Northwest Pipe Company (NASDAQ:NWPX) Q4 2023 Earnings Call Transcript
Northwest Pipe Company (NASDAQ:NWPX) Q4 2023 Earnings Call Transcript March 5, 2024
Northwest Pipe Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Northwest Pipe Company Fourth Quarter and Full Year 2023 Earnings Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Montross, CEO. Thank you, sir. You may begin.
Scott Montross: Good morning, and welcome to Northwest Pipe Company’s fourth quarter and full year 2023 earnings conference call. My name is Scott Montross, and I am President and CEO of the company. And 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 March 4, 2024, at approximately 4:00 p.m. Eastern Time. This call is being webcast, and it is available for replay. As we begin, I would like to remind everyone that 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'd like to begin with a review of our 2023 performance and an outlook for 2024 and Aaron will then walk you through our financials in greater detail. 2023 was a year that presented some fairly significant headwinds, including a very small bidding market for a steel pressure pipe business, as well as challenging interest rate environment that suppressed both the residential and non-residential construction markets, negatively impacting demand in our precast business. Despite the challenging market conditions, our annual net sales of $444.4 million declined only modestly from 2022 record levels and profitability levels remain fairly solid, demonstrating what we believe is a new level of through cycle resilience driven by the growth strategy that we have deployed for the last several years that we will continue to deploy moving forward.
Annual revenue from our steel pressure pipe segment remained fairly strong at $296.4 million, a decline of 3.6% from 2022, primarily due to lower tons produced resulting from changes in project timing and relatively small bidding year we had in 2023. This was partially offset by higher selling prices due to sales mix. After a highly volatile pricing year in 2023, prices of hot-rolled steel bands increased 50% from the end of the third quarter to the end of the fourth quarter. However, year to-date in 2024, prices have declined by about 15% and lead times remain fairly short. The steel pressure pipe backlog, including confirmed orders, was $319 million at the end of December 31, which modestly declined from $335 million at September 30, 2023 and from $372 million as of December 31, 2022.
Our backlog remains elevated by historical standards, even when taking into account the relatively small bidding year we had in 2023. We anticipate a significantly stronger bidding year in 2024. Now, turning to our precast segment, precast revenue modestly declined by 1.4% from 2022 to $148 million, primarily due to lower production and shipping volumes resulting from the current interest rate environment impacting the U.S. construction market, which led to changes in our product mix and increased levels of under absorption. That said, our teams in the field did a great job at keeping pricing levels high, helping to offset elevated raw material input costs, which mitigated the impact to our top line. Our precast related order book remained fairly strong, totaling $46 million as of December 31, 2023, which was down from $52 million as of September 30, 2023 and down from the record levels we saw last year at $64 million as of December 31, 2022.
Our 2023 consolidated gross profit decreased 9.6% year-over-year to $77.6 million, resulting in a gross profit margin of 17.5% down from 18.8% in 2022. Our Steel Pressure Pipe gross margin of 14.3% declined by approximately 20 basis points over 2022, primarily due to changes in production volume. Precast gross margin of 23.8% of precast sales in 2023 decreased by approximately 380 basis points from the record year we experienced in 2022. The decline was predominantly due to the impact of rising interest rates on the commercial construction and residential housing markets, which moderately reduced precast production demand, reducing overhead absorption and resulting in changes to our product mix. Next, I would like to provide an update on our capital allocation priorities.
Our focus on growing the business remains our top strategic priority through our precast product spread strategy and attractive M&A opportunities. Our level one product spread effort has been ramping up to build out capacity utilization at our Texas based precast plants to maximize efficiencies in production. To that end, we bid on $55.8 million worth of projects outside of the state of Texas in 2023, mainly in the western and southeastern regions of the United States. And of that, we booked approximately $9.1 million worth of orders outside of Texas in 2023. As previously discussed, our precast operations in Utah have been serving as the pilot location for level two product spread activity to produce primarily precast Park products out of our existing Northwest pipe locations.
In 2023, we reproduced 17 projects in Utah and are currently in production on four precast project orders with more scheduled to come. We plan to expand upon level two product spread once the Park precast products are more comfortably established at the Utah locations before we expand those products to additional geographic locations. Following organic growth, we remain highly focused on repaying the debt we incurred to finance the 2021 acquisition of ParkUSA in order to position ourselves for further acquisitions. Next I'll turn to our M&A strategy in which we are continuing to seek accretive acquisition candidates in the precast related space. We are continuing to evaluate prospective high quality opportunities that possess strong organic growth potential and margin characteristics, solid asset efficiency and a positive cash flow profile.
