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spk05: Good day and welcome to the Northwest Pipe third quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Scott Montross. Please go ahead.
spk04: Good morning, and welcome to Northwest Pipe Company's third 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, November 8, 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 the actual results could differ materially. Please refer to our most recent Form 10-K for the year ended December 31st, 2020 and in our other SEC filings for discussion of such risk factors that could cause actual results of different material from our expectations. We undertake no obligation to update any forward looking statements. Thank you for joining today. I'd like to begin with a review of our third quarter 2021 performance. As of September 30th, our backlog, including confirmed orders for the Northwest Pipe water transmission business, was approximately 273 million, a near record compared to 234 million in the second quarter of 2021 and 231 million in the third quarter of 2020. Our third quarter project bidding volumes improved, albeit at a slower than expected rate, as COVID-related delays continue to push projects out into 2022. Despite the slower improvement in bidding, we still ended the quarter with a near record backlog and the quality of the backlog continues to improve, which led to higher third quarter water transmission revenue and upward movement on margins. We expect the upward movement on backlog and margins to continue through year end and lead to a stronger start to 2022. Our third quarter net sales totaled $84.6 million, which included $15.2 million from Geneva. The increase versus the second quarter was primarily due to significantly higher water transmission revenue and precast revenue that was stable but at an elevated level. Our third quarter gross margins of 14.6% improved versus the previous quarter by approximately 169 basis points. In the steel pressure pipe business, we've seen some improvement in the volume of products that are bidding. which have resulted in improvements in the quality of the steel pressure pipe backlog, leading to margins that began to rise at a modest pace. We are still seeing some COVID-related delays of projects that are already in backlog. However, steel supply and delivery-related issues have largely abated, and steel prices, which are still very elevated by historical standards, have come off their recent high points. The precast concrete margins of Geneva showed strong improvement for the third quarter. And the Geneva precast concrete operations have begun to serve as a stabilizer to our top line and gross margin during slow periods for the water transmission business, which is exactly what it was intended to do. Next, I would like to turn to a discussion on our growth strategy, which is two-pronged and focused on, first, driving growth in adjacent water market, in which case we have selected the precast concrete related market, and second, continuing to maximize our core steel pressure pipe water transmission business. We have continued to execute against our top growth strategy of driving growth in an adjacent water market. This ultimately led us to our October 5th acquisition of Park USA. We were very excited about Park USA and what it means for our business moving forward. Through our stringent set of acquisition criteria, we're pleased to have identified this strong M&A opportunity, which checked all of our boxes, including a strong management team, which will remain with the company, a good organic growth potential, strong margin characteristics, solid asset efficiency, a strong cash flow profile, and we expect this acquisition to be accretive to our results in year one. For those that might have missed the acquisition conference call last month, Park USA is a technology leader in the water infrastructure market that develops, manufactures, and distributes engineered water and wastewater control products, as well as other water-related environmental solution products. In addition, the Park assets complement and further diversifies our product mix, as the majority of our engineered water control systems and environmental solutions products are assembled in various sized precast concrete vaults and then delivered to customer job sites already assembled. This significantly increases our participation in the precast related space from a revenue perspective, helping to better balance our product portfolio and offset periods of variability in the steel pressure pipe market. For context and size, Park USA's adjusted EBITDA for the full year ended 2020. was approximately $14 million on $66.5 million in revenues, with strong growth prospects for the future in its home market of Texas. Further, PARC has been successful in achieving strong profit margins from its value-added products, which is particularly exciting given the expansion potential for these products within our existing Northwest Pipe facilities. The integration process is well underway and is expected to take approximately 12 months. Importantly, Park USA employs some of the same capabilities that we have at our existing Northwest Pipe facilities, specifically the production of precast concrete vaults and fabricated steel housings, which serve as containment units for the engineered water control systems and water-related environmental solution products. Since we already produce concrete vaults and steel fabrications at our current Northwest Pipe plants, post-integration we will be focused on bringing the production of Park USA's products into our existing Northwest Pipe locations. This is a process we refer to as product spreading, which we believe will provide solid organic growth potential for the company. Additionally, Park USA's products include engineered environmental solutions for water that will sharpen our focus on driving ESG efforts. An example of these solutions include engineered products designed for removing hydrocarbons and other hazardous materials from stormwater before it can get into streams, rivers, or lakes. And