Q3 2019 Earnings Call
By Robin gain our Chief financial Officer, as we begin I would like to remind everyone that statements that we make in this call about our expectations for the future or forward looking statements and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause.
Actual results to differ materially from expectations I will now turn to Robin who will discuss our third quarter results. Thank you Scott.
Our adjusted third quarter net income was 9.1 million or 93 cents per diluted share.
Compared to an adjusted net income of 2.1 million.
Were 21 cents per diluted share and the third quarter of 2018.
Sales were 75.2 million as in the third quarter 2019.
Compared to 52.5 million in the third quarter of 2018.
Gross profit as a percent of sale was 20.6% in the third quarter of 2019.
Compared to 9.9% and the third quarter of 2018.
The sales increase was due to a significant increase in tons produced.
Partially offset by a decrease in selling prices per tonne that occurred with the change and product mix.
Gross profit and gross profit as a percentage of sales improved with the increases in production volumes.
In addition, we received 300000 in insurance proceeds net of the expenses incurred in the third quarter related to the fire at our Saginaw facility.
If we exclude the benefit of these net proceeds.
Our gross profit as a percent of sales would've been 20.2%.
Which is the best quarter since 2014.
You'll recall that we had.
Yes there.
So the net impact of the fire on gross margin through the end of September is about 2.9 million.
Which gives us a year to date gross margin of 16%.
We will have additional costs in the fourth quarter, but.
But we will also hopefully have additional insurance proceeds to offset the remaining cost.
Selling general and administrative cost decreased to 4.9 million in the third quarter 2019.
5.3 million and the third quarter.
2018.
This decrease was primarily due to nonrecurring cost and the third quarter of 2018.
Related to the acquisition of Ameron.
For partly offset by increased incentive compensation expense.
Our adjusted net income excludes about $1.7 million an after tax.
Legal settlement, we received related to pipe produced at our former tubular product facilities.
We had an income tax rate of 19% and the third quarter of two thoughts.
I wasn't 19.
Compared to a rate a 14.2%.
But in the third quarter of 2018.
Our 2019.
Earlier in October we are currently processing customer orders and we are back on normal coding schedule.
The strong demand levels elevated backlog and stable competitive landscape that we've experienced throughout 2019 led to a third quarter, that's showing strong improvement in revenue and a significant improvement in gross profit and gross profit margin.
We expect fourth quarter revenues to be only slightly lower as we move in to and with a year that can be affected by weather and holiday schedules. However, we expect margin levels to remain fairly stable.
As we stated in the previous earnings call.
Close we expect the next couple of quarters to have anomalies were related to the timing of expenses in insurance reimbursements from the fire the segment our coatings plant.
The following is a look at current and upcoming water transmission projects.
Northwest pipe was recently selected by guarantee construction to supply 14 miles of 54 inch engineered steel pipe for the new Cape Fear public utility authority Walt Raw water main in North Carolina. This project represents 5000 tons of pipe with production expected to begin in late fourth quarter.
In the Texas market.
The Swift program has funded over 8 billion in projects over the last six years Swift is expected to continue to fund major projects like the Houston project and bode Arclight project well into the future.
The Houston surface water project is a major multiyear multi agency program with a series of segments, representing 90000 tons of pipe northwest pipe has been successful bidder on multiple Houston segments, representing over 15000 tons of pipe the production of the individual segments are in various stages.
His from pre manufacturing to ship complete.
There are additional segments of the Houston project that will bid through 2020 that represent about 35000 tons of pipe.
The vote Arc Lake project by the North, Texas Municipal water District has begun construction and represents approximately 60000 tons of pipe.
Northwest pipe was successful bidder on a portion of the raw water line for boat Arclight project in the fourth quarter of 2018. The second segments that we were awarded represent approximately 25000 tons of pipe, which are currently in various stages of production.
The finished water line, representing 22000 tons for this project bids in June of 2019 in was awarded to northwest pipe. We will begin production late this year.
In the western market, the California prop one 7.1 billion dollar bond for water infrastructure has created the much needed funding for projects within the state.
According to the California Natural resources agency, 86% of those funds have been appropriated for various projects as of the 2017 2018 fiscal year, we expect requirements for these projects to stretch out over the next several years.
The water reuse programs have generated new opportunities in the California market on which we expect to see bidding activity continue for the next year, representing 8000 tons.
The PCCP rehabilitation program.
I will result in about 10000 tons annually over the next two to three years.
The sites reservoir as a water storage project delays received funding from prop one.
It will involve over 30 miles of 144 inch pipeline. This project is projected to begin in 2024.
In North Dakota progress has slowed on the 140 mile 87000 tonne Red River Valley water supply project.
As it is competing for funding with an urgent flood diversion project, which appears to be taking priority. We're hopeful that bidding on this project will start sometime within the next year.
Navajo Gallup is a multi center phase major project underway in new Mexico Northwest pipe was selected to supply. The most recent phase which represents over 7300 tons of pipe.
Production is scheduled to start in mid November .
