Northwest Pipe Company (NASDAQ:NWPX) Q1 2024 Earnings Call Transcript

Northwest Pipe Company (NASDAQ:NWPX) Q1 2024 Earnings Call Transcript May 4, 2024

Northwest Pipe Company  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello. And welcome to the Northwest Pipe Company First Quarter 2024 Earnings Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Scott Montross, CEO of Northwest Pipe Company. Please go ahead.

Scott Montross: Good morning. And welcome to Northwest Pipe Company’s first quarter 2024 earnings conference call. My name is Scott Montross and I’m President and CEO of the company. 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 1, 2024 at approximately 4 p.m. Eastern Time. This call is being webcast and it is available for replay. As 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, 2023, 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 first quarter performance and outlook for 2024. Aaron will then walk you through our financials in greater detail. Our first quarter results were mixed, with Steel Pressure Pipe business surpassing our expectations, while Precast came in softer than anticipated. On the whole, our net sales of $113.2 million increased 14.2% year-over-year on solid profitability levels and representing the strongest revenue first quarter we have ever had. First quarter revenue from our SPP segment totaled $80 million, an increase of 25.9% year-over-year, the highest first quarter ever reported in company history for this segment.

Our performance primarily reflected higher production levels due to changes in project timing related to strong pipeline of bidding opportunities in early-to-mid first quarter and the improved bidding environment we’ve experienced to-date following the relatively small bidding year we had in 2023. Our SPP team continues to do an excellent job executing on bids and projects. The very strong bidding activity and project wins in the first quarter led to our SPP backlog, including confirmed orders as of March 31st totaling $337 million, an improvement from $319 million as of December 31, 2023, and down from the $370 million at March 31, 2023. Our first quarter performance was partially offset by lower selling prices due to production mix and project timing.

Steel prices continue to remain fairly high by historical standards and appear to be relatively stable, fluctuating $10 per ton to $20 per ton up or down on a weekly basis. Lead times remain fairly short at between three weeks and six weeks. Now turning to our Precast segment. Precast revenue declined 6.6% year-over-year to $33.2 million, primarily due to very slow first quarter shipments in the non-residential construction related Precast business at Park, resulting from fairly light bookings in the fourth quarter of 2023 due mainly to customer caution related to current interest rate environment. As a result, we booked only $16 million of orders at Park in the fourth quarter. However, our first quarter bookings at Park rebounded to a strong level coming in at over $22 million.

The residential business at Geneva continued to be strong with strengthening order books, as well as robust production and shipment levels, especially for a first quarter, which is typically the seasonally slower time of the year. Both residential and non-residential Precast business came under modest pricing pressure during the first quarter. That, along with some of the mix changes that we experienced drove a lower average selling price for Precast, which was partially offset by higher shipping volumes from the residential Precast business at Geneva. As of March 31st, our order book totaled $52 million, up from $46 million as of December 31, 2023, and down from the $58 million as of March 31, 2023. First quarter consolidated gross profit increased 21.5% year-over-year to $20.1 million, resulting in a gross margin of 17.8%, up from 16.7% in the first quarter of 2023.

Our SPP gross margin of 17.8% was strong, increasing by approximately 560 basis points over the prior year period and 280 basis points over the prior quarter, primarily due to higher production volume, given customer driven timing changes and by significant strength in first quarter bidding activity coupled with our persistent focus on higher margin business. Our Precast gross margin of 17.7% was down, compared to 24.7% in the first quarter of 2023 as depressed shipments on the non-residential construction side resulted in reduced first quarter revenue at the Park facilities and the associated lower overhead absorption. However, as we expected, the margins on the residential construction side at Geneva have also come under some modest pressure due to regional differences in market demand.

Next, I would like to provide an update on our capital allocation priorities. Our top strategic priority for 2024 remains growth of the business through our organic product spread strategy and M&A opportunities. Beginning with product spread, we continue to execute Level 1 of this strategy by building out capacity utilization at our Texas-based Precast plants with a goal of maximizing overall efficiencies and production volume. During the first quarter, we bid on $11.8 million worth of projects outside of Texas and booked approximately $2.5 million worth of orders outside of Texas. In regard to Level 2 of our strategy to produce Park Precast products out of our existing Northwest Pipe locations. We were in production on 14 projects at the Geneva locations during the first quarter of 2024 and we are currently in production on 16 projects with more scheduled to come.

