Q2 2023 Northwest Pipe Company Earnings Call
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I would now like to turn the conference over to Scott mantra.
President and CEO . Please go ahead.
Good morning, and welcome to northwest Pipe Company's second quarter 2023 earnings Conference call. My name is Scott <unk>, President and CEO of the company I am 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 August 2023 and.
<unk> four P. M. Eastern time this call is being webcast and it is available for replay.
I begin 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 our most recent Form 10-K for the year ended December 31, 2022, and in 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 second quarter performance and outlook and Aaron will then walk you through our financials in greater detail.
We entered the year with a strong backlog positioning us well for a solid 2023, despite the slow first quarter.
Our second quarter results came in relatively in line with our expectations with revenues of $116 4 million, improving 17, 4% over the first quarter and declining by only one 8% compared to the prior year quarter.
Revenue from our SPP segment rebounded to $77 3 million following a slow first quarter, which was up slightly from the prior year quarter due to higher selling prices, which were partially offset by a decrease in tons produced resulting primarily from changes in product mix.
The SPP backlog, including confirmed order was 343 million at June 30th which remains strong by historical standards.
This reflected a decline in our backlog from the near record $370 million. We saw at March 31 2023.
So it was up from $338 million as of June 32022.
While bidding activity is projected to be lower in 2023 versus last year's level. We are currently awaiting the potential award of multiple projects that have recently bid and they could stabilize the near term backlog.
Prices of hot rolled band steel moderated in the second quarter remaining fairly high by historic standards, but were down 20% compared to the second quarter of 2022 and general higher steel prices are a positive for our SPP business.
Now turning to our free cash segment free cash revenue decreased five 6% from the prior year quarter to $39 1 million, primarily due to reduced shipments, resulting from the current interest rate environment impacting the U S. Construction market, which were partially offset by higher selling prices given higher raw material input costs.
Yes.
As anticipated our sales have continued to be impacted by the rising interest rate environment, which has persisted for more than a year and just increased again last week.
Our free cash related order book remained strong and totaled $58 million as of June 32023, which was consistent with our order book as of March 31, 2023, and down 70% from $75 million as of June 32022.
Our second quarter consolidated gross profit decreased six 6% year over year to $22 5 million, resulting in a gross margin of 19, 3% down from 23% in the second quarter of 2022.
Our SPP gross margin of 16, 3% improved by approximately 190 basis points over second quarter of 2022, primarily due to the strong project bidding environment, we experienced in the second half of 2022, which resulted in improved project pricing and lead to higher margin quality of.
Projects that we have in backlog.
Free cash gross margin of 25, 3% of free cash sales in the second quarter of 2023 decreased by approximately 600 basis points from the record highs experienced in the second quarter of 2022.
The decline was predominantly due to higher production costs related to lower levels of production and associated under absorption given the impact of rising interest rates on commercial construction in the residential housing markets.
The lingering effect of higher raw material costs further contributed to the decline in our free cash gross margin.
Next I would like to provide an update on our growth initiatives, while driving growth in the free cash related space remains our top strategic priority. We remain highly focused on maximizing our steel pressure pipe water transmission business to become as efficient as possible, while retaining our market leading position at 55% market share.
As many of you are aware the SPP market is significantly consolidated over the years and acquisition opportunities remain very limited as such our priorities for the SPP business are centered on driving enhanced shareholder value through identifying opportunities for incremental cost reduction measures at the plant.
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And focusing on lean manufacturing as well as maximizing margin over volume.
I'd also like to add that we remain encouraged by the amount of activity, we're seeing in our current and upcoming water transmission projects with our nationwide footprint and as an industry leader in this space, we are well positioned to participate in the increasing amount of water transmission grid infrastructure projects required to support the increasing United States population.
For a more complete view of these projects. Please review our investor presentation, which can be found on the investor tab of our website within the events and presentations section I'll now turn to a discussion on our pre cash strategy to further diversify our business with a goal of improving our resiliency through economic cycles.
And driving long term consistently profitable growth, we've made tremendous strides in our progress to integrate the acquisition of park USA, which remains ongoing.
As part of that effort, we have been continuing to execute on our organic gross product spreads strategy. As a reminder, our level one product spread effort is geared toward building out capacity utilization at our Texas based park USA plants to maximize efficiency and production through the second quarter of 2020.
Three the park team bid on over $27 million worth of projects outside of the state of Texas predominantly in the Western region of the United States.
Of that the team has booked approximately $4 $5 million worth of orders outside of Texas up from $2 million in the first quarter.
Over the last 12 months, we have successfully booked over $8 million and projects. Our objective remains to continue growing the level one product spread throughout the remainder of the year and beyond.
Which leads us to level two products spread aimed at producing and shipping part products at our legacy northwest pipe plants.