finally, the acquisition of PARCS supports our longer-term goal to grow our precast related business to a similar size as our steel pressure pipe business within the next three years. We look forward to updating you on our progress as we continue to integrate this business and benefit from its unique value proposition. In regard to our Geneva business, we are currently in the process of commercializing new innovative lined RCP and manholes for use in corrosive sewer applications. In addition to these products having significant organic growth potential, we believe that some of these products can also be part of product spreading and have the capability to be produced and sold out of our Park USA locations. The second prong of our growth strategy is to continue to maximize our core steel pressure pipe water transmission business to drive shareholder value. We are making progress through our cost reduction measures and lean manufacturing to drive further cost reduction efficiencies. As part of that effort, we will continue to work with outside engineering resources to explore opportunities for creating additional reduction measures in the longer term. I will now turn to a look at current and upcoming water transmission projects. In the east of the Rocky Mountains region, the ongoing multi-year, multi-agency Houston surface water program is expected to dig multiple segments in 2021 to 2022, representing 21,000 tons of pipe for the West and North Harris County regional water authorities. We anticipate both authorities having additional projects representing 28,000 tons through next year. The next new reservoir to be built in Texas is the 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 and construction on the dam began this year and the pipeline is expected to begin late in 2022 or early 2023. The Alliance Regional Water Authority program in Central Texas is is another multi-agency regional water program. The program includes a large pipeline, pump stations, and treatment facilities. Construction on the project has begun with approximately 12,000 tons remaining in the bid. In North Dakota, progress is being made on the 140-mile, 87,000-ton Red River Valley water supply project. The 1.5-mile demonstration project was awarded to Northwest Pipe in January and is nearing completion. Significant drought has now engulfed the state, and as part of the special legislative session beginning November 8th, acceleration of the Red River Valley Water Project will be considered, with completion potentially targeted within six years. Funding for the project acceleration will be allocated in part from federal funds received under the American Rescue Plan Act. We are closely tracking the outcome of further budget approval that may come from the state. In Colorado, we are tracking an expected 2021 record of decision by the U.S. 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 the west of the Rocky Mountains region, the California Prop 1 $7.5 billion bond for water infrastructure has created the much needed funding for projects within the state. According to the California Natural Resources Agency, 97% of those funds have been appropriated for various projects as of the 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 California market, in which we expect to see bidding activity continue for the next year. The City of San Diego anticipates bidding the three major remaining phases of the Pure Water program in the next 12 months. These phases include 8,600 tons of steel pipe. MWD is heading a regional reuse pilot project in conjunction with L.A. Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in Southern California. It involves 60 plus miles of large diameter pipe. The current demonstration facility has been operating for almost two years. MWD is currently soliciting preliminary design and permitting service and construction of full-scale treatment and conveyance facilities could begin as early as 2025. MWD secured a $224 million lethal loan in October of 2021, which will fund nearly 50% of the anticipated construction costs. The MWD PCCP Rehabilitation Program 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 1. It will involve over 30 miles of 144-inch pipeline. The project is forecast to begin in 2024-2025. 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 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. Construction is proceeding in earnest in New Mexico on the U.S. Bureau of Reclamation's Navajo Gallup supply project. The final major phase of the pipeline construction for this program is expected to bid mid-2022 and includes 4,700 tons of steel pipe. In summary, we are pleased to see our steel pressure pipe backlog gain momentum during the third quarter following the highly challenging period of pandemically related disruptions over the course of the past year and a half. We are optimistic this should help us set the stage for a stronger start to 2022. In addition, our precast concrete order book remains at an all-time high level and should continue to gain strength in the near term. With the addition of Park USA, we believe we are very well positioned for future organic growth that will be further supported by the growing infrastructure needs in the U.S. in upcoming water transmission projects. Looking ahead, we will remain focused on our top priority of taking every precaution to keep our employees safe through the ongoing pandemic, integrating Park USA as quickly and as efficiently as possible, a persistent focus on margin over volume, continuing to implement cost reductions and efficiencies at all levels of the company, and continuing to identify strategic opportunities to grow the company once we've completed the integration work with Park USA. Thank you very much to all of our employees at Northwest Pipe Company for your dedication to executing our strategy and by doing so safely. I'd also like to thank our customers, suppliers, and shareholders for your continued support of the business. I will now turn the call over to Aaron, who will walk through our third quarter financial results in greater detail.
