NWPX Infrastructure, Inc.

Quarter 2023 earnings conference 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Scott Montross, President and CEO of Northwest Pipe Company. Thank you. You may begin.

Good morning and welcome to Northwest Pipe Company's third quarter 2023 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, November 2nd, 2023 at approximately 4 p.m. Eastern time. This call is being webcast and it is available for replay. As we begin, I would 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, 2022 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 and outlook. Aaron will then walk you through our financials in greater detail. Our third quarter revenue of $118.7 million improved 2% over the second quarter and declined by 3.5% compared to the prior year quarter. Revenue from our SPP segment remained fairly strong but decreased 3.8% to $80.5 million compared to the prior year quarter. Coming in below our expectations due to one-time anomalies that impacted both revenue and gross margins in the third quarter. First, we had some customer-driven contract changes as well as scope changes of certain projects that had previously been forecasted to benefit the third quarter. We also encountered some customer-related delays that impacted project delivery timing, which pushed projects scheduled to be produced in the third quarter out into early 2024. This led to short-term production gaps at certain plants, causing higher levels of underabsorption, further impacting our revenue and margins for the quarter. In addition to these non-reoccurring items, higher selling prices in our SPP business due to sales mix were partially offset by decrease in tons produced, resulting primarily from changes in project timing. Prices of hot roll band steel declined approximately 27% from the second quarter to the third quarter, but have increased rapidly by approximately 16% from September through year-to-date fourth quarter. NPP backlog, including confirmed orders, was $335 million at September 30th, which modestly declined from $343 million at June 30th, 2023, and from $347 million as of September 30th, 2022. Our backlog remains elevated by historical standards, even though 2023 has been a relatively small bidding year. Now turning to our precast segment. Precast revenue decreased 2.8% from the prior year quarter to $38.2 million, primarily due to reduced demand resulting from the current interest rate environment impacting the U.S. construction market, which led to decreased absorption of overhead, changes in our product mix, and reduced selling prices given lower market demand. all while raw material input costs have remained fairly elevated. Nevertheless, as we progress into a slower period precast time of the year in the fourth quarter, our precast-related order book has remained fairly strong and totaled $52 million as of September 30, 2023, which was down from $58 million as of June 30, 2023, and down from $74 million as of September 30, 2022. Our third quarter consolidated gross profit decreased 23.2% year-over-year to 19.3 million, resulting in a gross margin of 16.3% down from 20.4% in the third quarter of 2022. Our SPP gross margin of 13.6% declined by approximately 340 basis points over third quarter 2022, primarily due to the anomalies I just discussed, including Customer-driven contract changes and project scope changes that reduced the gross profit we expected to realize in the third quarter. And from customer-driven changes in project delivery timing, which pushed projects that were scheduled to be produced in the third quarter out in early 2024 and created near-term production gaps at certain plants, leading to higher levels of underabsorption. Absent these items, we estimate that our SPP gross margins would have been approximately 200 basis points higher. Also important to note is that we are starting to see the relatively small SPP bidding market we have experienced in 2023 result in some pressure on project margins for projects that are currently bidding. Our precast gross margin of 21.9% of precast sales in the third quarter of 23 decreased by approximately 590 basis points from the near record highs experienced in the third quarter of 2022. The decline was predominantly due to the impact of rising interest rates on the commercial construction and residential housing markets, which moderately reduced pre-cash product demand, reducing overhead absorption and resulting in changes in our product mix. This led to our margins normalizing compared to the record year we had in 2022. Next, I would like to provide an update on our capital allocation priorities. Our focus on organic growth of the business remains a top priority by means of our product spread strategy with our precast operations. The acquisition of Park USA in October of 2021 spawned this strategy, given the park business employs some of the same capabilities that we have at our other Northwest pipe facilities, namely the production of precast vaults and fabricated steel housings, which in the case of Park USA serve as containment units for the water control system products, the water related environmental solution systems as such our level one product spread effort has been ramping to build out our capacity utilization at our texas-based park usa plants to maximize efficiency and production to that end the park team has been on approximately 32 million dollars worth of projects outside of texas year-to-date 2023 predominantly in the western and southeastern regions of the united states And of that, year to date, the team has booked approximately $7.1 million worth of orders outside of Texas, up from $4.5 million in the second quarter. Over the last 12 months, we've successfully booked approximately $8 million in projects, and we are just getting started. Level 2 product spread comes into play because we also produce the concrete vaults and steel fabrication at the current Northwest Pipe Plants. As such, we're in the early stages of bringing the production of Park USA's products to our existing Northwest Pipe locations, which we believe will provide incremental