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

Good morning and welcome to Northwest Pipe Company's third quarter 2020 earnings conference call. My name is Scott Montross, and I'm President and CEO of the company. I'm joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our earnings press release, which was issued yesterday, November 4, 2020 at approximately 4 P.M. Eastern Time. This call is being webcast, and it is available for a replay. As we begin, I'd like to remind everyone that statements made on this call regarding our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent Form 10-K for the year-ended December 31, 2019 and in our other SEC filings for a discussion of such 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 to discuss our results. I'll begin with a review of our third quarter 2020 performance. Recently, we've seen second half fitting delays related partly to the COVID pandemic, which have caused our backlog to moderate downward. However, these are not project cancellations, but simply delays. As of September 30, our backlog, including confirmed orders for the Northwest Pipe legacy business, was $231 million compared to $246 million at the end of the second quarter of 2020 and $270 million at the end of the third quarter of 2019. As we've continued to say, any backlog over $200 million is historically a very strong backlog. We have been over $200 million for the last nine quarters, during which time the backlog has fluctuated between $204 million and $276 million. Our third quarter ending backlog of $231 million is, by historical standards, a very…

Thank you, Scott, and good morning, everyone. I hope you're all staying safe and healthy. I'll start by detailing our third quarter performance and will offer some additional color on the remainder of the year. Adjusted net income for the third quarter of 2020 was $7.7 million or $0.78 per diluted share compared to adjusted net income of $8.9 million or $0.91 per diluted share for the third quarter of 2019. Adjusted net income excludes unique and unusual items and is provided for comparability purposes. The main adjustment in the third quarter of 2020 was $0.5 million in amortization of the intangible assets acquired with Geneva Pipe and Precast. Included in net income for the third quarter of 2019 was $2.3 million of income associated with legal settlement related to the pipe produced at our former TUBULAR Products facilities, $0.7 million in net insurance recovery for the Saginaw fire, $0.5 million in acquisition costs for Geneva as well as the associated estimated tax impact of those charges. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for full accounting of the aforementioned items. Our third quarter sales were the highest quarterly level achieved since the first quarter of 2013 and increased 3.2% to $77.6 million compared to $75.2 million in the third quarter of 2019. The increase was due to a $12.5 million contribution from Geneva. Legacy revenues declined 13% from the year ago quarter due to a 37% decrease in tons produced, partially offset by a 37% increase in selling price per ton. Due to the unique nature of the water transmission systems that we manufacture, production tons are not always the best indicator of productivity and comparability between periods are highly dependent on project timing and product mix. Gross profit increased nearly 1% to…

We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brent Thielman with D.A. Davidson.

Great. Thanks. Good morning, Scott and Aaron.

Hey, Brent. How are you?

Good morning.

I am good. Thanks. Scott, the bids that you're seeing sliding right potentially into 2021, it sounds like the reasons aren't as much funding related but more sort of process related. I guess, one, how pervasive or how broad have you seen these sort of job delays? Is it across the markets you serve? And are there any similarities in the types of jobs specifically that you're seeing sliding? Is it primarily the larger one, just be curious with what are you actually seeing out there?

No, I think, the – obviously, the larger ones take a little bit more time to get ready. And with the remote working environment that we've had and the amount of time it takes whether to get permitting or engineering drawings done, I think it's just starting – it just stretch things out enough where we've seen stuff leaking out from quarter-to-quarter and really into 2020. I wouldn’t say it’s relegated only to the larger projects, although, as you know, it takes a lot more time to get these larger projects in the work and shovel ready. But that's really what we're seeing is things are just moving and taking a longer time to get queued up to be released. We have not really seen anything related to funding at all. We still see 2020 is a pretty good year and 2021 is a year that’s pretty similar that’s getting a little bit larger by the amount of work that's moving from 2020 into 2021. So it’s certainly making 2021 look like a real solid year.

Okay. Yes, I guess – maybe on the fourth quarter, I mean, it tends to be seasonally slower for you anyway. So had expected that to come down sequentially. Just wondering if your expectations for the quarter changed from where you stood 90 days ago? Maybe you thought more work could prop it up that just isn't going to play out? I just want to get a feel for that.

Yes, and I think you are right by saying, I mean you're in the time of the year in the fourth quarter where are the two major holidays. But there has been some work that has slipped out from the fourth quarter into 2021. Now, we still expect the fourth quarter to be a pretty good quarter. But obviously, when you compare it to the third quarter of this year, which we're viewing as a really solid quarter, it's a little bit less. So I think that's probably the best way to look at it. We have seen stuff slip or jobs bidding that have slipped out enough to affect the fourth quarter, but also jobs that are in contract and under backlog that may have some delays related and get started to. And if those kind of delays tend to compound themselves a little bit, if you have a little bit of delay from the customer, then all of a sudden you're trying to get steel in and there's a steel delay, and you may not be able to get into the next year. So those things have caused the fourth quarter to moderate down a little bit versus what we see in the third quarter.

