Q4 2019 Earnings Call
[music].
Welcome and thank you for standing by at this time, all participants are in unless it on the bolt onto the question answer session of today's conference at that point, if you would like to ask a question. Please press star followed by the number one just call is being recorded if you have any objections you may disconnect. At this point I would now I'll turn the meeting over.
To your hosts Scott month, Ross you May now begin.
You Patrick Good morning, and welcome to Northwest Pipe Conference call. My name is Scott Montross named President and CEO of the company I'm joined by robbing again, our Chief Financial Officer, and Aaron Wilkins, Our Vice President Finance in corporate controller as we begin I'd like to remind everyone that statements. We make in this call about our expectations for the future.
Sure or forward looking statements and actual results could differ materially. Please refer to our most recent FCC filing on form 10-K for discussion of risk factors that could cause actual results to differ materially from expectations I will now turn to Robin who will discuss our fourth quarter and full year results.
Thank you Scott.
Our adjusted fourth quarter, net income was 12.1 million or $1.23 cents per diluted share.
So in adjusted net income of 2.6 million or 27 cents per diluted share in the fourth quarter of 2018.
Sales were 72.2 million in the fourth quarter 2019, compared to 57.5 million in the fourth quarter of 2018.
Gross profit as a percentage of sales was 23.4%.
Fourth quarter of 2019.
Compared to 11.8% in the fourth 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 a change in product mix.
Gross profit and gross profit as a percentage of sales.
Proved with the increases in production volumes.
In addition, we received 1.3 million in insurance proceeds net of the expenses incurred in the fourth quarter related to the fire at our stacking up city.
If we exclude the benefit of these proceeds our gross profit as a percent of sales would've been 21.6%, which is the best quarter since 2013.
We have about 1.6 million net costs remaining for reimbursement from the second on fire.
We are working with the insurance company on receiving the remaining recovery.
As we mentioned in our third quarter call backing out was fully operational in October.
Selling general and administrative costs increased 4.6 million in the fourth quarter of 2019.
From 4.1 million in the fourth quarter of 2018.
This increase was primarily due to increased incentive compensation expense with the increase in profitability.
Moving on to the full year results, our net income was 27.9 million or $2.85 per diluted share.
Compared to 20.3 million.
For $2.09 per diluted share in 2018.
We did have several onetime adjustments in 2019 in 2018 that impacted results, including the bargain purchase gain.
Gains on the sale of Houston in Monterrey.
Acquisition related costs.
Restructuring expenses.
And the legal settlements.
When we just the results for these onetime items net of tax.
Our adjusted net income was 26.7 million.
For $2.73 per diluted share in 2019.
Parents in adjusted net loss of 1.7 million or 18 cents per diluted share in 2018.
Sales increased to 279.3 million in 2019 from 172.1 million in 2018.
Gross profit as a percent of sales was 16.9% in 2019.
Compared to 7% in 2018.
Yeah, I'm or an acquisition added about 55 million in sales.
Rainy increase was due to an increase in tons produced.
The increase in demand.
Partially offset by decrease in selling prices per tonne, which was due to product mix.
Gross profit as a percentage of sales improved with the increases in volume.
Selling general and administrative costs increased to 18.5 million in 2019.
From 16.7 million in 2018.
This decrease is due to higher incentive compensation costs in 2019 with a return to profitability.
Actually offset by a decrease in the acquisition related costs.
We had about 2.6 million and acquisition related costs in 2018 with the acquisition of Ameron.
At about 600000 in 2019 related to the acquisition of Geneva pipe in pre cast in early 2020.
We had an income tax rate of 14.5% in 2019 compared to an income tax benefit rate of 19.1% in 2018.
Our 2019 rate was impacted by the changes in the valuation allowance.
In 2019, the company provided 42.9 million in cash from continuing operations.
Depreciation and amortization for 12.7 million in 2019.
And 9.3 million in 2018.
Capital expenditures were 8.6 million in 2019.
Which were for ongoing capital maintenance.
And the replacement building and equipment in Sag enough.
We have about 14 to 15 million in total capital expenditures for 2020.
Which is for ongoing maintenance capital spending.
Before I turn it over to Scott I would like to say, thank you and for farewell to everyone I have met in the Investor community.
As we announced in October. This is my final conference call before I leave as planned at the end of the month.
I will be moving onto new ventures, and I'm very confident that I, leaving the company in good hands.
There's been an honor to work at northwest pipe.
And I will Miss the conversations with many of you over the twists and turns in the water business.
