Ladies and gentlemen, thank you for standing by, and welcome to the FTAI's acquisition of Transtar conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Alan Andreini, Head of Investor Relations. Please go ahead.
Thank you, Josh. I would like to welcome you all to the Fortress Transportation and Infrastructure Investors Call regarding FTAI's acquisition of Transtar. Joining me here today are Joe Adams, our Chief Executive Officer; Ken Nicholson, Managing Director and a member of our Board of Directors; and Scott Christopher, our Chief Financial Officer. We have posted an investor presentation and press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including statements regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results.
We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and to review the risk factors contained in our recent 8-K filed with the SEC. Now, I would like to turn the call over to Joe.
Thanks very much, Alan. I'm very excited to be here this morning on this call to talk about the acquisition we announced last night with U.S. Steel. We're going to run through four slides that are posted and then open it up for Q&A after that. But I'll start on slide two, which is just a summary of the transaction in that last night we signed an agreement with U.S. Steel to acquire Transtar, which is a wholly-owned subsidiary of U.S. Steel and operates the rail operations for U.S. Steel inside of their company. But it consists of six different railroads, two of which represent by far the largest part of the deal. One is at Gary, Indiana, which serves the Gary steelmaking plant, which is the largest facility or plant that U.S. Steel operates.
And then Union Railroad, which operates at Mon Valley in Pittsburgh, which is their lowest-cost operation in the company. And so these two railroads comprise most of the volumes and revenues of the business. And we have additional four railroads that we'll talk about a little bit, which we think provide some interesting upside. The business is a sizable business. It's, for the last 12 months, handled over 200,000 rail cars and connects with all seven Class I railroads in the United States. So it's a big business, and there's lots of interchange and relationships that we look forward to taking over. It generated revenue of about $118 million and LTM EBITDA to about $62 million, including during the period where COVID significantly impacted the operations in Q2 and Q3 last year.
So based on the recent operating performance in the last couple of quarters and the strong rebound that we've seen in the steel business and implementation of some new initiatives that we expect to put in place once we acquire the company, we expect that Transtar will generate approximately $80 million EBITDA in the first year following acquisition by us. And so therefore, the deal is highly accretive for FTAI on really every measure accretive from an EBITDA point of view, accretive from a FAD point of view, given that maintenance CapEx is about $5 million a year, and also very accretive from an earnings point of view for shareholders. So we're very excited about this deal and what it does to grow and add long-term contracted cash flows to our infrastructure business.
We expect the closing to occur in the third quarter upon receipt of regulatory approval, which is principally the STB, Surface Transportation Board. We don't expect any major issue there. And we have a financing in place from Morgan Stanley and Barclays, which will allow us to close. And then we'll look to a variety of takeout financing possibilities once we close the deal. Looking over at the next page, on page three, I talked about this a little bit, but just in terms of the mix of business, over half of the revenues come from finished products of moving steel and merchandise that are produced by these steel plants out to the marketplace. And the other half is inbound, be it coal and coke and iron ore, which comes into this facility.
So it's a very critical function within these railroads, which makes it a very important partnership for both of us, for U.S. Steel and for us. And I think that was one of the primary considerations in the process of selection in that I think U.S. Steel had very high criteria in terms of how they selected who would they want to run these railroads over a long-term period of time. And they also do business with some third-party customers, although I would say principally, as a wholly-owned subsidiary of U.S. Steel, this has really been operated more for their own use. And I think our ownership will inject an element of looking at third-party opportunities and third-party revenues with a little more focus than has been the case in the past. So I think that from a commercial point of view represents a very interesting potential upside.
As I mentioned, it connects to all seven Class I railroads, so we become an important customer to all the major railroads in the United States, and sort of back to the days when we used to own RailAmerica and had 40 different short lines, we're going to be operating some high-volume short length operations, which we always found were the most profitable and the highest cash conversion, so if you operate a lot of rail cars over a short amount of track, it's probably the best business you could ever be in in the rail business, and that's what this really represents. As I mentioned, there's other properties that come along with this, which I would say we've attributed very little value to.
