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Edited Transcript of NWPX earnings conference call or presentation 14-Mar-19 2:00pm GMT

Q4 2018 Northwest Pipe Co Earnings Call

VANCOUVER Mar 18, 2019 (Thomson StreetEvents) -- Edited Transcript of Northwest Pipe Co earnings conference call or presentation Thursday, March 14, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robin A. Gantt

Northwest Pipe Company - Senior VP, CFO & Corporate Secretary

* Scott J. Montross

Northwest Pipe Company - President, CEO & Director

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Conference Call Participants

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* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

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Presentation

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Operator [1]

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Welcome, and thank you for standing by. (Operator Instructions) This call is being recorded. If you have any objections, you may disconnect at this point.

Now I will turn the meeting over to your host, Scott Montross. You may begin.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [2]

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Thank you, Angie. Good morning, and welcome to Northwest Pipe's Conference Call. My name is Scott Montross, and 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 that are 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 fourth quarter and full year results.

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Robin A. Gantt, Northwest Pipe Company - Senior VP, CFO & Corporate Secretary [3]

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Thank you, Scott. Our fourth quarter income from continuing operations was $148,000, or $0.02 per diluted share.

Adjusted for the bargain purchase, moderate sale gains and restructuring and acquisition-related costs, our adjusted income from continuing operations was $2.6 million or $0.27 per diluted share, compared to an adjusted loss from continuing operations of $1.1 million or $0.11 per diluted share in the fourth quarter of 2017.

Sales were $57.5 million in the fourth quarter of 2018 compared to $35.6 million in the fourth quarter of 2017.

Gross profit as a percent of sales was 11.8% in the fourth quarter of 2018 compared to 5.1% in the fourth quarter of 2017.

The Ameron acquisition added about $19.1 million in sales. The remaining increase was due to a 23% increase in selling price per ton, partially offset by a 12% decrease in tons produced.

Gross profit as a percent of sales improved with the increases in selling prices per ton.

Selling, general and administrative costs increased to $4.1 million in the fourth quarter of 2018 from $3.3 million in the fourth quarter of 2017. This increase was due primarily to $600,000 in acquisition-related costs.

We sold the Monterrey facility in the fourth quarter for net proceeds of $2.7 million or a quarter gain of about $200,000.

We did have an adjustment in the fourth quarter to the bargain purchase recorded with the acquisition of Ameron Water Transmission Group and have a net gain of $20.1 million. The initial gain was recorded based on preliminary fair value of the assets and liabilities, and we recorded some adjustments as we continued our fair value assessments. We may have additional adjustments in the future through first and second quarter of 2019.

As we know that last quarter, Ameron has been consolidated into Northwest Pipe's results and excluding the acquisition-related costs, Ameron has been accretive to Northwest Pipe's income in the third and fourth quarters.

Moving on to the full year results. Our income from continuing operations was $20.3 million or $2.09 per diluted share compared to a loss of $8.4 million or $0.88 per diluted share in 2017. We did have several onetime adjustments in 2018 and 2017 that impacted results, including the bargain purchase gain, gains on the sale of Houston and Monterrey, acquisition-related costs, restructuring expenses and a change in workers' compensation reserves. When we adjust the results for these onetime items net of tax, our adjusted net loss from continuing operations was $1.7 million or $0.18 per diluted share in 2018 compared to an adjusted net loss of $7.1 million or $0.74 per diluted share in 2017.

Sales increased to $172.1 million in 2018 from $132.8 million in 2017.

Gross profit as a percent of sales was 7% in 2018 compared to 4.4% in 2017. The Ameron acquisition added about $30.2 million in sales. The remaining increase was due to a 6% increase in selling price per ton and a 1% increase in tons produced. Gross profit as a percent of sales improved due to increases in selling prices per ton.

Selling, general and administrative costs increased to $16.7 million in 2018 from $14.1 million in 2017. This increase was due to $2.6 million in acquisition-related costs.

We had an income tax benefit rate of 19.1% in 2018 compared to an income tax benefit rate of 11.6% in 2017. Our 2018 rate was impacted by the nontaxable bargain purchase gain as well as changes in the valuation allowance and the tax windfall from share-based compensation.

In 2018, the company used $18.4 million in cash from operations. Depreciation and amortization were $9.3 million in 2018 and $6.6 million in 2017.

