NWPX Infrastructure, Inc. (NWPX) Earnings Call Transcript & Summary

Welcome, and thank you for standing by. [Operator Instructions]. This call is being recorded. If you have any objections, you may disconnect at this time. May I introduce your speaker for today, Mr. Scott Montross, Please go ahead.

Thank you, Anne. 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; and Aaron Wilkins, our Vice President of Finance. As we begin, I would like to remind everyone that the statements we make in this call about our expectations for the future are forward-looking statements and actual results could differ materially. Please refer to our most recent SEC filing on Form 10-K for a discussion of risk factors that could cause actual results to differ materially from expectations. As we've discussed in many of our quarterly earnings calls, we've been very focused on M&A for a significant period of time. Late in 2017, we began to refine our strategy with the goal of creating transformational growth and profitability in order to drive substantial improvement in shareholder value. Our growth strategy is two-pronged. First, maximize our core steel pressure pipe water transmission business by continuing our lean manufacturing and cost reduction focus and by pursuing limited but known acquisition opportunities. That ultimately led to the acquisition of Ameron in July of 2018, which was immediately accretive to the company's financial results. We then had approximately 50% of the steel pressure pipe market, a market that is generally a $450 million to $600 million market with very limited acquisition opportunities, which is why we have a second prong to grow in an adjacent water space. The second prong is to grow in an adjacent water market that has superior growth characteristics, strong margin characteristics, good asset efficiency, a better cash flow profile and is a strategic fit with Northwest pipe. We have explored many different water segments, various pipe products, pipe rehab, valves and fittings, along with Smartwater. We identified over 100 potential targets and made direct approaches to 40 different companies. The key was finding something in our size range that would move the needle for the company. We ultimately settled on the precast concrete market, a market that is somewhere in the area of $13 billion annually that presents, based on the structure of the market, a significant amount of growth opportunity. We already had reinforced concrete pipe product from the Ameron acquisition at our Tracy, California plant. And after making contact with many precast companies we chose Geneva Pipe and Precast. Our acquisition of Geneva Pipe and Precast closed on January 31 of this year. The transaction was $49.4 million in cash, which includes working capital, cash in Geneva and other adjustments. The transaction was financed with cash on hand from our -- in -- from our amended credit facility. Our pro forma leverage is 0.4x EBITDA, and we expect to reduce the debt very quickly. The 2019 preliminary unaudited financials for Geneva are approximately $43 million in revenue, with adjusted EBITDA margins in the mid-teens. We expect operational synergies to drive cost reductions and operating costs, and we expect the acquisition to be accretive in year 1. Geneva has 3 manufacturing facilities. Orem, Salt Lake City and St. George, all in Utah. All locations are currently leased. The company designs and manufactures precast concrete products for use by state and local municipalities in wastewater and storm water applications. We are also in the process of commercializing products that extend the life of concrete pipe and manholes for sewer applications. The company produces a wide variety of precast concrete products, including reinforced concrete pipe and manhole systems for storm drains and sanitary sewer applications. As well as innovative products designed to extend the life of both reinforced concrete pipe and manhole systems in corrosive sewer applications, products that we believe have exciting growth potential. In addition, the company produces box culverts, vaults, jacking pipe and concrete septic retaining systems. Geneva has a strong brand reputation driven by many years of producing quality products and providing outstanding customer service. As a result, they've seen strong growth in revenue over the last several years and EBITDA margins that are in the mid-teens, in a cash conversion cycle that is much shorter than our water transmission business. We expect the innovative products for corrosive sewer applications to provide solid organic growth as we move forward. And because the market that Geneva serves is a $3.5 billion to $4 billion market in the U.S., we expect continued growth opportunities through expansion and industry consolidation. Geneva Pipe and Precast fits well into Northwest Pipe's adjacent moderate space strategy. Adding capabilities at -- adding to the capabilities at Tracy that were acquired in the Ameron acquisition, and by using many of the same sales channels as our steel pressure pipe business. We are very excited about the growth opportunities with Geneva Pipe and Precast in the precast concrete market. I will now turn it over to Aaron, who will discuss our amended credit facility.