As previously discussed the preexisting Geneva precast locations have been serving as the pilot location for level two product spread activity, which has been progressing quite well as we continue to bid and produce new projects year to date in 2023 as of June 32023, we've produced several.
At Geneva, We are currently in production on six park product orders at Geneva with more scheduled to come.
We plan to expand on this strategy once part products are more comfortably established at the Geneva locations at which point, we'll begin to produce the park products at additional northwest pipe legacy locations.
In addition, we have dedicated resources to reinvest in our free cash locations to drive increased production capabilities and capacity improvements and example of this is our $16 million new RCP manhole facility at our Salt Lake City, Utah plant.
Despite the short term challenges affecting the free cash business, we believe in the long term value proposition of this business and the investments we are making to drive profitable growth before I conclude I'd like to summarize our outlook for the remainder of the year.
Aside from some of the shorter term challenges we are working through such as our ERP implementation. In addition to the continued pressure we're seeing in the interest rate environment. Our outlook for the second half of 2020 through remains positive. We entered 2023 with a robust FPP backlog near record territory, which we believe will carry us.
Through into 2024 and lead to a strong finish to 2023, despite the lower level of project bidding in 2023 for the third quarter of 2023, and our SPP business, we anticipate similar revenue levels compared to the third quarter of last year, driven by continued strength in our backlog even when.
Considering an expected downward moderation in bidding volume and the resulting backlog in the second half of 2023, we expect SPP revenue to remain at a higher level similar to 2022 levels, but with improved gross margins.
And our free cash business, we anticipate macroeconomic factors to continue to weigh on our volume and associated revenue in the third quarter, which could result in some additional downward pressure on our margins in the quarter.
Site from these challenges we remain cautiously optimistic demand will remain solid for the remainder of the year with 2023 off only modestly from what many consider to be a record year in 2022.
We continue to believe we are well positioned to benefit longer term given the significant level of pent up demand specifically for residential housing.
Growing need for infrastructure spending in the United States, and our strong market position and our presence in key areas, such as Utah, and Texas, which are among the top five fastest growing markets in the U S.
In summary, we are very pleased with the strides we've made to execute our strategy to drive enhanced shareholder value and long term profitable growth.
We remain bullish on our goal for our free cash related business to grow to a similar size as our SPP business supported by the strength, we have been maintaining in our SPP bidding activity. Looking ahead, we remain focused on one finalizing the integration of park USA as quickly and efficiently as possible to persistently.
Focused on margin over volume.
Three continuing to implement cost reductions and efficiencies at all levels of the company and number four continuing to identify strategic opportunities to grow the company. Once we've completed the integration work with park USA.
Thank you to our dedicated team at northwest pipe for your continued persistence and execution against our growth strategy 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 second quarter profitability.
Consolidated net income for the second quarter was seven 4 million or <unk> 74 cents per diluted share compared to $9 7 million or <unk> 97 per diluted share in the second quarter of 2022.
<unk> net sales decreased one 8% to $116 4 million compared to $118 $5 million in a year ago quarter.
SPP segment sales were relatively flat at $77 3 million compared to $77 1 million in the second quarter of 2022, resulting primarily from a 7% increase in selling price per ton due to product mix, which was almost entirely offset by a 6% decrease in tons produced resulting primarily from chi.
<unk> and project timing.
<unk> segment sales decreased five 6% to $39 1 million compared to $41 5 million in the second quarter of 2022 merrily due to a 13% decrease in volume shipped due to lower demand.
Really offset by an 8% increase in selling prices due to increased raw material input costs.
Consolidated gross profit decreased six 6% to $22 5 million or 19, 3% of sales to $24 1 million, 23% of sales in the second quarter of 2022.
Steel pressure pipe gross profit increased 13, 2% to $12 6 million or 16, 3% of segment sales.
This compared to gross profit of $11 1 million or 14, 4% of segment sales in the second quarter of 2022, primarily due to changes in product mix.
Free cash gross profit decreased 23, 6% to $9 9 million or 25, 3% of free cash sales from a $13 million or 31, 3% of segment sales in the second quarter of 2022, primarily due to increased production costs.
Selling general and administrative expenses increased eight 8% to $11 million of nine 5% of sales of $10 1 million in the second quarter of 2022 or eight 5% of sales.
The increase was primarily due to zero point $6 million higher salaries and associated benefits expense and <unk> $3 million higher administrative expense.
Further as many of you are aware, we committed to a large project to improve our ERP platform to integrate our park USA business, which contributed to an increase in professional fees compared to the year ago quarter.
In addition to some smaller increases for travel and advertising all of the aforementioned were partially offset by zero point $5 million and lower incentive compensation expense.
For the full year 2023, we expect consolidated selling general and administrative expenses in the range of $44 million to $46 million.
