Arcosa, Inc. (NYSE:ACA) Q3 2023 Earnings Call Transcript

Arcosa, Inc. (NYSE:ACA) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. Third Quarter 2023 Earnings Conference Call. My name is Shelby, and I will be your conference call coordinator today. As a reminder, today’s call is being recorded. Now, I would like to turn the call over to your host, Erin Drabek, Director of Investor Relations for Arcosa. Ms. Drabek, you may begin.

Erin Drabek: Good morning everyone and thank you for joining Arcosa’s third quarter 2023 earnings call. With me today are Antonio Carrillo, President and CEO; and Gail Peck, CFO. A question-and-answer session will follow their prepared remarks. A copy of yesterday’s press release and the slide presentation for this morning’s call are posted on our Investor Relations website, ir.arcosa.com. A replay of today’s call will be available for the next two weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for one year on our website under the News and Events tab. Today’s comments and presentation slides contain financial measures that have not been prepared in accordance with GAAP.

Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. In addition, today’s conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company’s SEC filings for more information on these risks and uncertainties, including the press release we filed yesterday and our Form 10-Q expected to be filed later today. I would now like to turn the call over to Antonio.

Antonio Carrillo: Thank you, Erin. Good morning. Thank you for joining us to discuss our third quarter results and outlook for the remainder of 2023. Please turn to Page 4. Arcosa generated double-digit growth in revenue and adjusted EBITDA normalizing for the divestiture of the storage tank business. Our solid financial results underscore the resilience of our diversified portfolio and the enhanced operating leverage in our cyclical businesses as production volumes improve. Starting with Construction Products. Strong pricing and recovery in natural aggregates volumes drove 9% adjusted EBITDA growth. We made progress on our improvement plan for specialty materials and margins for the business increased sequentially. I am pleased to announce that we recently closed on three bolt-on acquisitions in Construction Products.

In September, we acquired a stabilized sand producer, enhancing our presence in the fast-growing North Houston market. Following quarter end, we acquired two recycled aggregate producers, expanding our presence in Phoenix and entering the Florida recycled market. Our newly acquired businesses in Florida has six locations, predominantly in Central Florida from Orlando to Tampa. Combined, these three acquisitions represent an investment of approximately $41 million at an attractive multiple of roughly seven times EBITDA. We continue to have an attractive pipeline of additional bolt-on opportunities. Engineered Structures revenue increased. Segment profitability was below our expectations. Our utility structures business was impacted by several headwinds, including a shift in production mix, that certain high-margin orders were delayed to 2024 as well as an unfavorable foreign currency impact.

Additionally, we experienced operational challenges, including equipment downtime, which required the outsourcing of some processes at higher costs. During the quarter, we began implementing correcting actions that enabled initial margin improvement in the month of September. On the positive side, our wind business performed well in the third quarter even as production volume remained relatively low. With our continued focus on driving operational efficiencies, we anticipate our wind business will be profitable on an EBITDA basis for the year before considering the net benefit of tax credits. This forecast compares favorably with our earlier expectation for breakeven EBITDA performance for 2023. Transportation Products generated strong results, driven by volume and pricing growth in both barge and steel components.

While the barge order intake during the quarter was modest, inquiries continue to be healthy. And our backlog nearly doubled on a year-over-year basis, providing production visibility well into 2024. In summary, I am pleased with our solid year-to-date financial performance. We have continued to advance our strategic priorities, expanding our growth business both through M&A and organic projects. At the same time, we’ve positioned our cyclical businesses to capitalize on the expected improvement in market fundamentals next year. Finally, our balance sheet and liquidity position remains strong, providing flexibility for capital allocation. Gail will now provide detail on our financial results for the quarter, and I will return to discuss our updated outlook.

Gail?

Gail Peck: Thank you, Antonio. I’ll begin on Slide 11 to discuss our third quarter segment results. Starting with Construction Products, revenues increased 7%, driven by higher pricing across our construction aggregates and Specialty Materials businesses, a recovery in volumes in natural aggregates as well as organic volume growth and acquisition-related contribution in trench shoring. Adjusted segment EBITDA increased 9% year-over-year, reflecting strong pricing gains and reduced inflationary cost pressures. Freight adjusted segment EBITDA margin was flat, as higher margins in natural and recycled aggregates were offset by lower margin in Specialty Materials. Turning to natural aggregates, pricing momentum remains strong across our markets with average organic pricing up high single digits on a freight-adjusted basis, led by our West region.

