Q2 2021 Northwest Pipe Co Earnings Call
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Thank you for standing by this is the conference operator, welcome to the northwest Pipe Company second quarter, 2021 and earnings conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation there'll be an opportunity to ask a question.
To join the question queue you May Press Star then 1 on your telephone keypad.
Should you need assistance during the conference call you May signal, an operator by pressing star and zero I would now like to turn the conference over to Scott Montross, President and C E O.
Please go ahead.
Good morning, and welcome to northwest Pipe Company's second quarter 2021 earnings Conference call. My name is Scott Mantra, Austin, and President and CEO of the company and I'm joined today by Aaron Wilkins, Our Chief Financial Officer.
Now all of you should have access to our earnings press release, which was issued yesterday August 4th 2021, and approximately 4 P. M. Eastern time. This call is being webcast is available for replay.
And we began and 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 and most recent form 10-K for year ended December 31, 2020, and our other.
Other SEC filings for a discussion of risk factors that could cause actual results to differ materially from our expectations. You undertake no obligation to update any forward looking statements.
Thank you for joining our call today I'd like to begin with a review of our second quarter 2021 performance.
As of June 30th and our backlog include and confirmed orders from the northwest pipe legacy business was approximately 234 million compared to 210 million at the end of the first quarter of 2021 and $246 million at the end of the second quarter of 2020 <unk>.
The increase was driven by improvement and our project bidding that began in the second quarter, which led to an increase in backlog.
A trend that we expect to see continue and the second half of 2021.
Second quarter marks the 12th consecutive quarter, and which we've maintained and steel pressure pipe backlog over 200 million a level that remained strong by historical standards. This is despite the ongoing bidding delays we've experienced over the course of the past year due to various pandemic related issues.
That said I'd like to reiterate these are not project cancellations only delays.
And currently we see substantial amount of project volume scheduled to bid on the second half of 2021, which should continue to apply upward pressure on our backlog through the remainder of 2021.
Our second quarter net sales totaled $73.8 million, which included $15 million from Geneva. Once again, the top line contribution from Geneva, and enabled us to increase on a net sales sequentially and year over year.
Our second quarter gross margin of 12, 9% improved marginally from the first quarter of 2021.
The Geneva precast concrete operations are beginning to serve as a stabilizer to both revenue and gross margin to help offset periods of market choppiness in the steel pressure pipe business like we have had to navigate over recent quarters.
Revenue and gross margin for our steel pressure pipe business were negatively impacted by ongoing production delays and the second quarter, driven by steel market supply and delivery disruptions, which postponed the production of orders and customer driven delays on orders that were already in backlog.
In addition, the bidding delays experienced over the last 3 quarters resulted in fewer overall projects to bid on which led to some panic bidding by our peers and our space and therefore significantly more bidding pressure on projects that bid during that period, which has had a negative near term impact.
On project margins that said, we did see steel pressure pipe bidding stabilize and begin to improve during the second quarter, indicating and upcoming period of strong demand.
As we move into the second half of 2021, we expect getting for the steel pressure pipe business to continue to strengthen through the rest of the year. However, we expect revenue and corresponding margin recovery for the steel pressure pipe business to be slow and the beginning of the second half of 2021.
And as ongoing capacity and supply issues and the steel market are expected to linger and continued to delay production and we will continue to see some customer driven delays of orders that were already in backlog.
Also the bidding delays experienced over the recent quarters, which resulted in near term margin pressure, we will still have some effects at the beginning of the second half as the affected projects work through production.
However, with the large amount of work projected to bid and the second half of 2021 backlog is projected to trend upward for the rest of the year and the increase in backlog is expected to support improving steel pressure pipe revenue and margins as we move into the latter part of the year and enter 2022 and <unk>.
<unk> and our pre cast concrete order book remains at historically elevated levels and is continuing to gain strength and we expect to see the free cash concrete business to remain at strong levels for the remainder of 2021.
Next I would like to turn to a discussion on our 2 pronged growth strategy.
As highlighted over the past several quarters. Our primary focus has been on driving growth and the precast concrete market, which led us to our January 2020 acquisition of Geneva pipe and free cash.
We are currently and the process of commercializing new innovative lined RCP and manholes for use and corrosive sewer applications, which we believe have significant organic growth potential given.
Given the success of the Geneva transaction, and the broader strength and the water infrastructure market. We have been intently focused on the evaluation of potential acquisition candidates with a keen focus on organic growth potential strong margin characteristics and cash flow.