Yes. Another quarter with a pretty good-sized benefit from pricing. I think I've asked this before, Scott, but can you somehow dissect what portion of the improvement you're seeing, the 37% is – the fact that steel prices have moved higher versus just a better kind of bid pricing environment as a result of some of the consolidation of the industry? I think that becomes interesting, especially as you start to see volumes come back.

Yes. And I think the – when you look at that, it's to a very large extent driven by the product mix that we're running in a certain period and obviously this period is the third quarter. So when you have a lot of projects that have significantly different pricing and costs associated with them. For example, you could have a project that has a small amount of tons that has a selling price that's $5,000 a ton. Or you could have a project that has quite a bit of tons, that's maybe a $3,000 selling price that still has a 20% margin, right? So really, I think the most important thing is to look at here is the margins because we've really seen the pricing fluctuate around a mean, and there's so many different projects, it's really hard to get a real handle on how much price is moving. The real measure of it is what does the margin look like? And as we're generating these 20% margins, we feel pretty good about the pricing level and the way things and the way things look as we go forward.

Okay. One more I’ll pass it on. Aaron, just – I mean, it looks like better cash flow this quarter. Any details kind of just around the specifics of that this quarter?

Nothing has changed from our focus on current assets. So really, things have continued to go well there and our management of accounts receivables. I think our inventories dipped a little bit. That's just kind of a normal – things kind of ebb and flow a little bit with our working capital. So large part, it's just earnings based, and we've been kind of pumping out some good earnings and realize the corresponding cash flows in the third quarter of this year. So it's been good.

Has Geneva been a big help to it?

A little bit, Brent. I think – certainly, they're only about 15% of our business right now with our acquisition of Geneva and our first plant into the precast space. Yes, I think they're certainly helping. I think once we get a little bit more scale there, we'll see a little bit more effect from their sort of cash conversion cycle.

Okay, great. Thanks for taking all the questions.

Thanks Brent.

Thanks Brent.

Our next question comes from Gus Richard with Northland.

Yes, thanks for taking the question. Just on Geneva, can you talk a little bit about the gross margin contribution and sort of how much that's helped in the quarter?

Yes, I think, when you look at the Geneva gross margin contribution minus any onetime hits that might be taken, it's pretty much in line with the water transmission steel pressure pipe contribution for the quarter. And as we've said, Gus, as we've gone through this thing, we believe that the Geneva margins are toward the high side of what the water transmission contributions are – the steel pressure pipe contributions. In a sense, we're at a point now where we've gotten these steel pressure pipe contributions on a gross margin level up to 21%. They're pretty similar as we've gone through this period of time.

Okay. And then in terms of Geneva, I think 2019, they did about $43 million, and you're on a run rate of $50 million in the current quarter and kind of implying mid-teens kind of growth rate. Is that not the way to think of it? Is it just a seasonally strong quarter? Or should we be thinking about growth of Geneva in that ballpark? Or any help there, again?

Yes. What I would say is that the fourth quarter of the year on the precast business is generally the slower quarter of the year. Kind of like when we did the call on the acquisition of Geneva, we're expecting the Geneva business to be somewhere around $45 million for the year. Understanding that we didn't own them in the January time frame, so we take a little bit off for the January time frame we’ve got $45 million. So we've talked about a growth rate there that's probably a CAGR somewhere in the area of about 4% or 4.5% as you got forward and that market actually has held up quite well. And our order book for Geneva as we're moving into the slow time of the year has remained pretty steady, which is, by historical standards, a pretty elevated order book. And as we move forward, the things that we're looking at with some of the reforecasting on housing starts and population growth and interest rates, it certainly bodes well for the precast business. And I think when you look across a lot of the lines in the precast business, right now, a lot of the precast businesses that we've seen and that we've talked to are pretty much at the height of how they've been doing. So they're all making pretty good returns. So we expect a pretty good precast market as we go forward for a while.

Got it. And then on the reclamation opportunity in California, can you talk a little bit more about that? And is that a 2022 opportunity, 2023? How does that rollout? And do you see that picking up in other states? And does that also play to your precast business? Sorry, a lot of questions.

