Earnings Call Transcript - NWPX Q2 2021

Operator, Operator

Thank you for waiting. This is the conference operator. Welcome to the Northwest Pipe Company Second Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity for questions. I would now like to turn the conference over to Scott Montross, President and CEO. Please proceed.

Scott Montross, President and CEO

Good morning and welcome to Northwest Pipe Company's Second Quarter 2021 Earnings Conference Call. My name is Scott Montross, and I'm 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, August 4, 2021 at approximately 4 p.m. Eastern Time. This call is being webcast and it is available for replay. As we 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, 2020 and in our other SEC filings for a discussion of 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 for joining our call today. I'd like to begin with a review of our second quarter 2021 performance. As of June 30, our backlog including confirmed orders for the Northwest Pipe legacy business was approximately $234 million compared to $210 million at the end of the first quarter of 2021, and $246 million at the end of the second quarter of 2020. The increase was driven by improvement in our project bidding that began in the second quarter, which led to an increase in backlog, a trend that we expect to see continue in the second half of 2021. Second quarter marks the 12th consecutive quarter in which we have maintained a steel pressure pipe backlog over $200 million, a level that remains strong by historical standards. This is despite the ongoing bidding delays we've experienced over the course of the past year due to various pandemic-related issues. That said, I'd like to reiterate these are not project cancellations, only delays. And currently, we see a substantial amount of project volume scheduled to bid in the second half of 2021, which should continue to apply upward pressure on our backlog through the remainder of 2021. Our second quarter net sales totaled $73.8 million, which included $15 million from Geneva. Once again, the top line contribution from Geneva enabled us to increase our net sales sequentially and year-over-year. Our second quarter gross margin of 12.9% improved marginally from the first quarter of 2021. The Geneva precast concrete operations are beginning to serve as a stabilizer to both revenue and gross margin to help offset periods of market choppiness in the steel pressure pipe business, like we have had to navigate over recent quarters. Revenue and gross margin for our steel pressure pipe business were negatively impacted by ongoing production delays in the second quarter driven by steel market supply and delivery disruptions, which postponed the production of orders and customer-driven delays on orders that were already in backlog. In addition, the bidding delays experienced over the last three quarters led to fewer overall projects to bid on, which resulted in some panic bidding by our peers in our space. And therefore, significantly more bidding pressure on projects that bid during that period which has had a negative near-term impact on project margins. That said, we did see steel pressure pipe bidding stabilize and begin to improve during the second quarter, indicating an upcoming period of strong demand. As we move into the second half of 2021, we expect bidding for the steel pressure pipe business to continue to strengthen through the rest of the year. However, we expect revenue and corresponding margin recovery for the steel pressure pipe business to be slow in the beginning of the second half of 2021. Ongoing capacity and supply issues in the steel market were expected to linger and continue to delay production, and we will continue to see some customer-driven delays of orders that were already in backlog. Also, the bidding delays experienced over the recent quarters, which resulted in near-term margin pressure will still have some effects at the beginning of the second half, as the affected projects work through production. However, with a large amount of work projected to bid in the second half of 2021, backlog is projected to trend upward for the rest of the year, and the increasing backlog is expected to support improving steel pressure pipe revenue and margins as we move into the latter part of the year and enter 2022. In addition, our precast concrete order book remains at historically elevated levels and is continuing to gain strength. We expect to see the precast concrete business remain at strong levels for the remainder of 2021. Next, I would like to turn to a discussion on our two-pronged growth strategy. As highlighted over the past several quarters, our primary focus has been on driving growth in the precast concrete market, which led us to our January 2020 acquisition of Geneva Pipe and Precast. We are currently in the process of commercializing new innovative lined RCP, and manhole for use in corrosive sewer applications, which we believe have significant organic growth potential. Given the success of the Geneva transaction and the broader strength in the water infrastructure market, we have been intently focused on the evaluation of potential acquisition candidates with a keen focus on organic growth potential, strong margin characteristics, and cash flow. In tandem, with our efforts, we have been building cash on our balance sheet and recently amended our credit facility to further enhance our liquidity position in order to properly execute our strategy. The second prong of our strategy is to continue to maximize our core steel pressure pipe water transmission business in order to drive shareholder value. We have continued to make progress through cost reduction measures, and lead manufacturing to drive further efficiencies. As part of that effort, we have been leveraging outside engineering resources to explore opportunities for creating additional efficiencies