In tandem with our efforts we have been building cash on our balance sheet and recently amended our credit facility to further enhance our liquidity position and order to properly execute our strategy.
The second prong of our strategy is to continue to maximize our core steel pressure pipe water transmission business and order to drive shareholder value. We have continued to make progress through cost reduction measures and lean manufacturing to drive further efficiencies and.
As part of that effort, we have been leveraging outside engineering resources to explore opportunities for creating additional efficiencies to further drive cost reductions and the long run.
I will now turn to look at current and upcoming water transmission projects.
And the Texas market the ongoing multiyear multi agency Houston surface water program is expected to bid multiple segments and 2021, representing 21000 tons of pipe for the West and North Harris County regional water authorities, we anticipate both authorities, having additional projects representing 21.
Tons beyond next year.
The next new reservoir to be built and Texas is late growth Hall for the upper Trinity Regional water District. This is another major program currently and design that includes a new dam and pipeline to move water into the Dallas Fort worth Metroplex. The pipeline represents 17000 tons of pipe.
<unk> on the dam began this year and the pipeline is expected to begin late in 2022 early in 2023.
The Alliance regional water Authority program in Central Texas is another multi agency regional water program. The program includes a large pipeline pump stations and treatment facilities and represents 15000 tons of pipe construction and starting in 2021 and appears to be holding fast.
To the forecasted timeline.
And the western markets California's prop, 1 and 7.5 billion bond for water infrastructure has created the much needed funding for the projects within the state. According to the California, and natural resources agency and 97% of those funds have been appropriated for various projects as of the 2002.
<unk> thousand 21 fiscal year, we expect requirements for these projects to stretch out over the next several years.
Water reuse programs have generated new opportunities and the California market on which.
We expect to see bidding activity continue for the next year, we have identified 4 sizable projects bidding and the 2000 from any 1 timeframe representing 8300 times. Most recently northwest pipe was selected to supply pipe for the pure water San Diego project are sustainable and.
Mentally conscious water recycling project. This project will be a phased multi year program that will provide more than 40% of San Diego's water supply by the end of 2035, thereby reducing the city's dependence on imported water and will require over 3200 tons of steel.
For us to manufacture into engineered steel pipeline.
In addition, and WD is heading the regional reuse pilot project in conjunction with La Sanitation District. This reuse program would treat and recycle water from 1 of the largest reclamation facilities and southern California, and involve 60 plus miles of large diameter pipe.
The current demonstration facility has been operating for almost 2 years and WD is currently soliciting preliminary design and permitting services and construction of the full scale treatments and conveyance facilities could begin as early as 2025.
The <unk> rehabilitation programs will result in about 5000 tons annually over the next 10 to 15 years, we have seen a slowdown and this work this year, which appears to be COVID-19 related. So the timing of these projects has shifted to later this year.
The site's reservoir is a water storage project and has received funding from prop 1 and.
It will involve over 30 miles of 144 inch pipeline. The project is forecasted to begin in 2024.25.
Southern Nevada water authority has begun moving forward in earnest with and expansion of the southern part of their water delivery system. This program, which was recently started preliminary design activity will include approximately 25 miles of 78 and steel pipe with construction tentatively scheduled for 2.
24, and North Dakota progress has been slowed on the 140 mile 87000 ton Red River Valley water supply project debt.
Mile and a half demonstration project bid in January of this year and was awarded and northwest pipe. The bulk of the project is dependent upon a 2023 legislative session to commit to full funding. We are closely tracking the outcome of further budget approval now and discussion at the state Legislative Assembly.
And Colorado, we are tracking and expected 2021 record of decision by the U S. Army Corps of engineers for the northern integrated supply projects, if favorable construction of up to 150 miles of pipeline is expected to start in 2023. The project is located 60 miles north of Denver.
And the Fort Collins area.
And Utah design and permitting continues on the 150 mile and 69 inch Lake Powell pipeline. This pipeline will provide an alternative source of water for southern Utah.
In summary, we have continued to execute through a challenging period of pandemic related disruptions over the last several quarters and the steel pressure pipe business with significant delays and project bidding major steel market supply and delivery issues and customer driven delays on existing orders.
However, we saw things begin to stabilize and improve as we progress through the second quarter and we are currently seeing a solid buildup of steel pressure pipe bid requirements for the second half of 2021, which should result, and upward pressure on steel pressure pipe backlog and support improved revenue and margins as we move into the latter.
