Thank you for standing by. This is the conference operator. Welcome to the Northwest Pipe Company Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode. And the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

[Operator Instructions] I would now like to turn the conference over to Scott Montross, President and CEO. Please go ahead..

Good morning and welcome to Northwest Pipe Company's Second Quarter 2021 Earnings Conference Call. My name is Scott Montross, and I'm President and CEO of the company, and 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 August 4, 2021 at approximately 4 p.m. Eastern Time. This call is being webcast and it is available for replay.

As we begin, I'd 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, 2020 and in our other SEC filings for a discussion of 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 for joining our call today.

I'd like to begin with a review of our second quarter 2021 performance. As of June 30, our backlog including confirmed orders for the Northwest Pipe legacy business was approximately $234 million compared to $210 million at the end of the first quarter of 2021, and $246 million at the end of the second quarter of 2020.

The increase was driven by improvement in our project bidding that began in the second quarter, which led to an increase in backlog, a trend that we expect to see continue in the second half of 2021.

Second quarter marks the 12th consecutive quarter in which we have maintained a steel pressure pipe backlog over $200 million, a level that remains strong by historical standards. This is despite the ongoing bidding delays, we've experienced over the course of the past year, due to various pandemic-related issues.

That said, I'd like to reiterate these are not project cancellations only delays. And currently, we see substantial amount of project volume scheduled to bid in the second half of 2021, which should continue to apply upward pressure on our backlog through the remainder of 2021.

Our second quarter net sales totaled $73.8 million, which included $15 million from Geneva. Once again, the top line contribution from Geneva enabled us to increase our net sales sequentially and year-over-year. Our second quarter gross margin of 12.9% improved marginally from the first quarter of 2021.

The Geneva precast concrete operations are beginning to serve as a stabilizer to both revenue and gross margin to help offset periods of market choppiness in the steel pressure pipe business, like we have had to navigate over recent quarters.

Revenue and gross margin for our steel pressure pipe business were negatively impacted by ongoing production delays in the second quarter driven by steel market supply and delivery disruptions, which postponed the production of orders and customer-driven delays on orders that were already in backlog.

In addition, the bidding delays experienced over the last three quarters resulted in fewer overall projects to bid on, which led to some panic bidding by our peers in our space. And therefore, significantly more bidding pressure on projects that bid during that period which has had a negative near-term impact on project margins.

That said, we did see steel pressure pipe bidding stabilize and begin to improve during the second quarter, indicating an upcoming period of strong demand. As we move into the second half of 2021, we expect bidding for the steel pressure pipe business to continue to strengthen through the rest of the year.

However, we expect revenue and corresponding margin recovery for the steel pressure pipe business to be slow in the beginning of the second half of 2021.

As ongoing capacity and supply issues in the steel market were expected to linger and continue to delay production, and we will continue to see some customer-driven delays of orders that were already in backlog.

Also, the bidding delays experienced over the recent quarters, which resulted in near-term margin pressure will still have some effects at the beginning of the second half, as the affected projects work through production.

However, with a large amount of work projected to bid in the second half of 2021 backlog is projected to trend upward for the rest of the year, and the increasing backlog is expected to support improving steel pressure pipe revenue, and margins as we move into the latter part of the year and enter 2022.

In addition, our precast concrete order book remains at historically elevated levels, and is continuing to gain strength. And we expect to see the precast concrete business to remain at strong levels for the remainder of 2021. Next, I would like to turn to a discussion on our two-pronged growth strategy.

As highlighted over the past several quarters, our primary focus has been on driving growth in the precast concrete market, which led us to our January 2020 acquisition of Geneva Pipe and Precast.

We are currently in the process of commercializing new innovative lined RCP, and manhole for use in corrosive sewer applications, which we believe have significant organic growth potential.

Given the success of the Geneva transaction and the broader strength in the water infrastructure market, we have been intently focused on the evaluation of potential acquisition candidates with a keen focus on organic growth potential, strong margin characteristics and cash flow.

In tandem, with our efforts we have been building cash on our balance sheet and recently amended our credit facility to further enhance our liquidity position in order to properly execute our strategy.

