Greetings. Welcome to the Northwest Pipe Company First Quarter 2022 Earnings Call. [Operator Instructions] And please note that this conference is being recorded. I would now like to turn the conference over to Scott Montross, CEO. Thank you, sir. You may begin.

Good morning, and welcome to Northwest Pipe Company's First Quarter 2022 Earnings Conference Call. My name is Scott Montross, and I am 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, May 4, 2022, 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, 2021, 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 all for joining us today. I'll begin with a review of our first quarter performance, and Aaron will walk you through our financials in greater detail. Consolidated net sales were $109.3 million which included a $19.7 million contribution from our acquisition of ParkUSA. Revenue from our steel pressure pipe segment increased 24.4% year-over-year to $74.7 million. The increase was primarily due to higher steel pricing that we saw throughout 2021, which drove higher project pricing. This was partially offset by decreased production volumes resulting from the very small bidding year that we saw in 2021 related to bidding delays that we experienced throughout the year. These delays put product bidding out into 2022, which is partially why we experienced such a significant amount of project bidding in the first quarter of 2022 leading to the substantial increase in our current backlog. As of March 31,…

Thank you, Scott, and good morning, everyone. I'll start with our financial results. Consolidated net income was $3.6 million or $0.36 per diluted share compared to $2.2 million or $0.22 per diluted share in the first quarter of 2021. Our consolidated net income in the first quarter of 2022 included $0.9 million in amortization and other transaction costs specific to ParkUSA, which were partially offset by $0.2 million in associated tax expenses for these items. Adjusted net income, excluding the aforementioned items, was $4.2 million in the first quarter of 2022 or $0.42 per diluted share compared to $2.3 million or $0.23 per diluted share in the first quarter of 2021. Adjusted net income is provided for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments for each period. Consolidated net sales increased 51.2% to $109.3 million compared to $72.3 million in the first quarter of 2021. Steel pressure pipe segment sales increased 24.4% to $74.7 million compared to $60.1 million in 2021 due to an 85% increase in selling price per ton, resulting from increased steel costs along with changes in product mix, which was partially offset by a 33% decrease in tons produced, resulting from changes in project timing. Precast segment sales increased 182.5% to $34.6 million compared to $12.3 million in the first quarter of 2021, primarily due to $19.7 million contribution from the recently acquired ParkUSA operations which Scott discussed earlier. This is in addition to a 22% increase in sales at our pre-existing precast operations resulting from a 35% increase in selling prices, partially offset by a 10% decrease in shipments. Consolidated gross profit increased 68.5% to $14.8 million or 13.5% of sales compared to $8.8 million or 12.1% of sales in…

[Operator Instructions] Our first question comes from the line of Brent Thielman with D.A. Davidson.

Scott, maybe unlike a lot of other public companies right now, I haven't really heard you talk about challenges in margins with respect to kind of supply chain constraints sort of inefficiencies, logistics. I mean it seems like you all are working through that pretty well. Maybe there's something on the covers there that we can't see. But can you just talk a little bit more about how that's impacting the profitability you see in the business today?

Yes, sure. When you look at the steel pressure pipe side, Brent, on the steel piece, like we mentioned in the script, obviously, steel fell off quite a bit toward the end of the year into the first quarter and then start to come back up pricing-wise. And we've got some additional capacity that's come online in the steel business. And I think it's kind of stabilizing the supply right now. So we're not seeing really that much on the steel side. I think when you look at other parts of our business, though, like for example, on the ParkUSA side, we're seeing delivery issues with mainly the components, right, the pumps, the valves and things like that, which we're seeing extended deliveries on. It's not that we can't get them. It's just that the deliveries get a little bit extended which, quite frankly, has caused us to carry a little bit more inventory at Park at this point just to make sure that we have the components we need to make on-time deliveries. And with the precast infrastructure, the Geneva business, really, it's -- we haven't seen as much -- we've seen a little bit with cement deliveries and, obviously, pricing on cement and all those components are moving up at the same kind of rate. But I think it's -- it's mainly around the component side right now and a little bit on the cement side. And maybe a little bit on aggregates in the precast infrastructure side, which again is Geneva. But right now, we're working our way through those and generally not having many issues with them at this point.

Yes, that's great. Well -- and then, the precast margins looks like a great start here altogether. I mean, can they get better from here as we're in the kind of the seasonally stronger periods of the year?