Part of the year and into 2022. In addition, our precast order book continues to gain strength and is currently at an all time high level, we expect the free cash business to remain strong for the near term.
We are well positioned for future growth, which we believe will be further supported by the growing infrastructure needs and the United States.
Looking ahead, we will remain focused on our top priority of taking every precaution of keeping employees safe through the ongoing pandemic.
Also identifying strategic opportunities to grow the company and having a persistent focus on margin over volume and continuing to implement cost reductions and efficiencies at all levels of the company.
I'd like to extend my gratitude to all of our employees at northwest pipe company for their commitment to executing our strategy throughout the first half of the year and by doing so safely.
I will now turn the call over to Aaron who will walk through our second quarter financial results in greater detail.
Thank you Scott and good morning, everyone. Thank you for joining us today on our second quarter 2021 earnings Conference call.
I'll begin with our second quarter financial results.
Net income was $2.1 million or <unk> 21 per diluted share compared to 6 million or <unk> 61 per diluted share and the second quarter of 2020.
There were no adjustments to GAAP net income to consider for the second quarter of 2021.
Adjusted net income for the second quarter of 2020 was $4 million or <unk> 41 per diluted share adjustments of $2 million net of taxes, primarily consisted of favorable insurance recoveries associated with the Saginaw fire.
Adjusted net income excludes unique and unusual items and we provided for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures and our earnings release for a comprehensive schedule detailing the adjustments.
Our second quarter net sales increased 5.5% to $73.8 million compared to $70 million and the second quarter of 2020.
<unk> revenues increased to $50 million and the second quarter of 2021 compared to $12.4 million and the second quarter of 2020, primarily due to increased shipment volumes on very strong demand for pre cast concrete products.
Steel pressure pipe revenues increased 2% from the year ago quarter, due to a 7% increase and selling price per ton and resulting from rising steel input costs, which was partially offset by a 5% decrease and tons produced resulting from changes and product project timing.
Due to the unique nature of the water transmission systems, we manufacturer production tonnes and the result, and sales price per ton and do not always provide comparable metrics between periods as they are highly dependent on project timing and production mix.
Gross profit decreased 26, 4% to $9.5 million or 12, 9% of sales compared to $13 million or 18, 5% of sales and the second quarter of 2020.
The decrease was primarily due to changes and product mix and pressure on project pricing and realize on steel pressure pipe, partially offset by increased gross profit at Geneva.
Gross profit and the second quarter of 2020 was elevated by $1.8 million associated with the business interruption portion of our insurance claim for the second on fire.
Excluding this item our gross profit margin for the second quarter of 2020 would've been 16%.
Selling general and administrative expenses increased 13, 5% to $6.3 million and the second quarter of 2021 compared to $5.6 million and the second quarter of 2020.
The increase was primarily due to higher compensation related expense and professional fees, along with higher travel expenses compared to 2020, given the global pandemic.
In addition, I and updating our guidance for selling general and administrative expenses to now approximate $24 million for the full year of 2021.
Our income tax rate and the second quarter was 26, 1% compared to 26, 7% and the second quarter of 2020.
Both of which approximated statutory rates.
Im expecting full year 2021 income tax to be approximately 26, 5%.
Now I will transition to our cash flow and financial condition.
We generated cash flow from operations of $5.7 million during the second quarter compared to $13.8 million during the prior year period.
This decline was primarily due to the decrease in net income adjusted for noncash items.
The company has increased its available liquidity through the refinance of our credit facility with our financing partner and Wells Fargo.
The new $100 million cash flow loan provides flexibility to upsize to accommodate the companys strategic growth objectives, including and optional $25 million accordion feature.
All outstanding debt under the former credit agreement, including long term debt has been repaid.
This was the company's strongest financial condition and recent years with total available liquidity of approximately $121 million as of June 32021 comprised of $23.2 million and cash and cash equivalents and approximately $98 million available from our new line of credit.
Depreciation and amortization was $3.4 million and the second quarter of 2021, while our capital expenditures totaled $2.9 million.
We expect the pace of Capex spending to pick up which will result in spending for the full year to be between 12 and $14 million consisting entirely of maintenance capex.
In summary, we were pleased with our solid second quarter 2021 financial results, despite ongoing macroeconomic pressures, including labor transportation and raw material shortages, which have resulted in temporary disruptions to operations.
We look forward to benefiting from the improved demand as our steel pressure pipe market continues to stabilize.
I'd like to extend my thanks to all of our dedicated employees and our loyal shareholders for their ongoing support of northwest pipe company.
