Northwest Pipe Company
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Company Representatives:]

Scott Montross - President, Chief Executive Officer Aaron Wilkins - Chief Financial Officer

[Operator:]

Good morning and welcome to the Northwest Pipe Company, Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. . Please note, this event is being recorded. I would now like to turn the conference over to Scott Montross. Please go ahead.

[Scott Montross:]

Good morning and welcome to Northwest Pipe Company's fourth quarter and full year 2020 earnings conference call. My name is Scott Montross, and I'm the 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, March 3, 2021 at approximately 4

[Aaron Wilkins:]

Thank you, Scott, and good morning everyone. I hope you're all staying safe and healthy. I'll begin today with our fourth quarter results. Adjusted net income for the fourth quarter of 2020 was $5.6 million or $0.57 per diluted share, compared to adjusted net income of $10.2 million or $1.04 per diluted share in the fourth quarter of 2019. Adjusted net income excludes unique unusual items and is provided for compatibility purposes. The fourth quarter of 2020 excludes $0.4 million in amortization expense of intangible assets acquired with Geneva Pipe and Precast, net of applicable taxes. This compares to $1.9 million of favorable insurance recoveries associated with the Saginaw fire, net of taxes in the fourth quarter of 2019. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive accounting of the fourth quarter and full year adjustments. Our fourth quarter net sales decreased 4% to $69.4 million compared to $72.2 million in the fourth quarter of 2019. Geneva sales were $11.3 million in the fourth quarter of 2020. Legacy revenues decreased $14.1 million from the year ago quarter due to a 31% decrease in tones produced due to changes in project timing. This was partially offset by 17% increase in selling price per ton due to product mix.

[Operator:]

Thank you. Our first question is from Brent Thielman from D.A. Davidson. Please go ahead.

[Brent Thielman:]

Hey, good morning Scott and Aaron.

[Scott Montross:]

Hey Brent.

[Aaron Wilkins:]

Hey Brent.

[Brent Thielman:]

Hey, I guess first question. Some pretty extraordinary moves in steel prices lately. I guess first part of the question, do you feel your margins are pretty well protected for that and then the second part of the question Scott would just be that, you know assuming your selling prices are probably gone way up to offset that, can that offset a large portion of the volume declines that you are expecting early in the year?

[Scott Montross:]

Well, when you look at what’s going on with steel pricing Brent, really it started mainly in the fourth quarter of 2020. Actually what you have is a situation 2020 versus 2019, you know the steel price wasn't much different when you averaged for the year. It was just the fourth quarter that really started to have the impact, so that steel price and the steel that you are buying in the fourth quarter likely affects the revenues you more get into the late first quarter or early second quarter of the year where that starts coming in. Obviously after that, the longer the steel prices stay up, the higher it pushes the selling price, simply because of what the piece of the steel cost is. So on the margin side, when you're looking at it, you know we’re – when we bid our jobs, we go out and get a steel price and use that to grow with – to the customer. Generally that works pretty good. We have seen some cases with the volatility in steel and how overloaded the steel order books appear to be, that we've gone back and then there may not be steel available and we have to get it from somebody else, which has a little bit of an impact. But we have several people here that have been in the steel business for a lot of years, so we are kind of used to seeing this. The same thing really happened in 2008. So it's not something that we haven't seen before, it's just really managing your way through it. But certainly we’ll have – if the steel price stays high for an extended period of time, which it appears that it will, at least for at least another few months, then that certainly pushes the selling prices up. And what was the second part of the question Brent?

[Brent Thielman:]

Well, Scott yeah, I assumed that selling prices would move higher and I – you know I was trying to think about that in the context that you're going to have some volume pressure it sounds like here, in the early part of the year at least and you know could that be enough to offset a big portion of that?

