NWPX Infrastructure, Inc.

Greetings and welcome to the Northwest Pipe Company third quarter 2024 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Montross. CEO. Thank you. You may begin.

Good morning and welcome to Northwest Pipe Company's third 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, October 30th, 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 the statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially from expectations. Please refer to our most recent Form 10-K for the year ended December 31, 2023, 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 for 2024. Aaron will then walk you through our financials in greater detail. Once again, we delivered strong third quarter results, achieving new quarterly records in several key financial metrics. Our performance was driven by growth on the residential side of our precast business, as well as ongoing strength in our steel pressure pipe business. Our consolidated net sales increased 9.7% year-over-year to $130.2 million, outpacing our strong second quarter and reflecting the highest quarterly revenue ever reported by the company. And the $27 million of gross profit generated in the third quarter was also a quarterly record. In addition, our focus on effective working capital management helped drive another quarter of strong cash flow generation. To further break down our segment level results, revenue from our steel pressure pipe segment remained at near record levels totaling $85.9 million and increasing 6.7% year-over-year in line with our expectations. Our performance primarily reflected continued high production levels through the ongoing strength in the bidding environment that has carried over into the second half of 2024 as well as changes in project timing. Our SPP backlog, including confirmed orders, was 282 million as of September 30th, down from 348 million as of June 30th, 2024, and down from 335 million as of September 30th, 2023. Although our backlog declined, our SPP team has done a tremendous job executing on bids and projects. We attribute the third quarter decline in backlog primarily to the timing of expected job awards, our mix in backlog, and to a lesser extent, lower steel prices. Nevertheless, we believe our backlog remains healthy and the bidding environment remains strong with a significant number of tons expected to bid in the fourth quarter. As a result, we expect our backlog to improve through year end. Our third quarter performance was partially offset by lower realized selling prices due primarily to lower raw material costs. While steel prices were fairly volatile throughout the course of the third quarter, they appear to be stabilizing in the $700 per ton range, with lead times standing at about four to five weeks. Now turning to our precast segment. Precast revenue increased 15.8% year-over-year to a new quarterly record of 44.3 million, driven by strong operational execution by our teams in the field and a backdrop of continued robust demand on the residential side of our Geneva business, which resulted in strong production and shipment levels. However, reduced shipments on the non-residential construction-related portion of our precast business at PARC offset some of this strength. mainly due to the continued impact of current interest rate environment on the commercial construction portion of the business. We expect this to reverse and become a tailwind as rates continue to come down. To a lesser extent, our production was also impacted by the severe weather events we experienced in Texas in July. Currently, in the non-residential construction market, for projects that are going into planning, which is generally about 12 months prior to breaking ground, the commercial and institutional segments are up 31% and 4%, respectively, versus last year's levels. As interest rates fall, the length of time between planning and breaking ground is expected to compress. As a result, we are expecting upcoming near-term strength in the non-residential market. On the pricing side, The residential part of our precast business has enacted multiple price increases throughout 2024, driven by strong demand that we've experienced at the Geneva locations. However, our non-residential precast business experienced some downward pricing pressure as a result of the elevated interest rate environment and the negative impact it has had on the commercial construction demand. With the initial Fed 50 basis point rate cut in September and the additional cuts that are expected before year end, we expect the non-residential construction market to strengthen in the near term. As of September 30th, our precast order book totaled $57 million, down modestly from $62 million as of June 30th, 2024, further reflecting the resilience of this segment as we enter the traditionally slower time of the year. and it was up from $52 million as of September 30, 2023. Our consolidated gross profit for the third quarter increased 40% year-over-year to $27 million, a new quarterly gross profit record for the company, which resulted in a strong gross margin of 20.8%, up from 16.3% in the third quarter of 2023. This is the strongest quarterly gross margin we've reported for the current SPP and precast configuration of the company. Our SPP gross margin of 19.4% was strong, increasing by approximately 580 basis points over the prior year period and 40 basis points over the prior quarter, primarily