I will now turn it over to the operator to begin the question and answer session.
Thank you.
We'll now begin the question and answer session.
And the question queue you May Press Star then 1 on your telephone keypad.
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The first question comes from Brent Thielman with D. A davidson.
Please go ahead.
Hey, Thanks, good morning.
Good morning, Brent.
Hey.
Scott It sounds like the outlook suggests sort of us.
And our step up and revenue and margins and <unk> and <unk>.
With that so and I guess I'd take away from it but do you think you can still achieve that if the supply chain for.
Steel constraints today down a beta stick around longer just trying to get a feel for how much that's kind of NPD and the business right now.
Yes, I would say, it's been a little bit.
<unk> been a little bit dicey up to this point.
We've seen we've seen situations, where we have orders.
Scheduled to be produced and quarters, where we're getting late deliveries and orders fallout and things of that nature, but we're starting to see that stabilize a little bit and.
And we're starting to see that the deliveries are starting to improve capacity utilization rates and the steel industry are now up around 85%, which I think is.
<unk> is a positive sign that they're putting more steel into the market to support domestic requirements. So while we think the pricing level was going to and will probably continue to inch up now and probably not as quickly as it has in recent months, but it's probably going to continue to inch up for the rest of the year, we think that the <unk>.
<unk> position is going to be a little bit more stable as we go forward.
And there is a little bit more available plus we have some additional capacity coming online and the steel industry now we have attorney and mill in Mexico that obviously would support our SLR C facility and Mexico that started up and they are bringing.
At least a few million tons of new capacity into the market. We also have a new facility.
Starting up with STI STI down in Texas that will bring additional capacity. That's probably later in the year, then turn them and then there is a there is a new nucor capacity, which I think ex increased capacity coming online. So we think the steel sales starts to firm up but we still think the the <unk>.
Rice's there are going to be a little bit high at least for the near term, but we're feeling a little bit better about being able to get to scale and within a relatively timely matter and you know with the as.
As the backlog continues to grow even if there are a little bit of disruptions on the delivery side, you actually have more projects to pick from to be able to run and place. It still doesn't come on another project. So I think that looks a little bit better as we go into the second half of the year and we.
<unk> got a ton of work scheduled to bid and the second half of the year right now we're looking at.
Somewhere in the area of between 105, and 110000 tons of municipal work bidding and the second half of this year. It's really started later in the third quarter in the fourth quarter and you've heard me talk about before where 200000 tons is a good market well that 200000 tons as usual.
And we made up of municipal work and there is probably some plant work and there some hydro electric work and things like that what we're seeing bidding and the second half of this year that 105.110000 tonnes is primarily municipal work so well.
And we're pretty happy about the way the bidding looks and the way that the steel thing is starting to come together with that as we go through the second half of the year now and.
And the second and the second quarter timeframe as steel guys do a lot of their annual outages. So some of the supply probably get a little bit exacerbated during that timeframe, but we do think those are starting to abate with the higher capacity utilization. So we'll get more confident and as we move into the back half of the year now with that.
Okay.
Great and kind of elaborated.
Next question on Scott the 105 to 110.
And any way for us to think about how that compares to what you saw over the first half and this year on a same.
Yes.
The first quarter and what I will tell you about the first quarter was bidding and the first quarter was under 20000 tons of requirements and the first quarter. So it was a really light first quarter of the year and and the second quarter grew up to somewhere in the area of about 30 to 31000 and.
So you can see.
The first 2 quarters and year were pretty light on the bidding side. After we had a third and fourth quarter of 2020, where a bunch of stuff moved out. So some of that stuff is landing and the second half of this year and debt 105 to 110000 tons, but actually some of it has moved out later into 2022 so.
But the second half right now is looking very strong and theres always the possibility if things move around and the second half, but it appears that things are beginning to take root now so that the second half is going to be.
Pretty good bidding activity.
And.
Okay, that's great.
Net debt Geneva may looks like over 20% growth.
This quarter I don't recall, there being any big.
And then make room and and hang ups last year, maybe I'm wrong I mean, maybe maybe you could just speak to and.
Environment, Youre seeing there and what's the only and that growth continues to weigh on Bob I think.
And we cannot expect Covid demand.
Yes, the demand done on free cash concrete right now is what I would.
<unk> is pretty hot.
Our order book is for them.
And it's not the same as backlog because it's all.
On a relatively fast hitting projects and when you get an order and you're producing a project right now right now the order book is heavy enough, where we are pushing for everything we have to keep up with the order book and.
