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.

Good morning, and welcome to Northwest Pipe Company's second quarter 2023 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, August 2, 2023, at approximately 4:00 p.m. Eastern Time. This call is being webcast, and it is available for replay. As I 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, 2022, 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 second quarter performance and outlook, and Aaron will then walk you through our financials in greater detail. We ended the year with a strong backlog, positioning us well for a solid 2023 despite the slow first quarter. Our second quarter results came in relatively in line with our expectations, with revenues of $116.4 million improving 17.4% over the first quarter and declining by only 1.8% compared to the prior year quarter. Revenue from our SPP segment rebounded to $77.3 million following a slow first quarter, which was up slightly from the prior year quarter due to higher selling prices, which were partially offset by a decrease in tons produced resulting primarily from changes in product mix. The SPP backlog, including confirmed order, was $343 million at June 30, which remains strong by historical…

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…

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.