Depreciation and amortization expense in the second quarter of 2023 was $3 9 million or.
$4 2 million in the year ago quarter.
For the full year 2023, we expect depreciation and amortization to be in the range of $16 million to $18 million.
Our noncash incentive compensation expenses were $1 3 million and <unk> 7 million in the second quarter of 2023 and 2022, respectively.
Interest expense increased to $1 2 million in the second quarter of 2023 compared to <unk> 9 million in the year ago quarter.
We expect interest expense of approximately $5 million for the full year 2023.
Our second quarter income tax expense was $2 $7 million, resulting in an effective income tax rate of 26, 5% compared to $3 4 million in the prior year quarter for an expected income tax rate of 26, 1%.
Our tax rate for the second quarters of 2023, and 2022 were impacted by nondeductible permanent differences.
We continue to expect our income tax rate for full year 2023 to range between 24% and 26%.
Now I will transition to our financial condition.
We generated net cash provided by operating activities of $1 2 million in the second quarter of 2023, <unk> to $8 5 million in the second quarter of 2022, due primarily to changes in working capital and lower profitability.
Our capital expenditures totaled $4 million in the second quarter of 2023, which was flat with the prior year quarter.
We continued to anticipate total capex to be in the range of $24 million to $28 million for full year 2023.
As of June 32023, we had $71 million of outstanding borrowings on our credit facility, leaving approximately $54 million in additional borrowing capacity on our credit line.
We amended our credit facility during the quarter, providing for a five year term ended in June 2028.
$125 million facility provides an option to upsize the credit up to $50 million and also boosted the senior leverage ratio covenant required from two five times EBITDA to three times EBITDA.
Other modifications in terms were relatively minor and can be read in their entirety within the form 8-K filed on July 3rd we.
The continued support from our financing partner Wells Fargo.
Before I conclude I'd like to provide an update on our progress on the ongoing ERP implementation and material weakness remediation projects in relation to the former we have evaluated and have committed to certain business process changes that we are now working to push into the system architecture. In addition to the corresponding change.
Management with our employees involved in the day to day transacting at Park.
These third quarter activities, coupled with robust training will set the table for materials requirements planning automation, which we expect to be initially deployed at the end of the year.
Remediate the material weakness continues to be a priority of management and our audit Committee. We are currently working to institute more robust internal monitoring of manual controls that failed at park surrounding revenue and cost of sales.
We will also complete more frequent testing to gain additional comfort that the internal controls are executing as designed.
While this project will continue through this year's audit is important to reiterate that the internal control deficiencies identified have not impacted the accuracy of our current or historical financial results.
In closing I am very pleased with the progress our entire team has made to position us well for another strong year in 2023.
Also like to thank our employees for their continued prioritization of our safety program and to all our stakeholders for their continued confidence in northwest pipe.
I will now turn it over to the operator to begin the question and answer session.
Thank you we will now begin the question and answer session.
Quick question, you May Press Star and then one on your Touchtone phone.
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At this time, we will pause for a moment with some of our roster.
Our first question today will come from Julio Romero of Sidoti <unk> Company. Please go ahead.
Great. Thanks, Hey, good morning, everybody.
Good morning, good morning.
Can you maybe start on SPP.
At the bidding volume for the steel pressure pipe segment, you saw during the second quarter and can you maybe expand on the potential awarded multiple projects that you recently bad debt you mentioned in the prepared remarks and any sense of.
The type of projects he bed in the bid margins et cetera.
Well.
The second quarter this year.
Relatively large bidding because theres a couple of major projects bid in the second quarter.
One of the major projects was bull run reservoir hearing.
The Portland area and that I'm, just going to give a range otherwise.
Give us a little bit too specific probably somewhere between 20 and $25 million for that job and there is a couple other ones that bid that are not quite that large julio that we're waiting for what's going to happen on those and I would tell you that the margins on those products are are pretty consistent with the kind of margins that we're seeing right now.
When the SPP business.
So in line, maybe maybe a little better but pretty much in line.
Okay.
Okay. That's very helpful and then.
I think you might've touched on it in the prepared remarks, but can.
Can you talk about the trend of steel prices and how that may impact the steel pressure pipe business if at all.
Yes, we've seen that obviously steel prices have come down a bit through.
This is just part of the year into the middle of the year, we're seeing prices in hot rolled bands now that are probably somewhere between 850 and $900 a ton.
There is there's a couple of things that are going to impact. This as we go through the rest of this year. One is the capacity coming online at various places, which is obviously adds to the supply in the marketplace, but generally what you see in the back half of the year, especially as you get to the fourth quarter, our outages at the steel mills that star.
Art to tighten up supply a little bit and have a tendency to push the prices up so we're going to have to see what happens I think in.
