Q3 2021 Northwest Pipe Co Earnings Call
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.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone 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 Mantra. Please go ahead.
Good morning, and welcome to northwest Pipe Company's third quarter 2021 earnings Conference call. My name is Scott <unk>, 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 eight 2021 at approximately four PM Eastern time. This call is being webcast and it is available for replay now as we begin I'd like to remind everyone that the statements made on this call regarding our expectations for the future are forward looking statements and actual results could differ materially please refer to our most <unk>.
Form 10-K for the year ended December 31, 2020, and in our other SEC filings for a discussion of such risks and factors that could cause actual results to differ materially from our expectations and 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 30, 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 2000.
21, and $231 million in third quarter of 2020, our third quarter project bidding volumes improved, albeit at a slower than expected rate as COVID-19 related delays continued to push projects out into 2022 <unk>.
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 free cash revenue that was stable, but at an elevated level.
Third quarter gross margins of 14, 6% improved versus the previous quarter by approximately 169 basis points in the steel pressure pipe business. We have seen some improvement in the volume of products that are bidding which have resulted in improvements in Macquarie 80 of the steel pressure pipe backlog, leading to margins that began.
The rise at a modest pace, we are still seeing some COVID-19 related delays of projects that are already in backlog, however, steel supply and delivery related issues have largely abated and <unk>.
Steel prices, which are still very elevated by historical standards have come off their recent high points. The pre cast concrete margins at 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're very excited about <unk> USA and what it means for our business moving forward.
Yeah.
Through our stringent set of acquisition criteria. We're pleased to have identified the 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, our 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 as 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 diverse.
<unk> is our product mix as the majority of our engineered water control systems and environmental solutions products are assembled in various sized pre cast concrete vaults and then delivered to customer job sites already assembled.
This significantly increases our participation in the free cash related space from a revenue perspective, helping to better balance our product portfolio and offset periods of variability in the steel pressure pipe market 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 park 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.
The integration process is well underway and is expected to take approximately 12 months.
Importantly park USA employ some of the same capabilities that we have with our existing northwest pipe facilities, specifically the production of pre cast concrete vault 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 vault <unk>.
Steel fabrications and our current northwest pipe plants post integration, we will be focused on bringing the production of pork USA products into our existing northwest pipe locations. This is a process, we referred to as products spreading which we believe will provide solid organic growth potential for the company.
Additionally Park USA products include engineered environmental solutions for water that will sharpen our focus on driving ESG efforts and example of these solutions include engineered products designed for removing hydrocarbons and other hazardous materials from storm water before it can get into the streams rivers <unk> lakes and <unk>.
Finally, the acquisition of park supports our longer term goal to grow our free cash 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 line RCT and Manholes for Houston 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 <unk>.
<unk> 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 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 bid multiple segments in 2021, and 2022, representing 21000 tons of pipe for the west.
And North Harris County regional water authorities, we anticipate both authorities, having additional projects representing 28000 tons through next year.
The next new reservoir to be built in Texas is the Lake Ralph Hall for the opportunity 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 17000 tons of pipe and construction on the <unk>.
This year and the pipeline is expected to begin late in 2022 early 2023, the alliance regional water Authority program in Central Texas is another multi agency regional water program. The program includes a large pipeline pump stations and treatment facilities constructions on the project has begun.
With approximately 12000 tons remaining bid.
In North Dakota progress is being made on the 140 mile 87000 ton Red River Valley water supply project. The one five mile demonstration project was awarded to northwest pipe in January and is nearing completion significant drought has now on both the state and as part of the special <unk>.
Slated session beginning November eight acceleration of the Red River Valley water project will be considered with completion potentially targeted within six years funding for the project acceleration would be allocated in part from federal funds received under the American Rescue Plan Act, we are closely tracking the outcome of further.
Approval that may come from the state.
In Colorado, we are tracking and 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.
And the Fort Collins area.
In the west of the Rocky Mountains region, California, prop 175 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, and 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 <unk>.