So it really is a case where once we get in there, if we can figure out something new, which is what we've done with Long Ridge and Repauno and Jefferson, we could have some real gems in here. But at this point, it's probably a little early to predict which ones or how that will unfold. Flipping over on page four, in terms of the deal, it's an exclusive contract. So all the rail operations have to be conducted through us for the next 15 years. U.S. Steel has an extension option of 10 years. And if it is extended for 10 years, it also continues the exclusivity part of that contract as well. During the first five years, there are some minimum volume and revenue protections for us. And we've got pricing that escalates during this period of time with the rail cost index.
And so it's very attractive from our point of view in that a long-term contract with a preeminent industrial company with downside protection and a lot of upside, I think, is how we would summarize how we look at this. In terms of the two plants, which I mentioned, the vast majority of the revenue and the carloads come from these two. Gary Works in Indiana is the U.S. Steel's showcase plant in the United States. It has annual capacity of 7.5 million net tons of steel, which is huge. And it's one of the leading steelmaking providers for the automotive, construction, and appliance markets, all of which are doing very well right now and forecast to continue to do well, be it from COVID recovery or from infrastructure spending, which out of Washington, it seems like it may happen.
And then Mon Valley is important as U.S. Steel prides themselves on being really a vertically integrated company and insulated from commodity price movements and that they move their own iron ore and coal. So Mon Valley is a very low-cost North American flat roll facility, the lowest cost of their portfolio and one of the lowest costs in the world. So that makes it a very important long-term investment for them. So summing up, just on slide five, we expect EBITDA of $80 million over the coming 12 months following the acquisition. There's low CapEx. I mentioned $5 million maintenance CapEx, a high cash flow conversion, and very high-quality rail that we've inspected and feels in great shape. So it's a terrific asset partnering by providing an essential service to the largest and lowest-cost production facilities of U.S. Steel, and it's a 15-year deal with exclusivity.
So we've got tremendous visibility and forecast and range of cash flow. We also expect to work with U.S. Steel in partnership. We've been spending a lot of time on various clean energy or clean fuel opportunities, spending time on R&D. We expect to share some of our thoughts and ideas with U.S. Steel over the coming months that would improve the ESG profile of both of our operations. Lastly, the categories where we have had success in the past at growing rail businesses include adding car storage, which they do none of right now. Allowing other people to store rail cars on open track is something where we see as sort of an easy, low-hanging fruit, as they say. We also could provide other third-party services in repair, cleaning, switching. Th+en right-of-way income.
Whenever somebody crosses the right-of-way that we would own, there's an income opportunity. And so all of these are from our past playbook, and we feel like these could be implemented pretty quickly and pretty easily. And in addition, we think there's some cost savings and operating efficiencies that could be gotten as well. So all told, and highly visible in terms of forward cash flow, long-term deal, preeminent partner, and highly accretive for FTAI and its shareholders. So with that, I'm happy to pass it back to Alan and open for questions.
Thank you, Joe. Josh, you may now open the call to Q&A.
Thank you. As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stay by while we compile the Q&A roster. Our first question comes from Chris Wetherbee with Citi. You may proceed with your question.
Yeah. Hey, thanks. Good morning, guys. Maybe touching on where you sort of left off with some of these other opportunities on the revenue side. You talked about non-freight. Maybe there's some other things with third parties that you guys can do. Any way to quantify what the potential upside would be, either from a revenue or an EBITDA perspective from some of those services?
I would say that without, I wouldn't say breaking a sweat, but something like that, it's $10 million-$20 million a year.
Okay. And that's revenue or EBITDA?
Revenue. But those are high. Those tend to be—if you look at storage or right-of-way income, those are basically 80% or 90% cash conversion, EBITDA conversion.
Okay. That's helpful. And in terms of the run rate to $80 million of EBITDA, how does that sit relative to pre-pandemic type of activity? And maybe looking at the volume over the last 12 months, where is that relative to what this business was doing from a volume basis, say, in 2019 or 2018? Just wanted to get a sense roughly of sort of where it is in sort of the recovery process.