Yes. I think when you look at the first quarter, generally, on the precast side, it's generally the slower quarter, especially on the precast infrastructure, the Geneva-type business because you've got colder weather where they're located. So it starts to slow things down a little bit. And then on the Park side, we haven't seen anything slow down anywhere on Park, and it continues to be really strong. And I think when we look at margins, and we've talked a little bit about this in the past, I think a good measuring stick for like what you see with the precast infrastructure or Geneva margins is probably the very high side of what we can get in the water transmission when things are really, really strong. And then when you look at the Park margins, you're looking at probably 500 or 600 basis points above that. And I think, as we go through time and continue to get efficiencies in those facilities and cost reductions, that those margins will continue to improve as long as the market sticks because I can tell you right now, the precast and precast-related markets that we're in have been very strong and appear to be setting up for a really strong 2022 full year. So it's looking pretty good.

Scott, I mean to that point, it looks like Geneva in itself was up over 20% again this period. What -- I mean, what do you think is driving all this demand on the precast side? Is there a few select markets you can point to?

Yes. I think the thing -- the business drivers on the precast -- because Park and Geneva are a little bit different, right? Park is only about 15% residential. So it's more population growth, urbanization and interest rates that are business drivers to that business. But like I said, we have not seen the order book slow down at all at Park. And obviously, they're in Texas. And when you start looking at what the conflict in Ukraine is doing with the oil distribution around the world, obviously, there's going to be a lot of money being spent in the Texas economy. So the Texas economy is really, really strong. And I think the things that we've worried about more, Brent, are like, obviously, the Fed increases in the interest rates and the effect that those are going to have. But even when you're looking at where we have our Park facilities right now, as interest rates start to slow down single-family residential housing, people are still going to need places to live in Texas. So you're probably looking at potential growth in multifamily apartments and things like that. So I think that is really a big piece of the Park side. On the Geneva side, a little bit different drivers, a little bit different because it's mostly related to residential. You're looking at population growth, housing starts and interest rates. And the worry there, obviously, is the interest rates are going to slow down the residential market. And I think what's happened, and you mentioned it before about supply chain, that the supply chain issues that are through the system have caused a little bit of a buildup in construction starts on residential housing. So it's -- there's been a lot of delays in getting construction started and completion. So I think there's some momentum behind that market. And that momentum just is a continuation of what we've seen really for the last probably 1.5 years in both of those businesses, so...

Yes. Good to hear. I guess last one, I'll turn it over. How much of the $341 million in backlog do you think you could convert this year?

So backlog -- some of the backlog is always longer lead time. I mean, there's obviously stuff in that backlog that stretches out into 2023 and maybe even a little bit into 2024. I think we ended 2021 at what kind of a -- which was it, 280-ish, of the steel pressure pipe business. I think, obviously, the backlog would foretell that the revenue in that business should continue to climb over this period just because there's more work in backlog, and it's not even related to a steel price thing now, Brent, because what we're dealing with is we saw steel prices fall a bit at the beginning of the year so the steel prices aren't as big of an effect. And what we're seeing is way more tons in backlog. There's like 63% more tons in backlog now versus where there was in the fourth quarter and actually a bunch more than that when you look at the first quarter of 2021, it's even higher than 63% in the amount of tons in backlog. So I think that there's a good chance that, that revenue, while I don't want to throw a specific number out, continues to grow from where we were in 2021.

Our next question comes from the line of Gus Richard with Northland.

Just on the pressure pipe business, in the past, there's been some shipment delays from the steel companies. Have -- are you still experiencing that? Or have -- are they -- are the deliveries more predictable now?

Well, what I would tell you, Gus, is the -- you always experience some delays from the steel guys, right? There's always delays depending on the different mills that you're dealing with. But certainly, where we are right now, we're not seeing nearly what we saw in 2021. And I think in a couple of words, it's definitely becoming -- it's become more predictable than we've seen. So that has been a pretty good plus, especially since we saw last year delays in projects that we already had in backlog we already produced and we were waiting on steel for some of those projects. We're not seeing nearly as much of that now. So that's kind of leveled out. And really, Gus, I think it's -- you still got some of the markets in -- that are steel-related markets, like the automotive guys are still a little bit down. Obviously, the chip shortage is creating issues there. But we're also seeing additional capacity coming online which is making more steel available so I think those things are all helping.

Got it. That's helpful. And then just thinking about the margins in the pressure pipe business. In the past, you've been able to get 20%. Do you see a path to getting there? Or sort of how do you see those margins trending based on the better backlog?

