Northwest Pipe Company Q1 2023 Earnings Call
Excuse me. This is the conference operator, thank you for your patience call beginning approximately two minutes. Thank you for your patience. Thank you.
[music].
Good morning, and welcome to the Northwest Pipe Company first quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask any question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Scott Mantra President.
President and CEO of Northwest Pipe Company. Please go ahead.
Good morning, and welcome to northwest pipe Company's first quarter 2023 earnings Conference call. My name is Scott <unk>, President and CEO of the company and 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 may three.
<unk> 2023, and approximately four P. M. Eastern time this call is being webcast and it is available for replay.
If we begin I would 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. Please refer to our most recent Form 10-K for the year ended December 31 2022.
Our other SEC filings for a discussion of such risk factors that could cause actual results to differ materially from our expectations. We undertake no obligation to update any forward looking statements.
Thank you all for joining us today.
I'll begin with a review of our first quarter performance and outlook. Aaron will then walk you through our financials in greater detail. Our first quarter results came in slightly better than our expectations. We generated revenue of $99 1 million a decline of 19, 4% compared to the prior year quarter revenue from her.
Steel pressure pipe segment totaled $63 5 million, reflecting a decrease of 14, 9% over the prior year quarter, mainly due to anticipated customer driven delays, which affected the production timing of our projects in backlog. In addition to severe weather events, which led to unscheduled downtime at <unk>.
All of our facilities in the first quarter.
This resulted in relatively flat production volume year over year that said, we ended the quarter with a strong backlog, including confirmed orders near record territory at $370 million, which was down marginally from our all time highest $372 million at year end and up from 304.
$41 million as of March 31, 2022.
We entered 2023 with a very strong backlog from robust bidding in the second half of beer, which should carry us through to deliver strong steel pressure pipe results. In 2023, we do expect bidding volume to be down moderately in 2023 as a result backlog in the second quarter. Many modern.
Rate lower but is anticipated to still remain high by historical standards.
On the pricing side hot rolled steel prices have increased fairly rapidly since the start of this year, which in general bodes well for our steel pressure pipe business.
Now turning to our pre Cas segment.
Free cash revenue increased two 7% from the prior year quarter to $35 6 million driven primarily by higher selling prices given continued strong demand for our precast products as well as increased raw material input costs.
Our sales were partially offset by lost production days, resulting from the ongoing ERP implementation project at park USA as anticipated.
As well as severe weather events, we experienced in the first quarter, our pre cash related order book remains strong.
Totaled $58 million as of March 31, 2023, despite moderating down from 64 million as of December 31, 2022, and from $66 million as of March 31, 2022, while our order book was impacted by a softer U S. Residential housing market, we continue to build.
We are well positioned to benefit longer term given our strong presence in Utah in Texas. As these particular states are within the top five fastest growing markets in the U S. Further the park USA products provide unique advantages for growth in the commercial construction market despite near term macro economic.
Concerns highlighting a key benefit of our diversification strategy.
Our first quarter consolidated gross profit increased 12, 1% year over year to $16 6 million, resulting in a gross margin of 16, 7% up from 13, 5% in the first quarter of 2022.
Our steel pressure pipe gross margin of 12, 2% improved by approximately 260 basis points over first quarter 2022, primarily due to the higher margin quality of projects that we have in backlog as well as improved project pricing, partially offsetting the strength in our steel pressure pipe gross margin.
In the first quarter was a negative impact from severe weather events and customer driven production delays that affected our overhead absorption levels.
Our free cash gross margins improved by approximately 280 basis points over the first quarter of 2022 to 24, 7% of free cash sales. The improvement was predominantly due to improved pricing. Despite some of the ongoing challenges that we continue to face with the ERP implementation severe weather.
Once that caused unscheduled downtime and the impact of rising interest rates on the residential housing market.
Next I would like to provide an update on our growth initiatives to position northwest pipe for increased resilience through market cycles.
Our first strategic priority is to continue driving growth in the free cash related space, which we believe has attractive through cycle characteristics.