spk02: Thank you, Scott, and good morning, everyone. I'll begin with our third quarter 2021 financial results. Net income was $4.9 million, or $0.50 per diluted share, compared to $7.3 million, or $0.73 per diluted share, in the third quarter of 2020. Adjusted net income was $5.4 million, or $0.54 per litre of share, which included $0.6 million of pre-tax transaction costs specific to the Park USA acquisition. This compared to adjusted net income of $0.74 per litre of share in the third quarter of 2020. 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. Net sales increased 9% to $84.6 million compared to $77.6 million in the third quarter of 2020. Precast concrete revenues increased 12.6% to $15.2 million in the third quarter of 2021 compared to $12.5 million in the third quarter of 2020, primarily due to improved pricing and increased shipment volumes. As Scott indicated, we currently have strong demand for our precast concrete products. Fuel pressure product revenues increased 7% for the third quarter of 2020 due to a 17% increase in selling price per ton resulting from increased raw material costs and changes in product mix. This was partially offset by a 9% decrease in tons produced resulting from changes in project timing. Due to the unique nature of the water and 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 20.8% to $12.4 million, or 14.6% of sales, compared to $15.6 million, or 20.1% of sales in the third quarter of 2020. The decrease was primarily due to the combination of lower volumes and the impact from project pricing realized on steel pressure pipe, partly offset by the increased gross profit on on higher selling prices and volumes for precast concrete. Selling general and administrative expenses decreased 1.7% to $5.6 million compared to $5.7 million in the third quarter of 2020. The decrease was primarily due to lower compensation-related expense and professional fees, partially offset by higher acquisition-related transaction costs associated with ParksUSA. We expect to complete the pro forma financial statement filings for Park USA in the middle of December, at which point we will have greater visibility into gross margins and SG&A expenses for the new business. In addition to P&L classification, we will also complete a preliminary purchase price allocation, providing the incremental non-cash expenses, including depreciation and amortization. As this work is currently ongoing, it is difficult to quantify total projected SG&A expenses at this time. However, what I will point out is that we have incurred a one-time charge of $2 million in the fourth quarter for investment banking fees associated with the ParkUSA transaction. Full-year operating margins at Park have approximately 20%, and they typically have some downward pressure in the first and fourth quarters due to weather-related seasonality. In addition to the purchase price allocation items previously mentioned, we will incur future integration expenses which I expect will be most significant over the next nine months. Depreciation and amortization for the quarter was $2.9 million. Our income tax rate in the third quarter was 27.9% compared to 26.6% in the third quarter of 2020. We are expecting a full year 2021 income tax rate of approximately 26.5%. Now we will transition to our cash flows and financial conditions. We used $18.7 million in net cash from operating activities during the third quarter. This compared with $14.6 million of net cash provided by operating activities in the third quarter of 2020. The difference was due primarily to fluctuations in steel pricing and its corresponding effect on working capital needs for our steel pressure pipe business. As of September 30, 2021, we had $3.2 million in cash and cash equivalents and $2.2 million of outstanding bonds in our credit facility. After considering outstanding letters of credit, our quarter end borrowing capacity was approximately $96 million before considering our $87 million acquisition of Park USA, which closed on October 5th. Our pro forma availability, had the Park USA acquisition and the related credit facility amendment been completed in the third quarter, would have been approximately $34 million. As noted on our Park USA conference call last month, We continue to diligently manage our working capital and believe our available borrowing 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 in our steel pressure pipe business stabilize in the coming quarters. Our capital expenditures for the quarter totaled $3.3 million. Strains on labor markets and supply chain issues have resulted in slower capital spending, which we project to come in between $11 and $12 million for the year. General economic forces, coupled with some slowing and steel pressure pipe bidding, have created challenges for our business this year. But we are very pleased with the efforts of all of our employees that have led to the sequential quarter improvements in revenue and gross profit margins. I want to congratulate Geneva for their financial success and achieving record performance in the third quarter, and express my gratitude for all the knowledge that we have gained from them to this point. They are one of several important teams that will be influential in the successful integration of Park USA, which we believe has the potential to be an equally compelling piece of the growth strategy that we continue to execute. Finally, and most importantly, I want to encourage continued engagement and focus on our safety programs, which are critical for all our employees, including those old and new to the company. I will now turn it over to our operator to begin the question and answer session.