[A - Scott Montross:]

Yeah, I think that that's the key. The only – in the first quarter we're really seeing you know multiple things. One, is the amount of work that we actually saw slide out of 2020 and into 2021, maybe a little bit into 2022. But if you look at what really slid out of the second half of the year, by our calculations it was well in excess of $100 million worth of work, okay, so it was a big, big piece of work. So right now what we're seeing is a pretty solid bidding schedule in 2021. It's just a matter of really getting ourselves through the early part of the year and some of the weather and the steel disruptions that we saw in the early part of the year. But what I would say is – and I look at the bid log and bid calendar every week and have a bid meeting with our head of sales and our heads of operations and that bid calendar as we go out, especially over the next several weeks, it looks as good as I've seen it in a while. So in fact we've actually seen some jobs inserted into the bid calendar and other jobs actually pulled up into the bid calendar, so that's why we've got some cautious optimism about 2021.

[Brent Thielman:]

Okay, and Scott I mean it sounds like part of the slide was in fact some of the weather that you’d seen in terms of being back to the bid calendar.

[A - Scott Montross:]

Yeah, a little bit, but I think Brent, most of the impact that we saw with job sliding and there’s still a little bit of that going on with jobs sliding around, but most of the impact that pushed jobs out of 2020 into ‘21 was really COVID related. When you look at the first part of the year when this COVID virus really started to kick in, in the early second quarter you had a period of time, it may have been a month and a half or so where everything kind of stopped, because people are trying to figure out how to actually do things remotely and keep work and business going, so you had stuff push out into the second part of the year. But what you had once you got into the second quarter of the year is you had a situation where you have people working remotely and they are able to do the work with the permitting, the bidding of jobs, the engineering of jobs. It started to take longer and longer, which is why you're starting to see as much slide out into 2021. You know it could be as high as $130 million that actually slid out into 2021 or early ‘22. So when you think about that, you know the – just taking a look at that, looking at like 2019, which was relatively close to a record year, the water transmission steel pressure pipe side and looking at 2020, you know obviously some of that stuff that slid out of 2020 would have ended up being revenue in 2020 and then additional revenue in 2021 early in the year. So just looking at that for 2020, when you look at that much work sliding, that certainly makes the steel pressure pipe business a little bit larger in 2020 than it actually ended up being. So you could actually put some numbers together and kind of look at that and say, ‘well, there was a significant amount of more potential there that’s actually slid out into 2021.’

[Brent Thielman:]

And Scott from a, either $1 or a tons perspective, are you are able to give us a little more context of how much the market could be up this year if the calendar plays out as planned. I know it’s not always the case, but…

[A - Scott Montross:]

Well, you know what I can tell you Brent is looking at the number of jobs that we have, that we have forecasted to do, in 2019 we had about 242 jobs that bid. Now that was – that’s a really big bid in the year which obviously you know resulted in a pretty large near record year in 2019. In 2020 we had about 209 jobs that we’re bidding during that time and that probably leaked down a little bit more, because some were actually leaked out at the end of the year. We're actually looking at a number right now for 2021 in the mount of jobs that are between 2020 and 2019, somewhere in about the 220 job range. So pretty strong and solid bidding that we are currently seeing this year for the 2021 bid calendar.

[Brent Thielman:]

Okay, that's helpful. You know last one for me is just on Geneva. Any context at how much higher that order book is there? I think – I mean when you bought it, we were sort of entering this pandemic and I don't know if that’s a fair comparison you know in the last year. Just trying to think about how much the business can grow off that…

[A - Scott Montross:]

Yeah, if you look at what our results were, our revenue for Geneva for 2020, we were rated about $44.2 million. Well, that didn't include about $3 million that Geneva had in January prior to what we owned and so total Geneva business was likely in the area of about between – somewhere between $47 million and $47.5 million. You know we're expecting based on you know what's going on in the precast business that that’s to continue to grow. The order book right now that we have for Geneva is in a similar territory to what we saw last year when we were transacting for Geneva. I think the thing that we have going on for the precast business is you know a lot of the drivers are related to population growth and housing starts, and you know when you look at single family construction starts in 2020, that was one of the areas in the construction market that actually grew in 2020 and it's expected to continue to grow in 2021. I think we're seeing that – you know I know we're seeing it in the Pacific Northwest with how little housing inventory there actually is in the market right now in the building that's going on, then the low interest rates support that. With Geneva specific and really in Utah, you know we're seeing housing starts at least climb in the area of the national range if not a little bit higher, because there's a strong net migration into Utah and the forecast is pretty robust for Utah going forward. So I think when you're looking at what Geneva could be for 2021, thinking back to when we talk to the markets about Geneva when we acquired we’re saying, ‘Hey, you know it makes sense to look at a growth rate. It's probably somewhere between 3% and 4% and that probably works in this case.’ I do think that the line products that are starting to be commercialized and sold into the marketplace may cause a little bit of upward potential on that also.