The second prong of our strategy is to continue to maximize our core steel pressure pipe water transmission business, in order to drive shareholder value. We have continued to make progress through cost reduction measures, and lead manufacturing to drive further efficiencies.

As part of that effort, we have been leveraging outside engineering resources to explore opportunities for creating additional efficiencies to further drive cost reductions in the long run. I will now turn to look at current and upcoming water transmission projects.

In the Texas market, the ongoing multiyear, multiagency Houston Surface Water program is expected to bid multiple segments in 2021, representing 21,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects, representing 21,000 tons beyond next year.

The next new reservoir to be built in Texas is Lake Ralph Hall for the Upper Trinity Regional Water District. This is another major program currently in design that includes a new dam and pipeline to move water into the Dallas-Fort Worth, Metroplex. The pipeline represents 17,000 tons of pipe.

Construction on the dam began this year and the pipeline is expected to begin late in 2022 early in 2023. The Alliance Regional Water Authority program in Central Texas is another multiagency regional water program. The program includes a large pipeline, pump stations and treatment facilities and represents 15000 tons of pipe.

Construction is starting in 2021 and appears to be holding fast to the forecasted time line. In the western markets, California's Prop one $7.5 billion bond for water infrastructure has created the much-needed funding for the projects within the state.

According to the California Natural Resources Agency, 97% of those funds have been appropriated for various projects as of the 2020, 2021 fiscal year. We expect requirements for these projects to stretch out over the next several years.

Water reuse programs have generated new opportunities in the California market on which we expect to see bidding activity continue for the next year. We have identified four sizable projects bidding in the 2021 time frame, representing 8300 tons.

Most recently, Northwest Pipe was selected to supply pipe for the Pure Water San Diego Project, a sustainable and environmentally conscious water recycling project. This project will be a phased multiyear program that will provide more than 40% of San Diego's water supply by the end of 2035, thereby reducing the city's dependence on imported water.

And will require over 3,200 tons of steel for us to manufacture into engineered steel pipeline. In addition, MWD is heading a regional reuse pilot project in conjunction with LA Sanitation District.

This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California and involves 60-plus miles of large diameter pipe. The current demonstration facility has been operating for almost two years.

MWD is currently soliciting preliminary design and permitting services in construction of the full-scale treatment on conveyance facilities could begin as early as 2025. The MWD PCCP rehabilitation programs will result in about 5000 tons annually over the next 10 to 15 years.

We have seen a slowdown in this work this year which appears to be COVID related. So the timing of these projects has shifted to later this year. The site's reservoir is a water storage project that has received funding from Prop 1. It will involve over 30 miles of 144-inch pipeline. The project is forecasted to begin in 2024, 2025.

Southern Nevada Water Authority has begun moving forward in earnest with an expansion of the southern part of their water delivery system. This program, which has recently started preliminary design activity, will include approximately 25 miles of 78-inch steel pipe with construction tentatively scheduled for 2024.

In North Dakota, progress has been slowed on the 140-mile 87000 ton Red River Valley Water Supply Project. The 1.5-mile demonstration project bid in January of this year and was awarded in Northwest Pipe. The bulk of the project is dependent upon a 2023 legislative session to commit to full funding.

We are closely tracking the outcome of further budget approval now in discussion at the state legislative assembly. In Colorado we are tracking an expected 2021 record of decision by the US Army Corps of Engineers for the northern integrated supply project. If favorable, construction of up to 150 miles of pipeline is expected to start in 2023.

The project is located 60 miles north of Denver in the Fort Collins area. In Utah, design and permitting continues on the 150-mile, 69-inch Lake Powell pipeline. This pipeline will provide an alternative source of water for Southern Utah.

In summary, we have continued to execute through a challenging period of pandemic-related disruptions over the last several quarters in the steel pressure pipe business with significant delays in project bidding, major steel markets supply and delivery issues and customer-driven delays in existing orders.

However, we saw things begin to stabilize and improve as we progress through the second quarter.

And we are currently seeing a solid buildup of steel pressure pipe bid requirements for the second half of 2021, which should result in upward pressure on steel pressure pipe backlog and support improved revenue and margins as we move into the latter part of the year and into 2022.

In addition, our precast order book continues to gain strength and is currently at an all-time high level. We expect the precast business to remain strong for the near term. We are well positioned for future growth, which we believe will be further supported by the growing infrastructure needs in the United States.