The integration work post our acquisition of Park USA remains ongoing as we continue to assimilate the company into our operations and culture, and we are making solid progress towards finalizing the park ERP implementation project as we discussed on our last call we've encountered challenges with <unk>.
<unk> controlled deficiencies related to ERP system implementation have required us to take planned downtime at our plants as we work toward achieving optimum system functionality. This downtime reduced both our production levels and shipments adversely affecting both our pre cash revenue and gross margins during the first.
Quarter.
We expect we will experience additional downtime in the second and third quarters of 2023 before returning to a more normalized operation towards the end of this year to reiterate we view. This project as short term challenge and is necessary to achieving our strategic growth objectives.
Next I would like to turn to our ongoing organic growth strategy for free cash, which we refer to as product spread as a reminder level one product spread is focused on building out capacity utilization at our Texas based park plants to maximize overall production capabilities.
The Park sales group has made good progress on growing our sales outside of the state of Texas from the park facilities with approximately $2 million of orders booked outside the state of Texas in the first quarter and over $8 million in the last 12 months. Our objective remains to continue growing the level one product spread throughout 2020.
Three.
The premise for level two product spread is to produce and ship products out of our other northwest pipe plants, we are utilizing our preexisting Geneva precast operations as the pilot location for level two product spread activity we.
We are successfully continuing to bid new projects that are currently being produced and will be produced out of our Geneva plants. So far in 2023, we're in production on four park product orders at Geneva with more scheduled to come.
Once part products are comfortably established at Geneva locations will expand upon this strategy to produce these products at additional northwest pipe legacy locations. We remain bullish on the long term growth prospects for the park business. Additionally, part of our organic growth initiatives include reinvesting in our pre cast locations.
Particularly in the Geneva operations in order to increase our production capabilities and capacity through expansion and automation. For example, we are continuing work on the $16 million, New RCP manhole facility at our Salt Lake City, Utah plant, which is anticipated to become operational in the fourth quarter of this year.
While driving growth in the free cash related space remains our top strategic priority. We are also focused on maximizing our steel pressure pipe water transmission business can become as efficient as possible.
We currently have about 55% market share in this space with fairly limited to acquisition growth opportunities in the market that has been dramatically consolidated over the years.
With our nationwide footprint and as an industry leader in this space, we are well positioned to participate in the ever growing amount of water transmission grid infrastructure projects required to support the increasing U S population and we continue to be fixated on enhancing shareholder value over time as such we are focused on <unk>.
Opportunities for further cost reduction measures lean manufacturing and maximizing margin over volume.
Next I'd like to discuss project on some current and upcoming water transmission projects that are bidding in the steel pressure pipe market.
In the eastern markets the ongoing multiyear multi agency Houston surface water program is bidding 3600 tons of pipe this year across multiple projects with additional sections planned for 2024 for West and North Harris County regional water authorities.
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. The final remaining 2700 tons of pipe is expected to bid this year.
In North Dakota progress continues on 140 mile 87000 ton Red River Valley water supply project. The first two segments were awarded the northwest pipe and installation is currently underway. We are closely tracking the outcome of further budget approval for future segment construction.
In the western markets California's prop one $7 5 billion bond for water infrastructure has created the much needed funding for projects within the state. The following prop one projects are expected to start construction in the next five years.
Site's reservoir is this water storage project that has received funding from prop one it will involve over 30 miles of 144 inch pipeline. Additionally, site's reservoir received $30 million in <unk>.
<unk> funding this past quarter.
Harvest water is a program intended to provide recycled wastewater for agricultural use in the Sacramento area. This program includes nearly 25 miles of 30 inch to 66 inch pipeline. The first segments of this program are expected to bid in late 2023.
For Carlos Reservoir expansion program provides a substantial capacity improvements to the existing reservoir.
And conveyance facilities in Northern California. The program includes approximately 22 miles of 48 to 96 inch pipe.
Willow Springs water bank will create 500 acre feet of underground water storage and the Antelope Valley. The project includes approximately 16 miles of 30% to 84 inch pipe.