Throughout 2019, we've seen a solid bidding year in terms of volume a stable bidding environment.
In a backlog the continues to hover in near record territory.
As a result, we've seen strong revenues and margins that have continued to improve as we have progressed through 2019.
And because a substantial portion of the work currently bidding represents multiyear programs. We expect to see continued strength in the backlog for the near term, which should translate into continued positive business conditions beyond 2019.
If you ask a question press star followed by the number one.
Paul and recorded named clearly when prompted you name is required to introduce your question.
Give me press star followed by the number two.
Your first question.
Our first question comes from the line of Brent Thielman.
Davidson.
Thanks, Good morning, congratulations on a great quarter.
Good morning brand. Thank you good morning, Brett.
I guess first question obviously.
Or I guess about very the growth driven by by volume you mentioned.
And.
The decline and price per ton due to mix.
Can you talk about the change in mix, you're seen where that might be penetrated or whether that's changing and then.
With that have any and adverse impact on these margins. Despite how high they were in the quarter.
I think when you when you look at.
The the price that we get that we report on the earnings call. It's a matter.
Timing and the mix in specific months based on specifically the tons that come off of the spiral mills. So you have a month that has really high tons without a lot of downstream processing you can see a price that looks somewhat lower Conversely, if you have a month that has.
Relatively few tons processed on the on the spiral mill and a lot of downstream processing, you're going to see a price it significantly higher we just happened to be in the phase now we're going through these these projects like bode our work in Houston and a lot of other these projects, where we're producing a lot of tons offer.
The spiral mill Brent when you when you look at when you look at kind of pricing levels and what the effect is on pricing levels. We look at what we booked a year over year and looking at 2018 versus 2019, the pricing levels are still moving up I think the other thing that we're starting to see.
He is the spread between the pipe price and the hot roll coil price is continuing to increase as that coil price moderates back toward normal levels. You know as everybody knows when to 32 was announced it really had a huge driving up effect on the coil.
Price were hot roll coil was in the mid $900 range, you know now you're getting back down to relatively normal levels words in the 500 dollar a ton range. So that spread continues to to increase between that hot roll coil price and the pipe selling price, which obviously has an additional positive impact on them.
Market or on the margins. So it's a you know the prices that you're looking at when we report as a matter of the timing and mix that we're running in the facilities, but when you look at overall pricing, we still see pricing moving up and we see the spread increasing between hot roll coil and pipe price.
Okay, and then Scott did you burned through any legacy backlog associated with Amazon or or the work that bid.
Prior to when you did the deal or is that behind you now we are we in there's still a little bit of that.
Being done.
Now that we're getting through there's not a whole lot of that left I think what we would say as we're starting to really get into the media. The backlog now that we've seen this resulted from the bidding over the last year that we've been talking about in these calls, which which ultimately has just very solid margins in the backlog.
Okay, and and it sounds like your burn through a little more this backlog into year end can you talk about how the schedule.
Sort of look for bid scheduled to occur early 2020.
I don't I.
Provide an outlook but.
I guess, how kind of you're thinking about 2020 and now the market shaping up for next year. You know we look at first looking at the fourth quarter, where you expect a little bit down because again you move into a period a year that's affected by the holiday schedules and can be affected by.
By weather related but what we're seeing right now it doesn't have it down being very much as we look out into 2019, we're seeing a year that looks.
Oh, the first quarters, usually a little bit slower and the other than that grows in the second and third quarter and what we're seeing this year as more of a growth in the late third quarter early fourth quarter of 2020, So we're expecting a pretty strong year in 2020 and expect those.
Backlogs to remain at historically relatively high levels.
I think the interesting thing about the backlog is that when you look at it and look at the year end backlogs for the past 13 years save for the last quarter of 2018, which was a relatively large backlog, which were comparing the last quarter of 19 too.
We only had like one quarter I believe that entered that ended over $200 million. Okay. So so when you look at where we are now for the last five quarters. We've had 200 plus million dollars in backlog and obviously, we're expecting the fourth quarter to be pretty high too, which bodes well for a go.
Going into 2020, so if you if you look at 2020 projecting out I think you're starting to see more of the same that we've recently seen in 2019.
Okay I'll pass it on thank you. Thank you.
Brent.
Next question comes from David right.
The investment.
Your line is open.
Alright, Okay. Good morning.
David Blaine Davis.
So you May 10 million Bucks on 75 million in revenue.
Yes, that's a great quarter. Thank you.
Congratulations.
Couple of questions in your remarks, Scott here for the three goals.
No one was sort of.
Trying to continue to drive margins higher I think in the past few Cerner said, well you know 18, 20% it's kind of.
Historical peak or we'd like to get back to it and you did this quarter.
Or do you think you can get up into the low twentys.
Well I think one of the things that we've continued to work on David is cost reductions to our lean manufacturing programs and taking the caught the hours. It does it takes to do a specific job down, which I think what should lend itself to improvement in those margins than we've seen historically, we get really careful.