Pure water program in the next 12 months. These phases include 8600 tonnes of steel pipe <unk> is heading a regional reuse pilot project in conjunction with La Sanitation District. This reuse program would treat and recycle water from one of the largest reclamation facilities in southern California.
It involves 60 plus miles of large diameter pipe.
Demonstration facility has been operating for almost two years MW D is currently soliciting preliminary design and permitting services and construction of full scale treatment and conveyance facilities could begin as early as 2025 MW D secured a $224 million with alone in October.
2021, which will fund nearly 50% of the anticipated construction costs.
The <unk> rehabilitation program will result in about 5000 tons annually over the next 10 to 15 years, we have seen a slowdown in this work this year, which appears to be COVID-19 related. So the timing of these projects has shifted to later this year.
The site's reservoir is a water storage project that has received funding from prop one it will involve over 30 miles of 144 inch pipeline. The project is forecast to begin in 2020 for 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 miles 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, Navajo Gallup supply project. The final major phase of the pipeline construction for this program is expected to bid mid 2022 and includes 4700 tons of steel pipe.
In summary.
We were pleased to see our steel pressure pipe backlog gained momentum during the third quarter. Following the highly challenging period of pandemic related disruptions over the course of the past year and a half.
We are optimistic this should help us set the stage for stronger start to 2022.
In addition, our precast concrete order book remains at an all time high level and should continue to the Greens 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 and 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 efficiently as possible.
Our 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.
Thank you Scott and good morning, everyone.
Ill begin with our third quarter of 2021 financial results.
Net income of $4 9 million or <unk> 50 per diluted share compared to $7 3 million or <unk> 73 per diluted share in the third quarter of 2020.
Adjusted net income was $5 4 million or <unk> 54 per diluted share, which included $1 6 million of pre tax transaction costs specific to the park USA acquisition.
This compared to adjusted net income of 74 per diluted share in the third quarter of 2020.
Adjusted net income excludes unique and unusual items and we provided 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 six nine in the third quarter of 2020.
Precast concrete revenues increased 12, 6% to 52 mining 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.
Steel pressure pipe 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 transmission systems, we manufacturer production tonnes 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 28% to $12 4 million or 14, 6% of sales compared to $15 6 million or 21% of sales in the third quarter of 2020.
The decrease was primarily due to the combination of lower volumes and the impact on project pricing realized on steel pressure pipe, partially offset by the increased gross profit.
On higher selling prices and volumes for precast monthly.
Selling general and administrative expenses decreased one 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 PARP USA.
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 <unk> business.
In addition to P&L classification, we will also complete a preliminary purchase price allocation, providing the incremental noncash expenses, including depreciation and amortization.
As this work is currently ongoing is difficult to quantify total projected SG&A expenses at this time.
However, what I will point out is that we have incurred a onetime charge of $2 million in the fourth quarter for investment banking fees associated with public Park USA transaction.
Full year operating margins of park of 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.
For 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 2020.
We are expecting our full year 2021 income tax rate of approximately 26, 5%.
Now I will transition to our cash flow and financial condition.
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 32021, we had $3 2 million in cash and cash equivalents and $2 $2 million of outstanding borrowings on 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 five.
Our pro forma availability have the park USA acquisition and the related credit facility Amendment and completed in the third quarter would have been approximately $34 million.
As noted on our Park USA Conference call last month, we continued to diligently manage our working capital and believe our available borrowing capacity are 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 an flushing inflationary pressures on 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 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 improvement 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've gained from them at this point.
They are one of several important themes that will be influential in the successful integration of park USA.
Which we believe has the potential to be an equally component piece of the growth strategy, 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 of 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.
We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yes.
Yes.
And the first question comes from Zane Karimi with D. A Davidson. Please go ahead.
Hey, good morning, Scott and congratulations on the solid quarter.
Zane Hawaii Zhang.
Doing well doing well, especially with me.
Real quick park, USA thinking about that but how quickly can the poor park USA products until existing Geneva, and <unk> business and.