And a lot of People's views it looks like it's going to be where it is right now and stay kind of stable for a while through the end of the year, but I think what we've seen in the past several years as the steel prices never really stable, it's either going up or coming down. So I think Julio the biggest thing is how does the outages play.
Just the extra capacity coming online and what are the lead times do because ultimately.
My view on it is it could have some upward pressure as we get through the back part of the year, but that remains to be seen there's a lot of a lot of different <unk>.
Does it work in this right now.
Okay understood and then I just have a broader kind of big picture question.
The recent flooding in the northeastern U S kind of highlighted a need for greater infrastructure for drainage and sewer systems and northwest produces products that.
It could be part of the solution for that just talk about.
If the recent headlines our focus on on the floods could help kind of unlock the pipeline for water infrastructure spend and drainage spend needed.
And I'll just address both of the things that you said sewage or or <unk>.
Dirty water type stuff when you look at our SPP business, so relatively small part of that business, it's mostly potable water.
In the in the eastern United States with the flooding when you look at drainage type stuff I think it's you're.
Youre looking at probably more of a localized product. If you are talking about the free cash business.
Where we could play in a big way in that business is the environmental systems and solutions that we make at park USA with being part of those systems, which we can ship all over the country. So I think as far as the eastern United States Julio The park products are the ones that probably would play the best out there.
With that kind of situation at least at this point there is when you when you talk about pre cash products.
Youre talking about products that generally ship.
150, maybe 200 miles radius around the plants in our pre cast.
Infrastructure plans from an all in Utah, So it would probably be difficult to get out there, but I think the park products could play into environmental systems solutions.
And.
In taking hydrocarbons and and cleaning the water and those projects out in the northeastern United States. So thats really probably what we would focus on for there.
Understood well I appreciate you, taking the questions and I'll hop back into the queue.
Absolutely. Thank you.
Yes.
Our next question is from Jane Ramirez of D. A Davidson. Please go ahead.
Hi, This is John core brands gentlemen, how are you.
Good how are you.
Yes.
With <unk>, our precast orders down over 20% in the second quarter, two we expect to see that sort of the crusher on precast revenue in the third quarter or the second half.
And what would that what would help offset that.
Yeah.
When you look at the pre cashed order book that we have right now if you look at it from the first quarter of 2023 to what it ended at the second quarter of 2023 of its pretty flat right. If you compare it to second quarter of 2022 really it was an all time pretty much an all time record markets.
So the order book was was up significantly at that point I think what Youre seeing right now is in a more normalized order book and I think the thing that.
It weighs on that obviously as the interest rate environment, because interest rate environment puts pressure on just about everything free cash related obviously residential housing.
And even to some extent that can.
Nonresidential housing I think one of the interesting things right now is were.
We're starting to see.
Little bit of maybe upward movement in the park in the Geneva Order book, which is free cash infrastructure, which is obviously mostly related to residential housing. So that's an entry.
An interesting scenario as we go forward the other thing that I think effects.
You still see a shortage of inventory in the marketplace and people still buying houses where they're available. So I don't when we're looking at the precast market and looking at both sides of it residential nonresidential.
It doesn't look like either side of it has a significant falloff through this year and Thats why we said only modestly off versus last year, because certainly it looks like it still has some strength what you do see is a little bit less demand than we saw in the all time record year, which is probably bringing margins to what I'd call into probably.
And more normal range, what you would see in free cash I mean, the margins that we saw in the second quarter of 2022 of 31% were obviously astronomical margins. What we're seeing now 'twenty five 'twenty six or so percent are probably more normalized margins and I'm not I'm not sure if I hit all the pieces of that question.
So if theres another piece of that fire away.
Alright.
But it's probably going to be in that normalized range between 16 and 18% ish.
Great. Thank you.
I'll hop back into the queue.
Sure no problem.
At this time, we will conclude our question and answer session I would like to turn the conference back over to Scott mantra for any closing remarks.
Okay. Thank you again, thanks to everybody for joining the call today and as we said in the throughout the script, we started the year with.
Our record backlog or close to a record backlog in SPP in and we're really riding a pretty strong wave of backlog through 2023, even with a little bit lower bidding environment that we're seeing in the year. So we're pretty pretty well positioned to to do well on the steel pressure pipe side in 2023.
And on the free cash side, even with the elevated interest rates and the impact on both commercial and residential were only seeing the segment off just modestly versus where we were last year at least at this point things look still to be strong. So I think our long term view on focused on the free cash business remains unchanged.
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And as we've said many many times our goal is to get to the the free cash business to a similar size as the steel pressure pipe business in the next few years and that's really what we're focused on doing so I'd like to thank everybody for their time and attention today and we'll look forward to speaking to you again in November so thank you.
Conference has now concluded we thank you for attending today's presentation you may now disconnect.