And there is still more orders out there. So we had a $15 million second quarter, and Geneva, which is a big quarter.
Third quarter looks to be lining up pretty similarly.
And.
Like I said and like we said on the script and near term for the pre cast concrete business, which is driven heavily by residential and low interest rates and things of that nature looks really looks really good as we go forward.
Okay.
Maybe just the last 1 and sticking to the pre cast I mean.
The strength of that business, right, now and making it more challenged to get a deal done there.
I would say that there are there are significant amount of potential deals out there what we see Brad is really small things in and relatively large things and as you know the multiples for those things look different across different periods of time.
So I think we're seeing things now that have have multiples that are in the 7 times range 7.5 times range in that area.
When you look at really big things that quite frankly, with some of the really big things, maybe a little bit outside of our reach at this point and so youre seeing multiples that are 910 times, but there are there are there.
Quite a few potentials out there right now and.
As we said we're pretty active in that space I don't know that it makes things.
Getting getting things done any harder it just with the current environment.
And still being somewhat and this COVID-19 situation.
And it makes things a little bit slower rate so share.
Moving forward with those things gets it gets a little bit.
A little bit more arduous and slow as you go forward, but.
I think theres plenty of things out there to get done plenty of things that interest us and as we've said before are our strategic growth plan is really centered on the free cash and free cash related markets.
And we see the possibilities out there. So I don't think really anything has changed there.
Okay, great well, thanks for taking the questions and I'll get back in queue.
Absolutely.
The next question comes from Gus Richard with Northland. Please go ahead.
Yes, thanks for taking my questions.
Did you talk on a little bit about.
And still lead times at this point and and sort of what they did last quarter and and sort of what you see today.
Yes, Gus I would say still lead times right now, we're probably bordering on about 10 to 12 weeks for hot rolled bands and.
And Thats 10 to 12 weeks of lead time, what we've seen.
I guess, probably more back and the second quarter timeframe is that 10% to 12 weeks actually turned into something that was was quite a bit longer because of delivery issues and some of those delivery issues related to annual outages and just plain domestic demands I think as we go forward right now we are planning.
More like probably probably more like 12 weeks of lead time and as we go through this year and additional capacity starts up we think that that's going to come back a little bit, but we're still in the in the position where we've got to make sure that we're getting everything lined up with our steel with our steel.
Deliveries.
Before projects happen with making sure that we've got quotes.
Coach from suppliers and they're there.
And they are signed on to being able to supply the projects and I think debt stuff is all improving as we move through this part of the year. So that is that's a little bit of a positive sign it was really and I think I've said this before when we were in the first and probably early second quarter timeframe. It got it.
A little bit dicey with being able to get steel placed and delivered because they were running at capacity utilization rates that were $75, 77% and.
And they weren't keeping up with the domestic demand and it appears that they are getting a little bit more lined up with that now so I think lead times youre going to remain a little bit extended as we get towards the later part of the year and you get additional capacity coming online which is.
Turning and facilities already coming online and I think.
SDI was going to start up.
Like late summer early fall, that's probably more towards the end of the year now I think as that additional capacity comes online those lead times will come and a little bit and youll, probably be seeing something more like 8 and 10 weeks, but.
And when the when the hot rolled band lead times get down to 4 to 6 weeks you know that there's a lot of open capacity and the market for placing orders, but right now, it's holding pretty steady and probably that 10 to 12 week timeframe.
Got it and then.
I think China recently put on.
Tariffs on exporting steel.
Is that having any impact on the domestic market and.
As a follow on.
And I'll be done with seal.
How are you able to.
And perhaps on the costs as prices stabilize and elsewhere, where you sort of can capture that.
Yes.
We do these beds and our bids are they.
They can be on these major projects can be 50 pages of bid work too from a project but.
And what we're seeing now is is it's it's a little bit easier to get a bid.
And then that steel is available at that price. When you. When you go there and that prices just pass along and the <unk>.
And the bid to the customer what we did see a little bit of and I can't remember I think we talked about this on 1 of the previous calls earlier on and we'd go out and get a bid and then come back with an order and choice and try to place the order and the steel was no longer available and we had to scramble to get steel. So that you are trying to fly and <unk>.
And a little bit of a different price than what you thought you were going to get and that was probably more and the first quarter, maybe beginning second quarter phenomenon, we're not seeing that as much now and if theres a little bit more available and.
It's a little bit more stable than it has been but still at really high prices and we're seeing steel prices right now at $9100 a ton and.