Capital expenditures were $3.8 million in 2018, which were for ongoing maintenance capital expenditures. We've planned about $12 million in total capital expenditures for 2019, most of which falls under maintenance capital spending.

At the end of 2018, we had borrowed $11.5 million on our line of credit. Today, we do not have any borrowings and have about $50 million in availability for working capital needs.

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

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [4]

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We continue to make progress on integrating the Ameron Water Transmission Group into Northwest Pipe. This acquisition has created a strong platform, this is expected to have major impact on the ongoing earning potential of the company.

As of December 31, 2018, our backlog, including confirmed orders, was $252 million, an all-time record compared to $201 million in the third quarter and $88 million in the fourth quarter of 2017. The significant increase in backlog at year-end was a result of a strong fourth quarter bidding opportunities that we've discussed in our previous calls.

The current demand levels along with the stable competitive landscape should lead to a stronger first quarter than we've seen recently, bucking the trend for relatively slow first quarters for the last 3 years. We expect first quarter to be similar to the fourth quarter of 2018 with respect to revenue and gross profit.

Furthermore, we expect continuing improvement in revenues and margins as we progress through the rest of 2019.

The following is a look at current and upcoming water transmission projects. In the Texas market, the SWIFT program has funded over $8 billion in projects over the last 6 years. SWIFT is expected to continue to fund major projects like the Houston project in Boulder Reservoir well into the future. The Houston surface water project is a major multiyear multiagency program, with a series of segments representing 90,000 tons of pipe. Northwest Pipe has been the successful bidder on multiple Houston segments, representing over 15,000 tons of pipe. The production of the individual segments are in various stages from pre-manufacturing to ship-complete. There are additional segments of Houston project that will bid throughout 2019 and 2020, that represent about 35,000 tons of pipe.

The Bois d'Arc Reservoir project by the North Texas Municipal Water District has begun construction and represents approximately 60,000 tons of pipe. Northwest Pipe was the successful bidder on a portion of the raw water line for Bois d'Arc in the fourth quarter of 2018. The segments that we are awarded represent approximately 25,000 tons of pipe, scheduled to be produced in 2019. The finish water line for this project is forecast to bid in the first half of 2019 and represents an additional 22,000 tons of pipe.

In the Western market, the $2.6 billion California reline program began in 2017 and will be active over the next 20 years.

In 2018, Northwest Pipe was successful bidder on 2 reliner segments: first, the 6,000-ton MWD reline project, on which production began in the fourth quarter and will run through the first quarter of 2019; and the 3,500-ton San Diego County authority reline project with production that will run through the first quarter of 2019. Two to 3 additional reline segments will bid each year, representing 8,000 to 10,000 tons of pipe annually.

The city of San Diego's $1.7 billion pure water program is a 6,000-ton project, it is scheduled to begin bidding in the first half of 2019.

The Santa Clara Valley Water District's $1 billion pure water program represents 8,500 tons of pipe, projected to start bidding in early 2020.

In North Dakota, progress has slowed on the 140-mile 87,000-ton Red River Valley Water Supply Project as it is competing for funding with an urgent flood diversion project, which appears to be taking priority. We are hopeful that beginning on this project will start sometime within the next year.

With a very strong backlog coming out of 2018 and a solid bidding year projected for 2019, along with a stable bidding environment, we expect a positive trend in revenue and margins throughout 2019. And because of substantial portion of the projects currently bidding are multiyear programs, we expect to see continued strength in the backlog, which should translate into positive business conditions beyond 2019.

The acquisition of the Ameron Water Transmission Group further strengthens our position in the business.

In closing, as we move forward, we will remain focused on: one, the successful integration of the Ameron Water Transmission Group; two, improving the performance of the business by focusing on margin over volume; and three, driving cost reductions and efficiencies at all levels of the company.