Yes, okay, I'll try to get back with the first one. Okay. So when you see what we're seeing in the water reuse business, obviously, that's taking dirty water and treating it to be reused as potable water. We're seeing more of that start to come up. It's been on the drawing board – I guess, a couple of those projects in California for quite a period of time, and they're just really now starting to come to fruition. Those are probably 2021 projects. You'd probably see some of them stretching out into 2022 and 2023. So it's definitely much more prevalent in California than we've seen in other places. Although some of the other places in the west – the Western United States has talked about it, but certainly not as prevalent as what we've seen the discussions being California. So we think that this is a growing trend, and likely that's something that we should see grow in – not only in California, but in different parts of the Western United States. And ultimately, does it spread to the Eastern and Central part of the United States? I think it's – that's to be seen. But the way that things are going, I think it's likely that it spreads to those other regions, presenting more opportunities for us to go forward in the business to provide steel pressure pipe. We haven't really seen any opportunities there related to the precast side of the business at this point, which doesn't mean that we won't. But we are seeing various opportunities for the precast business in California related to jacking pipe and things of that nature that are concrete pipe applications. So that's just a lot of words on the question you asked. So hopefully, that answered your question, Gus.

It does, that was very helpful. And then in your prepared comments, you mentioned opportunities in water for preform, not wastewater. And I was just wondering what that was referring to, if you could just clarify that comment for me a bit?

Yes. When we talk about opportunities in water for the precast business, it's water and wastewater. It's generally – when you look at that $3.5 billion to $5 billion water-related market, those are – those projects are related to drainage, they're related to storm sewer, to some extent, sanitary sewer and things of that nature. So it's really the wide range.

Got it. That’s all from me. Thanks so much.

Thanks Gus.

Our next question comes from David Wright from Henry Investment Trust.

Scott and Aaron good morning.

Hey, David.

Hey, David.

In your remarks, Scott, you referred to the steel order book. And obviously, the steel prices recently have gone up a lot and capacity utilization is up. Can you give any comments over, say, the last three, four, five months, how the recovery in the steel market has affected Northwest Pipe, whether with respect to delivery times or otherwise?

What I would say – one of the things about the steel industry right now is there's a significant amount of outages that are going on in the business at this point in time around several major producers. So our best figures on what the capacity utilization is in the steel production business is probably somewhere in the area of about 65% to 70%. So they're down quite a bit based on having the facilities down for required maintenance, whether it's relining of furnaces or things of that nature. So that's tightened the supply a little bit as we've gone through this period of time, and we have seen prices move up significantly in the steel business. When you look at hot rolled coil, that price, based on the latest price that we've seen this week, is probably up $150 or $160 a ton over the last three months. So whether that continues as the maintenance outages are finished and capacity comes back online, there's also some additional new capacity coming online with the steel industry. I believe it's another 1.5 million tons that I believe it's with big river steel companies bringing online. So that adds a bunch back into the market. So it looks like there could be some downward pressure on steel prices as we go forward in the near future. For us, when steel prices go up, we like higher steel prices. It doesn't bother us at all, because what that drives, is higher revenue numbers because that's built into our project cost. And we like a 20% margin on $280 million, more than we like a 20% margin on $260 million. So it just more margin dollars. What we don't like in the steel side is when it gets too volatile, where it starts to get a little bit disruptive to the bidding process when it moves so quickly. And when lead times jump out, it causes a little more problem. But I think that will start to abate here in the relative near term.

Okay. And then you were talking about and then Gus was asking about additional opportunities to expand precast for water. Are there precast products that the company doesn't presently make that you want to add to the portfolio? Or would the opportunities be looked at more as either geographic or capacity additions?

Well, there is – geographies have certain demands. Right now, our geography is – in the precast business is really in and around the State of Utah and the surrounding states. Because the precast product generally doesn't ship much more than 120 to 150 miles. It's a relatively local business. Now we also have precast capabilities at our Tracy plant to be able to make a wet cast RCP precast product. It's more of a specialty product. But quite frankly, there are many, many other precast products that could be added to the portfolio. And I think – like what's in your question, some of those are geographic related. And as you look at getting into new markets, whether it's through acquisition or through building out precast capabilities at our – some of our existing plants, I think there are additional products that are out there, whether they're more related to control systems that are in precast vaults and things of that nature, but there are many, many different products that can be gotten into. Some of them are water-related because if you think about the precast market, the water piece of it is $3.5 billion to $5 billion. But the entire precast market, we thought originally, it was probably about a $14 billion or $15 billion, market. But as it's looking now, it's actually quite a bit bigger than that. But those are other products like utilities and – in different structures. Some of them are bridge products and things like that. So the precast market is gigantic. And there's a lot of growth opportunities for products not only in water, but really in the entire precast market. And quite frankly, even some of the stuff that we do at Geneva now isn't water related. It's a relatively small part of the product portfolio, but it isn't water related. And as you grow in that business and even growing in the water side of it, you're bound to pick up not only additional water products, but also products that are precast that are outside of water.

Okay. Well it sounds like Geneva is a great platform to try to find other opportunities to expand into?

