Good day, and welcome to the Northwest Pipe Company Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

one, finalizing the integration of ParkUSA as quickly and efficiently as possible; two, persistently focused on margin over volume; three, continuing to implement cost reductions and efficiencies at all levels of the company; and number four, continuing to identify strategic opportunities to grow the company once we have completed the integration work with ParkUSA.

Thank you to our dedicated team at Northwest Pipe for your continued persistence and execution against our growth strategy and for operational safety. I will now turn the call over to Aaron, who will walk through our financial results in greater detail..

Thank you, Scott, and good morning, everyone. I'll begin today with an overview of our second quarter profitability. Consolidated net income for the second quarter was $7.4 million, or $0.74 per diluted share, compared to $9.7 million, or $0.97 per diluted share, in the second quarter of 2022.

Consolidated net sales decreased 1.8% to $116.4 million, compared to $118.5 million in the year-ago quarter.

SPP segment sales were relatively flat at $77.3 million, compared to $77.1 million in the second quarter of 2022, resulting primarily from a 7% increase in selling price per ton due to product mix, which was almost entirely offset by a 6% decrease in tons produced resulting primarily from changes in project timing.

Precast segment sales decreased 5.6% to $39.1 million, compared to $41.5 million in the second quarter of 2022, primarily due to a 13% decrease in volume shipped due to lower demand, partially offset by an 8% increase in selling prices due to increased raw material input costs.

Consolidated gross profit decreased 6.6% to $22.5 million, or 19.3% of sales, compared to $24.1 million, 20.3% of sales, in the second quarter of 2022. Steel pressure pipe gross profit increased 13.2% to $12.6 million, or 16.3% of segment sales.

This compared to gross profit of $11.1 million, or 14.4% of segment sales, in the second quarter of 2022, primarily due to changes in product mix. Precast gross profit decreased 23.6% to $9.9 million, or 25.3% of precast sales, from $13 million, or 31.3% of segment sales, in the second quarter of 2022, primarily due to increased production costs.

Selling, general and administrative expenses increased 8.8% to $11 million, or 9.5% of sales, compared to $10.1 million in the second quarter of 2022, or 8.5% of sales. The increase was primarily due to $0.6 million in higher salaries and associated benefits expense and $0.3 million in higher administrative expense.

Further, as many of you are aware, we committed to a large project to improve our ERP platform to integrate our ParkUSA business, which contributed to an increase in professional fees compared to the year-ago quarter.

In addition to some smaller increases for travel and advertising, all of the aforementioned were partially offset by $0.5 million in lower incentive compensation expense. For the full-year 2023, we expect consolidated selling, general and administrative expenses to be in the range of $44 million to $46 million.

Depreciation and amortization expense in the second quarter of 2023 was $3.9 million, compared to $4.2 million in the year-ago quarter. For the full-year 2023, we expect depreciation and amortization to be in the range of $16 million to $18 million.

Our non-cash incentive compensation expenses were $1.3 million and $0.7 million in the second quarters of 2023 and 2022, respectively. Interest expense increased to $1.2 million in the second quarter of 2023, compared to $0.9 million in the year ago quarter. We expect interest expense of approximately $5 million for the full year 2023.

Our second quarter income tax expense was $2.7 million, resulting in an effective income tax rate of 26.5%, compared to $3.4 million in the prior year quarter for an expected income tax rate of 26.1%. Our tax rates for the second quarters of 2023 and 2022 were impacted by nondeductible permanent differences.

We continue to expect our income tax rate for full year 2023 to range between 24% and 26%. Now I'll transition to our financial condition.

We generated net cash provided by operating activities of $1.2 million in the second quarter of 2023, compared to $8.5 million in the second quarter of 2022, due primarily to changes in working capital and lower profitability. Our capital expenditures totaled $4 million in the second quarter of 2023, which was flat with the prior year quarter.

We continue to anticipate total CapEx to be in the range of $24 million to $28 million for full year 2023. As of June 30, 2023, we had $70.1 million of outstanding borrowing on our credit facility, leaving approximately $54 million in additional borrowing capacity on our credit line.

We amended our credit facility during the quarter, providing for a five-year term ending in June 2028. The $125 million facility provides an option to upsize the credit up to $50 million and also loosened the senior leverage ratio covenant required from 2.5x EBITDA to 3x EBITDA.

