Scott Montross - President and CEO Robin Gantt - CFO

Brent Thielman - D.A. Davidson & Co.

Thank you, Arn. Good morning, and welcome to Northwest Pipe’s Conference Call.

My name is Scott Montross. I’m President and CEO of the Company.

I’m joined by Robin Gantt, our Chief Financial Officer. As we begin, I would like to remind everyone that 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 SEC filing on Form 10-K for a discussion of Risk Factors that could cause actual results to differ materially from expectations. I will now turn to Robin, who will discuss our second quarter results.

Thank you, Scott. Our second quarter loss was $2.1 million or $0.22 per diluted share compared to a loss of $6.2 million or $0.65 per diluted share in the second quarter of 2016.

Water Transmission sales decreased to $28.7 million in the second quarter of 2017 from $39.8 million in the second quarter of 2016. Water Transmission gross profit, as a percent of sales, was positive 2.3% in the second quarter of 2017, an improvement from a loss of negative 3.2% in the second quarter of 2016.

The positive gross profit was due to an improvement in market conditions leading to higher selling prices. This can be seen in that volume decrease, 73%; yet, selling prices increased 163% compared to the second quarter of 2016.

Selling, general and administrative costs decreased to $3.6 million in the second quarter of 2017 from $4.1 million in the second quarter of 2016. This decrease was due to lower wage and benefit expense from reduced headcount.

We expect that our selling, general and administrative costs will run between $15 million and $16 million in 2017. Interest expense remained low in the second quarter.

We expect that the interest expense in 2017 will be around $400,000 to $500,000. We do not foresee a need to borrow against our credit agreement for working capital needs in 2017.

We had an income tax benefit rate of 39.9% in the second quarter of 2017 compared to an income tax benefit rate of 2.1% in the first quarter of 2016. The rate in second quarter 2017 was higher than statutory rate because of the favorable impact of the decrease in unrecognized income tax benefit of about $521,000 due to a lapse in the statute of limitations.

Additionally, in the current quarter and in the second quarter of 2016, our net operating losses were subject to a valuation allowance, which significantly impacted the rate. In the first 6 months of 2017, the company had a net outflow of cash from operations of $2.9 million as we purchased steel and other supplies for the project scheduled in the third quarter, as seen in the increase of our inventory.

Depreciation was $3.2 million in the first 6 months of 2017 and $5.0 million in the first 6 months of 2016. Capital expenditures through the second quarter were $1.2 million, which were for ongoing capital maintenance.

As of the end of June, the balance in fixed assets for Atchison was about $36.2 million. And Houston was about $3.2 million.

In Tubular Products, we expect our ongoing expenses to run around $2 million to $2.5 million annually. This includes some anticipated charges at Atchison for cleanup and periodic maintenance related to the shutdown.

Now, I’ll turn it over to Scott for an update on our business.

As of June 30, 2017, our Water Transmission backlog was approximately $101 million compared to $77 million at the end of the first quarter and $98 million at the end of the second quarter of 2016. As a result of the growth in our backlog, we expect that revenue and gross margins will be higher in the third quarter compared to both the first and second quarters.

But as we’ve said, due to the current overpopulated supply base, we believe the ongoing recovery will continue to be slower than we’ve seen traditionally. The following is an outlook of current and upcoming Water Transmission projects.

The Houston project is a major program with multiple small segments that started bidding in the second quarter of 2016. This is a multiyear series of segments that are expected to represent 90,000 tons of pipe.

The first larger segment, Capers Ridge Phase 2 bid on July 26, and we’re waiting for notification about the successful bidder. The scope of this project has increased and will now exceed 7,000 tons.

There are several other smaller segments scheduled to bid throughout 2017 that represent an additional 11,500 tons. Other major segments of the Houston project is the Surface Water Supply Project Segment A, which is currently scheduled to bid late second quarter of 2018 and could represent 15,000 tons.

Bidding on the entire Houston project is expected to continue into 2019. The Lower Bois d’Arc Reservoir project is a pipeline being planned by the North Texas Municipal Water District, which represents approximately 60,000 tons of pipe.

Garney Construction is the Manager, and they recently announced that procurement is anticipated to begin in the summer of 2018 with construction beginning in the spring of 2019. The Southeast Oklahoma Raw Water Supply, also known as Atoka Second Pipeline, is a 100-mile, 64,000-ton pipeline.

The time frame for bidding on this project has shifted out. And we are now expecting a late first quarter or early second quarter 2018 bid date.