Looking ahead, we will remain focused on our top priority of taking every precaution of keeping employees safe through the ongoing pandemic. Also identifying strategic opportunities to grow the company and having a persistent focus on margin over volume and continuing to implement cost reductions and efficiencies at all levels of the company.

I'd like to extend my gratitude to all of our employees at Northwest Pipe Company for their commitment to executing our strategy throughout the first half of the year and by doing so safely. I will now turn the call over to Aaron who will walk through our second quarter financial results in greater detail. .

Thank you, Scott and good morning, everyone. Thank you for joining us today on our second quarter 2021 earnings conference call. I'll begin with our second quarter financial results. Net income was $2.1 million or $0.21 per diluted share compared to $6 million or $0.61 per diluted share in the second quarter of 2020.

There were no adjustments to GAAP net income to consider for the second quarter of 2021. Adjusted net income for the second quarter of 2020 was $4 million or $0.41 per diluted share. Adjustments of $2 million net of taxes, primarily consisted of favorable insurance recoveries associated with the Saginaw fire.

Adjusted net income excludes unique and unusual items and we provide it for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments.

Our second quarter net sales increased 5.5% to $73.8 million, compared to $70 million in the second quarter of 2020. Geneva's revenues increased to $15 million in the second quarter of 2021, compared to $12.4 million in the second quarter of 2020, primarily due to increased shipment volumes on very strong demand for precast concrete products.

Steel pressure pipe revenues increased 2% from the year ago quarter, due to a 7% increase in selling price per ton resulting from rising steel input costs, which was partially offset by a 5% decrease in tons produced resulting from changes in project timing.

Due to the unique nature of the water transmission systems we manufacture, production tons and the resulting sales price per ton do not always provide comparable metrics between periods, as they are highly dependent on project timing and production mix.

Gross profit decreased 26.4% to $9.5 million or 12.9% of sales compared to $13 million or 18.5% of sales in the second quarter of 2020. The decrease was primarily due to changes in product mix and pressure on project pricing realized on steel pressure pipe, partially offset by increased gross profit at Geneva.

Gross profit in the second quarter of 2020 was elevated by $1.8 million associated with the business interruption portion of our insurance claim for the Saginaw fire. Excluding this item, our gross profit margin for the second quarter of 2020, would have been 16%.

Selling, general and administrative expenses increased 13.5% to $6.3 million in the second quarter of 2021, compared to $5.6 million in the second quarter of 2020. The increase was primarily due to higher compensation-related expense and professional fees along with higher travel expenses compared to 2020, given the global pandemic.

In addition, I am updating our guidance for selling, general and administrative expenses to now approximate $24 million for the full year of 2021. Our income tax rate in the second quarter was 26.1% compared to 26.7% in the second quarter of 2020, both of which approximated statutory rates.

I'm expecting full year 2021 income tax to be approximately 26.5%. Now, I will transition to our cash flows and financial conditions. We generated cash flows from operations of $5.7 million during the second quarter, compared to $13.8 million during the prior year period.

This decline was primarily due to the decrease in net income adjusted for noncash items. The company has increased its available liquidity through the refinance of our credit facility with our financing partner, Wells Fargo.

The new $100 million cash flow loan provides flexibility to be upsized to accommodate the company's strategic growth objectives, including an optional $25 million accordion feature. All outstanding debt under the former credit agreement, including long-term debt has been repaid.

This is the company's strongest financial condition in recent years, with total available liquidity of approximately $121 million as of June 30, 2021, comprised of $23.2 million in cash and cash equivalents and approximately $98 million available from our new line of credit.

Depreciation and amortization was $3.4 million in the second quarter of 2021, while our capital expenditures totaled $2.9 million. We expect the pace of CapEx spending to pick up, which will result in spending for the full year to be between $12 million and $14 million, consisting entirely of maintenance CapEx.

In summary, we were pleased with our solid second quarter 2021 financial results, despite ongoing macroeconomic pressures, including labor, transportation and raw material shortages, which have resulted in temporary disruptions to operations.

