Welcome, and thank you for standing by. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect. And now, I'm turning the meeting over to your host, Mr. Scott Montross. Sir, you may begin. .

Thank you, Al. Good morning, and welcome to Northwest Pipe's conference call. My name is Scott Montross, and I'm President and CEO of the company. And I'm joined by Robin Gantt, our Chief Financial Officer..

As we begin, I'd like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements, and actual results could differ materially.

Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations..

I will now turn to Robin, who will discuss our third quarter results. .

Thank you, Scott. .

Our income from continuing operations was $5.9 million or $0.61 per diluted share. .

Water Transmission sales increased to $76.9 million in the third quarter of 2014 from $46.8 million in the third quarter of 2013. Water Transmission gross profit as a percent of sales increased to 21.5% in the third quarter of 2014 from 16.9% in the third quarter of 2013.

We had a revision in our estimate of the contingent consideration related to the Permalok acquisition of $859,000, which was included in the Water Transmission results. Excluding this positive impact, the Water Transmission gross profit as a percent of sales in the third quarter of 2014 was 20.4%.

The increase in Water Transmission sales was due to continued production of the IPL and Madison Gillette projects in the third quarter. The increase in gross profit and gross profit as a percent of sales was driven by product mix, as well as the increase in production..

Tubular Products sales from continuing operations increased 25% to $39.6 million in the third quarter of 2014, from $31.7 million in the third quarter of 2013. Volume increased 23% and selling prices increased 2%. We sold 39,700 tons in the third quarter of 2014 compared to 32,400 tons in the third quarter of 2013..

Tubular Products' gross profit as a percent of sales was negative 1.9% in the third quarter of 2014 compared to a positive 10.5% in the third quarter of 2013. Our energy products comprised approximately 70% of Tubular Products volume -- sale volumes in the third quarter 2014, compared to 68% in the third quarter of 2013.

Gross profit and gross profit as a percent of sales were negatively impacted by margin compression as steel foil costs increased 9% while selling prices increased only 2%..

Selling, general and administrative costs increased in the third quarter of 2014 to $6.5 million from $5.6 million in the third quarter of 2013. The higher income in the third quarter of 2014 led to the accrual of some bonus expense, while we had some negative adjustments in the third quarter of 2013.

The amortization of the intangible assets acquired as part of the Permalok acquisition also contributed to the increase..

Interest expense was $457,000 in the third quarter of 2014 and $893,000 in the third quarter of 2013. The decrease was due to lower average borrowings and interest rates..

Our effective tax rate from continuing operations was 35.9% in the third quarter of 2014 and was 41.3% in the third quarter of 2013..

In the first 9 months of 2014, the company generated $31.2 million in cash from operations to support the growth of the business, mainly through decreases in trade and other receivables. Depreciation was $10.1 million in both the first 9 months of 2014 and 2013..

Inventories increased $11.5 million by the end of the third quarter from the end of 2013. This was due to an increase in Tubular Products inventory, which has become necessary with the increased production and shipment levels following the completion of the Atchison modernization project. This excludes the impact from the sale of the OCTG business..

Capital expenditures were $11.6 million in the first 9 months of 2014, which concluded $4.4 million for planned capacity expansion in our Atchison, Kansas line pipe facility. The remainder was for ongoing maintenance capital expenditures..

Now I'll turn it over to Scott for an update on our business. .

As of September 30, 2014, our backlog in Water Transmission was approximately $138 million. As of September 30, 2013, our backlog was approximately $108 million. We expect that the fourth quarter of 2014 will be challenging compared to the third quarter.

The backlog in Water Transmission has remained relatively steady, with the addition of the IPL and Madison Gillette jobs. We expect Water Transmission sales to be similar to second quarter levels, with gross margins in the low-teens.

Despite the significant operational improvements that we have made in the last couple of years, we've experienced an extremely aggressive bidding environment, which is negatively impacting our sales and margins..

Following is an outlook on upcoming Water Transmission projects. .

First segment of IPL was mostly complete by the end of the third quarter and will be complete by year-end. We have been awarded about half of the second segment of IPL, which will have limited production in the fourth quarter and will run through the first quarter of 2015.

Based on current construction timelines, we expect 2 more segments of IPL to bid in 2015. .

The 22-mile Madison Wyoming project started production in the second quarter and will run through early next year. The San Antonio water resource integration project was split into 4 bids, one of which has been awarded to us thus far and is included in our backlog. We believe that we have a good chance of winning 1 additional segment..