due to high production volume with strong overhead absorption, as well as changes in product mix. This in addition to the ongoing strength in the bidding activity we've been experiencing. Our pre-Caspros margin of 23.5% improved by approximately 160 basis points over the prior year period and 140 basis points over the prior quarter, primarily resulting from the strength in the residential construction market as well as changes in product mix. Margins on the residential construction site at the Geneva location strengthened versus the year-ago quarter. As indicated, non-residential commercial construction market demand has been adversely affected by the high interest rate environment creating some margin compression. In addition, early third quarter severe weather-related impacts on our production and shipping days not only reduced early third quarter revenue at the park facilities, but also reduced production levels leading to lower overhead absorption, further impacting non-residential margins. Next, I would like to provide an update on our precast product spread strategy to promote organic growth in the business. Year-to-date, we have bid on over $47 million worth of projects outside of the state of Texas and booked approximately $8 million worth of orders. As a result of our ongoing efforts to enhance capacity utilization at our Texas-based precast plants to maximize overall efficiency and production volume, Further, we gained additional traction on product spread at the Geneva plants in Utah by booking approximately $1.7 million of park-related projects. Our goal is to book in excess of $2 million worth of park-related projects at Geneva in 2024. As previously noted, once the park precast products... established at the Utah locations. We plan to expand our product spread strategy to additional current Northwest pipe geographic locations. This is in the planning stage and is scheduled to occur over the next couple of years. Further to expanding our capacity, we are pleased to report that our investment in the new reinforced concrete pipe and manhole mill at our Salt Lake City, Utah facility is near completion. This will unlock additional production capacity and capabilities positioning the Geneva business for additional growth. In addition to our organic growth activities, we are continuing to actively evaluate M&A opportunities in the precast-related space that would help accelerate progress in our precast strategy by increasing our manufacturing capabilities and production efficiencies and expanding our geographic reach and product portfolio. The ideal candidate would be accretive to our earnings, possess strong potential for organic growth, enhance our margins, and deliver consistent positive cash flow generation. To properly execute our growth strategy, repaying debt we've incurred to finance the 2021 acquisition of Park USA remains a top strategic focus of our capital allocation philosophy. In the absence of accretive M&A opportunities, we may opt to repurchase shares of our common stock. While we did not repurchase any shares during the third quarter, we remain opportunistic in our approach. Since the initial authorization of our share repurchase in November of 2023, we've bought back a total of 174,000 shares for $5.1 million as of September 30th. Before I conclude, I'd like to summarize our outlook for the fourth quarter of 2024. In our SPP business, we anticipate a stronger fourth quarter than we've seen in recent years, despite it generally being the slowest quarter of the year due to two major holidays as well as expected weather-related events. Nevertheless, we expect revenue and gross margins to be relatively strong for a fourth quarter of a year, primarily related to a mix of projects that we've booked and their overall impact on production volume. We also expect backlog to remain strong by historical standards, given the volume of expected steel pressure pipe bidding for the remainder of 2024. Further, we remain encouraged by the amount of activity we're 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. We continue to expect a healthy bidding year in 2025, similar to 2024 levels. In the precast business, we are expecting our fourth quarter revenue to be down sequentially from the record third quarter we just reported with relatively stable gross margins. We continue to believe in the strength of the precast business in the mid to long term, given the significant level of pent-up demand specifically for residential housing and a growing need for infrastructure spending in the U.S. and our growing market position. In summary, I'm very pleased with the strong operational and financial performance we delivered in the third quarter. Thank you to all of our team members for your continued dedication to success and safety in the field as we execute our growth strategy in pursuit of enhanced shareholder and stakeholder value. Our performance continues to be bolstered by strong bidding environment in 2024 that is anticipated to remain elevated throughout the balance of the year and into 2025. 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, intensifying our focus on strategic acquisition opportunities to grow the company, and five, in the absence of M&A opportunities, returning value to our shareholders through opportunistic share repurchases. I will now turn the call over to Aaron who will walk you through our financials in greater detail.