And how impactful could that be for you guys over the next 12 months.
I think first of all when you look at what will be involved with over the next several months, it's a big it's a big integration push rate. So so we're aligning the organizations now and getting people in the different <unk>.
Functions within the within the broader company, so its probably not going to be until we get really early into next year.
When we're looking at getting this product spread going in the right. The first place we're going to look is obviously, where we have free cash concrete assets and already is that the Geneva locations. So I think you're probably with the kind of things that we have to go through because youre looking at making sure that you can do a product that's made by <unk>.
Mark which is a water control system or an environmental solution system, that's within a pre cap cash vault. So you have to be able to do that product at Geneva, one theres got to be some training involved with that which were which were looking at how we get that done now and then two there is the idea of about how do you administrate that product through the process.
Product production control.
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 making sure that we're working through that but when you take a product that's not what I would call.
Hasnt existed at a plant before it gets a little bit complex. So we're probably looking at mid next year before we 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 be it could increase parks business at.
The Geneva facilities by five or 10% relatively quickly. The other thing is is there's also stuff that we do at Geneva.
Like the perfect system the line demand hole perfect pipe system that we actually can do at park too so theres 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 with our pre cash.
Facilities, but what are the possibilities.
Even the steel pressure pipe facilities because.
Clark has some products that are housed in steel housing's too 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 in our steel pressure pipe plants, because we coat in line, our steel pressure pipe with with Sumit on for certain jobs, so having the ability at some point to get that.
Product even the.
The pre cast concrete encased solutions potentially to the steel pressure pipe plants is something that we're pretty excited that looking at over the next few years. So I'm kind of extended this thing out a little ways versus what you asked but thats kind of the thought process.
No I appreciate it very much.
Next one for unit two partner, but are there any projects that you guys have been tracking that you thought would need the infrastructure Bill funding and now could potentially habit and how is that you think.
Impact the competitive bidding environment as these markets seem to be picking up.
Okay. So, let's let me let me address the first part.
<unk>.
The idea of the infrastructure pack is really two pieces to the infrastructure package writers to $50 billion piece for water, which which theres going to be a substantial amount of that for getting lead pipe out of the systems out of the <unk>.
The water grid around major metropolitan areas, So that probably takes 15 or $20 billion of that that piece. So that looks left that 30% to $35 billion, you'll have some other things associated with that we do think that that will probably splawn. Some some additional projects that maybe youre more spec.
<unk> right now that really arent on our radar because they are in a speculative form but I think the other piece that's important zain as the resiliency piece, which I think its resiliency piece was 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 Theyre 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 they may start speeding up jobs like for example, and these are just examples like the site's reservoir job in California, that's out a few years or the Red River Valley water supply job.
Pretty urgent as it is I think those kind of things are going to be subject to that to.
That money coming from the resiliency. So theres really two parts that are going to affect us from this infrastructure package and we're pretty confident that.
That we're going to see additional work related to this infrastructure package.
But generally if youre looking at speculative work those kind of things youre going to be maybe two or three years out into the future, but what if some of these funds can get to fund. These projects more quickly to that are out there right now that could have a much more immediate effect like I said on the Red River Valley water supply project or things like that California's insignificant drop.
So there is a lot of places I think that that's going to be able to go into play and create new projects going forward.
For for the steel pressure pipe business I also think that the infrastructure package with the transportation piece lends itself to <unk>.
Even greater demand and what we're seeing right now on the precast concrete site because free cash has has a tendency to be a little bit more related to department of transportation stuff. So there is multiple fronts here and we're pretty excited about.
The infrastructure package.
Okay, Great to hear and then just on the second part kind of how is the competitive bidding.
Now that the markets are picking up and how are your thoughts on the backlog in our Q, both on size or relative margin there.
Yes, what I would say Zane as this year is actually.
We expected the second half to pick up a lot more than it did in bidding.
Expected, a really big secondly, I know it improved versus what we saw in the first half, but it didn't improve as.