Yeah. So I'd say it's slightly above pre-pandemic. But when you look at the LTM, the EBITDA was severely affected in Q2 and Q3 of last year. So if you take then the rebounded post-COVID numbers, it's actually very much spot on.
Yeah. Okay. Okay. That makes sense. And obviously, this enhances and adds a big piece to the infrastructure side of the business. Could you maybe talk bigger picture about how this transaction could impact your thoughts around splitting the company over time? Does it accelerate that process? Is this sort of the piece that you need on the infrastructure to get it half to kind of do that? Can you just talk a little bit sort of bigger picture about thoughts around the company?
Yeah. So the last conversation we had, I talked about enhancements, which is a plural. This is one. And there's another one that is probably not far behind. And I mentioned sort of trying to put those in place in Q2, laying out a more specific T&R, time and responsibility outline in Q3, and then hopefully being able to implement in Q4. And I think we're right on - no pun intended - but right on track.
Okay. Okay. That's very helpful. Thanks very much for the time this morning, guys. Appreciate it.
Thank you.
Thank you. Our next question comes from Devin Ryan with JMP Securities. You may proceed with your question.
Great. Good morning, Joe. How are you?
Good. How are you?
Great. First question just on the process here. I'm not sure how much you can share, but it feels like a reasonable price. And so I'd just like to maybe get a little more color for whatever you can share around how this came together. It feels like being an important strategic partner, I think you alluded to that, is kind of a critical component here of the selection process. So just the process between kind of the strategic buyers and financial buyers and why FTAI kind of came out ahead here.
Well, I would say you're right. This was not a typical process given the critical function that the buyer would be assuming. Because if the buyer doesn't operate properly, then it's going to have an effect directly on the seller here. So it was not a broad process for that reason. And I would say it was a very long process. So by comparison, it went on quite some time. Because of that reason, there was a lot to negotiate. It was very bespoke. And I think that's kind of the kind of thing we specialize in: long, complicated processes with very few people that qualify. And we hung in there. And I think it worked out. So I can't speak for the seller. I can just speak for our observations. But we feel like it feels like a win-win for both of us.
Okay. Thanks, Joe. And then just to follow up, this is a scale acquisition, at least in our mind, in terms of a big push in the rail as you guys have kind of taken a little bit of a step back. So I'm curious how you're thinking about kind of the bigger picture. Does this asset give you kind of another base to do more in the space in terms of potentially more consolidation or even thinking about bolting on ancillary services or capabilities? You guys have done a lot on the aviation side in terms of kind of that vertical integration and being creative, as I think you alluded to. And so I'm curious if this is now kind of another platform to think about innovating off of and maybe doing more consolidation as well.
Yes. I think this is a very different scale. I mean, the Central Maine & Quebec Railway, which we bought, was highly opportunistic. It was bought out of bankruptcy and operated up in Maine. We did as much as we could figure out to do there, but there's a limited amount of what you can do in Maine. So we decided it was probably more valuable to CP than it was to us. So that was a very different business. But if you go back to the RailAmerica days, we're going to be doing business with all seven Class I railroads. It'll make us an important counterparty. We always have liked the space, but we've been very disciplined, and prices have gotten pretty high. This one sort of fit on a lot of criteria.
But I do think it gives us a platform that is a reasonable entry point into the business that will now open up other opportunities. And so I think this is a long-term play that is different from the past, the Central Maine investment we made.
Okay. Great. I'll leave it there. I'll hand it off to someone else, but thank you.
Thanks.
Thank you. Our next question comes from Rob Salmon with Wolfe Research. You may proceed with your question.
Hey, good morning, and thanks for taking the question. Joe, you had highlighted about kind of $80 million run rate EBITDA that you're expecting in the presentation and in your prepared remarks. Can you give us a sense of how much of the step up in EBITDA is tied to lapping the big COVID declines versus some of the new revenue initiatives that you had talked about?