Once the Park Precast products are more comfortably established at the Utah locations, we plan to expand our Level 2 product spread to additional geographic locations over the next couple of years. Following organic growth, we are committed to repaying the debt we incurred to finance the 2021 acquisition of ParkUSA to ensure we are well positioned to take advantage of future growth opportunities. As it pertains to our M&A strategy, we are actively evaluating Precast related opportunities. Our criteria includes, high quality candidates that are accretive to our EPS that possess strong organic growth and margin potential, solid asset efficiency and a consistent positive cash flow profile. Until we are ready to execute a meaningful acquisition, we may opt to be opportunistic in repurchasing shares of our common stock, subject to our liquidity, including availability of borrowings and covenant compliance under our amended credit facility and other capital needs of the business.

During the first quarter, we repurchased approximately 127,000 shares for a total of $3.7 million and since the initial authorization of our share repurchase in November 2023, we bought back a total of approximately $5 million worth of our shares as of April 30th. Before I conclude, I’d like to summarize our outlook for the second quarter of 2024. In our SPP business, we anticipate both our revenue and gross margin to be relatively in line with the first quarter of 2024. As we move throughout the balance of the year, we expect continued strength in our revenue and margins similar to what we saw in 2022. We also expect backlog to remain high by historical standards, given the volume mix of expected SPP bidding in 2024. I’d also like to add, we remain encouraged by the amount of activity we’re seeing on our current and upcoming Water Transmission projects.

For a more complete view of these projects, please review our investor presentations which can be found on the Investor tab of our website within the Events and Presentations section. In our Precast business following a slow first quarter, which is generally the case in our Precast segment, we are expecting significant improvement in both revenue and margins for the second quarter of 2024 and a strong remainder of the year. We continue to believe in the strength of the Precast business in the mid- to long-term, given the significant level of pent-up demand specifically for residential housing, a growing need for infrastructure spending in the U.S. and our growing market position. In summary, the first quarter marked a solid start to the year in what we believe will be a significantly stronger bidding environment despite persistent macroeconomic challenges.

The diversification strategy that we embarked on in 2020 is continuing to take shape and we remain focused on positioning ourselves to take advantage of future growth opportunities that we anticipate arising in the Precast space. We continue to believe in the prospects of the Precast business longer term, despite the current interest rate environment and the resultant impacts to our financial performance. We believe the less cyclical nature of the Precast business helps balance out the business during periods of variability and Steel Pressure Pipe market, given the more transactional nature of the Precast business and associated faster cash conversion cycle. Our goal remains for our Precast related business to grow to a similar size as our SPP business in the near-term.

I’d like to thank our teams in the field for the strong operational performance and for the continued emphasis on safety infused at every level of our organization. Looking ahead, our priorities remain; one, maintaining a safe workplace, where our employees are proud to work; two, persistently focus and on margin over volume; three, continuing to implement cost reductions and efficiencies at all levels of the company; four, continuing to identify strategic opportunities to grow the Company; and five, in the absence of M&A opportunities, returning value to our shareholders through opportunistic share repurchases. I will now turn the call over to Aaron, who will walk through our financial results in greater detail.

Aaron Wilkins: Thank you, Scott, and good morning, everyone. I’ll begin today with an overview of our first quarter profitability. Consolidated net income for the first quarter was $5.2 million or $0.52 per diluted share, compared to $2.4 million or $0.23 per diluted share in the first quarter of 2023. Consolidated net sales increased 14.2% to $113.2 million, compared to $99.1 million in the year ago quarter. Steel Pressure Pipe segment sales increased 25.9% to $80 million, compared to $63.5 million in the first quarter of 2023. As Scott highlighted earlier, Steel Pressure Pipe sales exceeded our expectations, driven by a 54% increase in tons produced, resulting primarily from changes in project timing, which was partially offset by an 18% decrease in selling price per ton, primarily due to product mix.

Precast segment sales decreased 6.6% to $33.2 million, compared to $35.6 million in the first quarter of 2023 due to a 24% decrease in selling prices, primarily due to product mix, which was partially offset by a 23% increase in volumes shipped. Our Geneva business benefited from high shipment volumes in the first quarter, while our Park business saw contractors extend delivery timelines. The products we manufacture are unique. Therefore, shipment volumes in the case of Precast, production volumes in the case of Steel Pressure Pipe and the corresponding average sales prices for both segments do not always provide comparable metrics between periods, as they are highly dependent on the composition of each segment’s product mix. Consolidated gross profit increased 21.5%, $20.1 million or 17.8% of sales, compared to $16.6 million or 16.7% of sales in the first quarter of 2023.

