The Exchanges

Q So you have this early success, some great growth, economic performance is great. You've gotten through some of that initial pulling these two carve outs out of public companies. How do you think about the next couple of years under your ownership?

A So we're very excited about the business. The rebranding and the positioning in the marketplace has garnered attention of the strategic buyer universe, as well as some of the infrastructure players in the market that are looking for assets of this scale. We have north of a hundred million dollars of EBITDA already on the combined platform. We like to drive that into the one 21 30 range organically over the next 12 to 18 months, we're gonna work on a couple of tuck-in acquisitions, and I'd imagine if someone doesn't knock on our door in the next 24 months, we will be going to market with the asset after that time. So I'd imagine this one will end up being a three-year hold as opposed to a five-year hold. And we're very bullish on the overall industrial demand cycle that we're in The federal government between the Inflation Reduction Act, the CHIPS Act, and some of the other energy transition spending is creating a tremendous amount of demand for the services that Ironclad provides. We don't think that's going to change the higher interest rate environment. While it makes our interest a little bit more expensive, it also dampens new entrants and new competition to the space. So we're really excited about the prospects of this business over the medium and even longer term as you think about some of the overall growth dynamics in the U.S. economy and where money's being spent.

AI assessment note: “I'd imagine if someone doesn't knock on our door in the next 24 months”

Q So as you've made these changes, bought these two businesses, how have the economics of the resulting business shaken out?

A So we've been driving double digit top line growth every month, month over month since our ownership. We're at 40% combined EBITDA on the business today. We're into our first budget cycle for the combined business going into 2024. And management is pretty confident we'll be able to continue with double digit organic revenue growth price and volume and drive our EBITDA into the low forties. It's a very strong cash generative business. It's also asset intensive. So you have to purchase new equipment over time. But again, given the utilization metrics that we were talking about, we have incremental assets that allow us to grow without a meaningful investment in new capital. So we are generating a lot of free cash flow in this business.

AI assessment note: “We're at 40% combined EBITDA on the business today.”

Q What were your key due diligence points as you went through the process?

A We looked at the business and very quickly came to the conclusion that they had a great fleet of assets, they had great geography, they had great customers, they had relatively low utilization, and they were unambitious in their pricing. When we went into diligence, we spent a lot of time with management about how they drive utilization, And why they haven't been more aggressive in driving price. This was in 2021 and 2022 as we're looking at the historical results. They've been targeting two percent price increases and what at that point was starting to become a nine percent inflationary environment. And we very quickly had an aha moment with the team where they said, you're right, we have a lot of opportunity here. The cost of replacing the equipment Was up double digits. We're talking 20 and 30% increases in the price to build a new frack tank or a new dewatering box. And that cost needs to be borne by the marketplace. And so we were able to work with the management team at Mobile Mini Tank as we went through diligence to really get a sense of which part of their asset base was most highly utilized and And how we price those, which ones were less well utilized, and how we price those, and to really come up with a good go-to-market strategy post-close to drive utilization and to drive incremental price. And that was the key to our underwriting and the diligence process.

AI assessment note: “we spent a lot of time with management about how they drive utilization”

Q What have been some of the challenges you faced since you bought the company?

A Culturally, it was a very smooth transaction. Both divisions were orphans. The teams, the people in the field really embraced the new ownership. They really were excited about the new name, the new brand, and now all of a sudden, you're the key player in the company. So culturally, it was incredibly positive and powerful combination. These were subsidiaries, so they were running on the parent company software for financial reporting. They were running on the parent company software for asset utilization and benefit management, and we had to extract and put in place our own platforms. We did that well, but it wasn't always without hiccups. You're transitioning a bunch of accounts onto a new platform, and you miss a billing cycle. And then there were new bank accounts, new names. Customers don't recognize the ironclad bill the first time they get it, or they send the payment to the wrong account. So we had to redirect the payments and things of that nature. It's a lot of the mechanics blocking and tackling when you're deploying new systems and standing up companies as independent entities. So those have been the challenges operationally as we've integrated these companies. Fortunately, we have good teams, we have good people, and we've been working through those transitions, but that's really where the biggest challenges were.