Water reuse programs have generated new opportunities in California market on which we expect to see bidding activity continue for the foreseeable future.
<unk> is heading a regional water reuse pilot project in conjunction with La Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in southern California, and involve 60 plus miles of large diameter pipe.
Current demonstration facility has been in operation for two years preliminary design and permitting is ongoing and construction of the full scale treatment and conveyance facilities could begin as early as 2025 MW.
<unk> secured a $224 million we've alone in October of 2021, which will fund nearly 50% of the anticipated construction cost.
<unk> W. A las Vegas water wholesaler in Colorado River water user has also played significant financial support for this program.
<unk> rehabilitation programs will result in about 5000 tons annually over the next 10 to 15 years. This program includes approximately 81 miles of pipe from 75 to 120 inches.
Southern Nevada water authority has begun moving forward in earnest with the 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 inch steel pipe with construction tentatively scheduled for 2025.
In Utah design and permitting continues on the 150 miles 69 inch Lake Powell pipeline. This pipeline will provide an alternative source of water for southern Utah.
Construction is proceeding in earnest in new Mexico on the U S Bureau of reclamation, Navajo Gallup supply program.
Final major phase of this pipeline construction for this program is advertised to bid in early 2024 and includes 2800 tons of steel pipe.
New Mexico, Governor Grisham recently announced a $160 million NII, aged IHA a funding for the completion of the eastern New Mexico Rural water system.
Remaining pipeline segments include 15000 tonnes of steel pipe to convey water from the reservoir and northern New Mexico, South to water users in the greater Clovis area.
Before I conclude I'd like to summarize our outlook our outlook for 2023 remains positive aside from the challenging first quarter that had many of the same issues. We experienced in the comparable period last year, we carried a robust near record territory backlog into 2023, which we believe will set the.
Base for a strong year, despite anticipated moderation in the amount of tons bidding in 2023 and.
In regard to the second quarter, our steel pressure pipe business, we anticipate similar production levels as to what we saw in the second quarter of last year, given the same strength that we've been maintaining our backlog, which should fuel improved gross profit and margins.
And our free cash business, we remain cautiously optimistic demand will remain fairly strong for the near term. Despite current macroeconomic uncertainty surrounding the residential housing market and current rate environment that said, we expect we will be able to maintain strong business levels and margins in the second quarter.
Even with a slight moderation in our order book, resulting from macroeconomic factors. The precast business is expected to have a solid 2023 off only modestly from what many considered to be an all time record year in 2022.
In summary, we are pleased with our solid start to the year, which surpassed our expectations. We remain bullish on our growth initiatives to increase our free cash related business to a similar size as our steel pressure pipe business.
Two new by strong demand for our high quality free cash products and growing infrastructure needs in the United States. Looking ahead, we will remain focused on finalizing the integration of park USA as quickly and efficiently as possible number two persistently focus on margin over volume number three continuing to implement <unk>.
Cost reductions and efficiencies at all levels of the company and number four continuing to identify strategic opportunities to grow the company and once we've completed the integration work with park USA. Thank you our dedicated team at northwest pipe for your commitment to the excellence and for operational safety.
I will now turn the call over to Aaron who will walk through our financial results in greater detail.
Thank you Scott and good morning, everyone I'll begin today with an overview of our profitability.
Consolidated net income for the first quarter was $2 4 million or <unk> 23 per diluted share compared to $3 6 million or <unk> 36 per diluted share in the first quarter of 2022.
Consolidated net sales decreased nine, 4% and $99 1 million compared to $109 3 million in the first quarter of 2022.
<unk> segment sales decreased 14, 9% to $63 5 million compared to $74 7 million in the first quarter of 2022, driven primarily by a 4% decrease in our tons produced mainly due to changes in project timing and an 11% decrease in there.
Selling price per ton due to decreased raw material input costs.
Free cash segment sales increased two 7% to $35 6 million compared to $34 6 million in the first quarter of 2022.
Primarily due to the increase in selling prices, resulting from the high demand for our concrete products. In addition to increased material costs.