spk05: We will now begin the question and answer session. To ask a question, press star then 1 on a touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question comes from Zane Carini with DA Davidson. Please go ahead.
spk06: Hey, good morning, Scott, Aaron. Congratulations on the solid quarter.
spk04: Hey, Zane, how are you?
spk06: I'm good, thanks. Doing well, especially with this. Real quick, Park USA, thinking about that, but how quickly can the pull Park USA products into existing Geneva and precast businesses? and how impactful can that be for you guys over the next 12 months?
spk04: I think, you know, first of all, when you look at what we'll be involved with over the next several months, it's a big integration push, right? So we're aligning the organizations now and getting people into different functions within the broader company. So it's probably not going to be until we get really early into next year when we're looking at getting this product spread going. And you're right, the first big place we're going to look is obviously where we have precast concrete assets already is at the Geneva locations. So I think you're probably with the kind of things that we have to go through because you're looking at making sure that you can do a product that's made by PARC, which is a water control system or an environmental solution system that's within a precast vault. So you have to be able to do that product at Geneva I. There's got to be some training involved with that, which we're looking at how we get that done now. And then two, there's the idea about how do you administrate that product through the process. product production control the scheduling shipping invoicing and all those things so we're working through those things right now so it's probably going to be probably what I would say Zane probably at least several months before it really picks up steam. Not to say that we're not going to be doing some of it earlier than that and making sure that we're working through that, but when you take a product that's not what I would call that hasn't existed at a plant before, it gets a little bit complex. So we're probably looking at mid-next year before we've got an impact on the Geneva facilities. and we think that picks up steam, so it's hard to tell what the overall impact is, but it could increase parks business at the Geneva facilities by five or 10% relatively quickly. The other thing is there's also stuff that we do at Geneva, uh like the perfect system the lined manhole perfect pipe system that we actually can do at part two so there's there's going to be some opposite way movement some growth there but it is i think the the potential for organic growth when we look across the company not only to what we can do at our precast facilities but what are the possibilities at even the steel pressure pipe facilities because you know Park has some products that are housed in steel housings too, like big break tanks and things like that that are steel fabrications. And we have steel fabricating facilities at each one of our steel pressure pipe plants, as well as having batch plants that are steel pressure pipe plants because we coat and line our steel pressure pipe with cement for certain jobs. So having the ability at some point to get that product, even the precast concrete encased solutions potentially to the steel pressure pipe plants is something that we're pretty excited at looking at over the next few years. So I've kind of extended this thing out a little ways versus what you asked, but that's kind of the thought process.
spk06: No, I appreciate it very much. This next one for you is a two-parter, but are there any projects you guys have been tracking that you thought would need the infrastructure bill funding and now could potentially have it? And how is that, you think, going to impact the competitive bidding environment as these markets seem to be picking up?