[Brent Thielman:]

Okay, very helpful. Thanks for taking the questions guys.

[A - Scott Montross:]

Absolutely.

[Operator:]

The next question is from Gus Richard from Northland. Please go ahead.

[Gus Richard:]

Yes, thanks for taking the questions. Just real quick, in terms of the steel market and then your ability to get the raw material, are there any disruption in terms of supply?

[A - Scott Montross:]

I would say that you can get supply. It's where it's been delivered Gus or when it's being delivered, because you know there's a few things that have gone on in the steel business over the last year. One, you got a couple of major mergers in steel, right. U.S. Steel acquires Big River and Cliffs, a mining company acquired substantially all of the assets in North America of Mittal Steel, except I believe the one in Calvert, Alabama and previous to that at the end of 2019 they acquired AK Steel. So what you had is a situation, you've got those major mergers going on and then what we saw later in 2020, we started to see some down times being scheduled normally for normal maintenance. It really tightened the steel supply during that period of time. As a result we saw lead times jump out and you know with the existing trade cases that are actually in place, supply got very tight. So getting it exactly when you want it has been a little bit difficult over the last probably three or four months. And when you look at pricing, you know since July of 2020 the steel prices kind of actually almost tripled. You know I think it was somewhere in the area for a hot rolled band about 465 last July and right now we're bumping into $1,200 a ton FOB the mill for steel. So when that price started going up it created a little bit of buying panic. The production schedules got overloaded at steel mills and the availability got a little bit sporadic. So it led to late deliveries and what that causes for us is, if we had projects scheduled to run, we may have to pull that production planning schedule, put another product in its place so you have more changeovers and not running what you thought you were going to run. So things got a little bit disruptive in steel for a while, but you know we’re fine and good with high steel prices; higher steel prices, higher freight prices. Even at the same gross margins, higher gross profit dollars, so we're fine with that. But what we have a little bit of an issue with is the volatility when it causes the availability and delivery issues, but as we go out through this period of time, we think that steel’s going to start to stabilize you know and you have the integration of the mergers that continues to get more traction. And then you know the higher steel prices attract more imports and ultimately that starts to balance off where the pricing is, and then we have a bunch of additional domestic capacity starting up sometime mid to late this year. So we think things are going to moderate and stabilize here, probably over the next few months, but it's been a little bit challenging.

[Gus Richard:]

Got it, that's very helpful. And then in terms of the first quarter, I mean we're pretty parked through the quarter and obviously there's been bad weather. Are you – through those weather delays, are those still impacting you and do you expect them to be an impact going into the second quarter?

[Scott Montross:]

As far as the weather delays, we were through the weather delays unless there is any more extreme weather. I mean we had three of our plants affected. Obviously the one near Dallas Texas was affected the most, where there was no power for you know 4.5 days and no power down there based on you know the normal weather patterns they have and the insulation levels of water pipe. Within the plants you have – you obviously have pipe freezing problems and you have some pipe break problems. But we were actually up and it will start running again after the fifth day, right after the power came back up, but it did disrupt us for a number of days. We had heavy icing in West Virginia. They had a part of the plant down for a couple of days. In Portland you know we had up to 15 inches of heavy snow here, which is not a snow event that we're used to here. So we had issues with getting people to work, we had a little bit of roof damage to one of our buildings which has been taken care of, so we were down for a couple of days at one of our plants in Portland. Now everything is back up and moving and it's been back up and moving for just right after the storm, but it definitely caused some disruptions. And the other thing Gus this really does is it also disrupts deliveries of raw materials a little bit more, especially steel, depending on where it's coming from, because over the road truck drivers or rail into certain areas was delayed for a couple of days, so a little bit more disruption to the delivery schedule. But everything right now is starting to get back to a little bit normal footing.