to further drive cost reductions in the long run. I will now turn to look at current and upcoming water transmission projects. In the Texas market, the ongoing multiyear, multiagency Houston Surface Water program is expected to bid multiple segments in 2021, representing 21,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects, representing 21,000 tons beyond next year. The next new reservoir to be built in Texas is Lake Ralph Hall for the Upper Trinity Regional Water District. This is another major program currently in design that includes a new dam and pipeline to move water into the Dallas-Fort Worth Metroplex. The pipeline represents 17,000 tons of pipe. Construction on the dam began this year and the pipeline is expected to begin late in 2022 or early in 2023. The Alliance Regional Water Authority program in Central Texas is another multiagency regional water program. The program includes a large pipeline, pump stations, and treatment facilities and represents 15,000 tons of pipe. Construction is starting in 2021 and appears to be holding fast to the forecasted timeline. In the western markets, California's Prop One $7.5 billion bond for water infrastructure has created the much-needed funding for the projects within the state. According to the California Natural Resources Agency, 97% of those funds have been appropriated for various projects as of the 2020-2021 fiscal year. We expect requirements for these projects to stretch out over the next several years. Water reuse programs have generated new opportunities in the California market on which we expect to see bidding activity continue for the next year. We have identified four sizable projects bidding in the 2021 timeframe, representing 8,300 tons. Most recently, Northwest Pipe was selected to supply pipe for the Pure Water San Diego Project, a sustainable and environmentally conscious water recycling project. This project will be a phased, multiyear program that will provide more than 40% of San Diego's water supply by the end of 2035, thereby reducing the city's dependence on imported water, and will require over 3,200 tons of steel for us to manufacture into engineered steel pipeline. In addition, MWD is heading a regional reuse pilot project in conjunction with LA Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California and involves over 60 miles of large diameter pipe. The current demonstration facility has been operating for almost two years. MWD is currently soliciting preliminary design and permitting services, and construction of the full-scale treatment on conveyance facilities could begin as early as 2025. The MWD PCCP rehabilitation programs will result in about 5,000 tons annually over the next 10 to 15 years. We have seen a slowdown in this work this year which appears to be COVID related, so the timing of these projects has shifted to later this year. The site's reservoir is a water storage project that has received funding from Prop One. It will involve over 30 miles of 144-inch pipeline. The project is forecasted to begin in 2024 or 2025. Southern Nevada Water Authority has begun moving forward in earnest with an expansion of the southern part of their water delivery system. This program, which has recently started preliminary design activity, will include approximately 25 miles of 78-inch steel pipe with construction tentatively scheduled for 2024. In North Dakota, progress has been slowed on the 140-mile, 87,000-ton Red River Valley Water Supply Project. The 1.5-mile demonstration project bid in January of this year and was awarded to Northwest Pipe. The bulk of the project is dependent upon a 2023 legislative session to commit to full funding. We are closely tracking the outcome of further budget approval now in discussion at the state legislative assembly. In Colorado, we are tracking an expected 2021 record of decision by the US Army Corps of Engineers for the northern integrated supply project. If favorable, construction of up to 150 miles of pipeline is expected to start in 2023. The project is located 60 miles north of Denver in the Fort Collins area. In Utah, design and permitting continues on the 150-mile, 69-inch Lake Powell pipeline. This pipeline will provide an alternative source of water for Southern Utah. In summary, we have continued to execute through a challenging period of pandemic-related disruptions over the last several quarters in the steel pressure pipe business with significant delays in project bidding, major steel market supply and delivery issues, and customer-driven delays in existing orders. However, we saw things begin to stabilize and improve as we progress through the second quarter. And we are currently seeing a solid buildup of steel pressure pipe bid requirements for the second half of 2021, which should result in upward pressure on the steel pressure pipe backlog and support improved revenue and margins as we move into the latter part of the year and into 2022. In addition, our precast order book continues to gain strength and is currently at an all-time high level. We expect the precast business to remain strong for the near term. We are well positioned for future growth, which we believe will be further supported by the growing infrastructure needs in the United States. Looking ahead, we will remain focused on our top priority of taking every precaution of keeping employees safe through the ongoing pandemic. Also identifying strategic opportunities to grow the company and having a persistent focus on margin over volume and continuing to implement cost reductions and efficiencies at all levels of the company. I'd like to extend my gratitude to all of our employees at Northwest Pipe Company for their commitment to executing our strategy throughout the first half of the year and by doing so safely. I will now turn the call over to Aaron who will walk through our second quarter financial results in greater detail.