The 140-mile Red River job in North Dakota is moving forward and will bid in 2016. While we're watching the drought situation in California very closely, we've not yet seen an increase in bidding activity.

Today's voters in California are considering Proposition 1, a $7.5 billion bond measure that would authorize the state to issue new bonds to pay for a wide variety of water-related projects.

There are some longer-term speculative projects that could start appearing in 2016 and later as a result of this bond measure, but it's too soon to know for certain. .

In Tubular Products, we are increasing volumes and enhancing our products mix as a result of the Atchison expansion project. Fourth quarter's net sales in Tubular Products will be higher than third quarter, but we do not expect to see any easing on pricing pressures from imported pipe. Therefore, we expect margins will be about breakeven.

In response to these pricing pressures, we are part of an industry trade case filed against Korea and Turkey on line pipes in October. The International Trade Commission preliminary determinations are expected in December, and the Commerce Department's preliminary determinations are expected in the second quarter of 2015..

We expect between $15 million and $16 million of total capital expenditures for 2014, which includes the Atchison expansion project completed earlier this year, and normal capital maintenance..

As we've mentioned in the past, we are aggressively seeking acquisitions. As all of you know, it's our policy not to discuss M&A activity on these calls. However, what we can tell you is that we've engaged a strategic firm to help us focus our efforts, and we are working very closely with investment banks to identify specific targets..

In conclusion, the third quarter of 2014 was a definite improvement over the last several quarters. We expect Water Transmission revenue and margins to decrease in the fourth quarter, with a continued aggressive bidding environment.

In Tubular Products, we anticipate fourth quarter volumes will continue to grow, but we, again, expect around breakeven results as line pipes and hot-rolled coil spreads has only recently begun to expand, and as the line pipe markets await the results of the recently filed trade case. .

At this time, we'll be happy to answer any of your questions. .

[Operator Instructions] Our first question here comes from Mr. Matt Sherwood. .

First of all, great quarter in the water side.

Can you sort of talk -- I mean, you referenced this aggressive bidding environment -- hello?.

Hello? We got a lot of feedback in the middle of your question, Matt. .

Yes. So you referenced this aggressive bidding environment on the water side. But this quarter, even when you back out the Permalok adjustments it was one of your best-margin quarters in -- gross margin quarters in history.

How can you reconcile those 2 statements?.

Well, I think when we really start seeing the impact of the aggressive bidding, Matt, is when you start looking at the fourth quarter with the numbers that we projected. And we talked about being in the low-teens of Water Transmission.

I think when we talked on past earnings calls, what we've seen specifically is the aggressive bidding activity on the smaller jobs. And we've seen situations where jobs have gone at breakeven numbers and even in some cases, where we think they're actually below breakeven, the jobs have been taken.

So we saw the impact on the smaller jobs in previous quarters. But what we're seeing going forward is, and as you know, we've just gotten through the bidding and the award on part of the next IPL segment and a part of the SAWS, or the San Antonio water replacement integration project.

We started to see that aggressive bidding even on the larger jobs from competitors that are, quite frankly, we don't see normally show up on those type of things. So what we're doing is seeing that impact as we move forward into the first quarter and going -- or into the fourth quarter and going through the fourth quarter.

And that, really, is what it is. Plus the other thing that you're seeing in the fourth quarter is you're only going to get part of a quarter of the IPL project. We won't be starting that next piece of IPL until mid-November, so you won't get a full quarter of that. And those are really the impacts, Matt. .

Yes, I mean, it sounds more though what you're saying is that there's a mix impact in Q4 than a sea change in your margin profile into '15 and beyond. .

Yes, I would say that we are definitely experiencing a much more aggressive bidding environment than we've seen over the last year.

I think the bidding has gotten significantly more aggressive and intense over this period of time, which is why we are a little bit less bullish on those margins, especially with the kind of the production levels that we're seeing in water right now.

Obviously, we've come, as you mentioned, through a pretty big third quarter, which you can see the results of some of the cost reduction work that we've done and having margins over 20% like we've talked about.

But when you get into a quarter that has similar top line numbers that we saw in the second quarter, with those lower volumes and that aggressive bidding, it really starts to impact the total gross margins. .

Got you.

And in terms of the orders, what's the growth been year-to-date in Water Transmission orders?.

Say that again. Say that again, Matt. .

Well, I -- it sounds like -- it looked like this quarter is a very good order quarter because -- for Water Transmission. And it sounds like it didn't include -- it might've included SAWS, but not IPL in the backlog. Because if you look at the sales of 76 million, 77 million and the backlog remaining stable, you must have had good orders.