[Gus Richard:]

Got it. And then you know so things have been slowed down a bit, the bidding process has been slowed down a little bit, but clearly there's demand and these projects are moving forward. Is there an opportunity for you guys to increase your output in the coming months and quarters as you know things sort of progress towards normal and is it – are the projects in a position where if you could produce more, they could use more.

[Scott Montross:]

Yeah you know, they – yes, we definitely have the ability to ramp up to take on projects. I think a little bit of what we're seeing right now obviously can always change and things can move, but we're seeing a little bit of projects stacking up in the bid log because of things that have moved out. You know we still have some still have some stuff moving down the calendar a little bit, but things are stacking up and as we through this year, at least currently things look pretty positive you know and it’s kind of in line with the way it looked last year before things started moving around and moving out. So we are still pretty cautiously optimistic on this year.

[Gus Richard:]

Got it, got it. And just basically, rolling all this up, you know Q1 will be very challenging. You'll start to recover in Q2. Q3 will be the big ramp quarter and then the seasonal softness and Q4. Is that sort of the trajectory you guys are thinking about?

[Scott Montross:]

You know that’s kind of the normal trajectory of the – both the steel pressure pipe business and the precast business. I think what you have now is the potential, at least as it sits right now, and again this could change. But you have the potential of things continuing to ramp through the year, even through the fourth quarter with what we see in front of us.

[Gus Richard:]

Okay, got it. Thank you for the clarity.

[Scott Montross:]

Absolutely.

[Operator:]

The next question is from Mike Morales from Walthausen & Company. Please go ahead.

[Mike Morales:]

Hey, good morning Scott and Aaron. Hope you are staying safe and well.

[Scott Montross:]

Hey Mike, how are you?

[Mike Morales:]

Doing well, thanks. Hey folks, I appreciate the color that you guys gave. Just on your thoughts as we are thinking about the precast market and moving forward with growth in that area. If you’d indulge in it, I’d like to dig a little bit deeper into that and kind of pick your brain on what you're seeing I guess out in the acquisition market currently? If we think back to when the Geneva acquisition was announced and kind of the financial characteristics of the acquisition, you know obviously it’s played out pretty well relative to your expectations. Are there other Geneva’s out there? What are the multiples? Just help me understand what you are seeing.

[Scott Montross:]

Yeah, the M&A markets were pre-cash and obviously that’s our growth area that we are focused on. People that are interested in talking, companies that are interested in talking, it's been pretty positive. I think one of the things about the precast business with everything that we talked about earlier is a lot of these companies had really good 2020’s and you know forecasting really good 2021’s. But there's definitely availability out there and a lot of the availability we are seeing are Geneva plus size, maybe a potentially bigger than Geneva and some quite frankly that could be a lot bigger, so those are out there. Same thing with the margin profile of these businesses that we've looked at. The margin profile is strong. It's product mix is a little bit different than maybe what we see at Geneva. You have the water piece of that, which you know centers upon RCP and Culvert and manholes and things like that. But some of these guys also have a little bit of the precast that’s maybe non-water, like different vaults for utilities and things like that. Those margins all look very strong through 2020 and looks strong going into 2021. I mean the big thing on the multiples of what we see, we're seeing multiples still right now that are probably similar to what we saw with Geneva. I think when we finished off on Geneva the multiple is about 7.4 times, is that right Aaron? If I remember that correctly, so they are similar to that. The interesting thing is if you saw some of the news that Quikrete just announced the impending acquisition of Forterra and Forterra is one of the big three in the precast concrete market. The other two of the big three are Rinker and Oldcastle, while Quikrete already owned Rinker. So now they have both Forterra and Rinker. They will have Forterra. It’s not scheduled to close until the fourth quarter. They much have to go though some regulatory things to close. But the interesting thing was, looking at that and the size of the multiple that they were looking at, which is significantly larger than what we've actually seen. So we're – Aaron and I are looking at that and man, that is a really – that's a really big multiple. The thing I don't see from the chair I’m sitting in, is what are they going to look at as far as synergies for the company. What are they going to realize for the synergies of the company, which could be really interesting when you put the two big guys together and what synergies they create. So it may drive that, the higher multiples. So it’s a little bit, it's a little bit of a range right now. I would say with the things that we're seeing multiple wise, depending on the size, you're seeing companies that are ranging anywhere from about 6x or 6.5x up to over 10x, but the stuff that we're looking at is more in the seven or so range.