Aaron Wilkins, Chief Financial Officer

Thank you, Scott and good morning, everyone. Thank you for joining us today on our second quarter 2021 earnings conference call. I'll begin with our second quarter financial results. Net income was $2.1 million or $0.21 per diluted share compared to $6 million or $0.61 per diluted share in the second quarter of 2020. There were no adjustments to GAAP net income to consider for the second quarter of 2021. Adjusted net income for the second quarter of 2020 was $4 million or $0.41 per diluted share. Adjustments of $2 million net of taxes primarily consisted of favorable insurance recoveries associated with the Saginaw fire. Adjusted net income excludes unique and unusual items and we provide it for comparability purposes. Please refer to the reconciliation of non-GAAP financial measures in our earnings release for a comprehensive schedule detailing the adjustments. Our second quarter net sales increased 5.5% to $73.8 million compared to $70 million in the second quarter of 2020. Geneva's revenues increased to $15 million in the second quarter of 2021, compared to $12.4 million in the second quarter of 2020, primarily due to increased shipment volumes on very strong demand for precast concrete products. Steel pressure pipe revenues increased 2% from the year-ago quarter due to a 7% increase in selling price per ton resulting from rising steel input costs, which was partially offset by a 5% decrease in tons produced resulting from changes in project timing. Due to the unique nature of the water transmission systems we manufacture, production tons and the resulting sales price per ton do not always provide comparable metrics between periods, as they are highly dependent on project timing and production mix. Gross profit decreased 26.4% to $9.5 million or 12.9% of sales compared to $13 million or 18.5% of sales in the second quarter of 2020. The decrease was primarily due to changes in product mix and pressure on project pricing realized on steel pressure pipe, partially offset by increased gross profit at Geneva. Gross profit in the second quarter of 2020 was elevated by $1.8 million associated with the business interruption portion of our insurance claim for the Saginaw fire. Excluding this item, our gross profit margin for the second quarter of 2020 would have been 16%. Selling, general and administrative expenses increased 13.5% to $6.3 million in the second quarter of 2021 compared to $5.6 million in the second quarter of 2020. The increase was primarily due to higher compensation-related expense and professional fees along with higher travel expenses compared to 2020, given the global pandemic. In addition, I am updating our guidance for selling, general and administrative expenses to now approximate $24 million for the full year of 2021. Our income tax rate in the second quarter was 26.1% compared to 26.7% in the second quarter of 2020, both of which approximated statutory rates. I'm expecting full year 2021 income tax to be approximately 26.5%. Now, I will transition to our cash flows and financial conditions. We generated cash flows from operations of $5.7 million during the second quarter, compared to $13.8 million during the prior year period. This decline was primarily due to the decrease in net income adjusted for noncash items. The company has increased its available liquidity through the refinance of our credit facility with our financing partner, Wells Fargo. The new $100 million cash flow loan provides flexibility to be upsized to accommodate the company's strategic growth objectives, including an optional $25 million accordion feature. All outstanding debt under the former credit agreement, including long-term debt has been repaid. This is the company's strongest financial condition in recent years, with total available liquidity of approximately $121 million as of June 30, 2021, comprised of $23.2 million in cash and cash equivalents and approximately $98 million available from our new line of credit. Depreciation and amortization was $3.4 million in the second quarter of 2021, while our capital expenditures totaled $2.9 million. We expect the pace of CapEx spending to pick up, which will result in spending for the full year to be between $12 million and $14 million, consisting entirely of maintenance CapEx. In summary, we were pleased with our solid second quarter 2021 financial results despite ongoing macroeconomic pressures, including labor, transportation, and raw material shortages, which have resulted in temporary disruptions to operations. We look forward to benefiting from the improved demand as our steel pressure pipe market continues to stabilize. I'd like to extend my thanks to all of our dedicated employees and our loyal shareholders for their ongoing support of Northwest Pipe Company. I will now turn it over to the operator to begin the question-and-answer session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Brent Thielman with D.A. Davidson. Please go ahead.