Yes. We see -- obviously, we're going to be able to run more tons in the -- first quarter was relatively small tons of production, right? I mean when you look at overall capacity utilization in the first quarter and look at the practical capacity of the facilities, we're probably somewhere in the area of about 35% capacity utilization. But we're going to be running more in the second quarter of the year. And obviously, with running more, you get better overhead absorption rates. So that's why we're kind of focused on those things getting into the mid-teens. We think that as we go through the year, there's a chance that they could continue up. But the -- I think when we get into the 20% range, there's a few things that have to happen. One, obviously, you need a really strong, good extended market because the key for margins over 20% are strong industry-wide backlogs. And that only comes with strong demand in the market so it creates a much more stable environment. And I think that's what you're looking for. And I can't say that we're there yet. Obviously, we had a really big first quarter bidding in 2022, and that's kind of set things up for the rest of the year. But I think the rest of the year, I would kind of deem is just solid bidding. And I think that backlog is -- the $340 million or $341 million of backlog is a good carry forward to 2022. And I think the other thing is, as we mentioned, that's going to be the high watermark because of what we see for the rest of the year, but we still think it's going to remain up ways. So as long as backlogs remain up industry-wide, there's no reason you can't start moving up at least toward that 22% or 20% number, but they've got to remain strong for a period of time to get there. So I think people have to have -- or competitors have to have a longer-term look at stronger backlogs, and that's really what starts to drive that. It's higher production levels, which creates better absorption rates in the plants and then the better backlogs that creates a more stable bidding environment. So I think it will -- we're not quite there yet, but I think we're starting to move in that direction.

And the sequential decline in bidding activity is just a function of the deferred bidding in '21 just being taken care of in the first quarter, and that pretty much is cleaned out. Is -- am I getting that correct?

Yes. I think we can still see a little bit of that in the later part of the year, but a lot of it was in 2022 first quarter. I think some of that work actually moved out into 2023. But in general, what you're saying is correct.

Got it. And then in terms of Geneva, with this CapEx you're putting into it, can the Geneva margins migrate up towards ParkUSA? Or is that just generically lower margin part of the precast?

Yes, because you're dealing with more of a -- I don't want to say commodity product, but it's more of a commodity-type product than what we see at Park. It's more the RCP pipe and manholes and things like that. So I think that there's room for improvement in Geneva margins, but I think the bigger question is, how high can Park margins get, right? I think the Geneva margins have developed quite nicely over the last 1.5 years. But the question starts to come down to where the Park margins get to, right, because like I said, they are 500 or 600 basis points above the Geneva margins, which we think is okay at this point, but I think that there's some room to move up in those too.

[Operator Instructions] Our next question comes from the line of David Wright with Henry Investment Trust.

In the press release, you talked about the -- at Geneva, a 35% increase in selling prices. That's pretty stunning. Can you put any context on that?

Yes. What I would say, David, is the selling price is reacting to the increase in raw materials because when you look at the raw materials on the precast business, you've seen a lot of them move up like whether it's reinforcing rod or wire or the sand and aggregates, a lot of those are up 15 or so percent, in some cases, even a little bit higher. So obviously, what we're trying to do is trying to make sure that we are covering the increased costs. But I think the other piece is the demand on the Geneva business has been so strong. It's just -- quite frankly, we're actually trying to slow down the order book, right, because you don't want to get the order book too far extended. Otherwise, the lead time gets extended. And what it means is it takes longer to get the price increases into the market. So we've continued to work price increases in the market to stay out in front of these cost increases we see at Geneva. And I think the guys on the precast side, Mike Wray and his team of guys have done a really good job with that. So same thing with Park. We're seeing the same kind of increases with Park on the raw materials side, which, again, you're dealing with a lot of the same that Geneva has for the precast concrete vaults but also the components. I think they're doing a pretty good job of keeping out in front of those things at this point. So hopefully, that answers your question and I didn't get off on too much of a tangent.

Well, no, I'm just thinking like a utility vault, a pretty generic precast item, for the price of that to go up so much and have the market tolerate it, it's interesting to think about.

Well, I'll tell you, David. The order book is -- has been really strong. It continued to grow through the back half of the year, and it's continued to grow in the first quarter and into the second quarter. So the key is to make sure that we're managing the order book so we don't get it too far extended. So we ended with about -- I guess, it was about $66 million in backlog -- or backlog, it's actually order book for the precast and precast-related business. Ideally, we'd like that to be a little bit closer in, maybe in the mid-50s, high-50s. We're getting out that far, it just takes longer to get the prices into the market to keep up with the cost increases. So the guys are doing a good job, but the demand on precast has been pretty stunning at this point.