We look forward to benefiting from the improved demand as our steel pressure pipe market continues to stabilize. I'd like to extend my thanks to all of our dedicated employees and our loyal shareholders for their ongoing support of Northwest Pipe Company. 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. [Operator Instructions] The first question comes from Brent Thielman with D.A. Davidson. Please go ahead..

Hey, thanks, good morning..

Good morning.

Good morning, Brent..

Scott, it sounds like the outlook suggests sort of a fair step-up in revenue and margins in 3Q and then into 4Q. At least that's what I guess I'd take away from it.

But do you think, you can still achieve that, if the supply chain sort of steel constraints today don't abate or stick around longer? Just trying to get a feel for how much that's kind of impeding the business right now?.

Yes. I would say, it's been a little bit dicey up to this point Brent, where we've seen situations, where we have orders scheduled to be produced in quarters, where we're getting late deliveries and orders fall out and things of that nature.

But we're starting to see that stabilize a little bit and we're starting to see that deliveries are starting to improve. Capacity utilization rates in the steel industry are now up around 85%, which I think is a positive sign that they're putting more steel into the market to support domestic requirements.

So while we think the pricing level is going to probably continue to inch up now and probably not as quickly as it has in recent months, but it's probably going to continue to inch up for the rest of the year. We think that the supply position is going to be a little bit more stable as we go forward.

There's a little bit more available -- plus, we have some additional capacity coming online in the steel industry now. We have a Ternium mill in Mexico that obviously would support our SLRC facility in Mexico that started up. And they're bringing at least a few million tons of new capacity into the market.

We also have a new facility, starting up with SDI down in Texas that will bring additional capacity. That's probably later in the year than Ternium. And then, there's a new Nucor capacity, which I think has increased capacity coming online.

So, we think this steel thing starts to firm up, but we still think the prices there are going to be a little bit high at least for the near term. But we're feeling a little bit better about being able to get the steel in a relatively timely matter.

And with the -- as the backlog continues to grow, even if there are a little bit of disruptions on the delivery side, you actually have more projects to pick from to be able to run in place, if steel doesn't come in another project.

So I think that looks a little bit better, as we go into the second half of the year and we've got a ton of work scheduled to bid in the second half of the year right now. We're looking at somewhere in the area of between 105,000 and 110,000 tons of municipal work bidding in the second half of this year.

It's really started later in the third quarter -- in the fourth quarter. And you've heard me talk about before, where 200,000 tons is a good market. Well, that 200,000 tons is usually made up of municipal work and there's probably some plant work in there, some hydroelectric work and things like that.

What we're seeing, bidding in the second half of this year, that 105,000 to 110,000 tons is primarily municipal work. So, we're pretty happy about the way the bidding looks and the way that the steel thing is starting to come together with that as we go through the second half of the year.

Now in the second quarter time frame, the steel guys do a lot of their annual outages. So, some of the supply problems get a little bit exacerbated during that time frame. But we do think, those are starting to abate with the higher capacity utilization. So, we're a bit more confident as we move into the back half of the year now with that..

Okay, that's great. And kind of led me to my next question Scott.

The 105,000 to 110,000 I mean any way for us to think about how that compares to what you saw over the first half of this year, obviously?.

Yes. The first quarter -- what I will tell you about the first quarter was bidding in the first quarter was under 20,000 tons of requirements in the first quarter. So, it was a really late first quarter of the year. And the second quarter grew up to somewhere in the area of about 30,000 or 31,000 tons.

So, you can see the first two quarters of the year were pretty light on the bidding side. After we had a third and fourth quarter of 2020 where a bunch of stuff moved out. So, some of that stuff is landing in the second half of this year and that 105,000 to 110,000 tons. But actually some of it has moved out later into 2022.

So -- but the second half right now is looking very strong. And yes, there's always the possibility that things move around in the second half but it appears that things are beginning to take root now so that the second half is going to be pretty good bidding activity..

Okay, that's great. Geneva I mean it looks like over 20% growth this quarter. I don't recall there being any big pandemic-related hang ups last year. Maybe I'm wrong. I mean maybe you could just speak to the environment you're seeing there and what's fueling that growth which is way above I think--.

Yes. The demand on free cash concrete right now is what I would term is pretty hot. I mean our order book is for them -- it's not the same as backlog because it's all relatively fast hitting projects. When you get an order and you're producing a project.