Brent Thielman, Analyst

Hey, thanks, good morning.

Aaron Wilkins, Chief Financial Officer

Good morning.

Scott Montross, President and CEO

Good morning, Brent.

Brent Thielman, Analyst

Scott, it sounds like the outlook suggests sort of a fair step-up in revenue and margins in 3Q and then into 4Q. At least that's what I guess I'd take away from it. But do you think you can still achieve that if the supply chain sort of steel constraints today don't abate or stick around longer? Just trying to get a feel for how much that's kind of impeding the business right now?

Scott Montross, President and CEO

Yes. I would say it's been a little bit dicey up to this point, Brent, where we've seen situations where we have orders scheduled to be produced in quarters, where we're getting late deliveries and orders fall out and things of that nature. But we're starting to see that stabilize a little bit and we're starting to see that deliveries are starting to improve. Capacity utilization rates in the steel industry are now up around 85%, which I think is a positive sign that they're putting more steel into the market to support domestic requirements. So while we think the pricing level is going to probably continue to inch up now and probably not as quickly as it has in recent months, but it's probably going to continue to inch up for the rest of the year. We think that the supply position is going to be a little bit more stable as we go forward. There's a little bit more available. Plus, we have some additional capacity coming online in the steel industry now. We have a Ternium mill in Mexico that obviously would support our SLRC facility in Mexico that started up. And they're bringing at least a few million tons of new capacity into the market. We also have a new facility starting up with SDI down in Texas that will bring additional capacity. That's probably later in the year than Ternium. And then, there's a new Nucor capacity, which I think has increased capacity coming online. So, we think this steel issue starts to firm up, but we still think the prices are going to be a little bit high, at least for the near term. But we're feeling a little bit better about being able to get the steel in a relatively timely manner. And with the increasing backlog, even if there are a few disruptions on the delivery side, you actually have more projects to pick from to be able to run in place, if steel doesn't come in from another project. So, I think that looks a little bit better as we go into the second half of the year and we've got a ton of work scheduled to bid in the second half of the year right now. We're looking at somewhere in the area of between 105,000 and 110,000 tons of municipal work bidding in the second half of this year. It really started later in the third quarter and into the fourth quarter. And you've heard me talk about it before, where 200,000 tons is a good market. Well, that 200,000 tons is usually made up of municipal work and there's probably some plant work in there, some hydroelectric work and things like that. What we're seeing, bidding in the second half of this year, that 105,000 to 110,000 tons is primarily municipal work. So, we're pretty happy about the way the bidding looks and the way that the steel situation is starting to come together as we go through the second half of the year. Now in the second quarter timeframe, the steel guys do a lot of their annual outages. So, some of the supply problems get a little bit exacerbated during that timeframe. But we do think those are starting to abate with the higher capacity utilization. So, we're a bit more confident as we move into the back half of the year now with that.

