NWPX Infrastructure, Inc.

Good morning and welcome to the Northwest Pipe Company's second quarter 2024 earnings call. All participants will be in a 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 using a touch-tone telephone. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Scott Montross, Chief Executive Officer. Please go ahead.

Good morning, and welcome to Northwest Pipe Company's second quarter 2024 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, July 31st, 2024, 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, 2023 in our other SEC filings for a 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 second quarter performance and outlook for 2024. Erin will then walk you through our financials in greater detail. We delivered strong second quarter results led by growth in our steel pressure pipe business and the residential side of our precast business. Our consolidated net sales increased 11.3% year over year to 129.5 million, the strongest quarterly level we have seen since early 2013. Our profitability significantly improved. And when coupled with the effective working capital management, helped drive strong cash flow during the quarter. To further break down our segment level results, revenue from our SPP segment totaled $89.5 million, an increase of 15.9% year-over-year in the highest quarterly revenue reported in our history. Our performance primarily reflected higher production levels due to changes in project timing, which were reflective of the strong pipeline of bidding opportunities that we saw in the first half of the year. Our SPP team has continued to do an excellent job executing on bids and projects, securing a number of new project wins in the second quarter and improving our backlog, while at the same time generating record revenue and strong free cash flow. Our SPP backlog, including confirmed orders as of June 30th, was $348 million, an improvement from $337 million as of March 31, 2024, and up from $343 million at June 30, 2023. Our second quarter performance was partially offset by lower realized selling prices due to production mix in the quarter. Steel prices steadily declined throughout the course of the second quarter, but appear to be reaching the bottom and are stabilizing in the $650 a ton range. Lead times stand at about three to four weeks. Now turning to our precast segment. Precast revenue increased by 2.2% year-over-year to $40 million, primarily due to continued strength on the residential side of our business at Geneva, which resulted in strong production and shipment levels and further improvement to our order book. However, reduced shipments on the non-residential construction-related portion of our precast business at Park offset much of this strength, primarily due to various severe weather events we experienced in Texas throughout the quarter. These events led to significant disruptions in our production, shipping, and order intake at all three Park facilities, which we estimate had an approximate $4.3 million negative impact on our precast sales during the quarter. In addition, The current interest rate environment continues to create persistent headwinds on the commercial non-residential side of our business. On the pricing side, both the residential and non-residential precast businesses saw better pricing dynamics in the second quarter following the implementation of multiple price increases. As of June 30th, our order book improved to $62 million from $52 million as of March 31st, 2024, and $58 million as of June 30, 2023. Our consolidated gross profit for the second quarter increased 14.8% year-over-year to $25.8 million, a new consolidated gross profit record for the company, resulting in gross margins of 19.9% up from 19.3% in the second quarter of 2023. Our SPP gross margin of 19% was strong, increasing by approximately 270 basis points over the prior year period and 120 basis points over the prior quarter, primarily due to higher production volume, which improved our overhead absorption, as well as changes in product mix and significant strength that we saw in the second quarter bidding activity. Our precast gross margin of 22.1% was down compared to the 25.3% in the second quarter of 2023, primarily as a result of the severe weather-related impacts on our production and shipping days, which reduced our second quarter revenue at the park facilities and resulted in reduced overhead absorption. However, the margins on the residential construction site at Geneva strengthened versus the year-ago period. Next, I would like to provide an update on our capital allocation priorities. Our primary strategic focus remains on growing the business through a combination of organic precast product spread strategy and future M&A opportunities. Beginning with product spread, traction has continued on level one of this strategy by building out capacity utilization at our Texas-based precast plants to maximize overall efficiencies and production volume. Year to date, we have continued to make solid progress despite the weather-related headwinds at PARC. by bidding on $30 million worth of projects outside of Texas and booking approximately $5 million worth of orders outside of Texas. In regard to level two of our strategy to produce park products at our existing Northwest Pike plants, year-to-date at Geneva we have completed production on 15 projects and we are currently in