Park Environmental Equipment, LLC (NWPX) Earnings Call Transcript & Summary

Good morning, and welcome to the Northwest Pipe Acquires ParkUSA Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Scott Montross, President and Chief Executive Officer. Please go ahead.

Good morning, and welcome to Northwest Pipe Company's conference call to discuss our recent acquisition of Park Environmental Equipment LLC, which I'll refer to as ParkUSA. My name is Scott Montross, and I am President and CEO of Northwest Pipe Company. I am joined today by Aaron Wilkins, our Chief Financial Officer. By now, all of you should have access to our acquisition announcement press release, which was issued Tuesday, October 5, 2021, at approximately 6:30 p.m. Eastern Time. This call is being webcast, and it is available for replay. In addition, a supplemental presentation to accommodate yesterday's press release in conference call can be found on the Investors portion of our website under the Events and Presentations tab. 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, 2020, 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 for joining our call today. We are excited to have announced the acquisition of ParkUSA for a total transaction value of $87.4 million, which we believe significantly strengthens our product capabilities within the water infrastructure market. Early in 2017, we embarked on creating a new growth strategy for Northwest Pipe Company. The strategy is based on expansion into a broader water market to create transformational growth and profitability to significantly improve shareholder value. Our growth strategy is two-pronged. First, continuing to maximize our core water transmission steel pressure pipe business, primarily through cost reductions and lean manufacturing programs and also understanding the limited but well-known acquisition opportunities in the steel pressure pipe market segment. This ultimately led to our acquisition of the Ameron Water Transmission Group in July of 2018. At that point, we had approximately 50% of the water transmission steel pressure pipe market, which is a relatively small market at about $450 million to $600 million annually. While we had solidified our position in the steel pressure pipe market, additional acquisition potential is -- and we needed something else to balance out the demand variability in the steel pressure pipe market. This is why we are focused on a dual-fold approach to growth. As such, the second prong of our growth strategy is to grow in an adjacent water space that have strong margins, good organic growth potential, a short cash cycle, solid asset efficiency and a high-velocity order book. Based on this criteria, we decided on the precast concrete pipe and forms business, which ultimately led to our successful acquisition of Geneva Pipe and Precast in January of 2020. As recently discussed in our second quarter 2021 earnings call, the Geneva Pipe and Precast business continues to be strong. Currently, the precast pipe and forms represents only about 15% of our total business, but it has helped offset the temporary slow period that we've recently seen in the steel pressure pipe business, which is one of the major benefits of adding precast-related business to our steel pressure pipe business. As we've continued to say in various forums, our goal is to grow our pre-cash related business to a similar size as our steel pressure pipe business in the next 3 years. As such, we've been highly focused on evaluating potential precast-related acquisitions with a focus on organic growth potential, strong margin characteristics and cash flow. And at the same time, we recently amended our credit facility to enhance our liquidity position in order to properly execute our strategy. This led to our acquisition of ParkUSA, a Texas-based company that operates 3 fabrication facilities in Houston, Dallas and San Antonio on over 70 acres. The acquisition was funded primarily through our amended credit facility, and Aaron will speak to the financing piece in greater detail shortly. ParkUSA is a technology leader in the water infrastructure market that develops, manufactures and distributes water and wastewater control products as well as other related environmental solution products. ParkUSA installs these products mainly in precast concrete vaults or fabricated steel housings and delivers the finished products to the customer job sites. The ParkUSA business employs some of the same capabilities that we have at the existing Northwest Pipe facilities, namely the production of precast concrete vaults and fabricated steel housings, which in the case of ParkUSA, service containment units for the water control system products and water-related environmental solution products. And because we also produce the concrete vaults and steel fabrication at the current Northwest Pipe plants, we will be focused on bringing the production of ParkUSA's products to our existing Northwest Pipe locations through a process that we refer to as product spreading, which we believe will provide solid organic growth potential to the company. Beyond the overlap with our existing core business, ParkUSA also produces environmental solutions for water, such as removing hydrocarbons and other hazardous materials in storm drains out of the water supply, which will be additive and highly complementary to existing precast concrete solutions. Importantly, and at the core of our strategic rationale for this acquisition, the addition of ParkUSA not only aligns with our precast growth strategy, but also provides broader product offering and capability in adjacent water segments. In addition, ParkUSA is positioned attractively with a foothold in the rapidly growing Texas water market, one of the top 20 construction markets in the world. Thirdly, ParkUSA has a unique product mix with scale and serves a diverse range of end markets. The company primarily serves commercial construction markets, and has the capability to service certain residential projects. Further, ParkUSA has delivered solid financial results with solid future growth potential. And finally, we have devised a thoughtful rollout strategy through product spreading that I mentioned earlier, which is focused on bringing ParkUSA's product into our existing Northwest Pipe locations. In regard to our acquisition criteria, ParkUSA checked all of our boxes, beginning with good organic growth potential. The company is a sizable supplier of specialty water products with 2020 annual revenues of approximately $67 million and adjusted EBITDA of approximately $14 million. The addition of Park's 3 plants brings our total to 13, with synergistic opportunities for product spreading to begin manufacturing their products at our existing Geneva locations with what we believe to be relatively modest investment. And eventually, we believe we will be in a position to expand manufacturing capabilities for ParkUSA's products to our existing steel pressure pipe facilities in line with our product spread strategy. Second, strong margin characteristics. ParkUSA's margin profile currently runs above our current company-wide average, and we expect the acquisition will be accretive to this result in year 1. Thirdly, solid asset efficiency. ParkUSA generates high revenue on a relatively low amount of fixed assets, resulting in a high asset turnover ratio. And finally, a strong cash flow profile. ParkUSA has a faster cash conversion cycle relative to our core business and similar to Geneva given the company's focus on smaller, high-margin projects. We look forward to continuing to benefit from the higher product margin opportunities in the precast concrete and related segment, which we believe will continue to help us offset slower periods in our legacy steel pressure pipe business. While our longer-term company-wide strategy will center on continued growth in precast-related adjacent water markets through a combination of organic and acquired growth, our near-term focus will be on integrating ParkUSA into our existing operations and strengthening our balance sheet. At the same time, a key prong of our growth strategy will remain to maximize efficiencies within our core steel pressure pipe water transmission business in order to enhance shareholder value. I will now turn the call over to Aaron, who will discuss our amended credit facility in greater detail.