spk04: Okay, so let me address the first part first. The idea of the infrastructure package, really two pieces to the infrastructure package. There's the $50 billion piece for water, which there's going to be a substantial amount of that for getting lead pipe out of the systems, out of the water grid around major metropolitan areas. So that probably takes $15 or $20 billion of that piece. So that what's left, that $30 or $35 billion, you'll have some other things associated with that. We do think that that will probably spawn some additional projects that, Maybe you're more speculative right now that really aren't on our radar because they're in a speculative form. But I think the other piece that's important, Zane, is the resiliency piece, which I think it's resiliency piece is what they call it, is another $50 billion that is really focused more on drought situations and things of that nature. And as you know, I mean, we have a very serious drought situation in the Western United States. When we talked about the jobs list, I mean, we talked about the Red River Valley water supply job in North Dakota that they're engulfed in a drought now. I mean, I think those funds probably start moving around to help some of the drought situation, and they may start speeding up jobs like, for example, and these are just examples, like the Sites Reservoir job in California that's out a few years, or the Red River Valley water supply job that's gotten pretty urgent as it is. I think those kind of things are going to be subject to that money coming from the resiliency piece. So there's really two parts that are going to affect us from this infrastructure package, and we're pretty confident that we're going to see additional work related to this infrastructure package. But generally, you know, if you're looking at speculative work, those kind of things are going to be maybe two or three years out into the future. But if some of these funds can get to fund these projects more quickly that are out there right now, they could have a much more immediate effect, like I said, on the Red River Valley Water Supply Project or things like that. California is in significant drought. So there's a lot of places I think that that's going to be able to go into play and create new projects going forward for the steel pressure pipe business. I also think that the infrastructure package with the transportation piece lends itself to even greater demand than what we're seeing right now on the precast concrete site, because precast has a tendency to be a little bit more related to Department of Transportation stuff. So there's multiple fronts here, and we're pretty excited about the infrastructure package.
spk06: Okay, great to hear. And then just on the second part, kind of how is the competitive bidding different Now that the markets are picking up and how are your thoughts on the backlog? Is it for a queue both on size or relative margin there?
spk04: Yeah, what I would say, Zane, is this year is actually, you know, we expected the second half to pick up a lot more than it did in bidding. We expected a really big second half. versus what we saw in the first half, but it didn't improve as much as we thought it was going to. So when you look at 2021, it's a relatively small bidding year, yet all of a sudden we have backlogs that are starting to grow industry-wide based on the bidding that has happened. And what we're seeing right now I think is a more reasonable bidding landscape as we're going through the end of the year. And we're expecting that the second half is still going to be a little bit bigger and quite a little – I'd say – somewhat bigger than what we saw in the first half. And I think that, as we said in the script and even the earnings release, we expect to see the upward movement of not only the backlog, but the continued upward movement of margins as we come out of a pretty low demand period and expect to really kind of hit the 2022 running pretty hard. And I think you asked a little bit of a question on the fourth quarter and how that looks. What I would say about the fourth quarter is that it's the time of the year that is – and you've got two major holidays in the fourth quarter, and it's the time of the year that, at least in recent years, has been – pretty significantly impacted by weather situations. So we're being a little bit cautious with the fourth quarter. Right now, just because of that, the third quarter was relatively strong, and I think we're talking about, especially on the steel pressure pipe side, the fourth quarter being down a little bit, and that's just with concern over weather things that we're seeing out there that we've normally seen. So ultimately, we still think that the fourth quarter is a quarter that's going to be relatively strong as we go in the slow part of the year for not only the water transmission piece because like I said the holidays and the inclement weather but the precast business has continued to remain pretty strong all throughout the year when you look at you know where we were last year with precast in the fourth quarter we expect that to be a bit stronger this year and in the fourth quarter, even than what we saw last year. So we expect fourth quarter to look pretty good. Okay.
spk06: Thank you. Last one for me, if I can. Where are you seeing margins going fourth quarter or through the new 2022 with the business picking up? And how are you managing through areas outside of steel with regards to supply chain constraints?