In the absence of meaningful M&A activity, we may return value to our stockholders via opportunistic share repurchases subject to our liquidity, including availability of borrowings and covenant compliance under our amended credit facility and other capital needs of the business. During the fourth quarter, our strong cash generation enabled us to repurchase approximately 29,000 shares for a total of $0.8 million. And as of February 29th, we have repurchased a total of approximately 149,000 shares at a total of approximately $4.4 million. Before I conclude, I'd like to summarize our outlook for 2024, which is very positive. In our SPP business, we anticipate moderately stronger revenue and margins in the first quarter of 2023. However, when compared to the prior quarter, we anticipate revenue to have a modest sequential decline and for margins to be in line with the fourth quarter of 2023.
Due to typical seasonally and severe weather conditions that have led to unscheduled downtime at our various SPP facilities, that said, we expect continued strength in our backlog, despite the relatively small level of bidding that we saw in 2023. I'd also like to add that we remain encouraged by the amount of activity we're seeing on our current and upcoming water transmission projects, as we are currently expecting a larger bidding year in 2024. For a complete view of these projects, please review our investor presentation, which could be found on the investor tab of our website within the events and presentation section. In our Precast business, we anticipate macroeconomic factors to continue to weigh on our volume. As a result, our precast revenue in the first quarter is expected to be down modestly from the prior year period.
With margins that we expect will continue to be depressed due to lower production levels and associated under absorption, as well as product mix changes related to the slower market. All associated with the impact of interest rates on the construction market. However, we expect this to be only a near term issue as we are projecting a strong 2024 for precast. We continue to believe our precast business is well positioned to grow longer term, given the significant level of pent up demand specifically for residential housing, a growing need for infrastructure spending in the U.S. in our strong market position. In some rate, 2023 was a challenging year considering the significant volatility we saw with steel prices, the relatively small SPP bidding year and the rising interest rate environment.
Nevertheless, we finish the year strong with only modest declines to both our top line and gross profit margins, which is a testament to the resiliency we've built into the business through maintaining our competitive edge in the SPP market, as well as our investments in the precast space to diversify the business and provide for strong organic growth potential in a shorter cash conversion cycle. Our goal remains for our precast related business to grow to a similar size as our SPP business. In addition, I'm extremely pleased to report that in 2023, we achieved our best safety year ever. Collectively, our 13 plants were well below the national average for recordable incident rate at 1.5, achieving the lowest total recordable incident rate ever seen at Northwest Pipe.
Our safety culture of accountability is at the core of our culture, which is infused at every level of our organization. Our commitment and teamwork sets the foundation for the stable manufacturing environment and ensures the well-being and performance of all of our employees. Thank you to our team at Northwest Pipe for your continued strong performance, execution against our growth strategy, and for operating safely. Looking ahead, our priorities remain, one, maintaining a safe workplace where employees are proud to work. Two, persistently focus on margin over volume, three, continuing to implement cost reductions and efficiencies at all levels of the company, four, continuing to identify strategic opportunities to grow the company. And finally, number five, in the absence of M&A opportunities, returning value to our shareholders through opportunistic share repurchases.
I will now turn the call over to Aaron to walk through our financials in greater detail.
Aaron Wilkins: Thank you, Scott, and good morning, everyone. Before I begin today, I would like to echo Scott's sentiments surrounding the company's record safety year. Congratulations to the entire company on this accomplishment. Now moving to an overview of our profitability. Consolidated net income for the fourth quarter was $5.4 million, or $0.54 per diluted share compared to $8 million or $0.79 per diluted share in the fourth quarter of 2022. For the full year, consolidated net income was $21.1 million, or $2.09 per diluted share compared to $31.1 million or $3.11 per diluted share in 2022. Our fourth quarter consolidated net sales increased 3.1% to $110.2 million compared to $106.8 million in the year ago quarter. Both business segments surpassed our revenue expectations for the fourth quarter.
Steel Pressure Pipe segment sales in the quarter increased 4.1% to $75.1 million compared to $72.1 million in the fourth quarter of 2022. This was driven by a 2% increase in tons produced resulting from changes in project timing as well as a 2% increase in sign price per ton primarily due to product mix. Precast segment sales for the fourth quarter increased 1.1% to $35.1 million compared to $34.7 million in the fourth quarter of 2022. This was primarily due to a 25% increase in volume shift due primarily to product mix, partially offset by a 19% decrease in selling prices, which was a result in changes in product mix in addition to lower demand. As a reminder, due to the unique nature of the products we manufacture, shipment volumes in the case of precast and production volumes in the case of steel pressure pipe, and the corresponding sales prices for both segments do not always provide comparable metrics between periods as they are highly dependent on the composition of the mix of our products.