Thank you, Scott, and good morning, everyone. As Scott discussed, the $87.4 million in cash consideration paid for ParkUSA was funded almost entirely with debt. In order to support our growth strategy, we worked with our financing partner, Wells Fargo, on a new cash flow-based credit facility, which we closed in June 2021. In addition to affording us the ability to pursue targets with the scale of ParkUSA, the loan was refinanced to more optimally provide for normal business needs. We have a full commitment from Wells Fargo to exercise the $25 million accordion feature of the loan which will provide total borrowing capacity of $125 million. I expect that amendment to be complete in the coming days. We are continuing to diligently manage our working capital and believe our available lending capacity is sufficient to navigate our near-term liquidity needs. Further, we expect to repay the loan aggressively through the improving cash flow profile of the newly combined company and as inflationary pressures on our steel pressure pipe business are expected to continue stabilizing in the coming quarters. ParkUSA's adjusted EBITDA for the full year ended 2020 was approximately $14 million on $66.5 million in revenues. Park has been successfully achieving strong gross profit margins from its value-added products, which is particularly exciting, given the expansion potential for these products within our existing Northwest Pipe facilities. For the first 9 months of 2021, ParkUSA's revenue and profitability slightly improved compared to the full year 2020's financial performance. Our GAAP-based pro formas will be filed with the Securities and Exchange Commission in approximately 70 days as we work to complete the preliminary purchase price allocation for this acquisition. Our financial integration efforts will begin immediately and focus on systems, internal controls and back office processes. As you would expect from an acquisition of any family company, the integration is expected to be a significant undertaking and will require increased investment over the next 18 months. While the integration process will add some near-term costs, the acquisition is expected to be immediately accretive to our earnings. While we have not completely vetted out cost classifications for the new business, we expect to have greater detail regarding ParkUSA's gross margins and incremental SG&A expenses in the near future. What I can say is the previous guidance surrounding our SG&A expenses will be increased by approximately $2.5 million to the transaction-related expenses we have incurred in the third and fourth quarters specific to the closing of this deal. Depreciation has historically been immaterial at ParkUSA. However, the company has intellectual property in the form of patents and trademarks that, like the machinery and equipment acquired, will be fair valued with the required purchase price allocation currently underway. In summary, we are very pleased to share the news of the acquisition of ParkUSA as we believe it will be an instrumental element in growing the business and improving the return on investment for our shareholders. In addition to the improved earnings and cash flow profile the deal provides, we are very excited to work with the talented ParkUSA team and to start realizing our combined potential together. I will now turn it over to the operator to begin the question-and-answer session.

