Apr 28, 2009
Executives
Brian Dunham - President and Chief Executive Officer Stephanie Welty - Senior Vice President and Chief Financial Officer
Analysts
Sharad Patel - Jeffery’s & Company Brendan Watkins - D.A. Davidson Ryan Connors - Boenning & Scattergood
Operator
Thank you all for standing by for today’s conference. Your lines have been placed in listen-only mode until the question-and-answer portion of today’s conference.
(Operator Instruction) Now, I’d like to turn today’s conference over to Mr. Brian Dunham.
Thank you sir. You may begin.
Brian Dunham
Thank you, Sarah. Welcome to Northwest Pipe’s conference call and the announcement of earnings for the first quarter of 2009.
My name is Brian Dunham; I’m the President and CEO of the Company. I am joined by Stephanie Welty, our Chief Financial Officer.
Before we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements, and actual results could differ materially. Please refer to our most recent filing with the SEC for a discussion of risk factors that could cause actual results to differ materially.
Stephanie will now address the quarterly results.
Stephanie Welty
Thank you Brian. First quarter revenues were $81.4 million compared to $94 million in the first quarter of 2008.
Net income for the first quarter of 2009 was $2.6 million, while net income for the first quarter of 2008 was $5.0 million. This translates to $0.28 per diluted share in the first quarter of 2009 versus $0.54 in the first quarter of 2008.
Moving on to quarterly results for the business group, Water Transmission revenue was $58.9 million in the first quarter of ‘09 compared to $63.9 million in the first quarter of ‘08. Gross profit was $11.3 million or 19.2% of revenue compared to $14.5 million or 22.6% of revenue last year in the first quarter.
First quarter results in the Water Transmission group were affected by the installation of the new mill in California, weather and some unevenness in our backlog that resulted in limited production schedules in some plants. Tubular Products sales were $22.5 million in the first quarter of ’09, compared to $30.1 million in the first quarter of 2008.
As expected with our volume and price decreases caused by termination of recession driven reduced demand and the impact of lower steel costs. Gross profit for Tubular Products was $1.4 million, or 6.4% of revenue compared to $3.3 million or 11.1% of revenue in the first quarter of ‘08.
Gross profit in the first quarter of ‘09 was affected by sales of higher priced inventory into the market characterized by falling prices. Selling, general and administrative costs were $7.2 million in the first quarter of 2009.
This is down $700,000 from the first quarter of ‘08 and down $1.7 million from the fourth quarter of ‘08. This number reflects significant reductions in variable compensation cost, outside service charges, sales commissions and travels along with the effective several other cost containment measures.
Interest expense was $1.2 million for the first quarter of 2009 compared to $1.8 million for the first quarter of ‘08. Over that period of time, we saw our blended interest rate come down from 7.1% to 5.6%.
In Q1 of ‘09, we reduced total debt by $26.2 million. We expect interest expense to be down slightly in the second quarter of ‘09.
After adjusting for taxes, we generated net income for the quarter of $2.6 million, which equates to $0.28 per share compared to $5 million and $0.54 respectively in the first quarter of ‘08. Free cash flow was $26.1 million, comprised of $30.6 million in cash from operation, less $4.5 million in capital expenditures.
Our significant capital projects in 2009 include the installation of a new mill in California, which is now complete and the relocation of the mill to Bossier City in Louisiana to manufacture oil country tubular goods when that market returns to health. In December, Northwest Pipe Asia acquired Byard Limited, a leading designer and builder of spiral pipe mills.
The new mill in California is a Byard mill. As we expected this relationship is generating a positive return and providing us with greater insight and exposure in international water infrastructure market.
We are already seeing more international opportunity. On April 17, we filed a $125 million universal shelf offering, its historically have been acquisitive when attractive opportunities present themselves and we want to be able to act quickly in this environment should we identify an accretive acquisition target.
Brian will now provide further insight into first quarter results and our expectations for 2009.
Brian Dunham
Thank you. Last quarter, we discussed the recession, the financial crisis, the changing cost of steel and finally the stimulus plan and how each of these may affect our businesses.