spk04: Yeah, I would say that we're continuing to see the upward movement on margins now. And I'll break this down into the pieces. With the steel pressure pipe piece, you know, we've seen the margin just starting to pick up. It's moving up relatively slowly. And remember, we're coming out of a pretty slow period for the last year in steel pressure pipe bidding, and there was a lot of pressure on bids, you know, really from the third quarter of 2020. through the second quarter of 2021. So now that pressure is abating a little bit. So we believe that that margin increase is going to be relatively slow as we go through the fourth quarter and into the first quarter, but it should continue to gain ground as we go over that period of time. When we look at the precast business and really Looking at the Geneva piece, you know, the pre-cash business for Geneva has been very strong this year. It actually has grown this year to a stronger CAGR than we thought even when we did the earnings call or the conference call after the acquisition. So that margin has grown, too, and we've tried to characterize that. in relation to the water transmission business, that margin has grown to the very high side of what we see in the water transmission business. And it appears to continue to be moving upward. Our order book at the Geneva facilities is what I would call pretty much an all-time high of what we're seeing as far as order books. And then the other piece of that is looking at PARCC You know, the park margins, when you're thinking of those, they're probably a little bit past where we see Geneva in relation to the water transmission margins. And they also have a backlog right now as we're coming through the fourth quarter that is at a historically high number. So we expect the margins on all of the precast and precast related to continue to improve as we go through the fourth quarter and into early next year. So with big order books, big backlogs, and really upward movement on margins in each one of the cases.
spk06: Sounds like 2022 is really shaping up to be a solid year. Congratulations again.
spk04: There was one more piece of that. Did I miss one piece of that?
spk06: You touched a little bit on it. Yeah, you touched a little bit. But on any other supply chain constraint outside of steel?
spk04: Yeah, I'd say, like we said in the script, steel is abating. Steel's come off its highs, but I don't, when I'm looking at steel right now, I don't think steel drops through the floor, okay? I mean, a lot of people hear a lot of people say, ah, it's going to drop below $1,000 a ton. You know, I think, you know, it may be $1,500, $1,400, something like that. It's going to drop quite a bit, but I don't think it's going to drop through the floor. So I think steel-wise, we're okay. I think the transportation issues are out there. With trucking, obviously, that's widely publicized in the media across the United States. So there's a little bit more of an issue being able to ship products when you need to be able to ship them. But we've been able to get through that. We've got, you know, our own trucks at the park location or at the Geneva locations and some of our own trucks at the park locations. So really the ones where we have a little bit of an issue is on the steel pressure pipe side. But as far as other products, maybe a little bit of a slowdown in being able to get cement deliveries for the precast business, but nothing major. We're not seeing prices go out of whack. We really haven't seen too much besides the transportation piece right now with the supply chain as it sits. I think one of the things, though, I would say with that, Zane, is when you look at jobs delaying in bidding that we're still seeing in the third quarter and delaying out into 2022, I think a lot of those are COVID-related. I think some of those are supply chain-related. if you include labor issues and being able to get equipment to different spots. So I think the effect on us isn't really direct. It's more indirect with the jobs moving out in relation to those things, if that makes sense.
spk06: Yeah. No, that does. And thank you for the comment.
spk04: Absolutely.
spk05: The next question comes from Gus Richard with Northland. Please go ahead.
spk00: Yes, thanks for taking the question. Just following up on the gross margins in the current quarter, there's a couple of moving pieces. I was wondering if you could talk on the pressure pipe business, you know, how much of the, you know, strength in gross margins was from mix and how much of it was, you know, from steel prices moderating and utilization for that matter?
spk04: I think, Gus, on the price improvements on steel pressure pipe, it was more related to the bidding environment that's going on. And we're starting to see backlogs that have started to improve at our major competitors. And as a result, there's not as much pressure on bidding, so the margin is starting to move up a little bit. I think it would be moving up quite a bit more if everything that we thought was originally going to bid in the second half of the year actually was bidding and not delaying out into 2022. I think it would be moving significantly faster because, like I said, I think that the bidding ended up being a pretty ho-hum bidding year this year. So I don't think it's steel price related. I think it's more of, especially on the gross margin percentage, I think it's definitely more of the bidding environment and the way backlogs are starting to look industry-wide. But I would say that the improvement in that steel pressure pipe margin, while it's going to continue, is going to continue at a relatively slow pace.