[Operator Instructions] The first question comes from Zane Karimi of D.A. Davidson.

Congratulations on the news. Quick question with ParkUSA, but can you give us any details on the growth profile in the recent years? And what should we be expecting through 2022?

If you look at revenue growth over the last probably a few to several years, you're probably looking at a CAGR rate that's in the area of about 4%, similar to what we saw with Geneva when we did the Geneva acquisition. Now that doesn't include the idea of any product spreading, Zane. That's just their normal trajectory on the business. With the idea of product spreading, that would look at bringing Park products to our existing Northwest Pipe lines like the Geneva facilities in places like that, that would obviously have a pretty big impact on organic growth going forward. But if you look at just the Park business, I think a 4% CAGR is about right.

Great. And I also noticed, has the company historically generated about 20% EBITDA margins that have been implied for that 2020 year?

When you look at the EBITDA margins, obviously, with a family company, there's a few things that happen that are adjustments that you make that we talked about. So when you adjust some of those things out, those EBITDA margins probably have gone from the mid-high teens up to 20% over the last few years. I think that they've done a lot of work on trimming costs out of their facilities in Dallas, San Antonio and Houston. They've done a lot of price work on revaluing some of their products into the marketplace. So it's enhanced, really, over the last probably 2 years, it's enhanced their margin percentage a little bit more than what they've had in the past. I would say there were mid-high teens in the past, but with what they've done recently has put them over the 20% EBITDA margin realm. And if you look at the operating margins, probably mid- to high-teen operating margins.

And last one real quick. But how is this acquisition different from Geneva? Are the product sets different? Or can it be replicated to other Northwest Pipe facilities?

Yes. It is -- this business is a business that is based on -- the housings are based on precast concrete vaults and steel housings. But really, it's a business that it's creating water control systems and environmental solutions systems and actually housing those things in the precast vaults in steel housings and actually delivering them to a customer -- customer site, and in some cases, dropping them right into the ditch so that the customer can hook them up. So there's some value-add components to that. And obviously, some -- what we're looking at is leaning more towards smart water components with the control systems that are inside. That is -- that's a different business than what we have at Geneva. Geneva makes the vault, they make the RCP pipe and things like that in all the forms that the normal pre-caster would make. I think what Park does is they take that a step further and they take those precast forms or steel fabricated housings and they put those control systems in them and deliver them for a value-added item to the customer, which obviously starts to promote those higher margins that you were asking about earlier. So that's pretty exciting to us saying because when you look at us having the ability to make precast vaults at our Geneva facilities and us having the ability to make steel fabrications at our steel pressure pipe facilities and looking at taking that Park product and spread it to our existing facilities, we think that that's going to provide good organic growth potential and provide, obviously, additional capacity utilization going forward at our other facilities with being able to do the Park products there. So pretty exciting. And obviously, the organic growth prospects as we look at that are pretty solid.

Great. And I guess last one, real quick. But does the business sell outside of Texas? And if that's so, what percent of Texas? And is that, that a priority to advance the business into new markets? And you kind of talked about that, but a little bit more detail will be much appreciated.

Yes. I think what I would say is probably about 95% of their business is in Texas. And really, the reason for that is a lot of their capacity is soaked up by Texas with the demand levels that are in Texas. Probably about 5% ships to various places. I mean, they ship products as far as the state of Washington and into the Northeast. So there is the ability to do that with these products. And I think the -- what was the second part of the question, Zane?