SPP gross profit increased 83%, $14.2 million or 17.8% of segment sales, compared to gross profit of $7.8 million, 12.2% of segment sales in the first quarter of 2023, primarily due to higher volume and changes in product mix. Precast gross profit decreased 33% to $5.9 million or 17.7% of Precast sales, $8.8 million or 24.7% of segment sales in the first quarter of 2023, primarily due to changes in product mix. While demand has shown some recent signs of strength, particularly for residential products, the Precast segment’s average sewing prices have moderated through recent market pressures, which coupled with the shipment delays at Park resulted in first quarter Precast margins below our expectations. Selling, general and administrative expenses decreased 3.6% to $11.4 million or 10.1% of sales, compared to $11.9 million in the first quarter of 2023 or 12% of sales.

The decrease was primarily due to $0.5 million in lower incentive compensation expense. For the full year of 2024, we continue to expect our consolidated selling, general and administrative expenses to be in the range of approximately $45 million to $47 million. Depreciation and amortization expense in the first quarter of 2024 was $3.4 million, compared to $2.8 million in the year ago quarter. Given the larger bidding year expected for the Steel Pressure Pipe business and the planned commissioning of our new reinforced concrete pipe plant, we currently expect depreciation and amortization to increase modestly in 2024. Our non-cash incentive compensation expenses were $1 million for both the first quarters of 2024 and 2023. Interest expense increased modestly to $1.5 million from $1.4 million in the first quarter of 2023 due to higher interest rates, which more than offset the decrease in average daily borrowings.

For the full year of 2024, we expect interest expense to range between $5 million and $6 million. Our first quarter income tax expense was $2 million, resulting in an effective income tax rate of 27.5%, compared to $1 million in the prior year quarter or an effective income tax rate of 28.7%. Our tax rate for the first quarters of 2024 and 2023 were impacted by non-deductible permanent differences. We continue to expect our tax rate for the full year of 2024 to be within the range of 25% to 27%. Now I will transition to our financial conditions. Net cash used in operating activities was $26.1 million in the first quarter of 2024, compared to net cash provided by operating activities of $26.3 million in the first quarter of 2023, primarily due to changes in working capital, which were partially offset by increased net income adjusted for non-cash items.

Cash flow generation remains a key strategic focus of our business, as it is critical to the execution of our growth and shareholder return strategies. While we expected pressure on working capital needs for the Steel Pressure Pipe business in the first half of the year, working capital at March 31st was higher than expected, due largely to higher production levels experienced in the quarter. This was coupled with traditional pressures we see on Steel Pressure Pipe segments working capital needs, usually attributed to lower billings associated with the seasonal slowing in shipments to job sites. In addition, we maintained higher inventory levels through the first quarter in order to support the growth in production levels expected in 2024. However, we continue to expect these timing differences will reverse through the balance of the year.

And as a result, we continue to expect full year 2024 free cash flow to range between $19 million and $25 million. Our capital expenditures totaled $4.6 million in the first quarter of 2024, compared to $4.4 million in the prior year quarter. We continue to anticipate our total CapEx to be in the range of $19 million to $22 million for full year 2024. As Scott highlighted, we completed $3.7 million in share repurchases in the first quarter of 2024, at an average price of $29.39 per share, all of which were executed under a 10b5-1 trading plan. Since the inception of the program through April 30th, the total value of share free purchases are approximately $5 million. As of March 31, 2024, we had $89.9 million of outstanding borrowings on our credit facility, leaving approximately $34 million in additional borrowing capacity on our credit line.

In summary, we are very pleased with the first quarter results, which represent the best first quarter profitability performance the company has achieved in over a decade. Now that we are through the seasonally slower first quarter, we are well positioned to capitalize on improving market conditions through the balance of the year. Thank you to all of our employees for their continued exemplary execution and commitment to safety, as well as to our shareholders for their continued support and confidence in Northwest Pipe Company. I will now turn it over to the Operator to begin the question-and-answer session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is coming from Brent Thielman from D.A. Davidson. Your line is now live.

Brent Thielman: Hey. Thanks. Good morning, guys.

Scott Montross: Good morning.

Aaron Wilkins: Good morning.

Brent Thielman: I guess just first on Precast, I mean, a little lower than we were thinking in terms of margins this quarter. Scott or Aaron, what’s kind of a reasonable case for a rebound in the next few quarters, just considering some of the differences in regions and what sounds like a little bit of pricing or lower pricing being realized right now?

Aaron Wilkins: Yeah. I think when you’re looking at the free cash flow, Brent, it’s really the Steel Pressure Pipe business ended up being significantly stronger than we thought it was going to be in the first quarter. So as you know, that ties up a lot of current assets initially and then it starts to roll out of those current assets and come back to the balance sheet. So we expect the Steel Pressure Pipe revenues to be relatively stable throughout the year. So now that we’re up at a plateau, I think that we’re going to see that reverse as we come out of this thing. The other thing we’re getting more all the time is more prepayments for steel and actually MOH payments. In fact, we just won a big project not long ago where we’re receiving well in excess of $10 million of prepayment for the whole project.