Right now the order book is heavy enough where we are pushing for everything we have to keep up with the order book and there's still more orders out there. So, we had a $15 million second quarter in Geneva which is a big quarter. The third quarter looks to be lining up pretty similarly.

And like we said in the script, the near-term for the precast concrete business which is driven heavily by residential and low interest rates and things of that nature looks really good as we go forward..

Okay. Maybe just the last one sticking to the precast.

I mean the strength of that business right now making it more challenged to get a deal done there?.

I would say that there are a significant amount of potential deals out there. What we see Brent is really small things and relatively large things. And as you know the multiples for those things look different across different periods of time.

So, I think we're seeing things now that have multiples that are in the seven times range seven and a half times range in that area. When you look at really big things that quite frankly with some of the really big things maybe a little bit outside of our reach at this point in time. You're seeing multiples that are nine, 10 times.

But there are quite a few potentials out there right now. And as we said, we're pretty active in that space. I don't know that it makes things getting things done any harder.

It's just with the current environment and still being somewhat in this COVID situation it makes things a little bit slower, right? So, moving forward those things gets a little bit more arduous and sluff as you go forward. But I think there's plenty of things out there to get done plenty of things that interest us.

And as we've said before, our strategic growth plan is really centered on the precast and precast-related markets and we see the possibilities out there. So, I don't think really anything's changed there..

Okay, great. Well, thanks for taking the questions. I’ll get back in queue..

Absolutely..

The next question comes from Gus Richard with Northland. Please go ahead..

Yes, t hanks for taking the questions.

Could you talk a little bit about steel lead-times at this point and sort of what they did last quarter and sort of what you see today?.

Yes Gus, I would say steel lead-times right now are probably bordering on about 10 to 12 weeks for hot-rolled bands and that's 10 to 12 weeks of lead-time. What we've seen I guess probably more back in the second quarter timeframe is that 10 to 12 weeks actually turned into something that was quite a bit longer because of delivery issues.

And some of those delivery issues related to annual outages and just plain domestic demand. I think as we go forward right now we're planning more like probably more like 12 weeks of lead-time. And as we go through this year and additional capacity starts up, we think that that's going to come back a little bit.

But we're still in the position where we've got to make sure that we're getting everything lined up with our steel deliveries well before projects happened with making sure that we've got quote from suppliers. And they're signed on to being able to self-supply the projects.

And I think that stuff is all improving as we move through this part of the year. So, that's a little bit of a positive sign.

It was really -- and I think I said this before when we were in the first and probably early second quarter timeframe, it got -- it was a little bit dicey with being able to get steel placed and delivered because they were running at capacity utilization rates that were 75%, 77% and they weren't keeping up with the domestic demand.

And it appears that they're getting a little bit more lined up with that now. So, I think lead-times are going to remain a little bit extended as we get toward the later part of the year and you get additional capacity coming online, which -- the turning facility is already coming online.

And I think SDI was going to start up like early fall that's probably more toward the end of the year now. I think as that additional capacity comes online, those lead-times will come in a little bit and you'll probably be seeing something more like eight and 10 weeks.

But when the hot-rolled band lead-times get down to four to six weeks you know that there's a lot of open capacity in the market for placing orders. But right now it's holding pretty steady in probably that 10 to 12-week timeframe..

Got it. And then I think China recently put on tariffs on exporting steel.

Is that having any impact on the domestic market? And as a follow-on and I'll be done with steel how are you able to pass on the cost? Has prices stabilized enough where you sort of can capture that?.

Yeah. We're -- we do these bids. And our bids are -- they can be -- on these major projects can be 50 pages of bid work to -- for a project. But what we're seeing now is it's a little bit easier to get a bid and then that steel is available at that price when you go there. And that price has just passed along in the bid to the customer.

What we did see a little bit of -- and I think we talked about this on one of the previous calls. Earlier on, we go out and get a bid and then come back with an order and try to place the order and the steel was no longer available and we had to scramble to get steel.

So then you're trying to find something at a little bit of a different price than what you thought you were going to get. And that was probably more end of first quarter maybe beginning second quarter phenomenon. We're not seeing that as much now. I think there's a little bit more available.