organic growth potential to the company. As previously discussed, our Geneva precast operations have been serving as the pilot locations for lever two product spread activity. Year to date in 2023, we have produced 10 projects at Geneva and are currently in production on three Park product orders with more scheduled to come. We plan to expand upon Level 2 product spread once park products are more comfortably established at the Geneva locations before we expand the park products to additional Northwest Pipe legacy plants. We remain confident in our organic growth strategy for the precast to further diversify our business with the goal of improving our resiliency through economic cycles and driving long-term, consistently profitable growth. Despite the short-term challenges affecting the precast business, we believe in the long-term value proposition of this space and investments that we are making to drive sustainable growth. Following organic growth, we remain highly focused on repaying the debt incurred to finance the acquisition of Park USA in order to position ourselves for further acquisitions, but only after we are comfortable that Park USA has been fully integrated. I'll next turn to our M&A strategy. in which we currently are continuing to seek accretive acquisition candidates in the pre-cash related space. While the integration of PARC remains paramount, including the finalization of the ERP system integration, which is expected to be completed by the end of this year, we are continuing to evaluate prospective high-quality opportunities that possess strong organic growth potential in margin characteristics, solid asset efficiency, and positive cash flow profiles. We recognize that finding the right opportunities takes significant due diligence and time. And as such, we are pleased that our board has authorized a stock repurchase program in the amount of $30 million with no expiration date, underscoring their confidence in our long-term strategic growth plan in alignment with our goal to enhance shareholder value. In the absence of meaningful M&A activity, we may opt to return value to our stockholders via opportunistic share repurchases as we deem appropriate. Obviously, any repurchases would be subject to our liquidity including availability of borrowings and covenant compliance under our amended credit facility and other capital needs of the business. Before I conclude, I'd like to summarize our outlook for the remainder of the year. Aside from some of the challenges we are continuing to work through such as our ERP implementation and the resultant impact the current interest rate environment has had on our business, our outlook for the balance of 2023 remains positive. In our SPP business, we anticipate a strong fourth quarter given various customer-driven anomalies that I just discussed that we've faced during the third quarter that are not expected to be reoccurring, as well as continued strength in our backlog. We entered 2023 with a robust steel pressure pipe backlog near record territory, which has remained elevated and should carry us through into 2024 and lead to a strong finish to 2023. Despite the relatively small level of bidding that we've seen this year, however, over the last few months, the small bidding environment has caused downward pressure on project bidding. As such, we expect fourth quarter SPP revenue to be in line with the fourth quarter of 2022, but with some downward pressure on gross margins. I'd also like to add that we remain encouraged by the amount of activity we're seeing on our current and upcoming water transmission projects. as we are currently expecting a larger bidding year in 2024. For a more complete review of the projects, please review our investor presentation, which can be found on the investor tab of our website within the events and presentation section. In our precast business, we anticipate macroeconomic factors to continue to weigh on our volume. As a result, our precast revenue in the fourth quarter is expected to be modestly down from the prior year period, with margins that are down from 2022 record hires, but similar to what we've seen in the second and third quarter of 2023. We continue to believe our precast business is well positioned to benefit longer term, given 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. In summary, I'd like to thank our team for the continued solid execution against our strategic plan to drive enhanced shareholder value, long-term profitable growth with our nationwide footprint and as an industry leader in the space we are well positioned to participate in the increasing amount of water infrastructure projects required to support the increasing US population in the years to come as a result our goal remains for our precast related business to grow to our similar size as our SPP business looking ahead we will remain focused on one finalizing the integration of Park USA as quickly and efficiently as possible. Two, persistently focus on margin over volume. Three, continuing to implement cost reductions and efficiencies at all levels of the company. Four, continuing to identify strategic growth opportunities for the company once we've completed the integration work with Park USA. And five, in the absence of M&A opportunities, returning value to our stockholders through opportunistic share repurchases. Thank you to our dedicated team at Northwest Pipe for your continued persistence in execution against our growth strategy and for operating 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 today with an overview of our third quarter profitability. Consolidated net income for the third quarter was $5.8 million or $0.58 per diluted share compared to $10 million or $0.99 per diluted share in the third quarter of 2022. Consolidated net sales decreased 3.5% to $118.7 million compared to $123 million in the year-ago quarter. Steel pressure pipe segment sales decreased 3.8% to $80.5 million compared to $83.7 million in the third quarter of 2022. The decrease, which Scott discussed earlier, was driven largely by customer-driven contract