As much as we thought it was going to so when you look at when you look at 2021, it's a relatively small bidding year.
All of a sudden.
We have we have.
Backlogs that are starting to grow industry wide based on the bidding that has happened and and what we're seeing right now I think it's a.
<unk> is a more reasonable bidding landscape.
We were going through the end of the year and we're expecting that that second half is still going to be a little bit bigger quite a little I'd say.
Somewhat bigger than what we saw in the first half so I think that as.
As we said in the script and even in the earnings release, we expect to see the upward.
Upward movement of not only the backlog, but the continued upward movement of margins as we come out of a pretty low demand period.
Expect to really kind of hit.
The 2022 running pretty hard so I think 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 <unk> 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 a little bit 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.
On the steel pressure pipe side, the fourth quarter being down a little bit and that's just with concern over whether things were seeing after we've normally seen so so ultimately we still think that the fourth quarter is a quarter that is going to be relatively strong as we go into the slow part of the year for not only the water transmission.
Can teach because like you said, the holidays and inclement weather, but the pre cash business.
His continued to remain pretty strong.
All throughout the year when you look at where we were last year with free cash in the fourth quarter, we expect that to be a bit stronger this year than the first and the fourth quarter, even though what we saw last year.
So we expect fourth quarter looked pretty good.
Okay. Thank you last one for me if I can.
What are you seeing margins going fourth quarter or through the mid 2022 with the business picking up and how are you managing through areas outside of steel with regard to supply chain constraints.
Yes, I would say that we're continuing to see the upward movement on margins now.
Break this down into the pieces with the steel pressure pipe piece, we've seen.
The margin just starting to pick up its moving up relatively slowly and remember we're coming out of a pretty slow periods for the last year.
In steel pressure pipe bidding and there was a lot of pressure on bids really from the <unk>.
The third quarter of 2020 through the second quarter of 2021, so now that pressures 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 there.
Period of time, when we look at.
The precast business and really looking at the Geneva piece.
Yes.
Pre cash business for Geneva has been very strong this year and actually has grown this year.
A stronger CAGR than we thought even when we did the earnings call or the conference call. After the acquisition.
No.
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.
Moving upward.
Order book at at the Geneva.
So this is what I would call pre.
Much at all time high of what we're seeing as far as order books and then the other piece of that is looking at park.
Margins when Youre thinking of those are.
They are 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 those.
The margins.
All of the pre cast and free cash related to continue to improve as we go through the first quarter or the fourth quarter and into early next year, So with big Big Order books Big backlogs and.
Really upward movement on margins in each one of the cases.
So it sounds like 2020 is really shaping up to be a solid year congratulations.
There was one more piece of that did I Miss one piece of that.
Can you be a little bit on it.
You touched on a little bit but on any other supply.
All right.
Items.
Yes, I would say like we said in the script steels abating.
Steel has come off its highs, but I don't when im looking at steel right now I don't think steel dropped through the floor. Okay. Can you hear a lot of people here here's a lot of people say its going to drop below $1000 a ton.
Thank you know, maybe 1500 1400, something like that it's going to drop quite a bit but I don't think its going to drop through the floor. So I think were still wider roquet think.
The transportation issues are out there with trucking, obviously thats widely publicized in.
In the media across the United States, So there's a little bit more of a issue being able to ship products. When you need to meet to be able to ship them, but but we've been able to get through that we've got.
Our own trucks at the park location or at the Geneva locations and some of our own trucks at the park location. So really the ones, where we have a little bit of an issue is it.
As steel pressure pipe side, but as far as other other products.
Maybe a little bit of a.
A slowdown in being able to get.
Cement deliveries for the free cash business, but nothing major we're not seeing prices go out of whack. So we really haven't seen too much. Besides the transportation piece right now with the supply chain as it sits so I can't say it.
Yes.
One of the things so I would say with that Jane is when you look at jobs delaying in bidding.