For the fourth quarter, consolidated gross profit decreased 11.8% to $19.3 million or 17.5% of sales compared to $21.9 million or 20.5% of sales in the fourth quarter of 2022. Steel Pressure Pipe gross profit decreased 6.8% in the quarter to $11.2 million or 14.9% of segment sales compared to gross profit of $12 million or 16.6% of segment sales in the fourth quarter of 2022 primarily due to changes in product mix. Precast gross profit decreased 17.8% in the quarter to $8.1 million or 23.2% of precast sales from $9.9 million or 28.5% of segment sales in the fourth quarter of 2022 due to pricing pressures brought on by lower demand, which also resulted in lower cost absorption. The downward pressure we've seen has been concentrated in the commercial construction markets.
Our residential precast markets have remained relatively strong despite ongoing macroeconomic headwinds with the current mortgage rate environment and the implications that poses on new housing starts. Selling, general and administrative expenses for the quarter decreased 2% to $10.7 million or 9.7% of sales compared to $10.9 million in the fourth quarter of 2022 or 10.2% of sales. The decrease was primarily driven by $1 million in lower incentive compensation expense partially offset by $0.4 million in higher professional services including system implementation fees. For the full year, our selling, general and administrative expenses increased 6.7% to $43.8 million or 9.9% of consolidated net sales compared to $41 million or 9% of sales in 2022.
The increase in SG&A expense was largely due to higher professional fees and system implementation costs coupled with broader inflationary pressures. For the full year of 2024, we estimate our consolidated selling, general and administrative expenses to be in the range of $45 million to $47 million. Depreciation and amortization expense in the fourth quarter of 2023 was $4 million compared to $4.4 million in the year ago quarter. For the full year, company-wise depreciation and amortization expense was $15.8 million compared to $17.1 million in 2022. Given the larger bidding year expected for the Steel Pressure Pipe business and the plan commissioning of our new reinforced concrete pipe plant, I currently expect depreciation and amortization to increase modestly in 2024.
Our non-cash incentive compensation expenses were $0.6 million and $1.2 million in the fourth quarters of 2023 and 2022 respectively. And for the full year, non-cash compensation related expense was $3.7 million, which was relatively flat with 2022. For the full year, interest expense increased to $4.9 million compared to $3.6 million in 2022 due to the increase in interest rates, which more than offset the decrease in average daily borrowing seen in 2023. We currently expect interest expense between $5 million and $6 million for full year 2024. Our 2023 income tax expense was $8.2 million, resulting in an effective income tax rate of 28% compared to $10.2 million in 2022 or an effective income tax rate of 24.7%. Our effective income tax came in higher than anticipated due to accrued interest on uncertain income tax positions, state tax rates, and non-deductible permanent differences.
We expect our tax rate for 2024 should be within the range of 25% to 27%. Now I will transition to our financial condition. We generated strong cash flows in 2023. For the quarter, net cash provided by operating activities was 9 million, compared to net cash used in operating activities $8 million in the fourth quarter of 2022. For the full year, we generated net cash provided by operating activities of $53.5 million, compared to net cash provided by operating activities of $17.5 million in 2022, primarily due to favorable changes in working capital, which was partially offset by lower profitability. Our capital expenditures for the fourth quarter were $5 million compared to $11 million in the year ago quarter. For the full year, our capital expenditures totaled $18.3 million, compared to $22.8 million in 2022.
We anticipate our total cap-ex for the full year of 2024 to be in the range of $19 million to $22 million. As a result, our full year free cash flow totaled $35.2 million, compared to negative free cash flow of $5.3 million in 2022. Looking forward, we anticipate full year 2024 free cash flow to range between $19 million and $25 million. While we expect some pressure on working capital needs for the steel pressure pipe business in the first half of the year, we believe that will reverse in the second half of 2024. Consistent cash flow generation remains a key strategic focus of our business, as evidenced by the addition of our new goal within our 2024 incentive compensation plan and applicable to every member of our management team. Collectively, we view free cash flow as critical to the execution of our growth and shareholder return strategies.
As Scott highlighted, through February 2024, we completed $4.4 million in share repurchases, all of which were executed under a 10b5-1 trading plan, and of which $0.8 million of the repurchases occurring in 2023. The average repurchase price paid today was $29.32 per share. As of December 31, 2023, we had $54.5 million of outstanding borrowings on our credit facility, down from $83.7 million as of year end 2022, leaving approximately $69 million in additional borrowing capacity on our credit line. In summary, I'd like to echo Scott's sentiment and that I am proud of our 2023 financial performance achieved in a challenging operating environment, positioned in us well for the year ahead. We are very pleased to have the material weakness remediation project behind us, and I would like to thank the employees that made it possible to accomplish that important objective.
The MRP pilot implementation project was another important 2023 accomplishment, and we will continue to seek opportunities to automate our precast business segment systems and thereby optimize our operating performance and market share moving forward. I would also like to take this opportunity to express my sincere -- 2023 and encourage their continued commitment into 2024. Finally, I would like to thank our shareholders for their continued support and confidence in Northwest Pipe. I will now turn it over to the operator to begin the question and answer session.
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