Brent Thielman, Analyst

Okay, that's great. And kind of led me to my next question Scott. The 105,000 to 110,000, I mean any way for us to think about how that compares to what you saw over the first half of this year, obviously?

Scott Montross, President and CEO

Yes. In the first quarter, the bidding was under 20,000 tons, making it a slow start to the year. By the second quarter, it increased to around 30,000 or 31,000 tons, indicating that the first half of the year was quite light in terms of bidding. This follows a strong third and fourth quarter in 2020, where many projects were pushed out. Some of that demand is now appearing in the second half of this year, estimated at 105,000 to 110,000 tons, although some may be delayed into 2022. Overall, the second half is currently looking very promising, and while there is always a chance for changes, it seems that bidding activity is gaining momentum.

Brent Thielman, Analyst

Okay, that's great. Geneva, I mean it looks like over 20% growth this quarter. I don't recall there being any big pandemic-related hang-ups last year. Maybe I'm wrong. I mean maybe you could just speak to the environment you're seeing there and what's fueling that growth which is way above I think...

Scott Montross, President and CEO

Yes. The demand for precast concrete right now is quite strong. Our order book is significant, though it's not the same as backlog since these projects move quickly. We have enough orders that we're working hard to keep pace, and there are still more orders coming in. We had a $15 million quarter in Geneva, which is a substantial amount. The outlook for the third quarter appears similar. As mentioned in our remarks, the short-term prospects for the precast concrete business, largely driven by residential demand and low interest rates, look very promising moving forward.

Brent Thielman, Analyst

Okay. Maybe just the last one sticking to the precast. I mean the strength of that business right now making it more challenged to get a deal done there?

Scott Montross, President and CEO

I would say that there are a significant amount of potential deals out there. What we see, Brent, is really small things and relatively large things. And as you know, the multiples for those things look different across different periods of time. So, I think we're seeing things now that have multiples that are in the seven times range, seven and a half times range in that area. When you look at really big things that, quite frankly, with some of the really big things, that may be a little bit outside of our reach at this point in time, you’re seeing multiples that are nine, ten times. But there are quite a few potentials out there right now. And as we said, we're pretty active in that space. I don't know that it makes things getting things done any harder. It's just with the current environment and still being somewhat in this COVID situation, it makes things a little bit slower, right? So, moving forward those things get a little bit more arduous and sluggish as you go forward. But I think there's plenty of things out there to get done, plenty of things that interest us. And as we've said before, our strategic growth plan is really centered on the precast and precast-related markets and we see the possibilities out there. So, I don't think really anything's changed there.

Brent Thielman, Analyst

Okay, great. Well, thanks for taking the questions. I’ll get back in queue.

Scott Montross, President and CEO

Absolutely.

Operator, Operator

The next question comes from Gus Richard with Northland. Please go ahead.

Gus Richard, Analyst

Yes, thanks for taking the questions. Could you talk a little bit about steel lead times at this point and sort of what they did last quarter and sort of what you see today?

Scott Montross, President and CEO

Yes, Gus, currently steel lead times are around 10 to 12 weeks for hot-rolled bands. We noticed that in the second quarter, those lead times extended significantly due to delivery issues stemming from annual outages and strong domestic demand. Looking ahead, we are planning for about 12 weeks of lead time. As we progress through the year and additional capacity becomes available, we expect lead times to improve. However, it is important to ensure we have everything organized with our steel deliveries well in advance of projects, which includes obtaining and finalizing quotes from suppliers for self-supplying the projects. We are seeing signs of improvement as we move through this part of the year. Earlier this year and in the early part of the second quarter, steel placement and delivery were challenging, with capacity utilization rates around 75% to 77%, which could not keep pace with demand. It seems that they are now getting more organized. I anticipate that lead times will remain somewhat extended towards the end of the year, although with additional capacity coming online, particularly with the turning facility and SDI starting up later this year, we expect those lead times to reduce to around eight to ten weeks. When lead times for hot-rolled bands drop to four to six weeks, it indicates a lot of available capacity in the market for orders. However, for now, the lead times are fairly stable in the 10 to 12-week range.