Other modifications and terms were relatively minor and can be read in their entirety within the Form 8-K filed on July 3. We appreciate the continued support from our financing partner, Wells Fargo. Before I conclude, I'd like to provide an update on our progress on the ongoing ERP implementation and material weakness remediation projects.

In relation to the former, we have evaluated and have committed to certain business process changes that we are now working to push into the system architecture in addition to the corresponding change management with our employees involved in the day-to-day transacting at Park.

These third quarter activities, coupled with robust training, will set the table for materials requirements planning automation, which we expect to be initially deployed at the end of the year. Remediating the material weakness continues to be a priority of management and our Audit Committee.

We are currently working to institute more robust internal monitoring of the manual controls that failed at Park surrounding revenue and cost of sales. We will also complete more frequent testing to gain additional comfort that the internal controls are executing as designed.

While this project will continue through this year's audit, it is important to reiterate that the internal control deficiencies identified have not impacted the accuracy of our current or historical financial results. In closing, I'm very pleased with the progress our entire team has made to position us well for another strong year in 2023.

I would also like to thank our employees for their continued prioritization of our safety program and to all our stakeholders for their continued confidence in Northwest Pipe. 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] Our first question today will come from Julio Romero, of Sidoti & Company. Please go ahead..

Great. Thanks. Hey, good morning, everbody..

Good morning..

Good morning..

Can you maybe start on SPP, at the bidding volume for the steel pressure pipe segment you saw during the second quarter? And can you maybe expand on the potential award of multiple projects that you recently bid that you mentioned in the prepared remarks and any sense of the type of projects you bid and the bid margins, et cetera?.

Well, the second quarter of this year was relatively large bidding because there's a couple of major projects that bid in the second quarter. One of the major projects was Bull Run Reservoir here in the Portland area.

And that, I'm just going to give a range, otherwise it gets a little bit too specific, probably somewhere between $20 million and $25 million for that job. And there's a couple of other ones that bid that are not quite that large, Julio, that we're waiting for what's going to happen on those.

And I would tell you that the margins on those products are pretty consistent with the kind of margins that we're seeing right now in the SPP business. So in line, maybe a little better, but pretty much in line..

Okay. That's very helpful.

And then I think you might have touched on it in the prepared remarks, but can you talk about the trend of steel prices and how that may impact the steel pressure pipe business, if at all?.

We've seen, obviously, steel prices have come down a bit through this part of the year, into the middle of the year. We're seeing prices in hot-rolled bands now that are probably somewhere between $850 and $900 a ton. There's a couple of things that are going to impact this as we go through the rest of this year.

One is capacity coming online at various places, which obviously adds to the supply in the marketplace. But generally, what you see in the back half of the year, especially as you get to the fourth quarter, are outages at the steel mills that start to tighten up supply a little bit and have a tendency to push the prices up.

So we're going to have to see what happens. I think in a lot of people's views, it looks like it's going to be where it is right now and stay kind of stable for a while through the end of the year. But I think what we've seen in the past several years is the steel price is never really stable. It's either going up or coming down.

So I think, Julio, the biggest thing is how do the outages play against the extra capacity coming online and what do the lead times do. Because ultimately, my view on it is it could have some upward pressure as we get through the back part of the year. But that remains to be seen. There's a lot of different forces at work in this right now..

Okay. Understood. And then I just have a broader kind of big-picture question. The recent flooding in the Northeastern U.S. kind of highlighted a need for greater infrastructure for drainage and sewer systems, and Northwest produces products that could be part of the solution for that.

Just talk about if the recent headlines are focused on the floods could help kind of unlock the pipeline for water infrastructure spend and drainage spend needed at all..

Well, just to address both of the things that you said, sewage or dirty water type stuff. When you look at our SPP business, it's a relatively small part of that business. It's mostly potable water.

In the Eastern United States with the flooding, when you look at drainage type stuff, I think you're looking at probably more of a localized product if you're talking about the precast business.

Where we could play in a big way in that business is the environmental systems and solutions that we make at ParkUSA with being part of those systems, which we can ship all over the country.

