing to implement cost reductions and efficiencies at all levels of the company. And number four, continuing to identify strategic opportunities to grow the company once we have completed the integration work with Park USA. Thank you to our dedicated team at Northwest Pipe for your continued persistence in execution against our growth strategy and for operational safety. 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 today with an overview of our second quarter profitability. Consolidated net income for the second quarter was $7.4 million, or $0.74 per diluted share, compared to $9.7 million or $0.97 per diluted share in the second quarter of 2022. Consolidated net sales decreased 1.8% to $116.4 million compared to $118.5 million in the year-ago quarter. SPP segment sales were relatively flat at $77.3 million compared to $77.1 million in the second quarter of 2022, resulting primarily from a 7% increase in selling price per ton due to product mix, which was almost entirely offset by a 6% decrease in tons produced, resulting primarily from changes in project timing. Precast segment sales decreased 5.6% to $39.1 million compared to $41.5 million in the second quarter of 2022, primarily due to a 13% decrease in volume shift due to lower demand, partially offset by an 8% increase in selling prices due to increased raw material input costs. Consolidated gross profit decreased 6.6% to $22.5 million, or 19.3% of sales, compared to $24.1 million 20.3% of sales in the second quarter of 2022. Steel pressure pipe gross profit increased 13.2% to 12.6 million, or 16.3% of segment sales. This compared to gross profit of 11.1 million, or 14.4% of segment sales in the second quarter of 2022, primarily due to changes in product mix. Precast gross profit decreased 23.6% to 9.9 million, or 25.3% of precast sales from a 13 million, or 31.3% of segment sales in the second quarter of 2022, primarily due to increased production costs. Selling general and administrative expenses increased 8.8% to 11 million, or 9.5% of sales, or to 10.1 million in the second quarter of 2022, or 8.5% of sales. The increase was primarily due to $0.6 million in higher salaries and associated benefits expense and $0.3 million in higher administrative expense. Further, as many of you are aware, we committed to a large project to improve our ERP platform to integrate our Park USA business, which contributed to an increase in professional fees compared to the year-ago quarter. In addition to some smaller increases for travel and advertising, All of the aforementioned were partially offset by $0.5 million in lower incentive compensation expense. For the full year 2023, we expect consolidated selling general and administrative expenses being the range of $44 to $46 million. Depreciation and amortization expense in the second quarter of 2023 was $3.9 million, compared to $4.2 million in the year-ago quarter. For the full year 2023, we expect depreciation and amortization to be in the range of $16 to $18 million. Our non-cash incentive compensation expenses were $1.3 million and $0.7 million in the second quarters of 2023 and 2022, respectively. Interest expense increased to $1.2 million in the second quarter of 2023, compared to $0.9 million in the year-ago quarter. We expect interest expense of approximately $5 million for the full year 2023. Our second quarter income tax expense was $2.7 million, resulting in an effective income tax rate of 26.5% compared to $3.4 million in the prior year quarter for an effective income tax rate of 26.1%. Our tax rates for the second quarters of 2023 and 2022 were impacted by non-deductible permanent differences. We continue to expect our income tax rate for full year 2023 to range between 24% and 26%. Now I'll transition to our financial condition. We generated net cash provided by operating activities of $1.2 million in the second quarter of 2023, compared to $8.5 million in the second quarter of 2022, due primarily to changes in working capital and lower profitability. capital expenditures totaled $4 million in the second quarter of 2023, which was flat with the prior year quarter. We continue to anticipate total CapEx to be in the range of $24 to $28 million for full year 2023. As of June 30, 2023, we had $70.1 million of outstanding borrowing on our credit facility, leaving approximately $54 million in additional borrowing capacity on our credit line. We amended our credit facility during the quarter, providing for a five-year term ending in June 2028. The $125 million facility provides an option to upsize the credit up to $50 million and also loosen the senior leverage ratio covenant required from 2.5 times EBITDA to 3 times EBITDA. Other modifications and terms were relatively minor and can be read in their entirety within the Form 8K filed on July 3rd. We appreciate the continued support from our financing partner, Wells Fargo. Before I conclude, I'd like to provide an update on our progress on the ongoing ERP implementation and material weakness remediation projects. In relation to the former, we have evaluated and have committed to certain business process changes that we are now working to push into the system architecture, in addition to the corresponding change management with our employees involved in the day-to-day transacting at PARC. These third quarter activities, coupled with robust training, will set the table for materials requirements planning automation, which we expect to be initially deployed at the end of the year. Remediating the material weakness continues to be a priority of management and our audit committee. We are currently working to institute more robust internal monitoring of the manual controls that failed at parks surrounding revenue and cost of sales. We will also complete more frequent testing to gain additional comfort that the internal controls are executing as designed. While this project will continue through this year's audit, it is important to reiterate that the internal control deficiencies identified have not impacted the accuracy of our current or historical financial results. In closing, I'm very pleased with the progress our entire team has made to position us well for another strong year in 2023. I would also like to thank our employees for their continued prioritization of our safety program and to all our stakeholders for their continued confidence in Northwest Pipe. I will now turn it over to the operator to begin the question and answer session.