I would like to talk through our expectations at that time, how that situation has sense develop and our current expectations for the future. As of the end of 2008, our backlog was approximately $190 million.
Backlog at the end of the first quarter grew to roughly $205 million. As expected we saw Water Transmission backlog increase and Tubular Products backlog decline.
The recession has had a significant negative impact on our Tubular Products business. As the recession hit, late in Q3 and early in Q4 one of the consequences was the decline in gas drilling activity and a related decline in order activity for our energy product.
Throughout the fourth quarter, however we continue to supply our customers with pipe they had previously ordered in this market. This drove strong results in Q4 even as demand declined precipitously.
In the first quarter of 2009, we shift the significant portion of our remaining backlog, but demand remained very weak. New bookings in this product line are virtually zero today.
Other key drivers for our Tubular Products Group include highway spending, non-residential construction and agricultural spending. Last quarter, we discussed our exception and the demand in all of these areas would be down in this recessionary environment, at least through the first half of 2009.
As the quarter developed we saw a magnified effect, because our customers, primarily distributors were reducing their own stocks. We are recently seeing some reversal in this trend although demand for our Tubular Products is still lower than last year.
Our view of the impact of the financial crisis on our Tubular Product’s business has not changed significantly over the last three months. As expected, it appears to be availability and cost of credit has reduced demand somewhat.
As we discussed in last quarter, drilling activity can be traced, with both economic conditions and the credit crunch. This is generally a highly leveraged business and the lack of credit may be exacerbating the slowdown that we currently see.
Of course, trying to separate the impact of the financial crisis from the recession is difficult. Last quarter, we also talked about the significant increase in steel prices in 2008.
Steel climbed almost $1,200 per ton for the grades that we use in this business. Last quarter, those same grades of steel were selling for approximately half of this amount.
In the first quarter of 2009, steel prices dropped again by almost one third. Steel has certainly gone lower than we expected several months ago.
We continue to believe steel cost will remain low throughout the year, although there may be some increases in the second half. In Tubular Products, changes in steel cost lead very quickly to changes in selling prices.
Our Q1 prices compared to Q4 for example are about 30% to 40% lower. At this time, we expect prices to stay at a low level until steel cost move up again.
We do not expect much of the benefit from the stimulus plan in the Tubular Products Group. Although there may be some small benefits for both traffic signpost systems and structural products if highway spending instead later in the year.
The real boost for the Tubular Products business will come if the natural gas exploration market improves. Rig counts continue to decline in the first quarter and it is not clear when this will reverse.
However, this country’s reliance on natural gas will not end and we believe if the long-term fundamentals for this business are still strong and we have a good position in this market. Turning to Water Transmission and again focusing on the recession, the financial crisis, the cost of steel and the stimulus package our views have not changed substantially.
First of all, as I’ve said before, the Water Transmission business does not always run according to the business cycle. Projects are often planned for many years in advance and are sometimes part of 50 year build-out plan.
Near-term issues can certainly delay projects, but fundamentally this is a business with a long time horizon. As we look at the effect of the recession, we have not seen anything like the impact that we’ve seeing in Tubular Products.
In fact, our three year outlook is consistent with our expectations from six months ago or a year-ago. We still see a significant number of projects ahead of us, primarily in new construction that will provide greater market opportunities in our future than we have seen to date.
Last quarter, in the wake of the financial crisis there were many concerns about funding issues for water infrastructure projects, because water projects are typically funded by revenue bonds, which are backed by connection fees or monthly water rates, they are generally not tax dollars involved. After a short freezing activity in October, the revenue bond market has returned to somewhat normal levels of activity.
We have not seen significant postponements of projects due to funding, although we believe some of the mega projects which are still in the future to be more difficult if current economic and financing conditions extend for a long period. Just as with our Tubular Products, we don’t expect a great benefit from the stimulus package in the Water Transmission Group.
The requirement projects begin within 12 months to access this funding makes it difficult to apply stimulus volumes to water projects that takes several years to develop. There may be some acceleration as projects originally scheduled just outside the stimulus window it pulled in to take advantage of stimulus money and lower cost of materials in construction.