So I think that’s going to contribute to the cash flow as we go forward, too. Plus, everybody in the senior management program at this company now has a cash flow goal for the year, so with it tied to variable compensation. So that is being very, very closely watched.

Scott Montross: Brent, just to make — I think you may have said free cash, we heard Precast in our set. Were you talking about the Precast margins?

Brent Thielman: Well, that was one of my questions was free cash, so you answered that. But, yeah, no, I was referencing that. The Precast margins and that kind of rebound we ought to be thinking about.

Scott Montross: Yeah.

Brent Thielman: It sounds like you think it’s going to get better from here.

Scott Montross: I know — I think what the Precast was, it was really on the non-res side part. The bookings were really, really slow in the fourth quarter of 2023. We only booked like $16 million worth of business at Park in the fourth quarter, which really led to a — and this is pretty transactional business on the Precast side, right? So it really led to a very small shipping first quarter of 2024. Well, that’s kind of rebounded now as we’ve gone through the first quarter. We’ve booked in excess of $22 million at Park in the first quarter, which should lead to a pretty strong second quarter in Park and those margins coming back up. The other thing is with Precast, we are still seeing substantial demand from the residential side.

And ultimately, what we’re seeing is a Geneva order book, since that’s mostly residential, that’s continuing to grow and we’ve just implemented a price increase there in March because the bookings are coming in so strong. So we’re pretty confident we’re going to see a pretty good rebound in both revenue and margins as we get into the second quarter and through the rest of the year.

Brent Thielman: Okay. And Scott, just coming back to SPP, I would have thought you would have seen some delays. I think you did see some delays just with respect to the poor weather in parts of the country, but it doesn’t seem to have been a huge impact. Was there pull-forward this quarter? I’m just wondering why the outside performance, because I had expected some delays there.

Scott Montross: We’re starting to see changes in project timing. I wouldn’t say anything was pulled-forward. But it’s really, we had so much work bid in the first quarter and won so much work in the first quarter that we’re starting to get pretty loaded up at some of the facilities. So as — we’re having to jockey the production schedules around a little bit so that we can produce these things on time and it really wasn’t a pull-forward. But, I mean, we produced $80 million worth of revenue in the first quarter and the backlog still went up by like $18 million or $19 million. I can’t remember what exactly it was. So you can kind of do the math on how much we won work in the first quarter. So we’re pretty loaded up at some of the facilities.

Brent Thielman: And just the last question to that, Scott, with all the work that you’re picking up, maybe the pricing attached to that, is it more attractive? I guess is the bid climate more appealing to you from a competitive standpoint?

Scott Montross: Yeah. I think when you’re dealing with the pricing, it’s a function of what steel prices are. And one of the things is that steel prices are remaining pretty high by historical standards. They’re pretty stable right now, fluctuating around $825 or $835 for a hot-roll band. But there’s two things that drive margins for the Steel Pressure Pipe thing. One is obviously demand, and demand builds backlog industry-wide. And when backlogs build like that industry-wide, what happens is not everybody can do a job at the same time, so you have less bidding pressure on these jobs and you tend to see the margins start to move its way up a bit too. So we’re pretty happy about the direction that all that is going right now and these margins are moving in the right direction at this point.

Brent Thielman: Excellent. Thank you. I’ll pass it on.

Scott Montross: Absolutely.

Operator: Thank you. Next question is coming from Julio Romero from Sidoti & Company. Your line is now live.

Julio Romero: Hey. Good morning, Scott and Aaron. Maybe staying on that point on SPP, just trying to maybe understand the strong margins a little bit, because they were really impressive. And as you just said in response to Brent’s question, it was customer-driven project timing. You said you had to move around production levels a bit, but it wasn’t pull-forward. So are you saying maybe you took on some quick-turn work at like…

Scott Montross: Yeah. We…

Julio Romero: … favorable. Is that what it was? Okay.

Scott Montross: Yeah. We got the first quarter, which [Technical Difficulty] on it, and ultimately, we got a little bit higher production levels on it. But we’re seeing really, really strong bidding through the first quarter and we expect the year to be a pretty good, strong bidding year. And we have not even gotten to the IIJA funded part of this market. For us on Steel Pressure Pipe, that is a thing that’s probably out in late 2025, 2026, 2027, 2028. So the expectation is we have a pretty strong Steel Pressure Pipe market coming at us for multiple years in a row. And when you get multiple strong markets for Steel Pressure Pipe in a row, you tend to get a situation where the margins start to push up toward something that begins with a two at that point.