About saying you know how high the margins going to go but I think that that based on cost reductions. The team is working on here that certainly you should start seeing that or you should continue to see that show up in the margin levels as we move forward as long as we have a relatively stable market condition, which appears that which.
It appears that we have for for a you know prolong period of time here going forward.
Okay.
And on the Cape fear contract.
Are you going to produce that in West Virginia.
We would we would likely produce that in west Virginia, Yes.
Can you that's kind of a new geography for year, yes.
Oh, well, we've had jobs in the east down in North Carolina is a little bit of a new geography for us I think that the the owner in the the contractors recognize the.
Importance of having a sturdy.
Product like steel in that kind of project show I think that maybe a little bit of new ground for us and and hopefully that kind of think continues as we go into the future. So I think.
The team has done a really good job promoting.
The steel pressure pipe advantages in all regions of the country and I think we're making a little headway and in some of the some different regions now than maybe what we were making previously.
Okay, great. Thanks, very much and you. Thank you David.
The next question comes from Brent Thielman, Mississippi Davidson.
Hey, Thanks for taking the follow up.
You know again phenomenal margins you guys talked for a while this is kind of the threshold do you want to get to Scott that sort of 20 plus percent or where you think the business should be operating that.
Notwithstanding some seasonality you're going to see in the business here and there quarter to quarter.
You know exists the new base, we can kind of think about going forward.
Well you know we've all we've talked about these for a period of time as you've mentioned, Brent and and we think those are the kind of margins in a stable market condition with with stable demand levels that are I guess, what we would call. Good demand levels. Those are the kind of margin levels that we think we should see.
No.
Again that Doesnt stop variations from quarter to quarter, you can see one off things headquarters like the fourth quarter could be impacted by for example, a lotta insurance recovery.
Which could show things being significantly higher but I think when you look at natural margins that are produced from the business. Those are the kind of numbers that we like to think that we're going to keep going forward and we're going to expect going forward.
Okay.
And just real quick on.
Thoughts on cash flow into year end.
Well.
Basically we see it continuing we.
And then able to maintain a fairly even.
There's no volume over the year, so working capital has grown a little type, but at a even pace and so clearly we've been able to stay at what we did have borrowings that the I think typically we have here and we pay that down and so we've been able to maintain a fairly debt free.
For the year. So we see that continuing we may anything what timing could cause us to to be in a position anyone damion borrowing but what the activity. We're seeing right now we should maintain our balance sheet pretty much where we are today.
Okay, great. Congrats again, thanks, and thanks Brett.
Thank you Brad once again participants on the phone to ask a question any press star Collin by the number one.
That's a record your name.
Our next question comes from the line of Mike Murali.
Walthausen <unk> company your line is open.
Hi, Good morning, guys, congratulations on a strong quarter.
Good morning, Mike Thank you anyway.
Touching on the third point of your priorities level for the strategic growth opportunities can you just give us a little bit of color on.
As you see the landscape today, what's the margin profile of the pendulum of that you're looking at is relative to the corporate average now and then what you're seeing from a multiple multiple perfect about there.
Yeah, I, what I would say is the margin profile that we look you are the things that we're looking at and as we've mentioned Mike when we've talked to you before we've we've been on this M&A track for many many years and continue to look at various things that fit when when we look at the margin profile, we look at.
Things would have no EBITDA margins that are similar or better than what we have.
In this period of time ER and the other thing that we look at his situation with cash flow ultimately we've done a lot new Brent asked a question just just recently about the cash flow we've done a lot to work on cash flow with with reducing the debt.
On a day sales outstanding with with working on getting progress payments on on some jobs and things like that to really improve the cash flow of the existing business. So we're looking at something that has margin levels that are at least as good if not better with a better cash flow profile and likely so.
Thing that is a little bit more opex related or that you. She quicker turns and and have a lot more I guess.
At bats on.
As you go through the market in specific year and something that is that we can take and weekend.
Because of our skill sets molded into into the company and be successful doing it. So those are really the things that we look at.
And as part of the multiples that you're seeing out there Scott Oh right now it depends on the size of what you look at with the multiples are still relatively heavy we see anywhere from probably seven and a half times up to in some cases nine times. When you. When you look at some of the bigger technology companies that.
Quite frankly, we're out of our region that this current time you see multiples that are significantly higher you can see 12, 13, 15 times, but stuff that we're looking looks like more like seven and a half to probably eight and a half times.
That's very helpful. Scott. Thank you for the color and keep up with work thanks, Mike that but.
Thank you Mike at this time speakers, we no longer have any questions. Thank you once again for any questions. You May press star followed by the number one you will be prompted some record your name.
[noise].
At this time is still going up have any questions. Thank you.
Okay, well, we thank everybody for a for listening in on the call. Obviously, we're starting to get back to the business levels in the profitability levels that we've been working for for a long time. We we think we continue to have some work to do on those things.
Continuing to improve those in and to grow the business. So we look forward to our next call which will be in March of next year. So thank you very much everyone.
Thank you features.
That concludes study.
This conference call. Thank you all for participating.
You may now disconnect.