AI assessment note: “You're transitioning a bunch of accounts onto a new platform, and you miss a billing cycle.”

Q Rob, we're going to dive into Ironclad. So why don't we start with a description of what this company is?

A Ironclad Environmental Services is a industrial and liquid waste containment solution, primarily servicing industry, petrochemical, refiners, large construction sites where you're managing primarily liquid waste for removal and disposal. And environmental services is a sector that I've been investing in for over 25 years. There are some core Characteristics of the industry that make it very attractive from an investment perspective, and really the most important one of those is that it's necessary. Environmental services means removing the trash, whether it's liquid waste, household waste, industrial waste. People expect garbage to be managed. They expect it to disappear. It's a necessary tenant to having a functioning society. So I always like to say, when you think about that, you need running water. Maybe you need electricity, and you need waste services. So when you think about a stable business model, waste really fits the bill, and it's in some measure like a utility, yet there's not a rate cap on the returns. So good service, good assets, being in the marketplace, and having a strong presence allows you to build reliable service models in the last 24, 36 months as we've entered into what has been a very Rapid inflationary environment. Waste services have been able to maintain margin by passing price to their customers. Why? Because it's necessary. And when you think abou…

AI assessment note: “Ironclad Environmental Services is a industrial and liquid waste containment solution”

Q When you first started looking at it, how did you dive into the due diligence?

A Part of being an industry expert is we have the players in our operating partner network who live and breathe these spaces in these industries all the time. I mentioned the gentleman that introduced us to the company. We also have a number of executives that operated the disposal side of the house with these types of industrial waste streams. We've owned a company called Circon Environmental. Their team was instrumental in helping us understand these assets and their customers uses. We used to own The Environmental Quality Company, which is a large hazardous waste treatment disposal business, they utilize this asset and this service for their business for many years. So having those industry players that literally use the service, use the assets that an ironclad environmental provides on a everyday basis gives us great insight into the pricing, the value proposition, What the customers look for when they go to market and sign in a master service agreement with the provider in this category.

AI assessment note: “we have the players in our operating partner network who live and breathe these spaces”

Q What did you see as the biggest issues or risks in the deal at the time?

A These assets were used heavily in the shale boom and the fracking boom in really, 2012, 2013. There was almost no price that a shale driller wouldn't pay for an asset that led to a large overinvestment in fleet in the 2012, the 2016 time period when the shale boom became a bit of a shale bust, and the assets flooded into the market, and you saw a large drop off in demand. That sense of cyclicality Presented a concern to us as you go, well, geez, when you look at these assets, did you have this boom-bust cycle? And what we did to get comfortable that was really a one-time phenomenon is we looked at 20 years of industrial waste tank demand, and over that twenty-year cycle, you really had one bust, and you could see the bust coming by the overinvestment in the Proceeding three years, 2012 to 20 15, 16, and then the bust in 2017, 18. Other than that, you had an up and to the right curve for utilization and growth of units and fleet, et cetera. So we're able to look at this business and really get comfortable that it provided the type of stable, predictable, demand curve that we're used to and we expect from our environmental services businesses.

AI assessment note: “That sense of cyclicality Presented a concern to us as you go”

Q So what happened when you went in to try to buy the deal? Talk me through the actual process.

A So the seller had a view of value. Naturally, that view of value was higher than our view. They contacted other parties to try to gin up a better price and a better opportunity for themselves as sellers of this asset. Fortunately for us, we had the team and the resources to be in a position to speak for our price. When push came to shove, the seller took the bird in the hand of certainty with us. Versus the incremental price that they may have been able to get by pushing and giving time to other parties in the market. So the dynamic of having the intellectual capital in our team as well as having completed our diligence process early allowed us to get the deal done at the price that we were prepared to underwrite. There's always that uncomfortable conversation and the seller went pencils down on us a couple different times because They weren't going to move forward at the price that we were at.