As I mentioned when I was talking to Chris's question, if you look at the most recent results and the post-COVID recovery, it's not much of a leap of faith to go from that to the $80 million, very little leap. So I think that the rest of it is, and to be fair, a lot of the upside of storage and right-of-way income takes time to implement. So we're not building in a lot in the first 12 months. But I think longer term, that's when you'll start to see it have a bigger impact.
Got it. That's helpful. And just so we can kind of conceptualize the volume volatility or revenue/earnings volatility, how should we think about the $60 million of EBITDA that the railroads generated during COVID, roughly, relative to kind of downside risk with the minimum contractual commitments that you have?
Well, I think—I guess the way I would say that is that at the depth of the COVID downside, the business was negatively impacted by probably 40%-50%. Some of that, obviously, was just pushed back and is now showing up. And some is lost forever. But that's kind of, and that's also part of having minimum volume commitments in place for the first five years. It reduces the volatility that way.
Got it. And when you divested the CMQR, you guys kind of retained the tank cleaning business. Is that something that you're going to be kind of lumping into the new railroad acquisition once it's completed? How should we think about that business looking forward?
Yes. You have a good memory. That's good. Yes. We like the tank cleaning business, and we've still been working on it. But this will give us an added boost, I think, to developing that business.
Sounds good. I'll hop back into the queue. Thanks for the time.
Thanks.
Thank you. Our next question comes from Ari Rosa with Bank of America. You may proceed with your question.
Great. Thank you, Joe, for taking the question. And maybe, Joe, you could give a little more context on why U.S. Steel is selling the asset, or rather kind of how the opportunity became available for FTAI. And then also, is management currently in place, or do you guys envision bringing in some of the previous executives that you've worked with at other short lines?
I'll take the last question first. I mean, yes, management is in place. They've always operated this as a separate standalone entity within U.S. Steel. So we've got a very good operating management team. I would say where Ken and I will probably focus is on developing third-party commercial opportunities. And management has never really been given that mandate. So it's sort of a new start for that. So I think Ken and I will work with them and do some of the similar things we did at RailAmerica and Florida East Coast. But the management team is coming with it and is very good and intact. So we don't really have any issues there. What was the first one? I forgot.
It was just kind of how the opportunity became available to FTAI and then why U.S. Steel is looking to sell against or partner with you guys.
I mean, if you go way back, U.S. Steel had a very big rail business. Transtar was actually sold in pieces over time back into the early 1990s. They have been selling off their rail business because typically rail trades at a higher multiple than steel. It's really from their point of view just monetizing assets so they can reinvest in the steel business. They sold the EJ&E. The initial Transtar was sold. Great Lakes Transportation was sold to Blackstone. Then that was sold to Canadian National. EJ&E was sold to Canadian National. It's been happening for quite a while. This happens to be the last piece. It's always been on our radar. When the process started, we got involved because we knew the assets. We knew the people. We felt like it was a good fit.
We had the capability to manage it. I think that was one of the criteria that probably knocked out quite a few people because we had the track record to be able to partner and run it competently. So we have a great safety record and a great record of investing in railroads. So I think it felt like it fit. So really the only issue from our point of view became price.
Got it. Understood. That's really helpful context. And then maybe you could just give a little, obviously, it's going to be important thinking about kind of the trajectory of the future success, I guess, of U.S. Steel is going to be integral to the success of this acquisition. Maybe you could give some context on how you're thinking about that as we think about kind of 10 or 15 years out. Or alternatively, is this an asset that you think you guys will hold for a couple of years and then look to kind of sell and monetize again yourselves?
No. I think we're in this for the long haul, and we like the position of these two, the two primary operations are Gary and Mon Valley. And we like the position in the industry of both of those facilities, so I think that it's a long-term investment. We see those as being competitive, and clearly, the steel industry is in a very strong position right now. And we expect that to continue for several years, and these facilities are very well positioned for the very long term. But as I mentioned, the world is, people are focused on ESG and CO2, and so it's incumbent upon us not to just look, not to pay attention because we just have five years of revenue projections, but look out for the next 20, 25 years and make sure these facilities are the most competitive in the United States and in the world.