[Mike Morales:]

That's really helpful and you know especially the discussion about the synergies coming from the acquisitions that you had just mentioned about. You know kind of taking that and always with the hope of a higher multiple for you guys, I'm thinking about acquisitions and…

[Scott Montross:]

There you go.

[Mike Morales:]

Would you guys be looking to – would you guys be looking to do acquisitions in the precast market, in a geographic, you know – let me be a little more of an optimist. Should I expect you guys to grow outwards from your existing footprint in order to capture synergies that you might be able to get there just knowing how geographically locked this business can be?

[Scott Montross:]

Best case scenario, you try to grow out geographically from the market that you are already in, which is for us, and that’s best case scenario. The issue is there is not always willing buyers that are in those markets that are in geographic locals that are close to what you have right now. So you potentially end up looking at stuff in different areas you know and ultimately trying to figure out how you pieced that together and the synergies out of it. I think from the synergy side, as you put stuff together, it's really an overall management piece, it’s a back office piece, its ERP systems, it's things like that where you really start to drive the synergies as you continue to put these pieces together. But we would love to be able to grow out like from a bulls eye geographically from where we are, but it's not always available and even the stuff that's available, it may be significantly smaller in size and you know there may be other things in other geographic locations that might make more sense.

[Mike Morales:]

Right, understood and maybe just hearing that, you know it strikes me that the learning that you guys have taken from the Geneva acquisition and the integration, you know if synergies are truly just coming from the back office functions, do you consolidate it?

[Aaron Wilkins:]

I think – did we lose you? Did we lose you Mike?

[Mike Morales:]

Sorry about that. Can you hear me?

[Scott Montross:]

Yeah.

[Mike Morales:]

You know it sounds like some of the improvements you can make are really very repeatable, and it kind of creates almost like a formula that you guys can have here, as you look to grow that business, if you know integrate the ERP, consolidate back office synergies, margin expansion, multiple expansion, is that kind of how you guys are thinking about it?

[Scott Montross:]

Absolutely! That's a very consistent topic of discussion at both the senior management and the board-of-directors level right now. Those are the absolute kind of things that we're looking at.

[Mike Morales:]

Got it. Folks I appreciate all the color. Exciting stuff to come. Keep up the good work.

[Scott Montross:]

Thanks Mike, good to talk to you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Scott Montross for any closing remarks.

[Scott Montross:]

Thank you. Thanks again for joining the call today. I'd like to conclude by reiterating that as we look at the structure of our business, it continues to remain strong. I think some of the programs that we see as potential, infrastructure programs that are out there that are being worked on like the water affordability and transparency, equity and reliability bill that they're working on, could also add to bolstering this business for a long, long period of time. Despite the near term delays that we've had into 2021, the demand remains healthy. As evidenced by our backlog, which has been over $200 million for the last 10 quarters and was still over, it's still over $220 million even after all the work moving out of 2020. As we look further out to 2021, the building projected to remain very solid, our precast order book remains elevated, even though we are in the slower time of the year, and we are in a very good position based on our liquidity, our continued cash generation, to continue to execute on our strategy and to continue to support the water infrastructure needs in the U.S. well into the future. So thank you to all of our employees again for their exceptional work during this very difficult year, and we look forward to speaking with everybody again on the first quarter call in early May. So thank you very much.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.