And it's a little bit more stable than it's been, but still at really high prices. And we're seeing steel prices right now at $1,900 a ton. And if you look at where that is in comparison to last year in the July time frame it was $465 a ton. So obviously there's a 300%-plus increase in steel prices during that time.

And even from the beginning of the year and the steel prices, if you look at the AMM published steel prices, they're up about 95%. That seems to be slowing down a little bit now and stabilizing because they're really gravitating up towards that $2,000 a ton level. And at some point, that starts to just top out.

But I think things are getting a little bit more stable. As long as we can buy it like we bid it, which we've been able to do, since we saw a couple of choppy periods in the first quarter, we're able to pass that along. So it's -- that doesn't that's really not an issue..

Okay. And then just in terms of the China tariffs on exports.

Is that having any impact on the domestic market or not?.

I don't -- at this point, I don't see any..

Okay. And then just -- it seems like you had relatively low bidding activity in the first half.

Can you just talk about how -- and I'm sure it affected pricing how that's going to -- how that revenue is going to flow through the P&L sort of in terms of times? Is that all second half and first half of next year, or is it longer projects? And sort of what do you see as a percentage of revenue during those periods?.

What I would say is the things that -- the bidding that we saw in the third and fourth quarter of 2020 where we had all those projects that were moving out.

And when you get a situation where those projects are moving out like that there's less projects to bid and all of a sudden competitors in the marketplace are looking at it and going oh my God I need the stuff to run on my facility. So all of a sudden there's a bunch more price pressure on those projects.

And we saw that and we're having those near-term margin impacts that we saw really in the first and the second quarter. That's going to linger a little bit into the third quarter because that third and fourth quarter of 2020 and the first quarter bidding which was also very light less than 20,000 tons.

That's where all that I guess what I would call panic bidding took place. So you started to see the effect in the first and the second quarter, you're going to have a lingering effect in the third quarter.

But what we're getting into is a situation where that stuff that was in our backlog, we're getting through those and actually getting to projects that we bid more recently that have better margins on those. That and as the production levels increase, you're going to get better absorption.

So as we get into the latter part of the year, you're going to see that take place with higher revenues and margin expansion as long as everything bids the way we think it's going to bid now.

So -- but you're still going to have some impact of all those things in the third quarter, which is why we're kind of terming that or talking about it as we're going to see a slow improvement at the beginning of the second half of the year, because you still have some of the lingering effects of that bidding.

But you still also have some of the lingering effects of steel deliveries, not quite as bad. But you also have customer orders that have been delayed due to various things and move out in the quarter. So you end up with a little bit less production more under absorption.

And those are all things that are still kind of playing out at least to a smaller extent in the third quarter of the year, which we think as we get in the fourth quarter of the year start to abate as we go up in backlog. And as you -- as bidding improves that equals higher backlog.

And as higher backlog grows, that equals higher revenue and margin improvement as you go forward. So that's what -- some of that stuff is going to come into play as we go through the third quarter and get into the fourth quarter..

Got it.

I guess what I was trying to ask is, is this all cleaned up by say the middle of next year?.

Yeah. I think as we get through the third quarter, as long as all the bidding sticks to where we see it taking route now, that bidding level is high enough where as you get through the third quarter, it starts to get cleaned up through the third quarter and the fourth quarter starts to look a bit different..

Got it. All right. Thanks so much..

Thanks, Gus..

[Operator Instructions] The next question comes from David Wright with Henry Investment Trust. Please go ahead..

Good morning. You've talked a lot about kind of the supply problems and delivery problems and stuff.

But over on the other side in a typical municipal job Scott, how much of the cost of the job is represented by the cost of the steel roughly?.

Somewhere between 20% and 30% depending on the size of the project and the timing of the project and which steel prices are during that specific time..

So with the municipal project that has to be financed and has a long kind of lead time to it the rise in the price of steel does it affect any of these projects' ability to proceed or do they say "Oh well we thought this is going to be $1,200 a ton and now it's $1,900 a ton and we can't proceed." Do you ever have that?.

David, that certainly has slowed some things down because what happens is it all starts with an engineer's estimate on a project and they could be doing these engineer's estimates a year ago, right? And all of a sudden, it depends on the size of the project. All of a sudden, they kick the project out to bid.