We certainly know there are few agencies that are trying to make this work for some of their project. The cost of steel will also have an impact on this business.
While steel is not nearly as bigger component of our cost in Water Transmission and its impact is not as direct as it is in Tubular Products, it can still have a substantial effect. Based on our forecasted steel cost, we expect our average selling price in 2009 will be lower in 2008.
We continue to be strong believers in the fundamentals of the water infrastructure market, even with the postponement of the selling Nevada project, we still see a very strong market over the next several years. New water infrastructures required to support population growth and migration within the United States.
Old infrastructure will continue to deteriorate and will lead to additional rehabilitation projects as well. There is still a significant gap between needs and current construction and over time this gap must be addressed.
In addition to our two primary businesses, we continue to look for adjacent opportunities. As I mentioned earlier, we are gathering information on a greater number of international projects and hope to increase our presence outside the United States over the next few years.
Our Industrial and Power Group continues to grow and we anticipate further enrolls in the power plant and other applications. We continue to look for related water infrastructure products that could be synergistic with our steel pipe and finally as Stephanie mentioned, we are alert to acquisition opportunities.
Obviously the current economic situation could result in some prospects in the near future in our shelf filing is a preparatory step. In summary, our outlook has not changed much.
We continue to expect Tubular Products volumes to be relatively low in the second quarter and will improve in the second half. At this time, it is still unclear as to the timing and the strength of that improvement particularly in energy pipe, both price and volume will be down in the second quarter.
However, raw material cost will also be down and will help offset the impact of working through any remaining higher cost inventory. In the Water Transmission business, we continue to expect a much stronger second half.
The second quarter will likely be similar to the first quarter largely due to our uneven backlog and the timing of releasing jobs to production. In closing, we have taken steps to help us through a difficult first quarter 2009.
As Stephanie mentioned, we have reduced spending, controlled cost and generated cash. At the same time, we’ve continue to look to and prepare for future.
Adversity can create opportunity and we are well positioned to respond quickly to the opportunities that may arise because of the recession and those opportunities that will develop with recovery. At this time we will be happy to answer any question you may have.
Sarah.
Operator
(Operator Instructions) Your first question comes from Ryan Connors - Boenning & Scattergood.
Ryan Connors - Boenning & Scattergood
I just wanted to talk a little bit about the backlog. Just anecdotally it seems like your announcement of major contracts has slowed over the last couple of months.
I know normally you would announce contracts I think, Brian in excess of $5 million, and so the fact that there haven’t been a whole lot of those and yet the backlog increased anyway. I guess that suggests that these are mostly smaller contracts entering the backlog.
So I wonder if you could just talk about whether that is in fact the case and if so how that impacts your business in terms of profitability etc. and what it says about the state of the market in general.
Brian Dunham
Well, I really don’t think there is a lot to conclude from that. Obviously it’s a project oriented business and projects are uneven, which is one of the challenges we have.
We have a huge proportion of our projects that are less than $5 million. It’s still relatively rare to have those larger than that.
I think our average project size Ryan, is about $1.5 million at this point. So there is enough lot of projects anyway that are under $5 million and it just happens that as the proponents of the work that was booked in the first quarter.
Ryan Connors - Boenning & Scattergood
Okay. So in terms of the mix of projects, there is nothing to conclude there that there is going to be a shift toward the next couple of quarters, towards smaller projects given that few of these large ones seems to be coming through?
Brian Dunham
No, I don’t think so, and in some cases as well it’s important to understand that just because we don’t have large projects, doesn’t mean that there aren’t large projects being done. The agencies often break large project up into smaller pieces.
So they might have a $20 million project, they might break it into four different sections.
Ryan Connors - Boenning & Scattergood
Then Stephanie, at the outset there you mentioned the California plant coming online as being an impact on the Water Transmission result. Is there any way you can roughly quantify that for us?
Stephanie Welty
That would be very difficult. I would say that it came online mid quarter.