I was just wondering what the order... .

Actually, the IPL segment, we got about half of that next segment of IPL, which originally, we thought we were going to have a hard time getting any of that next segment of IPL. And like I've said, the production on that really starts this month.

Now SAWS, which we've been awarded 1 section of SAWS, and we think there's a pretty good chance that we'll be awarded another segment, won't start until 2015. But I will say even the bidding on SAWS which, as I mentioned, was broken into 4 separate sections, was pretty aggressive.

And I guess I would characterize it as very aggressive, which is obviously again, why we continue the cost work that we have and making sure that we can drive the kind of the margin levels that we've been talking about. .

Fair enough. Then just quick question on Tubular, and then I'll let you get on to the next caller. It seems like you talked about steel prices being up 9% year-on-year. Line pipe prices being up 2%. If you say steel is 80% of the product cost, you should've seen maybe 5% year-on-year margin degradation.

Yet you saw 12% year-on-year gross margin degradation, on top of the fact that you had higher volumes that were leveraging fixed costs and a modernization product -- project that was supposed to improve the cost profile.

Just how can you reconcile that?.

Well I guess, just saying something about the coil price. And initially, the coil price, if you look at what happened over the last several months, really hit its high point in mid-May and really has stayed, until very recently, at that high point. So obviously, we expect the coil prices to drop a little bit more quickly than we have seen.

So obviously, coil is having a relatively major impact. One of the other things that we had in the third quarter, as we ran and ramped up the Atchison facility, we ran into a few production issues related to the heavier gauge pipe strength products that the mill was designed to make.

And quite frankly, we've had to make a few tweaks on those, and we think that we're through most of those and expect that the total production volumes and shipment volumes, as we go into the third quarter, are significantly higher.

Because when we talk about those kind of production volumes and shipment volumes, we were targeting somewhere in the area of being close to 60% capacity utilization of the new capacity at Atchison, and we didn't really get to that number in the third quarter.

And I will say, as we get into the fourth quarter and we look at how we look in the fourth quarter [indiscernible] the October productions and shipments [indiscernible] those productions and shipments actually take us past to where we were full year last year [indiscernible].

So I think that, along with all those things happening, it takes a while for that high coil price to bleed into your inventory cost as you get that in, because obviously, there's a lead time on coil. There's a lagging effect on that, that affect margins in the third quarter of this year.

But as we mentioned before, and I think we've talked about in previous calls, we are starting to see the coil price and line pipe price spread starting to open up. And that really started to happen -- if you could look -- if you look at the CRU, it really started to happen in the September timeframe, mid-September, and has continued into October.

So that, along with the idea of a trade case, starts to bode pretty well for what could happen with that Atchison facility with the amount of manufacturing leverage we have there as we move into late this year and into early next year. So I think all those are very positive things. .

And just for clarification, 60% capacity utilization would be like 200,000 tons a year, is that about right?.

When I look at -- yes, when I look at the capacities that we're talking about, we're talking about a production capacity on the Atchison facility of about 325,000 total with the absolute perfect mix. So yes, you'd be in excess of probably 50,000 tons a quarter. .

Matt, I just wanted to add one thing to the question you had earlier. You had said something about the second segment of the IPL not being in the backlog. It actually is at the... .

Yes, IPL -- the half of the second segment is in the backlog, Matt, along with 1 segment of SAWS. So remember, that SAWS job had 4 total segments. And the total job was about 16,000 tons. And again, we have 1 segment, and we think we're pretty well-positioned to get another segment of that. .

And our next question comes from Bhupender Bohra. .

Just wanted to get some numbers on how much did IPL contribute in this particular quarter? And some of the other programs like Wyoming and Tarrant, if you can give those numbers?.

Well, we don't talk about specific margins. And based on an agreement with the customer, we don't talk about specific dollar values with that. But what I can tell you is that the total production of the IPL project on Section 15-1 was somewhere in the area of 22,000 or 23,000 tons of pipe. So it was a significant contributor in the quarter. .

Okay.

And did you guys -- maybe I missed it, actually, give a number on Permalok? How much was the contribution in this quarter sales?.

No, we do not break Permalok out separately. It's within the Water Transmission numbers. .

Okay, okay. And the next question on Tubular, steel prices being higher, how should we think about that going into fourth quarter? I mean, the pricing was plus 2.

How do you think that is -- any plans on increasing that? How should we build that out like into 4Q and the early half of 2015?.

