Northwest Pipe Company (NASDAQ:NWPX) Q3 2023 Earnings Call Transcript

Northwest Pipe Company (NASDAQ:NWPX) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Greetings, and welcome to the Northwest Pipe Company Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Scott Montross, President and CEO of Northwest Pipe Company. Thank you. You may begin.

Scott Montross: Good morning, and welcome to Northwest Pipe Company’s third quarter 2023 earnings conference call. My name is Scott Montross, and I am 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 November 2, 2023, at approximately 4:00 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 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.

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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 third quarter performance and outlook. Aaron will then walk you through our financials in greater detail. Our third quarter revenue of $118.7 million improved 2% over the second quarter and declined by 3.5% compared to the prior year quarter. Revenue from our SPP segment remained fairly strong, but decreased 3.8% to $80.5 million compared to the prior year quarter. Coming in below our expectations due to onetime anomalies that impacted both revenue and gross margins in the third quarter. First, we had some customer-driven contract changes as well as scope changes of certain projects that had previously been forecasted to benefit the third quarter.

We also encountered some customer-related delays that impacted project delivery timing, which pushed projects scheduled to be produced in the third quarter out into early 2024. This led to short-term production gaps at certain plants causing higher levels of under absorption, further impacting our revenue and margins for the quarter. In addition to these nonrecurring items, higher selling prices in our SPP business due to sales mix were partially offset by decrease in tons produced, resulting primarily from changes in project timing. Prices of hot-rolled band steel declined approximately 27% from the second quarter to the third quarter, but have increased rapidly by approximately 16% from September through year-to-date fourth quarter. SPP backlog, including confirmed orders, was $335 million at September 30, which modestly declined from $343 million at June 30, 2023, and from $347 million as of September 30, 2022.

Our backlog remains elevated by historical standards even though 2023 has been a relatively small bidding year. Now turning to our Precast segment. Precast revenue decreased 2.8% from the prior year quarter to $38.2 million, primarily due to reduced demand resulting from the current interest rate environment impacting the U.S. construction market, which led to decreased absorption of overhead, changes in our product mix and reduced selling prices given lower market demand, all while raw material input costs have remained fairly elevated. Nevertheless, as we progressed into a slower period Precast time of the year in the fourth quarter, our Precast-related order book has remained fairly strong and totaled $52 million as of September 30, 2023, which was down from $58 million as of June 30, 2023, and down from $74 million as of September 30, 2022.

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Q&A Session

Our third quarter consolidated gross profit decreased 23.2% year-over-year to $19.3 million, resulting in a gross margin of 16.3%, down from 20.4% in the third quarter of 2022. Our SPP gross margin of 13.6% declined by approximately 340 basis points over third quarter 2022, primarily due to the anomalies I just discussed, including customer-driven contract changes and project scope changes that reduced the gross profit we expected to realize in the third quarter and from customer-driven changes in project delivery timing, which pushed projects that were scheduled to be produced in the third quarter out into early 2024 and created near-term production gaps at certain plants leading to higher levels of under-absorption. Absent these items, we estimate that our SPP gross margins would have been approximately 200 basis points higher.

Also important to note is that we are starting to see the relatively small SPP bidding market we have experienced in 2023 result in some pressure on project margins for projects that are currently bidding. Our Precast gross margin of 21.9% of Precast sales in the third quarter of 2023 decreased by approximately 590 basis points from the near record highs experienced in the third quarter of 2022. The decline was predominantly due to the impact of rising interest rates on the commercial construction and residential housing markets, which moderately reduced Precast product demand, reducing overhead absorption and resulting in changes in our product mix. This led to our margins normalizing compared to the record year we had in 2022. Next, I would like to provide an update on our capital allocation priorities.

Our focus on organic growth of the business remains a top priority by means of our product spread strategy with our Precast operations. The acquisition of ParkUSA in October of 2021 spawned this strategy given the Park business employs some of the same capabilities that we have in our other Northwest Pipe facilities, namely the production of Precast vaults and fabricated steel housings, which in the case of ParkUSA service containment units for the water control system products and the water-related environmental solutions systems. As such, our Level 1 product spread effort has been ramping to build out our capacity utilization in our Texas-based ParkUSA plants to maximize efficiency and production. To that end, the Park team has bid on approximately $32 million worth of projects outside of Texas year-to-date 2023, predominantly in the Western and Southeastern regions of the United States.

And of that, year-to-date, the team has booked approximately $7.1 million worth of orders outside of Texas, up from $4.5 million in the second quarter. Over the last 12 months, we’ve successfully booked approximately $8 million in projects, and we were just getting started. Level 2 product spread comes into play because we also produce the concrete vaults and steel fabrication at the current Northwest Pipe plants. As such, we are in the early stages of bringing the production of ParkUSA’s products to our existing Northwest Pipe locations, which we believe will provide incremental organic growth potential to the company. As previously discussed, our Geneva Precast operations have been serving as the pilot locations for Level 2 product spread activity.

Year-to-date in 2023, we have produced 10 projects at Geneva and are currently in production on three Park product orders with more scheduled to come. We plan to expand upon Level 2 product spread once Park products are more comfortably established at the Geneva locations before we expand the Park products to additional Northwest Pipe legacy plants. We remain confident in our organic growth strategy for the Precast to further diversify our business with the goal of improving our resiliency through economic cycles and driving long-term consistently profitable growth. Despite the short-term challenges affecting the Precast business, we believe in the long-term value proposition of this space and investments that we are making to drive sustainable growth.

Following organic growth, we remain highly focused on repaying the debt incurred to finance the acquisition of ParkUSA in order to position ourselves for further acquisitions, but only after we are comfortable that ParkUSA has been fully integrated. I’ll next turn to our M&A strategy, in which we currently are continuing to seek accretive acquisition candidates in the Precast-related space. While the integration of Park remains paramount, including the finalization of the ERP system integration, which is expected to be completed by the end of this year, we are continuing to evaluate prospective high-quality opportunities to possess strong organic growth potential and margin characteristics, solid asset efficiency and positive cash flow profiles.

We recognize that finding the right opportunities take significant due diligence in time. And as such, we are pleased that our Board has authorized a stock repurchase program in the amount of $30 million with no expiration date. Underscoring their confidence in our long-term strategic growth plan in alignment with our goal to enhance shareholder value. In the absence of meaningful M&A activity, we may opt to return value to our stockholders via opportunistic share repurchases as we deem appropriate. Obviously, any repurchases would be subject to our liquidity, including availability of borrowings and covenant compliance under our amended credit facility and other capital needs of the business. Before I conclude, I’d like to summarize our outlook for the remainder of the year.

Aside from some of the challenges we are continuing to work through, such as our ERP implementation, and the resultant impact the current interest rate environment has had on our business, our outlook for the balance of 2023 remains positive. In our SPP business, we anticipate a strong fourth quarter given various customer-driven anomalies that I just discussed that we faced during the third quarter that are not expected to be reoccurring as well as continued strength in our backlog. We entered 2023 with a robust Steel Pressure Pipe backlog near record territory, which has remained elevated and should carry us through into 2024 and lead to a strong finish to 2023. Despite the relatively small level of bidding that we’ve seen this year. However, over the last few months, the small bidding environment has caused downward pressure on project bidding.