The California market continues to develop. For 2017, there were significant number of projects that are between 1,000 and 6,000 tons each.

The following are some of the activities in California. The Southern California reline program is expected to continue over the next 20 years and will invest $2.6 billion.

We were the successful bidder on the Metropolitan Water District’s Second Lower Feeder Contract 1 Reline Project. This project represents approximately 4,500 tons and will start delivery in the second half of this year.

We are also the successful bidder on the San Diego County Water Authority portion of the reliner program. It represents approximately 3,500 tons of pipe.

And production will start late in the third quarter of this year. There are several recycled water programs we are tracking.

Most notably, the Santa Clara Valley Water District’s expedited purification water program. This represents up to 10,000 tons of opportunity starting late in the fourth quarter of 2017 to early first quarter of 2018.

The City of San Diego’s Pure Water program is a 6,000-ton project that is expected to start bidding in 2018. This project may become part of the Water Infrastructure Finance and Innovation Act, WIFIA for short, seeks to leverage about $1 billion in private capital and traditional financing sources like state revolving funds to help finance a broad range of water infrastructure projects.

The Cadiz Project is a water conservation supply and storage project in California that will create a new dependable water supply for 400,000 people. When built, this project will create upwards of 5,900 jobs in the region, and our Adelanto facility could be a direct beneficiary of the project.

Although headwinds still exist, we are hopeful the initial purchase of 25,000 tons of pipe will commence later this year. In North Dakota, work continues on the 140 miles of 72-inch Red River Valley Water Supply Project.

This project is still in the design and permitting stages. And we expect that bidding will begin in 2019.

The SWIFT program in Texas has almost $1 billion in projected funding for water projects that have been recommended to begin in 2017. In total, they project spending $5.6 billion over the next several years.

The SWIFT program is expected to continue to result in additional near and long-term opportunities. The administration’s stance on infrastructure spending has been well-publicized and has the potential to result in a significant opportunities for both near and long term.

In 2018, we are seeing a bidding year that could be larger than we’ve seen in many years. We have planned about $6 million in total capital expenditures for 2017, most of which fall under maintenance capital spending.

And we continue to look at a wide range of strategic opportunities for our Water Transmission business. This is a very active and ongoing process, and we have nothing further that we’re able to discuss at this time.

As we’ve discussed, over the last few quarters we are seeing a bidding environment that continues to improve. As a result, our backlog has grown from $66 million at the end of 2016 to $101 million at the end of the second quarter of 2017.

Not only has the backlog improved, but with our focus on margin over volume, the quality of the backlog has also improved. Our intense focus on reducing cost in our business over the last 2 to 3 years has continued to yield results.

We’ve achieved a 16% reduction in man hours per job; a 20% increase in tons per water transmission employee; a 26% reduction in plant overhead spending; and at the corporate level, a 42% reduction in SG&A headcount. The focus on cost has created a situation where we’re now able to generate gross profit.

And our Water Transmission business is very low production levels. This will lead to the opportunity to generate higher-than-historical margins as the market continues to improve.

Our balance sheet remains strong. We ended the second quarter with almost $18 million in cash.

This is lower than the first quarter level, but is related to an increasing raw material inventory to support higher second half 2017 demand. We also have additional noncore assets that we’re working toward monetizing to bring additional cash and flexibility to our balance sheet, which puts us in a stronger position than ever to create growth opportunities for the company.

And we continue to believe that with the amount of projects that we see coming through the system in the Water Transmission business, we’re heading into a normal cyclical upturn. The infrastructure Buy America focus and the administration stance on infrastructure spending, we believe will enhance that upturn.

In closing, as we’ve said in the past few calls, as we move forward, we will continue to be focused on margin over volume and achieving the market share that best positions the company to maximize long-term profitability. Two, monetizing the noncore assets, the Atchison plant, the Houston property to create additional balance sheet strength and flexibility.

And three, continuing to drive cost efficiencies and cost reductions at our production facilities. At this time, we would be happy to answer any of your questions.

Maybe just on the quarter itself, I guess -- were you surprised at the level of sales this quarter? Do you feel pretty confident this is kind of a trough in revenue this cycle and we kind of build off this?

And I guess, to what degree was any work kind of expected to execute in the quarter, kind of pushed into the third quarter?

Yes. I think, Brent, the conditions were that we -- I would say that we probably have -- in the area of several million dollars it actually pushed out.

And when I talk about jobs that push out, these are jobs that we have in our backlog that are ready to be produced. And for whatever reason, the job continues to slide out, mainly because of obviously customer wanting to push things out.