Thank you, Scott. The company worked with its existing lending partner, Wells Fargo, to secure financing sufficient to fund the acquisition and to provide the available liquidity to manage the working capital needs of our steel pressure pipe business. The asset-based loan was expanded to $90 million, $74 million of which is in the form of the revolving line of credit, in addition to a new $16 million term loan. After funding this acquisition, which exhausted essentially all of our cash reserves, the company borrowed $19 million. At current collateral levels, this leaves us with $55 million of additional availability under the loan, which we perceive to be a very comfortable level. The loan will be a valuable tool in the future growth of our business through its term, which the amendment extends into the fourth quarter of 2024. I will now turn it back to Scott for an update on our legacy business.

The following is a preliminary unaudited preview of the fourth quarter and full year results for the Northwest and the highest margin since 2014. Year-end backlog is expected to be around $257 million compared to the previous year-end record of $252 million at the end of 2018. We ended the year with no debt and $31 million in cash on our balance sheet. For the full year, we expect revenue to be around $279 million, which would be the highest level we've seen since 2008. And we expect gross margins for the full year of 2019 to be in the area of 16.5% to 17%. As we move forward, we will be focused on: one, the successful integration of the Geneva Pipe and Precast business into Northwest pipe; two, improving the financial performance of the company 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.

[Operator Instructions]. Our first question is coming from Brent Thielman.

Congratulations on the transaction.

Yes. Thanks, Brent.

Scott, I mean, it looks like, by my rough maths, you paid 5, 6x, I guess, the adjusted EBITDA number for this. Two-part question: one, should we kind of think of this as a blueprint for other similar assets you might look towards in the gray water space? Is this a one-off? And these are the types of multiples you can get these transactions for? And then two, is this -- I understand the business is going to be cyclical to some degree. Are these margins pretty consistent over time? Is nothing that's like a fluke in 2019 that impacted that number you gave us?

Okay. So let me take these in a couple of pieces. I think when you look at the multiple that we paid for the business, it was around 7.5x, Brent, looking at the adjusted EBITDA margins. So hopefully, I didn't say something that led you into a little bit of the wrong direction on that. I think the opportunities in the precast market, the precast concrete market are pretty significant. Obviously, there's a significant amount of facilities that are spread across the country. This is based on the situation that we've talked about in many of our earnings calls with the steel pressure pipe business, having about 50% of the market share in that business. We're kind of at the top of being able to continue to grow in that business, at least through acquisitions. Not saying that if something tremendous came up, we wouldn't look at it. But certainly, the direction that we're going to be looking toward in the future is the precast market and different things in the precast market, and we believe that Geneva is a really good base to move into that market with. They have a very solid management team, I think, a management team that will certainly help us as we move into this market and continue to grow, whether it's through expansions -- because as you know, we have already reinforced concrete product at the Tracy plant, that we acquired during the Ameron acquisition, or through additional acquisitions that are out there, which could be one or a couple of plants at a time. So certainly, the direction for our growth as we move into the future, is directed toward the precast market. The margins -- were you talking about the margins specific to the concrete pipe business or the precast business?

Well, I think you said something in the mid-teens adjusted EBITDA margin range. I'm just curious if there's -- if that's been pretty consistent for the business over time? And notwithstanding, obviously, some cycles, I'm sure it goes through.

Yes, I think it's been very consistent. They've had a very solid over the last several years, compound annual growth rate, which those margins of the mid-teens have -- the thing that gives a little bit more margin potential going forward is the innovative products we talked about for corrosive sewer applications. Certainly with what we're seeing there, we expect additional organic growth, driven by that piece of the business as well as probably some expansion on the margin side.

Okay. That's great. And then any more color on the historical growth rates of the business? And I guess, it sounds like kind of a $43 million base in 2019. How should we kind of think about that business going into 2020? I mean should we expect growth? Anything you can offer there?