When you look at steel pricing in 2014, it really changed course to what happened the previous 2 years.

In fact, when you look at second quarter in particular, which is I think where, obviously, most of the issues were created, and a lot of it was weather-related issues with the steel mills being able to get iron ore deliveries, issues at various mills because of the weather.

We saw a run-up in the second quarter of 2014 that, versus the previous year, the price was up $85 a ton, okay? And that's in a scenario where, as you know from the past, we've seen the line pipe price fall down over the last couple of years by some $250 a ton, with the steel price currently that's only down about 2 -- or 100 -- or $50 a ton.

So there's about a $200 a ton compression in that spread. So the spread has really been the thing that caused the issue. As we look at coil pricing going forward into the fourth quarter, we have seen the coil price fall some $25 a ton over the last several weeks.

And the overall opinion that we see from people that we talk to and the -- some of the experts in the market believe that, that coil price will continue to fall through the fourth quarter this year.

With 1 caveat is, probably, you've read the Russian suspension agreement has been terminated, so that could limit the amount of Russian hot-rolled band coming into the market, which could have an effect on the psychological thought process of the buyers in the market for a period of time, maybe a couple of weeks.

But we do believe that the coil price will continue to fall through the end of the year. And there's some speculation that it could follow -- fall through into the first quarter, maybe through the fourth quarter, based on the pricing differences, the hot bands that we're seeing around the world. The pricing difference in the U.S.

market is $100 to $200 a ton higher than other world markets, which is why we're attracting so many imports now of hot-rolled bands. So we think that there's some room to fall, which is why we believe that the spread in line pipe and line pipe prices has been inching up over the recent, probably, 6 or 8 weeks.

That's why we believe that there's some room for the spread to open up and things to get better on the energy tubular price as we go forward into 2015. I think the one -- the biggest issue, Bhu, is looking at what's going on with the oil pricing per barrel in the marketplace.

We see oil prices in the marketplace now that are sub-80 as of this morning. And what is the impact of that going to be on not only the producers, the E&P companies, but also the tubular manufacturers? And that's a little bit more cloudy.

I don't know that I can speculate on exactly what that's going to do, but I don't think that long term, based on the impact that the oil price has on the Saudi economy, the Russian economy and various other world economies, that it ultimately can stay down there for that long and basically languish in that region.

Again, I don't have a crystal ball with that. But all the things that we see and we measure, along with the trade case that's pending, would seem to point in a positive direction on Tubular Products. .

Okay. And the last one, actually, you mentioned about the acquisitions you have engaged like an investment bank with identifying targets here. I don't know if you can give some more color in terms of size or what you guys are looking for... .

Well, we've -- obviously, we're working with investment bankers to bring us everything that's tangential to what we do now that makes sense with the water storage we continue to develop and move the company forward.

I think size-wise, [indiscernible] we've looked at everything from a $50 million acquisition, up into including the size of the company that we are right now and what makes sense for the company. So we are looking at a very wide range of potential acquisitions.

And really, with the help of the strategic company that we've engaged, really trying to help focus our view on what we're looking at, and create that road map for growth as we go forward. Because what we do now know is that we cannot stay where we are.

Obviously, we've been in these markets for a period of time and we've made some changes with divesting the OCTG assets. But we have to continue to grow and develop ourselves, specifically on the Water Transmission side of the business. .

Okay.

So I can see the focus is more on the Water Transmission side than actually on the tubular side?.

Yes. I've made the statements at your conferences and on the non-deal roadshows that we do, as well as these calls, that Water Transmission business is the bedrock of the company. It's where we have expertise.

It's where we believe that we have some of the experts in the business, and where we're best positioned to be able to make acquisitions and make those acquisitions thrive. .

Our next question comes from Mr. Gerry Sweeney. .

Question on the Water Transmission side as you're talking about the competition, and you're starting to see some of that competition seep into some of these larger bids.

As you look at that, how much are you insulated from the competition when you -- for example, like the IPL? Are they looking at the size, the production capacity? How much of that goes into the bidding process versus just your pricing?.

Well, I think I heard most of the question. You're not -- you weren't coming through very loud, Gerry.

But it's how much of it -- how much of, basically, our size and what we can do goes into the bidding process, is that the question?.

Yes, versus pricing and the smaller players. .

Right. I think -- it's actually a big thing. And as I've mentioned before, in the segment that we participate, in steel pipe for high-pressure water transmission, we're the only one that has a nationwide footprint. In a lot of cases, we're the only one that has multiple plants that we can deploy on these larger projects.