At this time, we'd be happy to answer any of your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Brent Thielman.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [2]

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Scott or Robin, you've seen lot of improvement in profitability, but I know it's still not exactly where you want it to be. I guess, 2 questions. Did the fourth quarter have any negative sort of price cost impact because of this big move in steel last year? I presume that would subside. And then also, have you seen your gross profit percentage sort of markedly improved month-over-month? In other words, are you sort of exiting the quarter at something above that 12% level?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [3]

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When you think about the steel piece, Brent, I think the steel piece is -- in the pricing on pipe is pretty much kept up with the increasing on steel as we've gone through the marketplace. In fact, I think the price on pipe is increased even more than we've seen. As you go through a period of time, as you know, we've grown this backlog to $252 million. So you continue to work your way through a backlog that, quite frankly, as you look at it chronologically, has an improving margin over a period of time, which is what we expect to see as we move from the first quarter to the second quarter, the third quarter of this year. Really, what I would say is moving back toward what the historical margins level were for the company. So I think we're kind of in that track at this point.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [4]

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Okay, okay. And Scott, I assume you recall I think maybe last quarter, maybe your thought process was 2019 might not be quite as strong from a bidding perspective relative to 2018. Is that view changed at all? I mean it sounds like you should be still able to grow that backlog as we move through the year?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [5]

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Yes. Brent, the interesting thing is every year we expect to start out one way and it kind of changes around a little bit in more [up straight]. So 2018 was a really big bidding year. There were probably somewhere in the area of about 250,000 or so tons of bidding. When you look at 2019, bidding wise, it looks like a year with the municipal market -- some of the hydro work and plant work that's in there, it's probably relatively solid year that's around 200,000 tons, when you put that all together. So it's not a significant drop-off from what considered to be a very strong market. So as we look it -- as we look at bidding as we progress through 2019, as you know and we've heard really for the last few years, the first quarter generally starts off, not only relatively slow from a result standpoint, but relatively slow from a bidding standpoint. So you see probably the January, February time frame are a little bit slow and then things start to pick up in March for this year and really probably get to the highest level in the second and third quarter or sometime between the second and third quarter. So when we look at what we're forecasting our backlog to be, it probably takes a little bit of a dip in the first quarter. But we expect it, at least at this point with the way the bidding is shaping up, we expect it to be relatively range-bound and stay within a range and settle out at a higher level than we've seen recently.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [6]

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Got it. Okay. Out of curiosity, I mean, this does sound like weather has been a hang-up for you in terms of volume? Seems like that's been chatted about a lot of across the industry and other areas of construction.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [7]

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Yes, I think weather has been an issue in certain places. We've seen weather issues in both Texas and California, that have created issues with, I guess, probably as much as anything getting shipments to lay locations in the field to the contractors. But we definitely have seen some weather-related situations and looking at some of the transcription, some of the earnings calls that we've seen on other people in similar businesses. I would agree that we've had some impact from the weather. Obviously, the winter weather in the Midwest and further east has impacted things too. So I would say it had a reasonable impact on the -- with the revenues, Brent.

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Operator [8]

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Our next question comes from the line of David Wright.

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Unidentified Analyst, [9]

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Brent asked my questions. So let me just try to drill down on them a little bit further. So on backlog -- I'm sorry, on bidding opportunity, I was going to ask and the answer you gave. So the total opportunity this year was maybe about 80% of what you saw it as last year?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [10]

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Yes, I would say that's probably in the right range. It's in -- but in general, when you look at a year that has this kind of volume and this is a pretty solid year that we would characterize a bidding year being in any normal time other than, David, when you follow a year that has 250,000 tons of project bidding. So...

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Unidentified Analyst, [11]

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Right. Do you have a sense of what percentage of last year's opportunities you were successful on?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [12]

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Oh, when you look at market percentages last year, God, I would say that remember, we've only had the Ameron assets within the fold of the company for the last 4, 5 months of the year. So I would say we are probably in the mid-40s percent of market share. As we look forward, we think it's probably somewhere between 48% and 52% in this market that probably settles out as a market share for us.

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Unidentified Analyst, [13]

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Okay. So even with the lower opportunity, you do get a little more market share that's going to push you up a bit?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [14]

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Yes. And I think, David, just to add on to this, when you look at where the opportunities are in the market, we still see strength in the Texas market, which is where we've been strong for years. But we also see some strength in the Western market and that's not just California. It's different parts of the west. So I think we're located in the pretty good spots to be able to take advantage of the tons that are going to be bid.