We're still seeing in the third quarter and delaying out into 2022.
I think a lot of those are COVID-19 related I think some of those are supply chain related. If you include labor issues in being able to get equipment to different spots.
So I think the effect on us isn't really direct it's more indirect with with the jobs moving out in relation to those things if that makes sense.
Yes, I'll, let Doug and thank you for that color.
Absolutely.
The next question comes from Gus Richard with Northland. Please go ahead.
Yes, thanks for taking the question.
Follow up on the gross margins in the current quarter.
A couple of moving pieces I was wondering if you could talk on the pressure pipe business.
How much of the strength in gross margins was from mix and how much of it was from.
From steel prices moderating.
And utilization for that matter.
I think Gus on the on the price improvements on steel pressure pipe it was more related to the bidding.
Environment Thats going on and we're starting to see backlogs.
<unk> started to improve our major competitors and as a result, theres not as much pressure on bidding. So the margin is starting to move.
Move up a little bit I think it would be moving up quite a bit more.
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.
The bidding ended up being a pretty Ho Hum bidding year. This year. So I don't 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.
<unk>.
The industry wide, but I would say that the improvement net steel pressure pipe margin, while it's going to continue is going to continue at a relatively slow pace.
Got it very helpful. And then just looking at working capital needs.
Inventories and receivables went up sequentially.
Quite a bit and I'm wondering.
Cash conversion will those.
Balances come down and sort of spin off some cash or.
Yes.
Is that working any any help there.
Yes, I think for a spell.
That's probably the next couple of quarters, because we're probably going to be scanned at relatively elevated levels on contract assets, just due to what youre seeing with steel pricing.
We're getting to our average deal price consumed is starting to grow and get closer to where our where we're currently buying at which was just under $2000 a tonne.
I think our trade receivables are doing very good on that we actively manage our trade receivables and all our working capital for that matter are.
We have a very good current percent of on our trade receivables right now inventories are.
Probably where I'm a little.
Conscious of just kind of lumpiness that could occur.
With a buyout, we see we got a big backlog right now on the steel pressure pipe side have some some orders to fulfill expecting potential for some some lumpiness as it relates to the buy side for steel as we get out into the first quarter I think were pretty steady in the fourth quarter, but overall.
I mean I think.
We're at a very good level on the 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 through our contract asset balance and we should be kind of leveling off on that sort of stuff. So I think we got a good position for liquidity as we manage working capital in the near future here.
The other thing is is the steel price starting to it's crested in and starting to come down as it drops and like I said I think it's going to drop relatively slowly in the probably the $14 500 range, that's going to bring cash to the balance sheet because it topped out at over <unk>.
Relatively close to $2000 a tonne so youre going to see I think that cash come back to the balance sheet over the probably the next several months.
Is what we're looking at probably several maybe a year. So I think thats something thats going to happen too.
Okay and.
Just to be clear that.
Youre borrowing capacities I think $32 million.
Currently and do you think youll be cash flow positive in the fourth quarter or no.
Yes, I think we're going to be outside of the one unique item that we have in the fourth quarter, which I talked about which was the Jefferies.
Banking fee.
Yes, I think we're going to be cash flow positive I think are like I say, our working capital and it has 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 two graphs I think.
Yes.
We have burned through a lot of working capital and seen the effects of that on our on our cash in.
This year.
I think holistically, that's a better position to be in 2022, because we're already kind of about that at the top of the cycle. So I think even beyond the fourth quarter cash flows are going to be improvement for this business.
Got it perfect and then.
Just to follow on from me on the Park USA business.
And then probably you already touched on this but seasonality at that of that business and.
Sort of what you think the growth rate might be for.
For 2022 for that business.
Ballpark.
I would say the seasonality is is a little bit slower in the fourth quarter, obviously weather events lots of rain normally not not.
Generally like <unk> 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 in divide it into four quarters, you would you would love a little bit off of.
Probably the first quarter and probably a little bit more in the fourth quarter generally.