Consolidated gross profit increased 12, 1% to $16 6 million or 16, 7% of sales compared to $14 8 million or 13, 5% of sales in the first quarter of 2022.
Steel pressure pipe gross profit increased eight 2% to $7 8 million or 12, 2% of segment sales.
This compared to gross profit of $7 2 million or nine 6% of segment sales in the first quarter of 2022.
As a reminder, our STP gross margin in the first quarter of 2022 included a $2 million charge for a product liability claim reserve.
Without this our gross margins would have been $9 2 million or 12, 3% of segment sales in the first quarter of 2022.
Free cash gross profit increased 15, 8% to $8 8 million or 24, 7% of pre cash sales from $7 6 million or 21, 9% of segment sales in the first quarter of 2022, primarily due to the improved pricing.
Selling general and administrative expenses increased 26, 7% to $11 9 million or 11, 9% of sales compared to $9 4 million in the first quarter of 2022.
Eight 5% of sales.
Increase was primarily due to $1 million and higher incentive based compensation expenses.
<unk> 9 million higher salaries and related benefits to support the growing business as well as smaller increases in professional services and other administrative expenses.
For the full year of 2023, we now expect our consolidated selling general and administrative expenses be in the range of $43 million to $46 million.
Companywide depreciation and amortization expense in the first quarter of 2023 was $3 9 million compared to $4 1 million in the year ago quarter.
For the full year of 2023, we continue to expect depreciation and amortization to be in the range of $17 million to $19 million.
Our noncash incentive compensation expenses were $1 million and <unk> 6 million in the first quarter of 2023 and 2022, respectively.
Interest expense increased to $1 4 million in the first quarter of 2023 compared to 0.6 million in 2022.
We expect interest expense of approximately $5 million in 2023, however that could vary with interest rate movements and variability in working capital needs for our steel pressure pipe business.
Our first quarter income tax expense was $1 million, resulting in an effective income tax rate of 28, 7% compared to $1 3 million in 2022 or an effective income tax rate of 27, 4%.
Our tax rates for the first quarter of 2023, and 2022 were impacted by nondeductible permanent differences.
We continue to expect our tax rate for full year 2023 to range between 24% to 26%.
Now I'll transition to our financial condition.
We generated net cash provided by operating activities of $26 3 million in the first quarter of 2023 compared to $1 6 million in the first quarter of 2022 due to favorable changes in working capital.
Our capital expenditures totaled $4 4 million in the first quarter of 2023, which was flat with the prior year quarter.
We continue to anticipate our total capex to be in the range of $24 million to $28 million for full year 2023, which includes approximately $3 million in remaining investment capex for our new reinforced concrete pipe machine as well as other standard capital replacement projects.
As of March 31, 2023, we had $62 $6 million of outstanding borrowings on our credit facility, leaving approximately $61 million in additional borrowing capacity on our credit line.
Before I conclude I'd like to summarize our progress on the ERP implementation and material weakness remediation projects.
We are in the early stages of executing our plan to remediate the material weakness recently identified and discussed in our fourth quarter earnings call.
Our focus at this point has been concentrated on employee training and oversight.
We have also restricted certain access within the system, which is eliminated the ability to generate a portion of the problematic transactions.
Importantly.
The internal control deficiencies identified have not impacted the accuracy of our current or historical financial results.
We have also initiated a consulting project to assist with the refinement of our business processes and material Master data to the park USA ERP system.
This project's objectives are to improve overall transactional integrity as well as to automate some of the more laborious system activities.
We expect this project to achieve incremental improvements throughout this project's duration.
Include near the end of 2023.
We believe that the system architecture obtained from this project is critical for both our park USA business and also for our longer term execution of our two pronged growth strategy.
In closing I am very pleased with all of the work our team has done to position us well for another strong year in 2023.
I would like to thank our employees for their dedication to operational excellence X months and workplace safety as well as our stockholders for their continued confidence in northwest pipe.
I will now turn it over to the operator to begin the question and answer session.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Again it is star then one last quick question.