Thank you very much for your kind this over the years.
Now I'll turn it over to Scott for an update on our business.
As we discussed during our last call on February Threerd, when we announced the acquisition of Geneva placement precast, we have two parts to our growth strategy first to maximize our core steel price steel pressure pipe water transmission business by continuing to focus on cost reductions in lean manufacturing.
And by pursuing limited, but known growth opportunities ultimately, leaving us to our acquisition of the Ameron water transmission group in July of 2018, which was immediately accretive to the Companys financial results. We now have approximately 50% of the steel pressure pipe market.
Which is generally a 450 to 600 million dollar market with fairly limited expansion in acquisition opportunities, which is why there was the second quarter two our growth strategy, which is to grown in adjacent water segment, having superior growth opportunities strong margin characteristics and.
Better cash flow profile.
We chose to precast concrete market, which led to our recent acquisition of Geneva pipe in precast.
The acquisition of Geneva pipe in precast Diversifies, our product offering and opens avenues for growth by significantly expanding our available market.
Adding innovative products that are expected to provide organic growth opportunities and creating opportunities for expansion in acquisitions.
As of December 30, Onest 2019, our backlog for the northwest pipe legacy business was a year end record of 258 million.
Compared to 270 million at the ended the third quarter and 252 million at the end of the fourth quarter of 2018.
A strong demand levels elevated backlog and stable competitive landscape that we experienced throughout 2019 led to a fourth quarter that had the highest gross margin since 2013, and a full year that had revenue and gross profit that was closer to historical highs for water transmission steel price.
Sure pipe business.
Looking at the first quarter for the legacy northwest pipe business. The first quarter is generally the time of the year when weather events or customer delays affect our business. We have seen some jobs that have pushed out into the second quarter. As a result, we expect our backlog to drift a bit lower but remain elevated by historical standards.
Revenues are expected to be similar to the first quarter of 2019 with gross margins that are four to five percentage points higher.
Weather issues and customer job delays have affected the first quarter backlog revenue and gross profit.
For the newly acquired Geneva pipe in precast business in the first quarter.
Which will include the months of February in March we expect to generate several million in revenues.
And gross margins that are expected to be similar to the recent highs that we've seen in the legacy business.
The following is a look at current an upcoming water transmission projects.
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 programs like the Houston project and boat arc Lake 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 from pre manufacturing to ship complete.
We are forecasting that an additional segment or segments of the Houston surface water program will bid throughout 2020, representing an additional 50000 tons.
The voter Lake project.
By the North, Texas Municipal water district has begun construction and represents approximately 60000 tons of pipe.
Northwest pipe was a successful bidder on a portion of the raw water line in on all of the finished water line for the vote Arc Lake project. The segments. We were awarded represents approximately 50000 tons of pipe, which are currently in various stages of production and delivery.
The balance of the IPO project.
Representing 32000 tons is expected to begin bidding later this year in continue through 2020.
We were one of the major suppliers on the IPO project between the years of 2013 in 2017.
In the Western market, California is prop one $7.1 billion bond for water infrastructure has created the much needed funding for projects within the state.
According to California Natural resources agency, 86% of those funds have been appropriated for various projects. We expect requirements for these projects to stretch out over the next several years.
Water reuse programs have generated new opportunities in California market in which we expect to see bidding activity continue for the next year, representing 10500 tons.
The PCCP rehabilitation programs will result in about 10000 tons annually over the next two to three years.
The sites reservoir is a water storage project that has received funding from prop one that we will involve over 30 miles of 144 inch pipeline. The project is projected to begin in 2024 to 2025.
In North Dakota project has slowed on 140 mile 87000 ton Red River Valley water supply project as it is competing for funding was an urgent flood diversion project, which appears to be taking priority. We're hopeful that bidding on this project will start with the two mile demonstrations.
Segment this year.
Navajo Gallup is a multi phased major project underway in new Mexico.
Northwest pipe was selected to supply the last large diameter phase, which represents over 7300 tons of pipe production has started on this segment.
[laughter] excuse me.
Throughout 2019, we saw strong bidding volumes stable bidding market in a backlog that remained close to historical highs for the entire year.
A year, which ended with revenue and gross profit closer to historical highs for water transmission business. The bidding volumes look to continue to be strong in 2020 with a continuation of a number of large multiyear programs. We expect continued strengthen our backlog for the near term and.
Continued positive business conditions through 2020.
As we move forward, we will be focused on one the successful integration of Geneva pipe in pre cast.