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Unidentified Analyst, [15]

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Okay. And then going over to margins, I like your phrase, I hope it's not deemed an official condition, chronologically improving margins towards the historical norms. What would you call the historical gross profit? The [ideal] margin.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [16]

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I would say that when you look at the gross profit percentages historically, they probably are bound by about 15% to 17%, is what we've seen historically in gross profit margins when we've had good markets. I think the longer the markets stay stable and the competitive landscape remains stable, I think those continue to improve. If you look back to where we were in 2013, we had gross margin percentages in 2013 that for the year averaged over 20%. I think it was somewhere, Robin, in the area of 21%.

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Robin A. Gantt, Northwest Pipe Company - Senior VP, CFO & Corporate Secretary [17]

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Yes.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [18]

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So I don't think that's out of the question at all. I think things are setting up quite nicely as long as the bidding stays the way it looks right now, David, there's no reason why we can't get back to those kind of levels.

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Unidentified Analyst, [19]

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And does Ameron with their slightly different product mix -- does Ameron make it harder or easier to get to that gross profit level?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [20]

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No, I don't think it makes it harder. Certainly, I think that -- with the operational efficiencies and the administration -- administrative efficiencies that we see with combining the Ameron business into Northwest Pipe, we see room for margin improvement, just based on that, okay. So I think that when you look at the different products they have; one, they have that reinforced concrete product out of the Tracy facility, which is a more of -- when you look at concrete pipe more of a specialty product compared to what you normally think of reinforced concrete pipe being. The stuff that we make in Tracy is large diameter, heavy -- deep-burry corrosive soil, able to handle heavy loads. So it's more of a niche product. And that kind of a niche product generally carries a higher margin. But there is less of that niche product in the bidding environment. So -- but all in all, we think that the Ameron assets, as part of the company, definitely help the gross margin profile.

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Unidentified Analyst, [21]

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Okay, that's great. Last question, I'm going to call it personnel. So you're integrating an acquisition, you've got new facilities, just kind of in legacy Northwest Pipe, what's your headcount relative to where it was directionally?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [22]

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I would say the legacy headcount from Northwest Pipe of the legacy company is probably just below 500 in that area. In total, the headcount for both companies is, I think, somewhere in the area of little over 700. And we originally got about 228 from the Ameron group.

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Unidentified Analyst, [23]

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I guess where I was going was just on doing less tons, you're getting more for them, but does less tons mean less people compared to 5 years ago?

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [24]

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Well, not necessarily. I mean, it all depends on the niche profile of the product that you're making. One, we could be doing smaller diameter, lighter wall product. It's less tons with more lineal feet. So it's kind of that kind of a combination. But when you look at the less tons is -- I think we're probably comparing to the script. If you look at where we were with the legacy company through the July time frame, we were actually ahead year-over-year on tons. And it starts to get a little bit difficult when you look at the legacy company and trying to figure what the tons are for the legacy company because since day one and when we've got the Ameron assets, we've been bidding things as a combined entity. And we've chosen where to put all those orders that best fits our strategic goals. So it's difficult to tell just by looking at the legacy plants where the tons are. If you look at year-over-year, where we were versus '17 and where we're in '18, obviously, we're having more production facilities. We were probably 27% higher in tons and for the year higher than -- in tons. But it's difficult to look at just the legacy plants because we're deciding where to put things now.

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Unidentified Analyst, [25]

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Okay, it's great to see the projects you've been working on, actually, make the way into the revenue line. And keep up the good work and good luck with the chronological improvements.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [26]

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Thanks, David. Okay.

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Operator [27]

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Speakers, right now there are no questions on queue. (Operator Instructions) Speakers, right now, there are no questions on queue. You may proceed.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [28]

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Okay. Well, thank you, everyone, for attending the call. Obviously, we are excited about the improvement that we're seeing in the business and the company and look forward to seeing more of that as we go forward into future. So we'll see you on the next call, which is in...

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Robin A. Gantt, Northwest Pipe Company - Senior VP, CFO & Corporate Secretary [29]

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The early May.

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Scott J. Montross, Northwest Pipe Company - President, CEO & Director [30]

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Early May. So thank you, very much.

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Robin A. Gantt, Northwest Pipe Company - Senior VP, CFO & Corporate Secretary [31]

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Thank you.

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Operator [32]

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Thank you. And that concludes today's conference. Thank you, all for joining. You may disconnect now.