Yes, I think as we've looked at it over the last several years, their compound annual growth rate is, on the precast side, has been probably in the area of probably 6% or 7%. They've grown relatively quickly. They've got a very strong position in the Geneva markets or the Utah market. And we expect -- when we looked at the business, we kind of looked at about a 3% or 4% growth rate over time. But based on the economy that we see in Utah in some of the surrounding states that Geneva supports, where if you look at anything associated with some of the business news out there, Utah is one of the hottest economies for 2020 and 2021. But also some of the neighboring states are hot economies. Looking at Idaho is a hot economy, Nevada is a hot economy. So we have the expectation not only does the local economies -- because this is a fairly localized business. These products, a lot of them ship to 150 miles or so versus what we generally see in our steel pressure pipe business, where we could be shipping 600, 650 miles. Some -- in some cases, 1,000 miles. So it's relatively localized. So the Utah economy, which they have about a 2.4% unemployment rate in the Utah economy. There -- the private business employment growth, it's about 3.5% or 3.7%. The state government is very conservative on raising taxes, and they're pretty focused on infrastructure growth. So we feel pretty good about the ability of that business to continue to grow. Obviously, we've got some work to do to integrate some things into the company, but we're pretty solid on that. And we just think that those innovative products that we talked about also help the growth rate going forward.

Okay. And then you talked about -- and you guys have talked about this for some time, about finding something that has good cash flow attached to it. Any further detail with respect to kind of the shortened DSOs relative to your own? Is there a kind of a benchmark conversion of EBITDA to free cash flow, we can think about for the business. I'm just trying to...

Well, I would -- what I would say is if you look at our cash flow over time in the steel pressure pipe business. We've obviously done a significant amount of work working on cash flow to improve the cash flow, which if you look at what the company has generated over the last, probably, since we acquired the Ameron assets, it's been pretty significant. We -- I think we ended the year with the legacy business at about $5 million of net debt in 2018, and we ended this year with $31 million in cash on the balance sheet. And if you remember, when we bought Ameron, we spent somewhere in the area -- after adjustments, in the area of $40 million. So the cash flow generation has been pretty substantial. Now our cash flow cycle is probably, right now, after making the improvements, around somewhere in the area of 40% or 50% longer than what we see from the Geneva business. If we're in the area of 145 days or so, the Geneva business is probably more in the area of 82 to 90 days. So certainly, we expect that to have a very positive impact on the cash flow as we move forward. And we believe that looking at the way the business transacts because it is a much more transactional business than what we see that there's certainly a much faster spin on the cash.

And our next question is coming from Mike Morales.

Congratulations on announcing the acquisition. So thanks for a lot of the color. A lot of my questions have actually already been answered with what you gave, Scott. I did want to touch on -- again, you said you've looked at so many companies throughout the history of Northwest Pipe, and you've made direct purchase to 40 companies. The question was going to be what makes Utah such an attractive market? But if I'm understanding you correctly, it sounds like you not only have access to the Utah market, but -- with the St. George plant that gets you into Las Vegas, the Salt Lake City plant gets you into Southern Idaho and Wyoming. So you really have the Utah market and then other what could be potentially pretty nice, growth areas. Is that a good way to think about it?

Yes, that's correct. Out of the St. George facility, we have a focus on trying to get to Las Vegas. And obviously, that's a relatively large market. With Salt Lake, we have the ability to reach into Idaho and other states. So certainly, they -- the surrounding states are in our business plan, to continue to supply those surrounding states and hopefully continuing to expand outside of that. I think the biggest piece of that, Mike, is that we talked about Utah, is that Utah economy looks so strong over the next couple of years, and it gets a little fuzzy after that because it's hard to tell after a couple of years that, that really serves as a good base. But as we said, the Idaho economy looks very strong. The Nevada economy looks very strong. In fact, I think there is -- Fox Business News did something, some time ago, talking about the top 5 economies for 2020. I know Utah and Idaho, and I believe, Nevada were all in the top 5. So certainly, we expect that to help to drive some growth going forward.