To improving the performance of the business by focusing on margin over volume in three driving cost reductions in efficiencies at all levels of the company.
At this time, we'd be happy to answer any of your questions.
Participants over the phone we will now begin the question answer session. If you would like to ask a question. Please press star followed by the number one.
And also record your name clearly when prompted your name is required to introduce your question to cancel your request. Please press star followed by the number two.
For the participants to Q.
We have our first question coming from the line of Brent Thielman.
Brent Your line is now open you may ask your question.
Great. Thanks, good morning.
Good morning whenever it.
Yeah, Congrats on a year and Robin all the best you. It's been great work in my view companies come.
Our long way from few joint and Alot branded here with the latest results.
Thank you.
I guess my first question Scott I don't recall, a time at some of the company generate this type of margin.
In the fourth quarter, which I still kinda tend to think of it seasonally slower and I. Appreciate one Q is always seasonally slower it sounds like some weather here, but still a little surprised to see the margins come in as you're forecasting for maybe any more granularity around that.
I think Brent when you look at the the way that the bidding lined up in 2019, so when you're when you're when you're looking at what's going on in the fourth quarter really you're you're seeing stuff that actually bid either early the previous year sometime in the first half severe and I think thats just the the accumulate.
One of backlog with with a better market, where where the pipe pricing was continuing to moving the appropriate direction as well as the spread between steel and pipe prices and you know I think some of it has to be attributed to the cost work that we've done at all of our plants would.
Lean manufacturing and taking cost out of out of the entire production process. So I think that was we had a with a big fourth quarter and I think it's about a lot to do the backlog in the cost reductions that we've been working through over the last few years.
Yes.
I guess you know can you talk a little bit about on new Tom their new projects bad.
Three step away from mix, which I know, it's going to have an impact, but how the pricing environment looks today relative to where we stood a year ago and.
Again, I know it depends kind of on the flow of work.
It is but are we still in an environment conducive to continue to do 20% plus gross margins.
Yeah, I think you're in a pretty good environment, no obviously that can always change.
Relatively quickly, but right now I would say that the competitive landscape is still is.
Pretty stable.
I would also say this the spread between pipe pricing and steel pricing.
Remains a pretty stable, which is also conducive to the margins so certainly.
We expect the as we get through the first quarter and quite frankly start getting back to some of the the larger jobs, we've seen some delays in.
With the overhead absorption, we expect those margins to start declining back up in the second quarter the year.
Yes.
And just a clarification on the first quarter outlook is the thought process around G Geneva essentially it.
I will offer some revenue, but will be offset by transaction costs.
Well we are.
We were getting two months outage in either right because it was just acquired at a very very last day of January so there's there's several millions in revenue.
The we are trying to we're looking in working through all the transaction costs to see what the gross margins are going to look like but when you look at those gross margins for Geneva. They are they're generally what we see toward the high side, what we see on the water transmission business. So are there were.
Little bit higher so once you it stabilizes it should be positive in pulling the overall margin up.
At least to some extent because of Geneva business is still 43 $44 million or so on an annualized basis, but the the gross margins are high enough, where it's going to pull that up but we do expect to see be a little bit messy in the first quarter.
Because of the transaction in the amount of time the transaction talking some cost associated with that.
Which is why you'll see a.
A little bit of an elevated SGN a number as we get into the first quarter, because we've got some transaction related costs legal costs and quite frankly the process.
With the acquisition took quite a quite a long period of time, so ultimately the reserve theres, a little bit more costs than we expected on that but I think it's going to have a positive impact.
To the overall margins going forward, even when you're looking at us being on the high side of the water transmission margins.
Okay. That's all I have thank you appreciate it.
Okay.
At this moment, we have no questions over the phone, but once again, if you would like to asking question. Please press star followed by the number one and record your name clearly when prompted to cancel your request. Please press star followed by the number two one moment please for questions to come in.
At this moment, we had three questions over the phone. The next question is coming from the line of Gus Richard Your line is now open you may ask your question.
Yeah. Thanks for taking my question then congratulations on a great year.
As you Hogan Geneva can you talk a little bit about your expectations or.
You know seasonality and then you know how much do you think you can grow that that business over the course in the next two years.
Yeah, I think when when you look at the the precast.
Business in the RCP business, that's associated with that generally you start hitting the the seasonal high points in the main part of the construction season in the second and third quarters and things start to cool off a little bit in the in the fourth quarter and then slowly pick up in the first quarter. So that's that's kind of the way.
Seasonably, it seasonally develops but our order book.