Gus Richard, Analyst

Got it. And then I think China recently put on tariffs on exporting steel. Is that having any impact on the domestic market? And as a follow-on, I’ll be done with steel how are you able to pass on the cost? Has pricing stabilized enough where you sort of can capture that?

Scott Montross, President and CEO

We're doing these bids for major projects, which can involve a lot of detailed work. Recently, it’s been easier to secure bids and ensure that the steel is available at the quoted price. Previously, we faced challenges where we would win a bid, but by the time we went to place the order, the steel was no longer available, forcing us to find alternatives at potentially higher prices. This was particularly evident in the early part of the year, but now the situation has improved, with more availability and stability, although prices remain high. Currently, steel prices are around $1,900 a ton, compared to $465 a ton last July, representing an increase of over 300%. From the start of the year, steel prices have risen about 95%, but this trend seems to be tapering off as they approach the $2,000 a ton mark. We are better positioned now to pass along these costs since we’ve managed to secure what we bid for, and the issues we encountered earlier in the year have lessened.

Gus Richard, Analyst

Okay. And then just in terms of the China tariffs on exports. Is that having any impact on the domestic market or not?

Scott Montross, President and CEO

I don't see any.

Gus Richard, Analyst

Okay. It appears that there was relatively low bidding activity in the first half. Can you discuss how this has impacted pricing and how revenue is expected to flow through the P&L? Will this primarily affect the second half and the first half of next year, or are these longer-term projects? What do you anticipate as a percentage of revenue during those periods?

Scott Montross, President and CEO

What I can say is that during the third and fourth quarters of 2020, we experienced a significant amount of bidding related to several projects that were being pushed out. When these projects are delayed, there are fewer opportunities to bid on, leading competitors to become anxious about securing resources for their operations. This scenario creates additional price pressure on the projects. We observed this effect, which impacted our margins in the first and second quarters. This situation is expected to carry over into the third quarter due to the bidding environment in the previous third and fourth quarters of 2020, where bids were minimal, and we saw panic bidding. Consequently, while we began to see effects in the first and second quarters, there will be lingering impacts felt in the third quarter. However, we're progressing through our backlog and moving on to more recently bid projects that offer better margins. As our production levels rise, we anticipate improved absorption rates. By the latter part of the year, we expect to see higher revenues and margin expansion, assuming our bidding aligns with our expectations. That said, the third quarter will still reflect some of the effects we've discussed, which is why we characterize the beginning of the second half of the year as a period of slow improvement due to these lingering bidding impacts. Additionally, we are dealing with some delays in customer orders and steel deliveries, which have resulted in reduced production and under-absorption. We expect these issues to diminish as we progress into the fourth quarter, leading to increased backlog, which will contribute to revenue and margin growth moving forward. This situation will affect the third quarter as we transition into the fourth quarter.

Gus Richard, Analyst

Got it. I guess what I was trying to ask is, is this all cleaned up by say the middle of next year?

Scott Montross, President and CEO

Yeah. I think as we get through the third quarter, as long as all the bidding sticks to where we see it taking root now, that bidding level is high enough where as you get through the third quarter, it starts to get cleaned up through the third quarter and the fourth quarter starts to look a bit different.

Operator, Operator

The next question comes from David Wright with Henry Investment Trust. Please go ahead.

David Wright, Analyst

Good morning. You've talked a lot about kind of the supply problems and delivery problems and stuff. But over on the other side in a typical municipal job Scott, how much of the cost of the job is represented by the cost of the steel roughly?