We like the way Geneva looks. I think it's performing at least as well as we thought when we did the acquisition, and we think there's just a tremendous amount of potential there, so…

Okay. Well, great. And then lastly, so in terms of steel pipe and – steel water pipe and Geneva's business, too, for that matter, your end user customer is, I think, almost exclusively state and local or municipal authority related. Northwest Pipe tends to get grouped in with the so-called infrastructure stocks and the price of the stock moves around a little bit, and we've seen that recently with a little pullback generally in infrastructure-related stocks. Is any portion of your current order book federally funded? Or is there any reason in the future that Northwest Pipe's business would become – the federal funding would present opportunities for Northwest's business?

Well, there's – generally, when you're dealing with the municipal projects, state level or whatever level they're looking at, if they're coming out of the state revolving funds – those are state funds. And generally, there's EPA federal funds in those. But we are not seeing any projects that we currently have with any funding issues. In fact, as we look out – and we're working on our three-year strategic plan now for the company, as we look out over the next three years, this is over the next three years, already the 75% to 80% of the projects that we're looking at have funding or funding mechanisms already in place. And in that is nowhere any infrastructure-driven stimulus package, which we believe at some point could be in the offering here. So right now, we're not seeing anything around those kind of funding issues.

Okay, great. Well thanks for that answer. Thanks for taking my questions. And be well.

You too David thank you.

[Operator Instructions] Our next question is a follow-up from Brent Thielman with D.A. Davidson.

Hi guys, thanks. I'll take a crack at this, see where it goes. But Scott, is there any reason beyond some sort of collapse in steel prices, which – it doesn't look like it's happening. But this positive mix trend, which reflects in pricing this quarter and I guess last quarter as well, that, that could reverse next year and work materially against the end 2021?

Well, there's always potential pressures on pricing. As we've talked about multiple times, there's a new facility starting up in Texas in 2021, which we think that probably puts a little bit of pressure in that region on the margins for a period of time. But again, what we're seeing is, as we look at our plan for the next three years, a such large demand, not only in Texas, but going out over a 3-year period that ultimately, there's probably enough demand where that pressure on margins doesn't last for a really long time. The other thing that we're seeing is a little bit of a demand shift that we see – that we've talked a little bit in the past about, Brent, which is demand growth in California. And probably as we go forward over the next two to three years that you may have a situation where the largest demand market for a period of time is going to be the Western United States, driven significantly by the State of California. So there are some things out there, and there's always those competitive things. But I think the way things are lining up with the demand right now, it still looks pretty solid.

Right. sake of the argument, let's say it doesn't shift materially, it sounds like you got a pretty large potential pipeline of bid opportunities for next year. It's not larger than what you thought a quarter ago. Geneva looks to be pretty steady, if not better. Economy there looks pretty good in the mountain region. Do you feel confident, barring something extraordinary in the economy, that the business should grow next year at least organically?

It's hard to say when you're looking out in a COVID environment to be able to make those kind of statements definitively. Right now, what I would say, Brent, is the structure of the business still looks to be strong as we go out over the next couple of years. Now could COVID affect that? It's possible. But it still looks to be strong. We haven't seen any projects that are canceling, just moving around. So it could affect certain periods of time. But over the next three-year period the business still looks to be pretty strong. And as long as things continue to hold up, it looks like the precast business is positioned for growth as we go forward at the Geneva facilities. And obviously, we continue down the road, we're looking at M&A opportunities on the precast pipe and forms side of the business, which could also create some growth over the midterm here. So I think that there's a pretty good opportunity that the company is going to be growing. The steel pressure pipe side gets a little bit more nebulous sometimes simply because jobs start moving it around and it can affect a three-month or six-month period. But the fundamentals all continue to look very strong to where – that it looks like the business is going to be strong for quite a period of time.

Yes. Well at the moment, it doesn't look like you have extraordinary comparisons this year from a top line perspective, so – but we will make our assumptions there.

Thanks.

Thank you guys. I appreciate it.

Absolutely.

Thanks Brent.

[Operator Instructions] Seeing no further questions, I’d like to turn the call back over to Scott Montross for any closing remarks.

Well, thank you again for joining our call today. I'd like to conclude by reiterating that despite the near-term projects that we've seen with projects delaying into 2021, we are still very well positioned to continue to execute on our strategy and support the water infrastructure needs of the United States well into the future. As I've said, when we look out into 2021, bidding activity is continued to be projecting to remain very strong. Our backlog in steel pressure pipe has been over $200 million for the last nine straight quarters. And our precast remains elevated even as we enter the slow time of the year. So the structure of our business remains strong, and all this despite being in a pandemic environment. So I think we're positioned quite well as we go forward. And I'd just like to thank everybody again for joining the call. I'd like to thank our employees for their strong operational execution and commitment to Northwest Pipe, and we look forward to speaking with you again on the fourth quarter call in 2021. So thank you very much.

Thanks.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.