So when you start dealing with these larger projects, having that wherewithal really helps the confidence of the customer in you being able to supply the job. And God forbid, if there's ever an issue with one of your plants, you certainly can deploy other plants to take up the slack. So that goes in, too.

But there's other things that go into it, like your experience in the business, okay? And have you done larger jobs? What is your safety performance? Just various things that they use to basically evaluate each one of the suppliers. So that plays into it.

But I think what we see more often, Gerry, is almost like people coming in that have a little bit skeptical potential to supply the jobs and really taking a flyer, going after jobs and impacting those margins. And that's what we've seen most recently.

Now again, because we have a nationwide footprint and we've done a lot of work on our costs, taken a lot of cost out of each unit of production in our facilities, and we continue to work on that and the implementation of lean manufacturing, we certainly know that we're positioned to compete in this market with anybody that's in the market.

And as you guys know, and you've probably seen, Hanson and their business has filed an S-1 to basically spin their business off in the United States. So you can see what their financial results have been. And there's some anecdotal evidence on some of our other competitors on how they're doing in the marketplace versus how we're doing.

So I think that when you look at the strength, the nationwide footprint, the cost work, that we're pretty well-positioned costs-wise to be able to compete in any one of these markets.

But just to get back to the original question, because I have a tendency to like to expound on things, I think the nationwide footprint is a big deal for the customers in this business. .

Okay.

And then on the second IPL contract, what segment was that? And did they actually split that segment? Did they originally going to be bidding it as 1 piece and they decided to bid as 2 piece -- 2 pieces ?.

No, it's segment 12-13, and it's 1 segment that ended up getting split into 2 pieces. .

Okay.

And can -- what was the -- I know you don't talk price, but how many tons was that section?.

The total volume on that was pretty similar to 15-1. Pipe-wise, it was 22,000 to 23,000 tons. .

And was it split 50-50, or... .

Pretty much 50-50. .

Okay. And then just jumping over to Tubular real quick. You talked a little bit about the inventory in the hot coil [indiscernible], how long does it take to run through inventory? Is it 2 months, 3 months? Any kind of estimate? I do have a little bit of a spread analysis going, and I was just curious... .

I missed the first part of that question, Gerry, because you're a little bit low on coming through right now. .

Is that better? I'm talking a little bit louder. .

Yes, that's much better. .

The -- how long does it take for inventory to go through on the Tubular side to have a little bit of a spread analysis going. And is it 2 months, 3 months... .

So when you order steel, depending on the lead time of that steel, obviously, hot roll lead times expand and contract demand -- based on what the demand is in the steel market.

So sometimes, we've seen lead times anywhere from 8 weeks recently, maybe even a little bit longer, to where they start -- where they're starting to contract now, down more into the 6 -- 6-week time frame. So when we order steel, once it ships, we start to recognize that revenue once it ships now with... .

We recognize the inventory. .

Or excuse me, not the revenue. We start to recognize inventory once it ships in our inventory values. So it would take anywhere from 10 to -- 10 days to 2 weeks, depending on what's going on with the steel, if there's any additional processing involved.

And when you look at the inventory levels in our plant site at the Atchison facility, we target having about 1 month of coil inventory and 1 month of finished goods inventory, depending on what the lead times are in the steel market. If the lead time start to shrink, we'll start to grind those inventories down a little bit.

But if they start to expand and we'll start to move them up a little bit. Because when those lead times start to expand out, if there's a production problem at one of the mills, you could end up relatively short.

And what we're seeing is because if you look at the Atchison facility right now, we're probably running about double the volume at the Atchison facility than we were running just 2 years ago on the same plant site footprint, okay? So we are closely managing the inventories.

And I think part of your question is kind of directed at we saw the Tubular Products inventories jump a little bit in the third quarter.

That was related to a direct job that we had with an end user that we produced the steel, and obviously, you have, with inventory, as you produce the steel, and we actually had fusion bond epoxy coated on the outside to ship direct to the end user.

So what you'll see is those inventories work their way down over probably -- they've already come down quite a bit. But you'll see them work their way down a little bit over the next probably 60 days. .

[Operator Instructions] Sir, at this time, we don't have any questions on the queue. .

Okay. Well, thank you, everybody, for attending the call. Our next call is in the probably early March timeframe. And hopefully, we've got things breaking even more positively as we go into that timeframe. So thank you, and we'll talk to you then. Bye. .

Thank you, and this concludes today's conference. Thank you for joining and you may now disconnect..