Thank you, Scott, and good morning, everyone. Beginning with our third quarter profitability, consolidated net income was $10.3 million or $1.02 per diluted share compared to $5.8 million or $0.58 per diluted share in the third quarter of 2023. Consolidated net sales increased 9.7% to $130.2 million compared to $118.7 million in the year-ago quarter. Steel pressure pipe segment sales increased 6.7% to $85.9 million compared to $80.5 million in the third quarter of 2023. The improvement was driven by an 18% increase in tons produced, resulting primarily from improved market demand in a continued strong bidding environment, as well as changes in project timing. It was partially offset by a 9% decrease in selling price per ton due to lower raw material costs. Precast segment sales increased 15.8% to a new quarterly record of $44.3 million compared to $38.2 million in the third quarter of 2023. This was driven by a 35% increase in volume shift, which was partially offset by a 14% decrease in selling prices, resulting from changes in product mix. Our Geneva business continued its strong performance on resilient demand in Utah, while the headwinds for commercial construction demand in Texas continued, encumbering our park business that was also slowed by weather-related delays. As a reminder, the products we manufacture are unique and 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 was also a record, increasing 40% to 27 million, or 20.8% of sales, compared to 19.3 million, or 16.3% of sales in the third quarter of 2023. SPP gross profit increased 52.4% to 16.6 million, or 19.4% of segment sales, compared to gross profit of 10.9 million, or 13.6% of segment sales in the third quarter of 2023, primarily due to higher production volume resulting from improved market conditions. Precast gross profit increased 24% to $10.4 million or 23.5% of precast sales from $8.4 million or 21.9% of segment sales in the third quarter of 2023, primarily due to increased shipment volume, particularly in Utah. Selling, general, and administrative expenses increased 13.1%, to $11.6 million or 8.9% of sales compared to $10.2 million in the third quarter of 2023 or 8.7% of sales. Selling general and administrative expenses increased 13.1% or $11.6 million or 8.9% of sales compared to $10.2 million in the third quarter of 2023 or 8.7% of sales. The increase was primarily due to higher incentive compensation expense. Our non-cash incentive compensation expense in the third quarter of 2024 was $1.2 million compared to $0.7 million in the year-ago quarter. For the full year of 2024, we now expect our consolidated, settling, general, and administrative expenses to be in the range of approximately $47 to $48 million. Depreciation and amortization expense in the third quarter of 2024 was $5.2 million compared to $4 million in the year-ago quarter. We expect depreciation and amortization expense to be approximately $19 million in the full year of 2024. Interest expense increased to $1.5 million from $1.2 million in the third quarter of 2023 due primarily to higher interest rates and an increase in average daily borrowings. The full year of 2024, we expect interest expense to be approximately $6 million. Our third quarter income tax expense was $3.7 million, resulting in an effective income tax rate of 26.3% compared to $2 million in the prior year quarter, or an effective income tax rate of 25.7%. Our tax rates for the third quarters of 2024 and 2023 were impacted by non-deductible permanent differences. We now expect our tax rate for the full year of 2024 to be within the range of 20 to 21%. The change in our expectation is due to the statute of limitations that have expired on uncertain tax positions during the fourth quarter. Now I will transition to our financial condition. Net cash provided by operating activities, 22.7 million in the third quarter of 2024, per to $16.9 million in the third quarter of 2023 due to the company's improved profitability. Improving cash flows remains a key strategic focus of our business and critical for the execution of both our growth and stockholder return priorities. While our third quarter free cash flow has improved, the working capital needs of our steel pressure pipe business can be highly variable between quarters, and therefore we concentrate on the annual performance of this key metric. We continue to anticipate free cash flows to range between $19 and $25 million for the full year 2024. Our capital expenditures totaled $6 million in the third quarter of 2024 compared to $4.8 million in the prior year quarter. As a reminder, we anticipate completion of the new concrete pipe mill project in Salt Lake City by year end. which after successful commissioning is expected to improve production yields and efficiencies on reinforced concrete pipe and manholes we produce and sell out of that facility. Participate our total capex to be in the range of 20 to 22 million for full year 2024, which includes approximately 8 million of investment in our new reinforced concrete pipe mill and associated building and the remainder primarily for standard capital replacement. As of September 30, 2024, we had $60.7 million of outstanding borrowings on our credit facility, leaving approximately $63 million in additional borrowing capacity on our credit line. In summary, we were pleased to deliver another very strong quarter of financial performance and the consecutive quarterly records for consolidated gross profit. Our steel pressure pipe business is well positioned for the remainder of the year and into 2025, and our precast business returned a new quarterly revenue record for that segment. These achievements are made possible by our employees' exceptional execution. I would like to thank each of them for their commitment to safety, as well as our shareholders for their continued support and trust in Northwest Pipe Company. I will now turn it over to the operator to begin the question and answer session.