spk00: Got it. Very helpful. Just looking at working capital needs, you know, inventories and receivables went up sequentially quite a bit. And I'm wondering, you know, cash conversion, will those balances come down and sort of spin off some cash? Or, you know, how is that working? Any help there?
spk03: Yeah, I think for SPELL, of probably the next couple quarters, Gus. We're probably going to be staying at relatively elevated levels on contract assets just due to what you're seeing with steel pricing. You know, we're getting to our average steel price consumed is starting to grow and get closer to where we're currently buying at, which is, you know, just under $2,000 a ton. I think our trade receivables, we're doing very good on that. We actively manage our trade receivables. All our working capital, for that matter, have a very good current percent on our trade receivables right now. Inventories are probably where I'm a little conscious of just kind of a lumpiness that could occur. With a buy, obviously, we've got a big backlog right now on the steel pressure pipe side, have some orders to fulfill. expecting potential for some lumpiness as it relates to the buy side for steel as we get out into the first quarter. I think we're pretty steady on the fourth quarter, but overall, I'm thinking we're at a very good level on the credit facility. And I think we're nearing the top of the cycle as it relates to getting some of these higher steel prices through our contract asset balance, and we should be kind of leveling off on that sort of stuff. So I think we've got a good position for liquidity as we manage working capital in the near future here.
spk04: You know, the other thing, Gus, is the steel price starting to, it's crested and starting to come down as it drops. And like I said, I think it's going to drop relatively slowly into probably the $1,400, $1,500 range. That's going to bring cash to the balance sheet because it topped out at relatively close to $2,000 a ton. So you're going to see, I think, that cash come back to the balance sheet over probably the next several months. is what we're looking at, you know, probably several, maybe a year. So I think that's something that's going to happen, too. Okay.
spk00: And just to be clear, though, your borrowing capacity is, I think, $32 million currently, and do you think you'll be cash flow positive in the fourth quarter or no?
spk03: Yeah, I think we're going to be, outside of the one unique item that we have for the fourth quarter, which I talked about, which was the Jeffries investment banking fee. Yeah, I think we're going to be cash flow positive. I think, like I say, our working capital is leveled off and the profitability from the combined business is going to get us over the hump for the fourth quarter and then beyond that too, Gus. We obviously have burned through a lot of working capital and seen the effects of that on our cash this year. I think holistically, that's a better position to be in for 2022 because we're already kind of at the top of the cycle. So yeah, I think even beyond the fourth quarter, cash flows are going to be improving for this business.
spk00: Got it. Perfect. And then Just to follow on for me on the Park USA business, you know, just – and you probably already touched on this, but seasonality of that business and, you know, sort of what you think the growth rate might be for 2022 for that business, just ballpark.
spk04: I would say the seasonality is – little bit slower in the in the fourth quarter obviously weather events lots of rain normally not not generally like freeze like we saw I think last year earlier this year but heavy rain that slow things down so if you think about it and think about parks business and last year they were about about 67 million and divide it into four quarters you know you would you would lop a little bit off of of probably the first quarter and probably a little bit more in the fourth quarter, generally, because I think that the weather effects happens, and plus you have the holidays and the slower shipping rate during that quarter. So you do have a little bit of seasonality in that.
spk00: Got it. And then just any color on what you think the growth rate might be to that business, you know, next year?
spk04: Yeah. I think it's, you know, if you look at the business right now, and I hesitate to give any growth rate based on the organic growth that we're going to work on driving with spreading the product, but just as a general rule, I think looking at that business growing at about a KGAR that's about 3.5% to 4% is probably in line, similar to what we talked about when we acquired Geneva Gust.
spk00: Perfect.
spk04: But I think that organic growth in the product spread probably, what I would say, may expedite that a little bit.
spk00: Got it. That's perfect. Thank you so much. Great quarter.
spk04: Good to talk to you, Gus. Thank you, Gus.
spk05: Again, if you would like to ask a question, press star then 1 to join the queue. The next question comes from David Wright with Henry Investment Trust. Please go ahead.