Just talking about how you're thinking about advancing into new markets?

Yes. So we obviously would start with the markets where we have existing plants. Like, for example, the Utah market would be an absolute target right from the very beginning because we have the precast concrete capabilities right there in Salt Lake City, Orem and St. George and obviously have the ability to make those precast vaults and getting the training done at those facilities to be able to install the control systems in those are something that we've obviously been talking about for quite some time. So we would start really with there. I think the second piece of it is as you look at our steel pressure pipe facilities and as I mentioned, some of the work that they do are -- it's steel, same kind of fabrication type work that we do at our current steel pressure pipe facilities. So making great tanks that are for irrigation or fire suppression and things like that. You would look at that probably as the next phase of that. I think third phase, when you look at -- we have -- we make cement at all of our steel pressure pipe plants for cement water lines and cement motor coatings. So we already have batch plants there, right? So you look at that and say, okay, what kind of capital investment do you need to make those batch plants so that you could actually do those kind of those concrete applications in those different markets. So you can look at upgrading the batch plants and say, all right, well, here's the capital expenditure that is going to be required on that. Or would you started out by saying, well, I'm going to bring ready-mix in important forms and start out with ready-mix out of the steel pressure pipe plants and then graduate or evolve to upgrading the batch plant, depending on how that market grows in a specific region. And then I think what you're looking for, Zane, as you're looking for potentially other pre-casters that are within regions that may make sense that may have a plant here or there, that have precast products like Geneva currently has, where you could potentially spread that Park product to those locations. And I think probably the other thing I should have said, there are Geneva products that we will likely spread to the Park locations. When we start talking about line manholes and things like that, that we do at the Geneva locations, likely those products are going to end up going to the Park facilities too for a product that goes into the market there. So there is a gigantic amount of potential product spread that we see right now with this business. Just on the outset, looking at the business, it's grown with the way the Texas market has grown for construction and it's -- Texas market's a huge construction market and it's grown with that. And it's a very scalable business, and we're pretty excited about the opportunities that are outside of Texas right now. And it really would start with our existing locations though.

[Operator Instructions] Our next question comes from Gus Richard of Northland.

Yes. I'd like to offer my congratulations as well. It looks like a great acquisition for you guys. Can you talk a little bit about the trajectory of synergies? It sounds like you've got some work to do in order to bring ParkUSA into a capability of a publicly traded company. And then going forward, there's some opportunities to spread the products around increasing fixed absorption. Can you just kind of walk through how that is going to work over time?

Yes. I would say, Gus, to start off, and then I'm going to drive it over to Aaron for a little further discussion is, as when you look at the back-office synergies, ultimately, you look at those kind of things and those things combine over a period of time. And I think before I start talking about some of the other stuff, I'll probably pitch it over to Aaron a little bit because I think one of the big things is giving the ERP system, our ERP system in place. And I'm going to let Aaron talk about that.

Yes. I think the most interesting part of the synergy conversation is really on the revenue side. But as you look at kind of the back-office stuff, I mean we do have a lot of significant priorities as it relates to getting them ready to be part of a public company. So immediately, as we look at cost synergies, you really don't have a lot there. We have audit costs that they haven't incurred as a company. And obviously, [indiscernible] compliant, that's a significant cost. Initially, we're going to be really aggressive about going to a system integration. It's something that they're hungry for and anxious to get set up with. So that's going to be a big part of the cost over the first 6 to 8 months of ownership there. I'd also say just that general IT infrastructure is going to be a decent spend as we get out of the gates, getting the network up, getting them on hardware that's compliant and able to communicate with the Northwest Pipe Systems. So that's going to really be a lot of the focus and as it relates to the back-office stuff. And for that reason, I just don't think there's something we can guide you for, for something that's cost synergistic over the next 18 months.

And I think the second piece of it that you get on, Gus, is the revenue synergies and with the product spread that we think is pretty substantial. As I said, I think when the last question was asked, I think the initial piece of that is at the precast facilities because they have exactly what they need there to be able to make the vault, to be able to put the control systems in those vaults. So I think that's a big place grow one. But the biggest -- I would say the biggest part of the synergies besides the revenue is probably going to be on the cost side with bringing lean manufacturing to those facilities and things like that. But I think the biggest synergy is revenue growth synergy and what we're going to get out of that go forward.