And the bid is significantly higher than engineer's estimate, which is called the basically they busted the engineer's estimate. So generally, what we've seen is on probably smaller and medium sized projects they tend to go forward. They have to go out and make sure they get the additional funding. And it's just -- those go forward like that.

I think there are some really large projects that we haven't been involved in that we've heard about over the last couple of months that are out there that may have been a couple of years ago with steel indices.

And the end customer saying "Hey we're not going to do this one right now because it's such a large project that the change is really big." We're not involved in any of those but we've heard of one major project like that going on. So it can cause those delays.

Right now I think a lot of the delays that happen with that when an engineer's estimate gets busted is they've got to go back and talk about it and make sure that they're okay with the funding and that's more of what we've seen. We haven't seen too many projects that have delayed because of steel pricing.

And some of these projects like I said, we have steel pricing that maybe 20% 25% of the project depending on the makeup of the project. And when I say the makeup it really starts to be how much fabrication is involved with the project versus just straight pipe. And that tends to overweigh what the amount of steel impact is.

But they still have to go back and make sure that they have the funding right to be able to move forward. And it's slowing some things down and we've seen some of that. .

Okay. Going back several quarters when the oil and gas guys tried to get it into your business and that affected margins adversely. And then there were some quarters more recently where you talked about the bidding market is in balance and margins are more normalized.

What's kind of -- what's the swing in margins, during these times and expressed in basis points?.

Oh, God. That was a hard one to answer. I think when you look back to the time when the oil and gas guys were getting into the business you're really probably talking about something more along the lines of probably 2015 2016 time frame when all of a sudden the oil and gas business really started to get into a real crunch.

And the guys that made large diameter API pipe said well we've got to find something different to get into and we had some get into our business. And it's not like running a major API project where you're running thousands of feet of the same sized pipe, same diameter, same well same testing without the same coatings, without any fabrication in it.

And it's not the same thing. You've got a lot of small projects. So I think what the oil and gas guys found is, that was a little bit of a bridge too far right? There's a bunch of fabrication. Each one of our fabrication facilities have a -- each one of our steel pressure pipe facilities have a fabrication facility so we do all that.

When you look at the margin swings of, what happened back in 2015 and 2016, I think is a little bit of a different. And 2017 too is a little bit of a different time frame because you had five major competitors in the steel pressure pipe market. And now we have three major competitors in the steel pressure pipe market.

So the dynamics are a little bit different where those margin swings may have been I don't know 12 points who knows at that point. They're a little bit less now because you have three major players. And what most recently caused this little bit of near-term impact on margin is, we saw these jobs that were moving out with the bids.

And all of a sudden you have like I said other companies looking around saying "Hey we need to make sure that we have a backlog to run so you get a little bit more margin pressure." So I think you probably get something in the area of maybe half of what you've seen previously because there's only three major players in the market.

But it really depends on, what the situation is in the market David, what's coming up to bid which bidding in specific areas. So there's so many variables to be able to answer that question that it's really difficult to give you a good defined answer.

But it still has an impact right?.

So clearly though we're talking several hundred basis point swings? Not 50 or hundreds?.

And hundreds of basis points? Yes. I mean... .

I said in quarterly margins. And so that's, what I'm just trying to get you to say yes one job might be 400 basis points another job might be 1,100 basis points..

Yes. I think that's fair. And depending on the region you're dealing with..

Volume to bidding environment there's all sorts of variables. .

Yes. I think... .

And then just before I hop over to precast. When you look at your steel pipe backlog and you know the margins that you bid the jobs at. And so you could look at your backlog in sign case and like overall the margin on the existing backlog was bid at x.

But then as you actually go and deliver do you find that you're able to track your original margins pretty well, or like kind of what's the experience when you don't?.

Yes. I mean see the project margins are based on a certain load. When we bid a project it's based on a certain load on the mills right? So a load that we see going forward. Now that load can adjust up or down depending on what's going on in the market.

So the margins could get a little bit less or a little bit more depending on how much of a load we have on the mill. So yes we're pretty good at tracking, what the margins look like and pretty accurate with our bidding that we have.