Because I think the weather effects happened and plushy of the holidays and the lower the slower shipping during that quarter. So you do have a little bit of seasonality in that.
Got it and then just any color on what you think the growth rate might be for that business.
Next year yet.
I think it's.
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 in the product, but just as a general rule I think looking at that business growing at about a CAGR, that's about three and a half 2% to 4% is probably in line similar to what.
We talked about when we when we acquired Geneva Gus.
Perfect.
Organic growth in the product spread probably.
I would say may expedite that a little bit.
Got it.
That's perfect. Thank you so much great quarter.
Talk to you guys congrats.
Yes.
Again, if you would like to ask a question Press Star then one to join the queue. The next question comes from David Wright with Henry Investment Trust. Please go ahead hi, good.
Good morning.
David morning, David.
Remind me what what did you pay for Geneva EBITDA multiple.
It was 7474.
So then.
Your page six and a quarter times for park Usaf's that sound right.
Right.
That seems like an awful goodbye because it seems that because of that park has may be off hire what I am going to call a technology component to it.
Then the Geneva business am I thinking about that the right way.
Yes, I think youre definitely thinking about it the right way David because I mean these are these are engineered water control systems inside these pre cast votes in environmental solutions. So these are.
Engineered systems, so youre talking about a company that has multiple patents.
A significant amount of trademarks.
Obviously intellectual property that goes along with all of that in a relatively.
What I would say.
Robust engineering effort to be able to continue to create and improve these products. So youre thinking about that the right way and obviously, we think we've done a pretty good pretty good by with this.
Yeah, I mean, it's exciting I mean, youre not going to be like a badger meter or something but its really is.
A lot sexier than then.
And.
The original steel water pipe business.
Okay.
Second question.
Thanks for detailing all of the different potential jobs.
That could be coming up for bid.
And one thing that you mentioned was Fort Collins, which I think you said was.
Related to our core of engineers project is that correct.
Yes.
Can you talk about that a little more 150 miles of pipeline it sounds pretty exciting.
Well there is.
Obviously, there is 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 slowed down for a number of years, but there were some really really big projects there.
Probably from about 2008 through about 2011 that were probably I don't know 100 miles of pipe.
Can't remember exactly the name of the project some of it was before I came on board.
There were a lot of projects, there and I think what theyre seeing the same kind of situation David with the drought.
Fliers, those kinds of things and.
Not only that project I think the net project is getting steam but also that Red River Valley water supply project that is in the Dakotas gets one which seems to really be picking up steam and like I said before I think that those kind of projects get a little bit of it.
Get a little bit of.
Momentum potentially from the resiliency part of the.
Of the infrastructure package. So so ultimately those are still things that where.
We are watching very closely because the Fort Collins project as of 2023 project right now so a lot of things can happen between now and then.
But.
We do think that the infrastructure package potentially could help those.
And again, we're looking at demand over the next couple of years.
In the water infrastructure business it looks like it continues to improve and these ships will add to it.
So.
Which will help pricing probably as well.
<unk> will help pricing will help.
Production levels and will help absorption and will help margins.
Well listen Great report and best wishes to both of you for the upcoming holiday season.
Same to you gave really good good to hear from you. Thanks very much.
This concludes our question and answer session I'll now turn the conference back over to management for any closing remarks.
Okay. Thank you and I'd like to thank everybody again today for joining the call before we close the call I want to leave with the leave you with a few key takeaways I think.
What we're seeing right now is we're seeing a water transmission backlog that is exciting and it's really starting to.
To move as we go through the end of this year.
<unk> is putting us in a pretty strong position as we enter 2022.
Under 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 day is at a really high level historically.
And.
Again.
We're very excited to have closed on the acquisition of park USA, We think it aligns really well with the strategy and we're excited to the things that can happen post post the acquisition and with the idea of products spreading in all the other attributes that have faster cash cycle within.
A higher velocity order book all of 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 in like the steel pressure pipe business, we expect to enter 2022 and the free cash free cash 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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