And if you look at where that is in comparison to last year and the July timeframe. It was $465 a ton.
Obviously, there's a 300% plus increase in steel prices during that time and even from the beginning of the year and then.
Steel prices, if you look at the AMM published steel.
Fuel prices are up about 95% that seems to be slowing down a little bit now and stabilizing because they are really gravitating up towards that $2000 per tonne level and.
And at some point that starts to just top out but I.
I think things are getting a little bit more stable as long as we as long as we can by like like we bid it which we've been able to do since we saw a couple of choppy periods and the first quarter, we're able to pass that along.
That does and that's really not an issue.
Okay.
Okay, and then just in terms of the China tariffs on exports is that having any impact on the domestic market or not.
I don't at this point I don't see any.
Okay and then just.
It seems like you had relatively low bidding activity and the first half and you just talk about how.
And I am sure it affected pricing, how that's going to.
How that revenue is going to flow through the <unk>.
P&L sort of and in terms of times is that all second half from first half of next year or is it longer projects, so and sort of what do you see as a percentage of revenue and during those periods.
What I would say is the things the bidding that we saw in the third and the fourth quarter of 2020, where we had all of those projects that were moving out and.
And.
And then when you get a situation where those projects are moving not like debt.
Less projects to bid and all of a sudden competitors and the marketplace and we're looking on it going Oh, My God I need that we need to start to run on my facility. So all of a sudden doers.
A bunch more price pressure on those projects and.
And we saw that and and.
And.
We're having those near term margin impacts that we saw really and the first and the second quarter and.
And that's been a labor a little bit into the third quarter, because thats third and fourth quarter of 2020, and the first quarter bidding, which was which was also very light less and 20000 tons.
And we're all of that all of that I guess, what I would call 10 of getting took place and you started to see the effect and the first and the second quarter Youre going to have a lingering effect and the third quarter, but what we're getting into a situation where that stuff that was and our backlog, we're getting through those and actually getting to.
Projects that we bid more recently that have have better margins on those.
And as the production levels increase and Youre going to get better absorption. So as we get into the latter part of the year Youre going to see that take place with higher revenues and margin expansion as long as everything bids. The way. We think it is winning the bid now so but youre still going to have some impact of all those things.
<unk> and the third quarter, which is which is why we're.
And kind of terming that or talking about it as we're going to see a slow improvement.
At the beginning of the second half of the year, because you still have some of the lingering effects of that bidding, but you still also have some of the lingering effects of steel deliveries not quite as bad.
But we also have customer orders that have been have been delayed due to various things and move out and the quarter show you end up with a little bit less production more under absorption and those are all things that are that are still kind of playing out at least to us.
A smaller extent the extent and the third quarter of the year, which we think as we get into the fourth quarter of the year start to abate as we go up and then.
And backlog and.
And as you as you as bidding and proves that equals higher backlog and higher backlog grows that equals higher revenue and margin improvement as you go forward. So that's what some of that stuff is going to come into play as we go through the third quarter and get into the fourth quarter.
Okay got it I guess, what I was trying to ask is is this all cleaned up by say the middle of next year.
Oh, Yes, I think I think as we get through the third quarter as long as all the bidding sticks to where we see it taking route now that bidding level is high enough, where as you get through the third quarter. It starts to get cleaned up through the third quarter and the fourth quarter starts to look a bit different.
Got it alright, thanks, so much.
Thanks Scott.
Okay.
Once again, if you have a question. Please press Star then 1.
Our next question comes from David Wright with Henry Investment Trust.
Please go ahead.
Good morning, you've talked a lot about kind of the.
And the supply problems and delivery problems and stuff.
But over on the other side.
And.
And a typical municipal jobs, Scott how much how much of the cost of the job is represented by the cost of the steel roughly.
Somewhere between 20 and 30% depending on.
The size of the project and the timing of the project and what steel prices are during that specific time.
So with the municipal project and it has to be financed and.
Long kind of lead time to it.
The rise on the price of steel.
And.
Does it affect any of these projects ability to proceed with ACO or well Gee. We thought this was going to be $200 a ton and now it's $1900 a ton and we can proceed to ever do you ever have that debt.
Net.
David debt certainly has slowed some things down because what happens is it all starts with engineered engineers estimate on a project and they could be doing these engineered estimates a year ago right and on.
All of a sudden and it depends on the size of the project all of a sudden they.
Take the project out to bid and.