And that's why we're able to say looking at kind of, what we've got going from now as we go through the latter part of the year, what we see in our backlog right now and what those have been bid at it certainly should continue to apply upward pressure to the revenues and margins as we get out later in the year..

Okay. Great.

On the precast side would you say you were operating at pretty close to full capacity recently and currently?.

I'd tell you, I think it, would be getting relatively close. We are -- so the configuration that we have right now we're actually adding a second full shift to one of our plants now because there's enough work out in the marketplace right now.

It's been a little bit of a struggle getting to that second shift because finding the manpower to do that has been a little bit of a challenge. And I think that's a challenge we find all over the place. But as we get on to that second shift at that one facility we're probably getting relatively close to capacity if we start running that full.

But we're not full on the second shift yet. So we've got a little bit of a ways to go. .

Okay. And when you're looking... .

In other words, we have more capacity. .

Yes. Right. Okay.

So as you expand your -- as you're looking to expand your precast business with acquisitions are you looking to stay along the lines of products that are driven by residential demand, or are you looking to go into other areas?.

Yeah. It's interesting. A lot of it comes down David to what's available. I mean, we like residential but everything we see including what we have at Geneva has some different aspects to it other than residential, right? So we have a little bit of commercial in there and things like that.

So what we're looking at is probably combinations of commercial and residential as we go forward that are precast or free cash related products. There's a wide variety of stuff that's available out there. And obviously we're looking at things that are going to drive the shareholder value to the direction that we want it.

And have the margins and the EBITDA margins that we're trying to get to. And you've got precast, you've got precast related. You've got other things associated with that that are along those lines that really can make up that thing -- those things that we're looking for on the precast or precast related site.

Some of the stuff is -- has control systems with it and things like that. So we're looking at a bunch of different things at this point that I think would be enhancing to what we have as a business and really do well to drive shareholder value. .

Do you want to stay with the Western geography for the -- I mean that's really where your two acquisitions have been?.

Ideally, I would say -- ideally the closer we can get to our other precast, precast-related business the better, but they don't always come out like that right? Because there's not always opportunities for acquisitions at -- in the locations that you already exist. So we're trying to keep it in a relative geography.

Like right now we're still looking in the Western United States more than the Eastern United States. But it really depends on what's available. And a lot of it David depends on what the size of an acquisition is.

If you look at, for example, single plant acquisitions could you have a single plant acquisition in the let's say the Eastern United States, it gets a little bit more difficult because then you're in a situation where okay does it have the management structure to be able to support that operation in that part of the United States.

When you look at operations that are maybe three plants or more plants, they've got a much more defined management structure and systems to be able to combine a lot more easily. So it really depends on what the circumstance is.

But our preference is to stay in the Western United States at this point and it's just for managing reasons, right? It's easy to manage things that are closer to what you have right now. .

Okay.

And just for the avoidance of doubt when you were talking about the multiples on small precast companies and big precast companies, you were referencing EBITDA multiples?.

Yeah. It's -- for example when you look at the quick acquisition Forterra that's supposed to conclude sometime in the fourth quarter of this year. I think the trailing 12 that was somewhere like 10 times. I mean, obviously a big company, public company.

If you're looking at more like single plant type acquisitions, I mean you can see some with 5.5 times or six times. If you're looking at multiple plants, you're probably looking at more at the seven times, 7.5 times. That are -- seven times to 7.5 times that are still the size of companies around Geneva size or maybe a little bit larger..

Thank you for taking my questions. Nice to speak with you..

Absolutely. Good to speak with you David..

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

Thank you and thanks again everybody for joining our call today. And I'd like to conclude by saying we're cautiously optimistic about what we see in front of us. Obviously we've been through a challenging COVID period. But what we see in front of us with the second half of 2021, a significant bidding on steel pressure pipe side.

And with the chance to go into 2022, we think with a backlog that was similar to how we entered 2019. And the other thing is we have right now what we would consider a pretty hot precast concrete market. So, therefore, we are pretty optimistic about how things look as we exit 2021 and head into 2022.

And again I'd like to thank all of our employees, suppliers, customers and the shareholders for continued dedication to Northwest Pipe. And we look forward to speaking with you all again in the third quarter call in November. So thank you very much..

This concludes Northwest Pipe's second quarter earnings conference call..