production on six more projects with an additional 10 projects pending. Once the park precast products are more comfortably established at the Utah locations, we plan to expand our level two product spread to additional geographic locations over the next couple of years. Following organic growth, repaying the debt we incurred to finance the 2021 acquisition of Park USA, as well as financing the current growth of the SPP business in related working capital, remains very high on our list of priorities to ensure that we are well positioned to pursue further precast related growth opportunities. In regard to our M&A strategy, we are actively evaluating various opportunities in the precast related space that would help increase our manufacturing capabilities and product portfolio, maximize production efficiencies, and expand our geographic reach. The precast space continues to be an attractive area of expansion for us despite the near-term headwinds we've encountered resulting from the current interest rate environment. As previously noted, we are looking for high-quality, well-run businesses that are accretive to our earnings and that possess a strong potential for organic growth, enhanced margins, and consistent positive cash flow generation. Next, we may opt to be opportunistic in repurchasing shares of our common stock while we continue to evaluate accretive M&A opportunities. During the second quarter, we repurchased approximately 18,000 shares of our common stock for a total of $0.6 million. And since the initial authorization of our share repurchase in November of 2023, we bought back a total of 174,000 shares for $5.1 million as of July 31st. Before I conclude, I'd like to summarize our outlook for the third quarter of 2024. In our steel pressure pipe business, we anticipate both our revenue and gross margins to be relatively in line to down modestly from the record second quarter we just delivered, primarily related to a mix of projects that we have booked and their overall impact on production volume. We also expect backlog to remain high by historical standards, given the volume of expected SPP bidding in the second half of 2024 that is currently expected to be slightly larger than the first half. We remain encouraged by the amount of activity we are seeing on our current and upcoming water transmission projects, which can be found detailed in our investor presentation on the investor relations portion of our website. In our precast business, following a slow first half of the year, we're expecting a stronger third quarter with improvements in both revenue and margins, positioning us for a strong second half of the year. We continue to believe in the strength of the precast business in the mid to long term, given the significant amount of pent-up demand specifically for residential housing, a growing need for infrastructure spending in the U.S. in our growing market position. In summary, we are very pleased with our results, which reflect the attainment of two new quarterly records despite the various challenges we encountered. Our performance continues to be supported by a significantly stronger bidding environment in 2024 that is anticipated to remain elevated throughout the balance of the year. I'd like to express my gratitude to our teams in the field for their continued strong execution and for prioritizing safety in everything that they do. Additionally, our results continue to be bolstered by the diversification strategy we began deploying in 2020 with our entry into the precast space. In comparison to the SPP business, the precast businesses are more transactional, in nature, which creates an overall faster cash conversion cycle and helps balance out our business, especially during periods of variability in the SPP market. Looking ahead, our priorities remain on one, maintaining a safe workplace where our employees are proud to work, two, persistently focusing on margin over volume, three, continuing to implement cost reductions and efficiencies at all levels of the company, four, continuing to identify strategic opportunities to grow the company, and five, in the absence of M&A opportunities, returning values to our shareholders through opportunistic share repurchases. 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 an overview of our second quarter profitability. Consolidated net income for the second quarter was $8.6 million, or $0.86 per alluded share. compared to $7.4 million or $0.74 per diluted share in the second quarter of 2023. Consolidated net sales increased 11.3% to $129.5 million compared to $116.4 million in the year-ago quarter. Steel pressure pipe segment sales increased 15.9% to a record $89.5 million compared to $77.3 million in the second quarter of 2023. As Scott highlighted, SPP sales exceeded our expectations, driven by a 56% increase in tons produced, resulting primarily from improved market demand and changes in project timing, which was partially offset by a 26% decrease in selling price per ton, primarily due to lower raw material costs coupled with changes in product mix. Precast segment sales increased 2.2% to $40 million compared to $39.1 million in the second quarter of 2023 due to a 30% increase in volume shipped partially offset by a 22% decrease in selling prices stemming from changes in product mix. Our Geneva business continued to benefit from higher shipment volumes in the second