Our first question comes from David Wright with Henry Investment Trust.
Please go ahead.
Hey, Hi, good morning.
Hey, David Weinberg.
Lot to digest, there are lots of good information and thanks for thanks for all of it.
Got it.
People.
Q2, and Q3 last year were really strong years for the company.
Really strong quarters excuse me.
Your commentary suggests that Q2 this year could be close to as good as last years did I hear that correctly.
David after after a pretty slow first quarter right because of weather and a lot of different things.
We're actually carrying a backlog right now in tons, it's about 12% higher at the end of the first quarter of this year than it was last year. So we're set up to really get back on a pretty similar revenue trajectory that we saw in steel pressure pipe.
And the the rest of the quarters this year, but with improved margins because of the big bidding activity that we saw at the end of 2022. So we're pretty excited about the way that steel pressure pipe is looking for the rest of the year.
So then the kind of the variance.
And year over year comparisons for the next couple of quarters will depend more on on what pre cast us.
Yes, I think so but the interesting thing about precast David is.
We are in two of the very very hot markets in this country, one, Utah, which has really low unemployment and a significant net migration right into.
The state of Utah and <unk>.
Significant requirements for housing builds and we still have a little bit of pent up demand from the supply chain issues in Utah during the pandemic. So really what we're seeing along that part of our business with Geneva is we're seeing a market right now that's a little bit skittish and people are.
Holding onto their quotes a little bit longer and there are certain products that may be down a little bit but.
Some of the major products are still very strong our lead times are a little bit shorter than they were last year, but last year like we said in some of the calls we got a little bit over booked, but we're still seeing Utah as being pretty busy.
In Texas on the park side any way, which is obviously Geneva is mostly residential and others, probably 85% residential for Geneva.
We're 80% residential for Geneva anyway, but park is about 85% nonresidential and we're still seeing a very very strong nonresidential market and the state of Texas and really seeing the park business not having dropped off at all so that's why we said during the call.
We're seeing strong steel pressure pipe for the rest of the year and we're seeing a precast market, that's really down only modestly at this point with a lot of people consider to be an all time record year in 2022, but with margins that are in line with what we saw last year. So it really feels like we're setting up for another <unk>.
Strong year in 2023.
Okay and then my.
My other questions you talked about California proposition, one and all the different pretty large projects that.
That could lead to over the next you said over the next five years, just kind of big picture and obviously not everything happens at the same time, but big picture just does the contracting capacity exists in California for multiple.
Projects like that to be going on at the same time.
Yes, I would say David that all the major contractors that we deal with have have multiple locations.
Especially especially in the locations are the markets that are traditionally really strong steel pressure pipe market and really those are California, and Texas. So, yes, I would say that the contracting capacity is likely more than enough to handle those big projects as we go forward into the next three years.
Four years.
Okay. Thanks, Thanks for taking my questions.
Absolutely.
This concludes our question and answer session I would like to turn the conference back over to Scott <unk> for any closing remarks.
Yes.
A few things as we close I would like to thank everybody for joining the call today, but again.
As we get through the first quarter we ended.
The first quarter with a backlog in tons, it's up 12% versus what we were last year first quarter and really kind of positions us to really have a really.
Our solid steel pressure pipe year for the rest of this year, but like I said before with improved margins and precast.
Like we said a little bit earlier with David's questions, even with the headwinds wins in residential housing. We're in two of the best markets and we're expecting to see a precast and free cash related market that is only modestly off of what we saw in 2022 and I think the last thing I'd like to say is if you look at where the comps.
<unk> come from in the last five years in 2017, the company had about $132 million in revenue.
About $5 million of gross profit and really de Minimis EBITDA, while we finished 2022 with $458 million in revenue and in the mid <unk> of gross profit in the low to mid sixties of EBITDA. So we've come a long way in the last five years and we feel like we are.
Getting started on that growth path to continuing to grow and become more profitable and to become a better holding for our shareholders. So thanks, everybody again for joining the call today and we'll talk to you again in a few months in August August timeframe. So thank you very much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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Yeah.