There’s also the instances where you have jobs that actually bid a little bit later than you think. And we’ve had probably two or three jobs that are relatively substantial that probably have bid probably anywhere from six to eight weeks later than we expected.

So that’s really the reason for the low revenue level in the quarter. So I think that we are expecting, as we said, revenue levels and profitability levels to continue to pick up as we go through the third and the fourth quarter.

We have $101 million worth of revenue now so -- which is substantially larger than when we came out of the year with it, $66 million. So obviously, when you have things push out, when you have that low of a backlog level, okay, at $66 million when things push out, there’s not a whole lot to replace it with.

Now that we have that backlog that has grown to $101 million, and obviously, there are things going on where we expect that to continue to improve as we go forward. That certainly makes the odd jobs that move out a little way, a little easier to deal with.

So we expect the, certainly, the revenue to improve as we go into the third and the fourth quarters. And we still have a substantial amount of bidding going on in the rest of the year too.

So I think it looks good, relatively strong in the second half compared to what it did in the first half.

Okay. And then Scott, with what you’re seeing out there, bidding still active in the second half and likely you burned a little more revenue in the second half.

I mean can you still build on that $100-odd million in backlog from here? Or do you kind of...

You know I think you’ll see it spike up a little bit, Brent. The problem -- the question is, is when does it exactly spike?

If you get to the end of the quarter and you’ve gotten one of these larger jobs and you could see a little bit larger number. But as, when you look at this backlog at $101 million, and we recognize that we have 1 plant out of that, obviously, we don’t have our Denver plant anymore.

In Denver, could -- at any one point in time could have $15 million, $17 million in backlog. That backlog is a pretty decent backlog for where we are right now.

Could we see it go a little bit higher? Yes, but I expect it to probably stay a little bit stable where we see it right now.

And like I said, I think you’ll see it spike up at certain points in time. But we’re pretty comfortable with this backlog right now.

Okay. And then...

Significantly larger than what we saw at the end of the year, right? Even at the end of the first quarter.

Scott, any thoughts on the recent change in hands of some of the assets of your competitors? And I guess, more so from the standpoint that during that transition, do you feel like it created even more disruption in the market?

Obviously, I’m assuming you’re talking about the Forterra assets being sold to Thompson Pipe. And I think that what I would say, we know the Thompson people very well.

I think they’re a solid competitor. And we believe that this kind of situation should bring additional stability to the Texas market, which we haven’t seen stability in the Texas market probably for the last 1.5 years.

So certainly, we see this is a positive for the market, especially in Texas.

Okay. Any signs that that’s happening?

I would say that, over the last couple of jobs that we bid, the pressure on each one of those jobs is significantly less than we saw in the previous few months. So I think that we have at least a couple of data points right now that points to the biggest market in the country on an ongoing basis has an upward trajectory on pricing.

So I think that’s a very solid sign as we head through the second half of this year and into 2017 because -- or excuse me, into 2018. 2018, as I said, could be a really big year.

Obviously, Texas has a lot of stuff going on. They’ve got a lot of work going on with this Houston project that we talked about in the script.

They’ve got the Lower Bois d’Arc Project going on. And also, what’s going to be happening in 2018 is this -- the job in Oklahoma around Oklahoma City, the Atoka Second Pipeline job, which is 65,000 tons or 70,000 tons that’s moved out there.

So 2018, in and around Texas, is really looking like it’s going to be relatively large year. And ultimately, if Texas is in good shape, it makes the rest of the market good shape -- in good shape.

But we’re also seeing these ongoing programs in California. The reliner programs in California that I mentioned we won both of.

That continues on in California. These other Pure Water programs in California certainly bode well for a lot of the business in California going forward for at least the next couple of years.

So it’s certainly nice that we’ve gotten the other major market in this country that’s all of a sudden starting to push up and continuing to push up versus what we saw back in like 2012, ‘13, ‘14 and ‘15. That’s a good sign.

The other thing is that New York continues to be busy. New York’s done some things where they’ve got about $2 billion.

They put the New York Clean Water Infrastructure Act, $2 billion, and many projects that are going to be going on. A lot of stuff has to be replaced and redone around New York City.

And there’s even talks about some major projects in Buffalo. So I think we’ve got 3 relatively good markets that continue to develop into 2017, which really is going to make 2018, it looks like from where we stand right now, a pretty strong year.

Scott, in your remarks, you mentioned additional noncore assets to monetize. Were you referring to anything beyond Atchison and Houston?

No. They are the two noncore assets, David.