Scott Montross, President and CEO

Somewhere between 20% and 30% depending on the size of the project and the timing of the project and which steel prices are during that specific time.

David Wright, Analyst

So with the municipal project that has to be financed and has a long kind of lead time to it the rise in the price of steel does it affect any of these projects' ability to proceed or do they say 'Oh well we thought this was going to be $1,200 a ton and now it's $1,900 a ton and we can't proceed.' Do you ever have that?

Scott Montross, President and CEO

David, this certainly has caused some delays because it begins with an engineer's estimate for a project, which could have been made a year ago. Depending on the project's size, it might be put out to bid, and the bid may be significantly higher than the initial estimate, indicating that the estimate was inaccurate. Typically, for smaller and medium-sized projects, they continue forward but need to secure additional funding. However, there are some large projects we've heard about recently that may have stemmed from estimates made a couple of years ago using outdated steel indices. The end customer might decide not to proceed with these large projects due to significant cost changes. Although we aren't involved in those projects, we are aware of at least one major project facing this issue. Delays arise primarily when an engineer's estimate is exceeded, necessitating discussions to ensure proper funding, which we've observed. The impact of steel pricing has not caused many delays in the projects we are tracking. In some cases, steel pricing may account for 20% to 25% of the total project cost, depending on its composition. The extent of fabrication versus simple piping influences how significant the steel's impact is. Nonetheless, they still need to confirm their funding to move ahead, which is slowing progress, and we've witnessed some of this.

David Wright, Analyst

Okay. Reflecting on previous quarters when oil and gas companies attempted to enter your market, which negatively impacted margins, and considering some more recent quarters where you mentioned that the bidding environment is stable and margins have returned to a more typical state, what has been the fluctuation in margins during these periods expressed in basis points?

Scott Montross, President and CEO

That was a tough question to address. Looking back to when oil and gas companies entered the market, it was around 2015-2016, during a challenging time for the sector. Companies that manufactured large diameter API pipe began seeking other opportunities, and some entered our industry. However, our operations differ significantly from managing major API projects that involve extensive uniform pipe and testing without fabrication. We handle many smaller projects, and the oil and gas companies realized that this approach was quite challenging. Each of our steel pressure pipe facilities has its own fabrication capabilities, which we manage internally. The margin fluctuations seen in 2015 and 2016 were quite different, and the situation in 2017 also varied since there were five major competitors in the steel pressure pipe market back then, compared to three today. This shift has altered the dynamics; the margin swings that may have been significant previously are now somewhat reduced. Recently, we’ve noticed some short-term margin pressure due to projects shifting between bids, leading other firms to seek backlogs, which increases competition and affects margins. Currently, you could expect margins to be about half of what they were before because there are only three major players. However, the actual situation depends heavily on market conditions and upcoming bids, making it difficult to provide a precise answer, but it certainly has an impact.

David Wright, Analyst

So clearly though we're talking several hundred basis point swings? Not 50 or hundreds?

Scott Montross, President and CEO

And hundreds of basis points? Yes.

Aaron Wilkins, Chief Financial Officer

Volume to bidding environment there's all sorts of variables.

Scott Montross, President and CEO

Yes. I think...

David Wright, Analyst

And then just before I hop over to precast. When you look at your steel pipe backlog and you know the margins that you bid the jobs at. And so you could look at your backlog in sign case and like overall the margin on the existing backlog was bid at x. But then as you actually go and deliver do you find that you're able to track your original margins pretty well, or like kind of what's the experience when you don't?

Scott Montross, President and CEO

Yes. I mean see the project margins are based on a certain load. When we bid a project it's based on a certain load on the mills right? So a load that we see going forward. Now that load can adjust up or down depending on what's going on in the market. So the margins could get a little bit less or a little bit more depending on how much of a load we have on the mill. So yes we're pretty good at tracking what the margins look like and pretty accurate with our bidding that we have. And that's why we're able to say looking at kind of what we've got going from now as we go through the latter part of the year, what we see in our backlog right now and what those have been bid at it certainly should continue to apply upward pressure to the revenues and margins as we get out later in the year.