So I think as far as the Eastern United States, Julio, the Park products are the ones that probably would play the best out there with that kind of situation, at least at this point.

Because when you talk about precast products, I mean, you're talking about products that generally ship 150, maybe 200 miles radius around the plants, and our precast infrastructure plants are all in Utah. So it would probably be difficult to get out there.

But I think the Park products could play into environmental solutions and taking hydrocarbons and cleaning the water in those projects out in the Northeastern United States. So that's really probably what we would focus on for there..

Understood. Well, appreciate you taking the question. And I’ll hop back into the queue..

Absolutely. Thank you..

Our next question is from Jean Ramirez of D.A. Davidson. Please go ahead..

Hi. This is Jean, for Brent Thielman.

How are you?.

Good.

How are you?.

Good.

With precast orders down over 20% in the second quarter, do we expect to see that sort of pressure on precast revenue in the third quarter or the second half? And what would help offset that?.

I think that when you look at the precast order book that we have right now, if you look at it from the first quarter of 2023 to what it ended at the second quarter of 2023, it was pretty flat, right? If you compare it to second quarter of 2022, it really was pretty much an all-time record market. So the order book was up significantly at that point.

I think what you're seeing right now is a more normalized order book. And I think the thing that weighs on that, obviously, is the interest rate environment. Because interest rate environment puts pressure on just about everything precast-related; obviously, residential housing and even, to some extent, the nonresidential housing.

I think one of the interesting things right now is we're starting to see what I would call a little bit of maybe upward movement in the Geneva order book, which is precast infrastructure, which is obviously mostly related to residential housing. So that's an interesting scenario as we go forward.

The other thing that I think affects that precast side of the business is also the pent-up demand for housing. Even though we see the interest rates going where they are and they've been the highest in many, many years, you still see a shortage of inventory in the marketplace and people still buying houses where they're available.

So I don't – when we're looking at the precast market and looking at both sides of it, residential, nonresidential, it doesn't look like either side of it has a significant falloff through this year, and that's why we said only modestly off versus last year. Because certainly, it looks like it still has some strength.

What you do see is a little bit less demand than we saw in the all-time record year, which is probably bringing margins to what I'd call probably a more normal range what you would see in precast. I mean, the margins that we saw in the second quarter of 2022 of 31% were obviously astronomical margins.

What we're seeing now, 25%, 26-or-so percent are probably more normalized margins. And I'm not sure if I hit all the pieces of that question you asked. So if there's another piece of that, fire away..

No. I think that's pretty much it. And on SPP, you gave us an idea how to think about third quarter.

Do you mind repeating how you're looking at margins for the third quarter for SPP?.

I think, like as we've gone through the last couple of calls, we've talked about that the SPP business was going to get on a pretty similar trajectory revenue-wise as what we saw in 2022. But margin-wise, there were going to be better margins.

And we obviously saw that in the second quarter, with a 16.3% margin, which I think it was 190 basis points over where we were last year. I think that kind of trend continues.

I think you may see a little bit more upward movement in the margin in SPP as we go through the year and we have a little bit higher production volumes and better overhead absorption, but it's probably going to be in that normalized range between probably 16% and 18%-ish..

Great. Thank you. I’ll hop back into the queue. Thank you..

Sure. No problem..

At this time, we will conclude our question-and-answer session. I would like to turn the conference back over to Scott Montross for any closing remarks..

Thank you. Again, thanks, everybody, for joining the call today. And as we've said throughout the script, we started the year with a record backlog or close to a record backlog in SPP, and we're really riding a pretty strong wave of backlog through 2023, even with a little bit lower bidding environment that we're seeing in the year.

So we're pretty well positioned to do well on the steel pressure pipe side in 2023. And on the precast side, even with the elevated interest rates and the impact on both commercial and residential, we're only seeing the segment off just modestly versus where we were last year. At least at this point, things look still to be strong.

So I think our long-term view and focus on the precast business remains unchanged. And as we've said many, many times, our goal is to get the precast business to a similar size as the steel pressure pipe business in the next few years, and that's really what we're focused on doing.

So I'd like to thank everybody for their time and attention today, and we'll look forward to speaking to you again in November. So thank you..

The conference has now concluded. We thank you for attending today's presentation. You may now disconnect..