And obviously with what’s occurring in the energy market right now, we’re up to about the mid-900s in rig count in the United States. So rigs continue to get added.

I think that market continues to improve. So the interest level in those two noncore assets continues to grow as we’ve gone out over the last few months.

So I think that those are the two noncore assets that we’re talking about. And certainly, we’re seeing more interest on those as we’ve gone through this period of time.

Okay. When you said 2018 could be a huge bidding year, can you put some -- can you quantify that compared to prior years, would have been x-tons; ‘19, could be y-tons.

Yes, if you look at the Water Transmission business, we see a good market in Water Transmission being about 200,000 tons. That’s a good market.

We haven’t seen a market like that in the last probably, I’d say, five or six years, of 200,000 tons or more. What we’re seeing right now could be substantially larger than 200,000 tons in 2018.

So I mean, some of the things that we look at because I think we’ve talked a little bit before whether it’s our one-on-one discussions. But we have a project tracking system that gives us a really good view on all the jobs that are coming forward in the United States and in Canada, for that matter.

So when you look at that stuff, it has a tendency to overinflate things. But even when we haircut it, that number could be substantially larger than 200,000 tons.

I hesitate to put a specific number on it, but it’s looking much better than 200,000 tons at this point.

Hello.

Hello. Can you hear us, David?

Did we lose David?

Scott, maybe one more on next year and just so I’m clear. Based on what you see in the market right now, you think a minimum is 200,000 tons?

I mean do you feel pretty confident about that? Because obviously, these projects do swing around?

Yes. They do swing around.

The things that we have going on right now are starting to look relatively solid. We’ve seen -- this Atoka project was originally scheduled for the fourth quarter of 2017, right.

So that’s 65,000 or 70,000 tons that pushes into the first part of 2018. Now there was never going to be any revenue on that project in 2017 because it bid so late in the year.

But it just makes that, the 2018 number of tons that are going to bid that much larger. So I think with that going on -- and I think 200,000 tons will be -- is probably a pretty good number to see as a little bit of a floor here.

I’m back, sorry about that. And so for the quarter, tons produced down 3 quarters and pricing up over 1.5x.

So if I think about that and with backlog up, you must have less tons in back...

Yes. There are a little fewer tons in backlog than say for example, that we would have been seeing in the end of 2016 or say mid-2016, when the prices were lower because the prices have moved up quite a bit at this point.

But we still have, I would say, okay tons in backlog right now. With what we feel like our more pending orders starting to come at us.

So I think the tons are going to be okay as we go forward.

Right. And keeping in mind you want to be focused on profitability on good jobs is where you say you want to go.

If there’s a greater amount of absolute demand by tonnage coming ahead and the price per ton is up substantially, that would actually suggest there’s an opportunity for quite a lot more business than has been done in the last couple of years. Kind of peak revenues, ‘11 and ‘12, I mean could the company exceed those levels or has the market changed, and the world’s changed and your capacities changed?

Well, it all depends on exactly how many tons. But I think that there is a -- with the upward trend in pricing and the trend that we’re seeing in tons that will bid in 2018 and the stability that we’re seeing in the marketplace, certainly, 2018 if everything goes the way it looks right now, because obviously things can change in this business.

But I think when I look at this, I’m as positive as I’ve been on this business right now in a while, not only from the bidding perspective, but also the tons that we see coming through the system. Certainly, you could start seeing revenue levels that are quite a bit higher than we’ve seen in recent years.

And then just a last question on Cadiz. That’s not really a municipal project, is it?

That’s more of a private project, yes, no?

Yes, it’s a private project. But I think unfortunately, what the people of Cadiz are running into because we’ve got a relatively close relationship with them being in the same area of Southern California we are, in and around San Bernardino county.

They run, they continue to run into a few hurdles. The first hurdle was the Bureau of Land Management issue with being able to use the railroad right of ways for the conveyance of water.

And I think that they’ve worked -- they started to work their way through that one. And I think they’re hopefully getting towards the end of that.

But they continue to get roadblocks thrown in front of them, when it’s a water resource that could bring badly needed water into the Colorado River Aqueduct and get it into Southern California. Plus it creates a whole lot of jobs in and around San Bernardino County.

So certainly, we’re in full support of them. We obviously help them wherever we can in this process.

But it is a private process. But again, I think that they’ve started to clear a lot of these hurdles.

And we’re hoping that 25,000 tons of pipe they’re going to buy will start bidding sometime later this year.

Okay. I thank everybody for your attendance on the call.

And we’ll talk to you again in November. Thank you.

Thank you.