AI assessment note: “the seller took the bird in the hand of certainty with us”

Q When you have the importance and the focus on service, how do you think about creating efficiencies on the cost side?

A What we think about is getting paid for the service. So we don't look to manage cost. We look to manage price. So quite frankly, I'd rather pay drivers better rates that are going to show up on time. They're not going to have accidents. They're not going to ruin my equipment. And I'm going to make sure the customer rewards me for that quality service that that individual provides. That's how we think about it. So, of course, there are cost savings when you're doing acquisitions. There are synergies. I mentioned earlier the notion of we had overlapping leases between Adler and Mobile Mini. We took out some of those leases. Of course, there was overlapping people in some situations, but honestly, we did more to redeploy our combined staff than to cut our combined staff, and the biggest value proposition Is making sure that we communicate how we're gonna provide that service so that we can get that price.

AI assessment note: “we don't look to manage cost. We look to manage price.”

Q I'd love to ask, what have been your biggest lessons learned from this deal?

A It's always great to be an industry expert, and I think this reinforces that. We're able to take advantage of this opportunity precisely because we had the requisite knowledge of the markets to act quickly. We've been able to create value precisely because we understand what the customers want so well. So that really reinforces it. I would say the other thing, no integration is without challenges. And I think this one's gone pretty well, but when you move down the path of integrating two businesses, you don't know what you don't know, and you don't know what hiccups you're going to have, and I think it behooves us with relatively low leverage that if you don't string the drum too tight, you don't have to worry about it breaking when things don't go perfect. And then the last thing I would say is that it's always about management, and we are a management-centric organization. We partner with management teams, and we take partnership very seriously. Great partnerships are about mutual respect, trust, communication, and when you have a great partnership with your management team, you're able to solve problems together, and they share their challenges because they trust you, and we're able to then work together to address them, and so we really value our partnership with our team's Our operating partners really are our most valuable asset. We always say our references and you shoul…

AI assessment note: “It's always great to be an industry expert, and I think this reinforces that.”

Q So let's go back into the process of your owning this. So you mentioned this came to you from one of your operating partners. What was that initial conversation like?

A Got a phone call. He sits on the board of our Musino Industrial Pump Division. He has pretty good knowledge of the industrial equipment as a service business. He had been involved with Mobile Mini Tank before. I think it was pretty well known that This was the orphan division of Mobile Mini. Mobile Mini's industrial storage , they lease shipping containers for storage purposes. It's a great business, very high margin, very high cash flow business for Will Scott. The tank and pump division was a much more service oriented, requires more people and more fleet, as opposed to dropping a box, collecting rent, and picking up a box, which was their core business. So this resided under that umbrella It was the runt of the family, if you will, so it didn't get its share of the capital allocation from budget, so they decided that it would be better owned by another party.

AI assessment note: “Got a phone call. He sits on the board of our Musino Industrial Pump Division.”

Q In a situation like this, where it's clearly in your sweet spot, it's in one of your three verticals, you understand the business well, you understand the assets. How do you think about negotiating just that incremental price when you're close to the finish line, knowing that you want to get the asset?

A That is the secret sauce. It's not always easy. To your point, when you really have a deep knowledge and appreciation for the beauty of the asset, and I would argue that our view of the beauty was far greater than the seller's view of the beauty, there is a propensity to want to cave and just pay and get it done. We had as good of intelligence as we could gather on the alternative buyers, and we felt good holding our cards. But no question about it, Ted, that is where the rubber meets the road in these types of situations. We were very happy with the price that we paid. Was there more on the table from us? Yes, but we were able to get it done. And I think part of the value proposition we have in our diligence processes, it's not just understanding what we're buying, it's trying to come up with the thesis for growth. And I mentioned that earlier. We were looking at the mobile mini tank division We had gotten pretty close to getting a deal. We had in our back pocket the opportunity to acquire the Adler Tank business, which was their largest competitor. We knew that at the point at which we finally agreed to terms, and that made us pretty pleased with the outcome that we were able to drive.

AI assessment note: “We had as good of intelligence as we could gather on the alternative buyers”