And the the bid is significantly higher than engineer's estimate, which is called the bus.
Busted the engineer's estimate.
So generally what we've seen is on.
On probably smaller and medium sized projects. They tend to go forward. They have to go out and make sure they get the additional funding.
And it's just those go forward like debt I think there are some really large projects that we havent been involved and we've heard about and over the last.
Couple of months debt.
Are out there that may have been a couple of years ago with steel indices and.
And the end customers, saying, Hey, we're not going to do this 1 right now because it's such a large project that the changes is really is really big.
Not involved in any of those but we've heard of 1 major project like that going on so it can cause those delays.
Right now I think a lot of the delays that happened with that 1 and engineers estimate gets gets busted as they've got to go back and talk about it and make sure that they're okay with the funding and that's more of what we've seen we haven't seen too many projects that are delayed because of steel pricing.
And.
Some of these projects like I said, you have steel pricing that may be 20, maybe 20% 25% of the project depending on the makeup of the project and when I say the makeup of it really starts to be how much fabrication is involved with the project and.
Versus just straight pipe and.
That tends to overlay with the amount of steel impact us, but they still have to go back and make sure that they have the funding rate to be able to move forward and it's slowing some things down and.
And we've seen some of that.
Okay going.
Going back several quarters, where on the oil and gas guys try to get it into your business on that.
<unk> margins adversely and then there were some quarters more recently, where you talked about.
Those are bidding market is and balance and margins are more normalized.
And what's kind of what's the swing and margins during <unk>.
During these times and expressed in basis points.
Oh God.
That was the hardware and the answer I think when you when you look back to the time when the oil and gas day, we're getting into the business you really probably talking about something more along the lines of probably 2015.2016 timeframe when when all the sudden and the oil and gas business.
And really started to get into a real crunch and the and the guys that made large diameter API pipe said, what we've got to find something different to get into and.
We had some get into our business and.
It's not like it's not like running a major API project, where youre running.
And as of feet of the same same size pipe same diameter same well same testing without same coatings and without any fabrication and and it's not the same thing that you've got a lot of small projects. So I think with the oil and gas gauge down is that was that was a.
A little bit of a bridge too far right Theres, a bunch of fabrication each 1 of our fabrication facilities have a have a range.
1 of our steel pressure pipe facilities have a fabrication facility. So we do all of that when you look at the when you. When you look at the margin swings of what happened back in 15, and 16 and I think it is.
And as a little bit of a different and 17, 2 it's a little bit of a different timeframe. Because you had 5 major competitors and steel pressure pipe market and now we have 3 major competitors and the steel pressure pipe market. So the dynamics are a little bit different where those margin swings may have been I don't know.
$12, who knows at that point, there were a little bit less now because you have 3 major players.
And most recently cause this little bit of near term impact on margin is when we saw these jobs that were that were moving out with the bids and all of a sudden.
Like I said other companies looking around and saying Hey, we need to make sure that we have a backlog to run and so you'll get a little bit more margin pressure. So so I think you probably get something in the area of maybe half of what <unk> seen previously because there's only there's only 3 major players and the market, but it really depends on with the.
Situation is and the market, David what's coming up the bid, which bidding and specific areas. So theres. So many variables to be able to answer that question debt, it's really difficult to give you a good defined and so but it still has some impact right.
So clearly, though we're talking several hundred basis points swings.
Not.
And 1 hundreds of basis points, yes, I mean.
And again.
Quarterly margins and so that's why I'm just trying to get you to just say, yes, 1 job might be 400 basis points and other job might be 100 basis points.
Yes, yes, yes, I think thats fair and it depending on depending on the region, you're dealing with volume of bidding environment and Theres all sorts of variables.
Okay.
This metaphor.
Hop over to free cash when you look at your your steel pipe backlog and you know the margins that you bid the jobs at and so you can look at your backlog and scientists on like overall the margin on the existing backlog as bid ask.
But then as you actually go and deliver do you find that you're able to track your original margins pretty well.
Or like kind of what's the EPS when you don't.
Yes, so I mean the <unk>.
Project margins are based on a certain load when we bid a project it's based on a certain load on the mills right. So a load that we see going forward and that now that load can adjust up or down depending on depending on what's going on and the market. So the margins could get a little bit a little bit less or a little bit more depending on how much of a load we have.
On the mill. So yes, we are we're pretty good at tracking with the margins look like and.
And <unk>.
Pretty accurate with our bidding that we have.
So and Thats why we are able to say looking at kind of what we've got going from.