spk01: Hi, good morning.
spk03: Hey, David. Good morning, David.
spk01: Remind me, what did you pay for Geneva EBITDA multiple?
spk04: It was 7.4. Yeah, 7.4.
spk01: Right. So then you paid six and a quarter times for Park USA. Does that sound right? Right. That seems like an awful good buy because it seems that Park has maybe a higher what I'm going to call technology component to it than the Geneva business? Am I thinking about that the right way?
spk04: Yeah, I think you're definitely thinking about it the right way, David, because, I mean, these are engineered water control systems inside these precast vaults in environmental solutions. So these are really engineered systems. So you're talking about a company that has multiple patents – a significant amount of trademarks, obviously intellectual property that goes along with all of that, and a relatively, what I would say, robust engineering effort to be able to continue to create and improve these products. So you're thinking about that the right way. And obviously we think we got a pretty good buy with this.
spk01: Well, yeah, I mean, it's exciting. I mean, you're not going to be like a badger meter or something, but it really is a lot sexier than the original steel water pipe business. And the second question, thanks for detailing all of the different potential jobs that could be coming up for bid. And one that you mentioned was Fort Collins, which I think you said was related to a Corps of Engineers project, is that correct?
spk04: Yes.
spk01: Can you talk about that a little more? 150 miles of pipeline sounds pretty exciting.
spk04: Well, obviously there's a whole bunch of development that has to go on with the Army Corps of Engineers. I think it's one that we're going to keep our eyes on. I think Colorado, when you look at the amount of projects that we've done there over the years, and obviously we used to have a facility in Denver, and then things slowed down for a number of years, but there were some really, really big projects there, probably from about 2008 through about 2011, that probably used, I don't know, 100 miles of pipe, I can't remember exactly the name of the project. Some of it was before I came on board. But there were a lot of projects there. And I think what they're seeing is the same kind of situation, David, with the droughts, the fires, those kind of things. And, you know, it's not only that project. I think that project is getting steam, but also that Red River Valley water supply project that is in the Dakotas. That's one that seems to really be picking up steam. And like I said before, I think that those kind of projects get a little bit of momentum potentially from the resiliency part of the infrastructure package. So ultimately, those are still things that we're... We're watching very closely because the Fort Collins project is a 2023 project right now, so a lot of things can happen between now and then. But we do think that this infrastructure package potentially could help those. And again, we're looking at demand over the next couple of years. in the water infrastructure business that looks like it continues to improve, and these just will add to it. Which will help pricing probably as well. Which will help pricing and will help production levels and will help absorption and will help margins.
spk01: Well, listen, great report and best wishes to both of you for the upcoming holiday season.
spk04: Same to you, Dave.
spk01: It was really good to talk to you. Good to hear from you. Thanks very much.
spk05: This concludes our question and answer session. I'll now turn the conference back over to management for any closing remarks.
spk04: Okay, thank you. I'd like to thank everybody again today for joining the call. Before we close the call, I want to leave you with a few key takeaways. You know, what we're seeing right now is we're seeing a water transmission backlog that is exciting and it's really starting to move as we go through the end of this year and really is putting us in a pretty strong position as we enter 2022. We're going to enter 2022, we believe, in a much stronger position than we did 2021, definitely due to the backlog. Again, the Geneva business has been strong. It remains strong. Margins continue to be very strong. And as I said before, the order book is at a really high level historically. And, you know, again, we're very excited to have closed on the acquisition of Park USA. We think that it aligns really well with the strategy, and we're excited to the things that can happen post-acquisition. with the idea of product spreading and all the other attributes they have with the faster cast cycle, with a higher velocity order book, all those kind of things. And what we're seeing from them is also a situation where they have a very high order book and margins that are strong. And like the steel pressure pipe business, we expect to enter 2022 in the precast pipe-related business with some pretty significant momentum. So I'd like to thank everybody again for their attention today, and we look forward to speaking with you all again on our fourth quarter call early in 2022. So thank you very much.
spk05: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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