Sure. That makes sense. And then thinking about, maybe, switching gears a little bit. Scott, while, I have you here, with -- what we've been seeing in steel pricing, how are you guys figuring that into your pricing strategy going forward? And just touch on how you're thinking about that?

Yes. And we -- steel pricing is basically a pass-through. So certainly, if steel prices go up, the prices of the pipe go up. And as we see steel prices have crossed over the $600 a ton on the hot-rolled bands again and probably, in a lot of cases, heading towards $640, it's really starting to drive the pipe prices, especially, on the steel pressure pipe side. But also, when you look at the reinforced concrete side with the Rebar product, the reinforcing bar product, that goes into -- inside the RCP, which is -- if I say RCP, that means reinforced concrete pipe, and both Aaron and Robin kept reminding me before the call, "You got to say, RCP, reinforced concrete pipe". So I think the steel has a little bit of an effect on driving that, too. So certainly, we passed that through. As these prices go up, we don't go out and speculate on steel. When we have orders, we'll go out and get steel pricing set with the wide variety of steel suppliers that we have so that we back-to-back the orders and don't put any risk on the up or downs or especially the downside of steel pricing.

Sure. And then lastly for me. Scott, one of the things that you mentioned is that it is a -- maybe more transactional business compared to the legacy Northwest Pipe business. So help me understand on the sales -- on the selling cycle there? Is there maybe more competition that you're expecting there? Or does the geographic insulation that the business has just by nature of the product, kind of, prevent some of the competitive nature that I might be thinking of?

Well, I think you always have the competitive pressures in every market. And when you look at -- there's some major competitors across the United States that serve many of the different markets that are -- that seem to be pretty responsible competitors across the board and then you generally will have some local competitors. But like I said, Mike, a lot of this product -- because, I mean, you're shipping -- in the case of reinforced concrete pipe, you're shipping relatively large pieces. So about 150 miles with the impact of freight costs, maybe a little bit more about as far as it goes. So I think that the -- competitive-wise, you can always expect potentially more competition. But our idea behind all of that is always looking at cost reductions and driving cost out of the operating process. And a lot of times, people view that as we're saying, "Well, cost reductions mean reduction in people". But it's not, it's taking the cost out of the process with lean manufacturing that we spent a lot of time implementing at our -- on our steel pressure pipe side of the business, which the Geneva people have also been into the lean manufacturing. And we're just going to continue to pressure, the lean manufacturing side, continue to reduce costs to get a strong of a cost position as we can. So I think that's a big piece of it, too.

Excellent. And congratulations again.

Thanks, Mike.

Thanks, Mike.

And our next question is coming from David Wright.

Can you talk a little bit about Geneva management group, the selling shareholders? You said it had a strong management culture. Like who's leaving, who's staying, et cetera?

Yes, we have a very strong management group. We are keeping and retaining a management group and expect them to help us move the ball forward in growing the business in the precast concrete side. So this is -- this process has gone on for quite some time, David, actually, in excess of a year. So we've gotten to know the management group very well. We've gotten to know obviously the shareholders very well. Very good group of people, very smart group of people, solid in the business -- solid with the ideas of basically the expansion beyond just the products that are the baseline business for the precast concrete pipe business, which is one of the ideas of looking at the innovative products to continue to create product lines that, that will continue to allow us to grow organically in the business and knowing that they can't stop at -- even with the innovative products that they have now. Looking out 3 and 4 years, so that they're continuing to develop products. So I think it's a very solid and very strategically thinking management group, and we're pretty happy with what we got with the acquisition.

So -- I'm sorry. So is the -- are you buying the company from a founder who's retiring? Or the people you're buying the company from the Management group that's staying.

The company is owned by a family and 4 shareholders from the family. And the CEO is related to the family. And yes, she is staying with us.

Okay. What was the backlog at the most recent period at Geneva?

We don't really look at it in backlog with Geneva because it's such a transactional business. But what I can tell you is their order book has been about as strong as they've seen it in, I guess, recent history.