Well, that's been a good move that the company made to expand into precast. And you hit the beginning of the cycle and are benefiting from the improvement, so that's a really great move. And then my other question is with possible further expansion on the precast side, is there any kind of a debt metric that management and the Board are kind of comfortable with getting to but not exceeding?

Yes. That's been a big level of discussion specifically with Aaron and I because, obviously, the big thing is where we are now. We'd like to get the credit facility down into a reasonable range. So I mean, that's going to be the first order of business, I think, before we get any more expansion going on. It could be a little bit of a while before that happens because we're still integrating Park. But I would say at this point, to us, and both Aaron and I are pretty debt-light. I don't like to have a lot of debt. So I like to keep working things down. At this point, I would say, these are just kind of round numbers. I'd start feeling more comfortable with a credit facility that's kind of in the 40s range, you know what I'm saying, at this point because we've got some integration to do. And obviously, we like to do things off the balance sheet if we can. And that's going to -- we're going to continue looking at that as we go forward. But we're pretty debt conscious when you look at what we're -- how we run the business, so...

Yes, credit facility allows for 3x EBITDA right now, David, due to the acquisition. That acquisition holiday kind of ends in the fourth quarter. So we would drop down to 2.5x. I mean, Scott and I have typically been comfortable at 2x and not feeling too much stress at 2x. But like Scott said, we naturally want it as low as we can and are pretty conscious on paying that loan down. So something we're very focused on, have been focused on forever. I mean Scott really kind of brings that to the culture and something that he does during his meetings with the executive team, where we really start a lot of meetings with a discussion around our current assets and receivable collections and cash. So something we pay attention to all the time.

Yes. And I think what's been a big piece of it is the receivables and working those percent on times much higher, especially in the steel pressure pipe business.

So it sounds like a debt-to-equity ratio, for example, that you wouldn't be comfortable going any further than you are right now.

Yes. It would have to be something that was really transformative. I think that the -- obviously, there's variability in the steel pressure pipe business, and we're conscious of variability just like when we talked about 2021, we thought the back half of 2021 was going to be a really large bidding back half of the year. And as we got through the back half of 2021, it deteriorated, and things pushed out into 2022. So I'm more comfortable with a little bit less leverage, unless there's something out there that really made sense. So -- and it's really -- that's the focus on, all right, well, we've got to continue to grow the precast business to continue to balance off the variability that we see in steel pressure pipe. Because when the steel pressure pipe business is good, I mean, it's pretty good. But when it's slow, obviously, you've seen some really, really slow years for us on the steel pressure pipe side. And the key, I think, is getting something to balance that out, and that was the reason for the precast growth strategy and continuing down the road in the precast growth strategy into a market that, as we see it now, has much faster cash cycle, better margins and is more consistent. But the -- we're still -- the base of the company is still the steel pressure pipe water transmission business, and we've got to pay attention to the variables that we see in that based on how jobs line up because you start the beginning of a year and you think you're going to have a certain amount of jobs bidding throughout the year and you build your plan based on those number of jobs. And as we saw in 2021, which obviously had some unusual events like the continuation of the pandemic, it can change relatively quickly. So we're pretty conscious on that and that affects how we look at comfortably being in a certain debt level, so...

Well, that's great because sometimes when management start making acquisitions and they're successful, they say, "Oh, wow, let's do some more." So your discipline is very comforting. So that's great, a great quarter.

At this time, we have reached the end of the question-and-answer session, and I will now turn the call back over to Scott Montross for any closing remarks.

Yes. I'd just like to say thank you again for joining our call. Just to leave you with just a couple of takeaways. Our first quarter backlog for steel pressure pipe should position us well for improved margins in the second quarter. And at the same time, our precast business has remained strong with record order book, which should facilitate the potential of margin expansion as we progress through what appears to be, as I said before, a pretty strong 2022 precast market. And finally, we're pleased with the integration of ParkUSA, it's on schedule. And we continue to be very excited about the future growth prospects of the business. And I'd, again, say thank you for all your time and attention today, and we look forward to speaking with you again on our second quarter call in August. So thank you very much.

This concludes today's conference call. You may disconnect your lines at this time. Thank you all for your participation, and have a great day.