Be mindful and be working towards that from day one.
Okay. Great. Thanks for the time, Joe.
Yep.
Thank you. Our next question comes from Justin Long with Stephens. You may proceed with your question.
Thanks. Congrats on the deal. I wanted to follow up on the cost-saving and operating efficiency opportunity. I don't know if you've quantified that yet. I think earlier you quantified what the non-freight revenue opportunity could look like. Any color you could give us on the cost-saving opportunity as well and how much of that is baked into the $80 million of year one EBITDA you're expecting?
So I think we would today, it's sort of and if you think about other railroads, it's in sort of the mid-60s in terms of operating ratio. And everybody is readjusted and recalibrated. And I think we could do the same and target a closer to 50% OR. So I think that's kind of the magnitude of where that should be if it were sort of best in class. And we don't see why it shouldn't be. It's a short, as I said, it's a high-volume, short operation, which is, in our experience, those are the best railroads to operate. So we should be there over time.
Okay, and I know you gave the outlook for $80 million of EBITDA in year one, but you kind of put all these pieces together around the non-freight opportunity, the cost-saving opportunity, the growth you expect in the business. Any thoughts on kind of the three-to-five-year EBITDA outlook?
I will let you do that. It's still pretty early on. I think I'll save that for a future call.
Fair enough. And I'll close with one last quick one. So Joe, I think at the beginning of the call, you talked about $5 million of maintenance CapEx. Anything you could share on growth CapEx expectations going forward?
It will be a function of, I think, what we can uncover and develop at these additional four railroads. So there's some interesting railroads in here. We haven't spent a lot of time on them yet. And what we typically do is brainstorm and try to look at the locations and figure out what sort of industrial development activities can we attract? Could we invest in other businesses that might use the railroad? So we have not really started that process yet. But that's where the upside, I think that's where the growth CapEx largely would come from. And these are four railroads. And as we always love the fact that you really don't make new railroads, right? So you've got four that are in place. And we've always found things to do that other people might not have seen. So we're hopeful.
But it's a little bit early to, and the numbers really depend on, as I said, what our level of involvement is. Are we just facilitating somebody coming in? Are we building next to them? Are we using the railroad in a way where we can do both, invest in something new and grow the railroad?
Okay. I'll leave it at that. Thanks for the time.
Thanks.
Thank you. Our next question comes from Frank Galanti with Stifel. You may proceed with your question.
Great. Thank you very much. I wanted to ask about the capital needs for this acquisition. I know you guys have the bridge financing in place. But looking longer term, I guess what percentage of leverage do you think this type of acquisition could handle?
Well, typically, if you're looking at a double B rail, it would be in the neighborhood of four-to-five times EBITDA. That would be kind of what historically, where I remember RailAmerica, Florida East Coast was a little bit higher than that. But that's where I would say you'd want to be. You could go a little bit higher given that it's a 15-year deal with minimum volumes. But I think that's a reasonable number.
Okay. That's helpful. And then does this, so you'd mentioned that second potential infrastructure deal. And I guess it's just more of a broader question in terms of where cash flow is going today between infrastructure and aviation. Is there a preference? I guess you just speak to that, where you're seeing opportunities and where you want to put cash flow to work today.
As I always say, it's like which child do you like more? We like both aviation and infrastructure. They're obviously different businesses. But we see very good investment opportunities in both. Obviously, the aviation recovery is underway. We've given guidance on that this year for a meaningful uptick in third and fourth quarter. The infrastructure, as I mentioned, the businesses that we had been building are all turning into operating companies now. This is a big year for that transition. We see significant growth. This will add a meaningful amount of EBITDA to that number in an immediate way, which is one of the things we really liked about the deal, is that this is not a three-year build, which we've done in other cases. This is more like a sale-leaseback. We're going to get the income immediately.
So this complements that development opportunity in a really positive way. So I think it fits together quite nicely.