And from now as we go through the latter part of the year, what we see and our backlog right now and with those who have been bid at it certainly should continue to apply upward pressure to the revenues and margins as we get out later in the year.
Okay great.
Great on the pre cash side would you say you are operating at pretty close to full capacity recently.
Currently.
I would tell you I think.
It would be getting it would be getting relatively close.
Our upfront.
The configuration that we have right now we're actually adding a second full shifts.
1 of our plants now because there's enough work out in the marketplace right now.
Been a little bit of a little bit of a struggle getting to that second shift because finding finding the manpower to do that has been a little bit of a challenge and I think that's a challenge we find all over the place, but if we get on to that second shift at.
That 1 facility, we're probably getting relatively close to capacity, if we start running that flow, but we're not we're not full on the second shift yet so we've got a little bit of a ways to go.
Okay and.
And when Youre looking another and we have more capacity.
Right. Okay. So as you expand your and maybe as Youre looking to expand your your your free cash business with acquisitions are you looking to stay.
Along the lines of you know.
And products that are driven by residential demand.
Or are you looking to go into other areas.
Yes.
It's interesting a lot of it comes down David to whats available and we will like we like residential but everything we see and including what we have at Geneva has some different aspects to it other than residential right. So we have we have a little bit of commercial and there and things like that so what we're looking at.
And is is probably combinations of commercial and residential as we go forward debt our free cash from free cash related products. There is a wide variety and stuff that's available out there and.
And obviously, we're looking at things that are going to drive the shareholder value to a direction that we want and have the margins and the EBITDA margins that that we're trying to get to and.
And you've got you've got free cash you've got free cash related you've got other things associated with that debt are along those lines.
Really can make up that thing those things that we're looking for on the free cash or free cash related side. Some of the stuff is has control systems with it and things like that so we're looking at a bunch of different things at this point that that I think.
Would be enhancing to what we have as a business and really do well to drive shareholder value.
Do you want to stay with the western geography for them I mean, thats really for you to acquisitions and Ben.
<unk>.
And ideally so I would say ideally the closest the closer we can get to to our other pre cash free cash related business.
But they don't always come out like that right because either there is not always opportunities for acquisitions at.
And the locations that you already exists. So we're trying to keep it on a relative geography and like right now we're still looking in the western United States more than the eastern United States.
But it really.
And on what's available and a lot of it David depends on what the size of an acquisition is if you look at for example, a single plant.
Acquisitions could you have a simple plant acquisition and the I'd say, the eastern United States. It gets a little bit more difficult because net.
And then you are in a situation where okay does it have the management structure to be able to support that operation and that part of the United States. When you look at operations that are maybe 3 plants are more plants, they've got a much more defined management structure.
And systems to be able to combine a lot more easily so it really depends on what the circumstances, but our preference is to stay and the western United States at this point.
And it's just from managing reasons right, it's easy to manage things that are closer to what you have right now.
And just for the avoidance of doubt when you were talking about the multiples on small and free cash companies and big free cash companies you were referencing EBITDA multiples.
Yes, yes.
For example, when you look at.
The quick quick acquisition for Taro that supposed to conclude sometime in the fourth quarter and this year I think the trailing 12 on that was somewhere around 10 times I mean, obviously, a big company public company, if youre looking at more like single plant.
Type acquisitions, and you can see some with 5 and half are 6 times and if youre looking multiple plants, you're probably looking at more at the 775 items.
Debt are 7 to 7.5 times that are that are still kind of the size of companies around Geneva size or maybe a little bit larger.
Thank you for taking my questions nice to speak with you.
Absolutely good to speak with you David.
This concludes our question and answer session I would like to turn the conference back over to Scott mantra for any closing remarks.
Thank you and thanks again for everybody for joining our call today and I'd like to.
To conclude by saying, we're we're cautiously optimistic about what we see in front of us and obviously, we've been through a challenging totally period, but what we see in front of us with the second half of 2021 is significant bidding on the <unk>.
Flow pressure pipe side and was a chance to go on into 2022, we think with the backlog that was similar to how we entered 2019 and.
Other thing is as we have right now what we would consider a pretty hot pre cast concrete market. So therefore, we are we're pretty optimistic about how things look as we exit 2021 and head into 2022 and again I'd like to thank all of our.
Our employees suppliers customers and shareholders for continued dedication and northwest pipe and we look forward to speaking with you all again and the third quarter call in November so thank you very much.
This concludes northwest pipe second quarter earnings conference call.
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