changes as well as other anomalies that impacted production timing. This resulted in a 13% decrease in tons produced, which was partially offset by an 11% increase in selling price per ton, primarily due to product mix. Precast segment sales decreased 2.8%, to $38.2 million compared to $39.3 million in the third quarter of 2022, primarily due to an 8% decrease in selling prices due to reduced demand, which was partially offset by a 6% increase in volume shipped due to changes in product mix. Due to the unique nature of the products we manufacture, shipment volumes in the case of precast and production volumes in the case of SPP, and the corresponding sales prices for both segments do not always provide comparable metrics between periods as they are highly dependent on the composition of the mix of our products. Consolidated gross profit decreased 23.2% to 19.3 million or 16.3% of sales compared to 25.1 million or 20.4% of sales in the third quarter of 2022. Steel pressure pipe gross profit decreased 23.1% to 10.9 million, or 13.6% of segment sales. This compared to gross profit of 14.2 million, or 17% of segment sales in the third quarter of 2022, primarily due to contract changes and project timing delays. It's important to note that while timing delays are typical for the steel pressure pipe business, the magnitude of these changes reduced revenue and production efficiencies at certain plants, resulting in a significant variance from our expectations for the third quarter. Precast gross profit decreased 23.2% to 8.4 million or 21.9% of precast sales from 10.9 million or 27.8% of segment sales in the third quarter of 2022. primarily due to changes in product mix. We have seen our commercial construction precast markets decrease. However, our residential precast markets have held up better to the current pressures from the broader economy. Selling, general and administrative expenses decreased 3.9% to 10.2 million, or 8.7% of sales, compared to 10.7 million in the third quarter of 2022, or 8.6% of sales. The decrease was primarily due to $2 million in lower incentive and compensation expense, partially offset by $0.9 million in higher professional services, including ERP implementation fees, and $0.7 million in higher base compensation and benefits expense. For the full year of 2023, we expect our consolidated selling general and administrative expenses to be approximately $44 million. Appreciation and amortization expense in the third quarter of 2023 was $4 million compared to $4.3 million in the year-ago quarter, and I currently expect the quarterly run rate to continue at a similar pace. Our non-cash incentive compensation expenses were $0.7 million and $1.2 million in the third quarters of 2023 and 2022, respectively. interest expense increased to $1.2 million compared to $1 million in the third quarter of 2022. We continue to hedge approximately half of our exposure to variable interest rates using interest rate swaps. Due to the dramatic increase in the risk-free interest rates compared to the year-ago quarter, our interest costs increased even though our average debt balance decreased from the third quarter of 2022. We expect interest expense of approximately $5 million for full year 2023. Our third quarter income tax expense was $2 million, resulting in an effective income tax rate of 25.7%, compared to $3.6 million in the prior year quarter, or an effective income tax rate of 26.3%. Our tax rates for the third quarters of 2023 and 2022 were impacted by non-deductible permanent differences. We continue to expect our tax rate for full year 2023 to range between 25% and 26%. Now I will transition to our financial condition. We generated net cash provided by operating activities of $16.9 million in the third quarter of 2023 compared to $15.3 million in the third quarter of 2022 due to changes in working capital partially offset by lower net income adjusted for non-cash items. Our capital expenditures totaled $4.9 million in the third quarter of 2023 compared to $3.3 million in the third quarter of 2022. We anticipate our total CapEx to be in the range of $18 to $21 million for full year 2023. As of September 30, 2023, we had $58.1 million of outstanding borrowings on our credit facility, leaving approximately $66 million in additional borrowing capacity on our credit line. Before I conclude, I'd like to provide an update on the progress we've made with the ongoing ERP implementation and material weakness remediation projects. With respect to the ERP implementation, we continue to meet project milestones and remain on schedule. We are working through user testing and broader training of the workforce in advance of our initial deployment of materials resource planning or MRP automation by the end of the year. I'm proud of the team's incremental gains in data management and business process improvement. Physical inventories are detecting fewer variances, which will reduce our dependency on these labor-intensive events. As for the material weakness remediation, this remains a top priority for management and our audit committee. We have instituted more robust internal monitoring of our manual controls that failed at PARC while related to revenue and cost of sales while we continue to focus on addressing specific concerns that arose from system development lifecycle control failures noted in last year's audit. Importantly, the internal control deficiencies identified have not impacted the accuracy of our current or historical financial results. In closing, even though we encountered some anomalies that impacted our third quarter financial results, I am very pleased with the progress our team has made, positioning us well for a solid finish to 2023 and the year ahead. We remain steadfast in our commitment to drive long-term growth and enhance shareholder value. I would also like to thank our employees for their continued prioritization of our safety program and express gratitude to all our stakeholders for their continued confidence in Northwest Pipe. I will now turn it over to the operators to begin the question and answer session.