David Wright, Analyst

Okay, great. On the precast side would you say you were operating at pretty close to full capacity recently and currently?

Scott Montross, President and CEO

I believe we are getting close to full capacity. We are currently adding a second full shift to one of our plants due to the demand in the market. However, it has been a challenge to find enough manpower for that second shift. This is a common issue we are experiencing across the board. Once we fully implement the second shift at that facility, we should be nearing capacity, but we are not at that point yet. We still have some way to go.

David Wright, Analyst

Okay. And when you're looking...

Scott Montross, President and CEO

In other words, we have more capacity.

David Wright, Analyst

So as you look to expand your precast business through acquisitions, are you planning to focus on products driven by residential demand or are you considering branching into other areas?

Scott Montross, President and CEO

It's interesting. A lot of it comes down to what's available. We like residential, but everything we see, including what we have at Geneva, has some different aspects beyond just residential. We have a bit of commercial in there and other elements as well. What we're focusing on are probably combinations of commercial and residential as we move forward that involve precast or related products. There's a wide variety of options available, and naturally, we're targeting things that will drive shareholder value in the direction we desire and provide the margins and EBITDA margins we're aiming for. We're looking at precast, precast-related options, and other associated elements that align with what we need on that front. Some of these options include control systems and similar features. We're considering a variety of possibilities at this stage that we believe would enhance our business and significantly contribute to driving shareholder value.

David Wright, Analyst

Do you want to stay focused on the Western region since that's really where your two acquisitions have been?

Scott Montross, President and CEO

Ideally, the closer we can align with our other precast and precast-related businesses, the better. However, opportunities for acquisitions may not always be available in the locations where we already operate. We are currently focusing on the Western United States more than the Eastern United States, but this largely depends on what is available. A lot also hinges on the size of the acquisition. For instance, pursuing a single plant acquisition in the Eastern United States can be challenging since it raises questions about whether it has the management structure necessary to support operations in that region. In contrast, operations involving three or more plants typically have a more established management structure and systems, making integration easier. Our preference right now is to remain in the Western United States for management reasons, as it is simpler to oversee operations that are geographically closer to what we currently have.

David Wright, Analyst

Okay. And just for the avoidance of doubt when you were talking about the multiples on small precast companies and big precast companies, you were referencing EBITDA multiples?

Scott Montross, President and CEO

Yeah. For example, when you look at the quick acquisition of Forterra, that's expected to conclude sometime in the fourth quarter of this year. I think the trailing twelve months was around 10 times. Obviously, it's a big public company. If you're considering smaller, single plant acquisitions, you might see multiples around 5.5 times or six times. For multiple plants, you're likely looking at multiples closer to 7 times or 7.5 times, which would still be in the range of companies similar to Geneva or possibly a bit larger.

David Wright, Analyst

Thank you for taking my questions. Nice to speak with you.

Scott Montross, President and CEO

Absolutely. Good to speak with you, David.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the conference back over to Scott Montross for any closing remarks.

Scott Montross, President and CEO

Thank you and thanks again everybody for joining our call today. And I'd like to conclude by saying we're cautiously optimistic about what we see in front of us. Obviously, we've been through a challenging COVID period. But what we see in front of us with the second half of 2021, a significant bidding on steel pressure pipe side. And with the chance to go into 2022, we think with a backlog that was similar to how we entered 2019. And the other thing is we have right now what we would consider a pretty hot precast concrete market. So, therefore, we are pretty optimistic about how things look as we exit 2021 and head into 2022. And again I'd like to thank all of our employees, suppliers, customers and the shareholders for continued dedication to Northwest Pipe. And we look forward to speaking with you all again in the third quarter call in November. So thank you very much.

Operator, Operator

This concludes Northwest Pipe's second quarter earnings conference call.