quarter on strong demand, while our Park business was slower due to headwinds in the commercial construction market in Texas as a result of the interest rate environment, as well as weather delays. As a reminder, the products we manufacture are unique, therefore shipment volumes in the case of Precast production volumes in the case of steel pressure pipe and the corresponding average sales prices for both segments do not always provide comparable metrics between periods as they are highly dependent on the composition of each segment's product mix. Consolidated gross profit increased 14.8% to 25.8 million or 19.9% of sales compared to 22.5 million or 19.3% of sales in the second quarter of 2023. Our second quarter represented a record consolidated gross profit for the company. Steel pressure pipe gross profit increased 35.1% to 17 million, or 19% of segment sales, compared to gross profit of 12.6 million, or 16.3% of segment sales in the second quarter of 2023, primarily due to higher volume and changes in product mix. Precast gross profit decreased 10.9% to 8.8 million, or 22.1% of precast sales, from 9.9 million, or 25.3% of segment sales in the second quarter of 2023, primarily due to changes in product mix. Despite strengthening residential infrastructure demand, particularly in Utah, we saw continued margin compression for the precast segment during the second quarter due to continued headwinds in the commercial infrastructure markets, coupled with shipment delays at PARC. Selling general and administrative expenses increased 10.7% to $12.2 million, or 9.4% of sales, compared to $11 million in the second quarter of 2023, or 9.5% of sales. The increase was primarily due to higher incentive compensation expense. Our non-cash incentive compensation expense in the second quarter of 2024 was $1.6 million, compared to $1.3 million in the year-ago quarter. For the full year of 2024, we now expect our consolidated selling general administrative expenses to be in the range of approximately $46 to $48 million. Appreciation and amortization expense in the second quarter of 2024 was $4.7 million compared to $3.9 million in the year-ago quarter. We expect appreciation and amortization expense to be between $19 and $20 million for the full year of 2024. Interest expense increased to $1.8 million from $1.2 million in the second quarter of 2023 due primarily to the increase in average daily borrowings and, to a lesser extent, a higher average interest rate. For the full year of 2024, we expect interest expense to be approximately $6 million. Our second quarter income tax expense was $2.9 million, resulting in an effective income tax rate of 25.5%. compared to $2.7 million in the prior year quarter, or an effective income tax rate of 26.5%. Our tax rates for the second quarters of 2024 and 2023 were impacted by non-deductible permanent differences. We continue to expect our tax rate for the full year of 2024 to be within the range of 25 to 27%. Now I will transition to our financial condition. Net cash provided by Operant Activities was $22.3 million in the second quarter of 2024, compared to $1.2 million in the second quarter of 2023, primarily due to changes in working capital and higher profitability. Enhanced cash flow generation remains a key focus of our business as it is critical to the execution of our growth strategy and delivering greater value to our shareholders. While we had anticipated working capital pressures for the steel pressure pipe business in the first half of the year, The actual working capital position at June 30th was less than expected attributable to an increase in contract liabilities stemming from our ability to bill early for certain large projects. This more than offset the higher than anticipated SPP production levels achieved during the quarter. We continue to expect our cash flows to improve in the second half of the year, with free cash flow anticipated to range between $19 and $25 million for the full year 2024. Our capital expenditures totaled $6.1 million in the second quarter of 2024, compared to $4 million in the prior year quarter. We anticipate completion of the new concrete pipe project in Salt Lake City in the next three months, which, after successful commissioning, is expected to improve production yields and efficiencies on the reinforced concrete pipe and manholes we produce and sell out of that facility. We continue to anticipate our total CapEx to be in the range of $19 to $22 million for the full year 2024. As of June 30, 2024, we had $75.9 million of outstanding borrowings on our credit facility, leaving approximately $47 million in additional borrowing capacity on our credit line. In summary, we are extremely pleased with our record quarterly gross profit and overall improved financial performance, including our cash flows, which are all a testament to our team's focus, dedication, and execution. Our ability to adapt to market conditions is evident in our financial achievements and our strategic initiatives have positioned us well for future growth and continued success through the balance of this year and beyond. Thank you to all of our employees for the continued commitment to safety and exemplary execution, as well as to our shareholders for their continued support and confidence in Northwest Pipe Company. I will now turn it over to the operator to begin the question and answer session.