Geneva rate now seems a little bit larger than normally is at this time of the year I think when you're looking at growth on that when we talked about gas on the on the call where we talked about the acquisition. We're looking at a growth rate of probably about 4%.
We think that year over year growth rate, we think that actually could be a little bit better based on these innovative products that were working on for the corrosive sewer applications. So we see that as a 4% rate being added to buy these new and innovative products on a year over year over year basis is long.
Is the market stays relative to where it is right now.
Got it and then just thinking about the growth of that business.
You have a capability in cranes in California.
Are you going to.
Augment that and how does that pulled into the.
I'll do strategy were can either.
Yes, I think weve. The one thing that we've talked about when we've looked at this whole pre cast a concept in that being a growth pattern for the company is that.
We look at not only acquisitions, but expansions and like you said because we have the ability to expand what we're doing at our Tracy, California plant. That's one of the first places we're going to be looking because we already do a webcast RCP product very large diameter webcast.
RCP products, they're up to 12 13 feet in diameter, which is which is a little bit different than what we do at Geneva were Geneva, only goes up to about 96 inches in diameter and they can do webcast, but a lot of its a dry cask product too. So we're looking at the idea of of creating something.
That at the Tracy plant, where where these innovative products might be in a little bit more play we already have a lot of forums to be able to make RCP product there we'd have to do a little bit of different things to make other pre cast products like volts, but that certainly is one of the directions.
We've been looking and seeing what we can we can do with the Tracy plant because we think that there's some opportunities there.
Got it and then in terms of the guidance I just want to make sure I understand clearly you expect the legacy business to be flat year on year and then.
Several million from the Geneva acquisition on top of that is that correct correct correct got it alright. Thanks, so much.
Thanks, guys. Thank you that.
Our next question is coming from the line of Mike Miraculous. Your line is now open you may ask your question.
Good morning folks. Thank you for taking my question.
Robin to Echo everything that Brent said.
Great working best of luck on your future endeavors.
Thank you I appreciate it like.
Hey, guys just a housekeeping question for me now that we're through the Ameron transaction, you know and in light of some of the expansion discussion that you just had on the Tracy plant can you just give us an update on how you're thinking about capital allocation post acquisition.
Oh, well, we go through the capital allocation process every year in the October timeframe, so where it's kind of a little bit disjointed. This year, because we've already got capital allocation for the for the legacy business, but as we as we did the purchase of Geneva and the.
January timeframe, we were working through capital allocation. There. So you know we're you know, we're probably going to be somewhere in the area of another oh, probably a million and a half Geneva over the course of 2019, mainly mainly geared toward.
Building out for these innovative products that I think gives us a little bit deeper into the dirty water side of the business, which we think is going to create a lot of organic growth.
At the Geneva facilities, and then then relatively normal capital.
Pretty much in line with depreciation that we've had that the legacy northwest pipe Lance.
Great. That's all I have thank you Scott.
Thanks, Mike.
At this moment speakers, we have no question over the phone once again ask your question. Please press star followed by the number one.
One moment please for questions.
At this moment speakers, we have no questions over the phone.
Yeah.
Okay, well if there are no other questions. We appreciate everybody's attendance on the call I think the you know we're very very excited about the the Judy but.
Free cash pipe and pre cast acquisition and what it's going to bring to the company and growth opportunities. We're coming out of a of this year into 2020 with relatively close to a record year with our steel pressure pipe business. We have a very very strong backlog in the big thing about the back.
Along this when we talk about a backlog over 200 million when you dated back to 2011 before before the last quarter of 2018, durum wheat, two or three quarters that we had $200 million and backlog well right. Now we've had 200 plus million for the last six quarters.
We see that going forward all the way through 2000 in 20, so that bodes well I think the other big thing is the precast market being the sizes than it is a $13 billion market three and a half the 4 billion for water related.
Presents a lot of opportunities for growth in Geneva has a very strong position in that market. We think those innovative products add even more to that so and it is I think some of the questions were around we think we have very exciting expansion and.
Acquisition opportunities going forward, obviously right now our biggest concern is making sure that we successfully integrate the Geneva pipe and free cash business, but I think the opportunities that this market's going to present, our are really exciting and its setting on selling us on a very.
Solid growth pack path as we move forward for northwest pipe. So we appreciate everybody appreciate everybody attending the call and will be excited to talk to you again, you're in the May timeframe I think it is right made the right. Okay. So thank you very much. Thank you bye bye.
That concludes today's conference. Thank you for participating.
Disconnect.