Right. And so the plan is to move precast concrete to, over time, all of the Northwest Pipe facilities that don't overlap with Geneva and ParkUSA?

I think what you would do is you look at all of those facilities. And the first thing you do is you start looking at the steel fabrication work that's done in various places for Park for like brake tanks and irrigation systems and oil separators, oil water separators things like that and things that you can actually do right now out of steel fabrication facilities that we already have at every one of our water transmission plants, and those would be #1. The second piece of it is, you look at which markets that we're in right now with these plants have a reasonable precast, a market situation where you could actually sell these products into those markets. And we have multiple of those that we feel work. And what we would initially start at is probably bringing ready-mix and to pour into the forms until we develop the market enough where it would justify the capital expenditure to the upgrade the batch plants to steel pressure pipe plants. But that would be the ultimate sequencing of how we would do it.

Great. And then just a final one for me. When you look at ParkUSA's business in Texas, how much of it is driven by new construction, new home starts? How much of it is driven by environmental remediation? And how much of it is driven by climate change and the fact that Houston floods periodically when the storm comes through?

Yes. I think it's kind of a mixed bag depending on what the situation is, Gus. I think what you get is a situation where a lot of things are new construction. A lot of the work is new construction, but you're having things that are being replaced all the time, like if you look at any of the products that they do that are environmental products, I mean obviously, there's a bigger push towards environmental, social and governance all the time in this country. So with putting products in like these storm troopers that they produce that will take storm water and take hydrocarbons out of the storm water so it doesn't get into the water system and things like that. I think a bunch of that is new and some of that's replacement. So it's kind of a mixed bag. Probably 50% or so is new. And I think you're looking at some of it, maybe 25% to 35%, and these are just numbers off the top of my head right now, is probably replacement or something along those lines. And then you'll just have various things that are being put in new because of environmental regulations and things like that. The interesting thing about this business is the guys who run this business are really focused on what the new regulations are and bringing new products into the marketplace. And so it's a constant look at what new products do the customers, which are cities and utilities, what are they looking for and actually working to get the Park name spec-ed in on all those projects. So -- it could be new, it could be existing, it could be replacement. It just depends on whatever time frame you're looking at.

Got it. And do they have a solution for lead?

Lead. I don't -- I can't answer that one off the top of my head. None of the products that I've looked at right now for them has a lead removal component. It doesn't mean that they don't have something because there's a lot of products there that are on the drawing board. But I will say, they have stuff -- they have products that are called grease troopers that take grease out of food production, industrial kitchens and things like that and stops the amount of grease that gets into the water that's hard to break down. They have stuff that takes hydrocarbons out of the water. They have stuff that's -- they have another product, a trooper product called a hazardous material product that is that gas stations that stops the gas leaks and things like that from getting in the storm drains and getting into the water systems. They have products that go into helicopter pads that, with Abgas or helicopter gas that will take that and clean that out. There's a product for just about everything. But I can't answer that on lead. I don't know that on lead.

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

Yes. I'd like to thank everybody again for joining our call today. I think it's got to be said that with the Park acquisition, we've gotten a very, very strong senior management team that's come with that acquisition with the 2 or 3 people that were running that company before we came in. Very strong senior management team along with a strong management team and really, really good workforce. And I think this group is going to be key in helping us drive the next phase of our growth, which we think is going to be heavily weighted towards organic growth at Northwest Pipe. And we're excited to have closed on the acquisition. We look forward to benefiting from the expanded addressable market that we see and the growth potential that we see in all these adjacencies. And like I said before, the products are -- and solutions are very scalable to our precast facilities and ultimately, we believe, to our steel pressure pipe facilities. And they're strongly positioned in the Texas market based on their growth that we've seen over the last several years. And we think that this whole thing will really provide an organic growth platform for Northwest Pipe. So we appreciate everybody being on the call, and we look forward to speaking with everyone again on our third quarter call in November. So thanks very much, and look forward to seeing you again soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.