Yeah. That's super helpful. That's all I had. Thanks.
Thank you. Our next question comes from Giuliano Bologna with Compass Point. You may proceed with your question.
Good morning, and thanks for taking my questions. I'd be curious, as you think about the opportunities, you've mentioned kind of somewhat of a two-step process where this being one of the steps in the process. For the other stuff, I'm curious if you're looking at more acquisition-related opportunities on the infrastructure side or if you're really thinking about more contracting some of the existing assets and scaling some of your existing assets.
It's the latter. It would be contracting an existing asset, is what we're targeting. And so the two parts, one is this would be an acquisition. The other would be contracting an asset we already own. Those would be how I would characterize the enhancements.
That makes a lot of sense. And this is a little bit of a. Let me clean up, just make sure I have it right on my side. I think you guys still own the short line at Jefferson. And if I'm not mistaken, I think you may have pushed the operations out as part of the sale of CMQR. But I guess, is there any opportunity there to kind of bring some of the operations in-house if you have a scaled operator? Or sorry, you got Long Ridge.
I think you're referring to Long Ridge, where we retained the short line at Long Ridge, but we sold half of Long Ridge to Grosvenor, GCM Grosvenor. I keep saying CMQR. But GCM Grosvenor, about half of Long Ridge, including the short line there. So we own half of that short line, which we've retained, and I think that's a good business. We do a fair amount of frac sand and some salt at the Long Ridge terminal. So it's a positive contributor, not a huge business, about 10 miles in length. But that's what we currently own.
That makes sense. Then kind of the final one is that I think historically, the way that it's been framed is that in order to split the businesses, what you really want to achieve was standalone businesses that were a billion-plus on either side. This acquisition obviously gets you a lot of equity capital. If you have $80 million EBITDA, you don't need a huge multiple on it. You also have the power plant coming online, hopefully, in the very near term. And if you have some expansion opportunities at Jefferson, for example, you should have a lot of EBITDA. I'm kind of curious if you think this is what gets you to that level where everything is—you have the floatable entity that is large enough on a standalone basis to complete the split.
Yes. Well, as I mentioned, I thought we could have done the split even without this. But that's why I called it an enhancement. And this is one of two. So I think that we feel good about getting those done and then moving forward towards sort of making it happen.
That's great. Thank you for the time, and I'll jump back into queue.
Thanks.
Thank you. And as a reminder, to ask a question, you'll need to press star one on your telephone. Our next question comes from Josh Sullivan with The Benchmark Company. You may proceed with your question.
Hey, good morning, and congratulations on the transaction here.
Good morning.
Yeah. Just one question that's been asked. But you've been very active on the ESG front with the hydrogen power project. Just can you expand on the comments on improving the ESG profile for U.S. Steel? Can you dig into that? Do you see that as a meaningful opportunity? Or is that a nice-to-have?
I think it's meaningful. It's something we're very excited about in terms of we've spent time on many different technologies that are developing in either recycling or carbon capture or clean fuels. And clearly, this is one of the big companies in the United States and one of the industries in focus. And so I think it gives us a great opportunity to test some of these products and ideas out.
Got it. And then maybe just one. I mean, is there any joint ventures or holes you see needing to fill down the road? Or do you see most of those growth opportunities you're talking about as internal organic investments?
I don't see any joint ventures that we would need to do. But I also think that there are sometimes joint ventures that make a lot of sense. And we're always open to that. We have some discussions going on with Repauno right now because we have a great facility on the East Coast of the United States that can access and export markets for LPGs. But we don't handle a lot of LPGs across the United States. So there's some opportunity there that would be complementary and additive. So we're always thinking about what we have and what other people have. And can you make more out of that than by just being a standalone? But we don't feel that there's anything we have to do. It's really just a question of whether there's additional value that we can obtain.
Got it. Thank you for the time.
Thanks.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Alan Andreini for any further remarks.
Thank you. Thank you, Josh. And thank you all for participating in today's call. We look forward to updating you again after Q2.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now.