Brian Dunham
It is our largest plant and so destruction and production there is obviously more of an impact than any other facility, and it was out for about half a quarter.
Ryan Connors - Boenning & Scattergood
Okay. Well, your prepared remarks were detailed, so that’s all I have.
Thanks again.
Operator
Our next question comes from Brendan Watkins - D.A. Davidson.
Brendan Watkins - D.A. Davidson
I have a few quick questions, I was wondering if your Tubular Products segment. You said you can work through your inventory kind of fact and I was wondering if there is still some higher cost inventory in there that’s kind of overhanging on margins.
I was trying to get an idea of what it would take for you guys to get back to double digit gross margin in that segment?
Brian Dunham
There certainly still is higher cost inventory hanging around and probably because steel prices have continued to decline. So, there is still obviously an inventory lag and as prices continue to decline, you are going to have higher cost inventory.
So, as we see that settle down we will work through that relatively quickly, but we are not through it, yet.
Brendan Watkins - D.A. Davidson
Okay, excellent. Then next about your backlogs, in your commentary you guys said you expected to be higher in Q2 and I’m assuming you meant sequentially, but I just wanted to double check that.
Brian Dunham
That’s correct.
Brendan Watkins - D.A. Davidson
Then last question, you guys talked about paying down debt, the lower interest rates have lowered your interest expense. It sounds like we can expect going forward about the $1.2 million, $1.3 million a quarter is that fair?
And then kind of paying off that is your kind of priority in allocation of capital continues paying down some debt or the acquisitions are potential build out. Is that more of your priority in your allocation of capital?
Stephanie Welty
Well, our priority on capital. We always want to reduce costs where we can, so we’ll pay down where that makes sense, but again certainly if there were an accretive opportunity we certainly would take on more debt.
We’ve got a lot of capacity available. So, it really depends upon the circumstances that present themselves.
Remind me the first part of that question.
Brendan Watkins - D.A. Davidson
Just with the interest rates coming down and lowering your debt level, sequentially I guess I’m just curious if we can expect that kind of run rate s $1.2 million, $1.3 million a quarter on interest expense?
Stephanie Welty
That’s probably a good expectation borrowing as a significant event such as a steep increase in steel cost, because that would drive working capital up, could drive that up and of course in acquisition, but all other things being equal that would be a reasonable expectation. We do expect interest rates to come up at some point, but probably not in the near term.
Operator
(Operator Instruction). Your last question comes from Sharad Patel - Jeffery’s & Company
Sharad Patel - Jeffery’s & Co.
Just a couple of quick housekeeping items here. You said CapEx in that quarter was about 4.5, is the run rate supposed to still be around $10 million to $12 million?
Stephanie Welty
Yes, outside of what we are doing with Bossier City.
Sharad Patel - Jeffery’s & Company
Okay and D&A in the quarter?
Stephanie Welty
I’m sorry.
Sharad Patel - Jeffery’s & Company
Depreciation?
Stephanie Welty
Depreciation that was 1.2
Sharad Patel - Jeffery’s & Company
Then we can still look for a tax rate at these current levels 38.3%, 38% something like that?
Stephanie Welty
In that territory. We execute a little bit when the earnings come down due to the relative significance of the discrete items.
Sharad Patel - Jeffery’s & Company
Then moving on to just one last piece here, as we look at the Water Transmission business last quarter you had commented that there was a $100 million in postponed bidding activity in the fourth quarter that you expected to happen within the next six months. Can you give us a feel for what do you see with that currently?
Is that still next six months, have you seen some of that activity start to pickup in the first quarter?
Brian Dunham
Yes, I think we are expecting pretty strong in the second quarter. Our first quarter wasn’t too bad obviously and a strong second quarter as well.
Operator
I’m showing no further questions from the phone line.
Brian Dunham
If there are no further questions, then this will be the end of the conference call for the first quarter of 2009. Thank you for your interest in Northwest Pipe.
Good bye.
Operator
This does conclude today’s conference. You may disconnect at this time.
Again, thank you for your participation.