Third quarter natural aggregates volumes increased by high single digits, driven by strong growth in our Gulf Coast and Texas regions, partially offset by modest declines in our West and Ohio River Valley regions. Favorable pricing and lower inflationary costs, particularly for diesel, resulted in year-over-year margin expansion. In recycled aggregates, we continued to focus on value over volume. Pricing was up significantly in the third quarter, driving year-over-year margin expansion despite a decline in [indiscernible] Within Specialty Materials, overall demand remained healthy, particularly for our industrial and flooring faster and lightweight aggregates. Pricing gains were solid for these product lines. While multifamily starts have receded from peak in some markets, our customers’ backlogs are strong and plaster supply remains constrained.

Third quarter margins decreased year-over-year, but improved significantly from the second quarter as we made progress on our operational improvement plan and increased throughput. We remain focused on driving continued margin improvement in this business. Finally, revenues in our trench shoring business grew 25% on higher organic volumes as well as contribution from the Houston acquisition that closed earlier in the year. Margins also expanded slightly and our backlog and inquiry levels remain supportive of growth in 2024. Moving to Engineered Structures on Slide 12. Adjusted segment EBITDA declined 6% and margins were 140 basis points lower year-over-year, normalizing for the storage tanks divestiture. Our Wind Towers business performed well and benefited as anticipated from $5.6 million of net AMP tax credits, which more than offset the impact from lower wind tower volumes.

Results for our utility structures business were below our expectations, although revenues grew at a solid double-digit pace, led by strong unit volume growth. Several factors impacted segment profitability during the quarter. There was a shift in product mix as certain higher-margin projects were pushed into 2024 and were substituted with lower margin bid work. From an operational standpoint, equipment downtime at several locations resulted in additional expense and production inefficiencies. Lastly, a stronger peso impacted the profitability of our manufacturing operations in Mexico. The peso began appreciating relative to the dollar earlier in the year and was up more than 15% in the third quarter compared to year ago levels. In prior quarters, we overcame negative currency effects through operating efficiencies.

Turning to our backlog. We ended the quarter with combined backlog for utility wind and related structures of $1.5 billion, approximately in line with the second quarter as order activity and utility structures kept pace with shipments. Moving to Transportation Products on Slide 13. Segment revenues were up 30%, driven by volume growth and improved pricing in both our barge and steel components businesses. Adjusted segment EBITDA more than tripled with margins reaching a three-year high. This significant improvement was accretive to our consolidated margin, reflecting the significant operating leverage in these businesses. We received barge orders of $21 million, predominantly for hopper barges, representing a book-to-bill of 0.3. We ended the quarter with total barge backlog of $240 million, approximately 75% of which we expect to deliver during 2024.

I’ll conclude on Slide 14 with some comments on our cash flow and balance sheet position. We generated $44 million of operating cash flow during the quarter, which was down year-over-year due to a $29 million increase in working capital, primarily driven by high overall volumes and the timing of collection of receivables. We anticipate a moderation in working capital needs in the fourth quarter, but our expectation is that working capital will be a use of cash for the full year. As we continue to make progress on the organic projects underway and construction products and engineered structures, net capital expenditures were $42 million during the quarter, an increase of $12 million year-over-year. Third quarter free cash flow was $2 million.

With one quarter remaining, we have tightened our full year CapEx range to $200 million to $210 million. We ended the quarter with net debt to adjusted EBITDA of one time and available liquidity of $633 million. During the quarter, we amended our credit facility to increase our revolver from $500 million to $600 million, extend the maturity date to 2028 and repay in full our $135 million term loan. Pricing and financial covenants remained unchanged. Our healthy balance sheet and liquidity continue to provide ample flexibility to pursue disciplined capital allocation. I will now turn the call back over to Antonio for an update on our outlook.

Antonio Carrillo: Thank you, Gail. Arcosa continues to perform well and is on track to generate double-digit growth in both revenue and adjusted EBITDA for 2023. Please turn to Slide 16. Given our solid year-to-date performance and our visibility into the fourth quarter, we are confident in our 2023 revenue and adjusted EBITDA guidance. At the midpoint of our guidance ranges, we forecast 11% revenue growth and 30% adjusted EBITDA growth on a year-over-year basis, normalizing for the storage stack divestitures. Consistent with our prior guidance, our 2023 adjusted EBITDA forecast assumes estimated wind-related net tax credits of between $17 million and $22 million, pending final clarification from the IRS. Please turn to Slide 17 to review the outlook for our growth businesses.

In Construction Products, pricing across our portfolio has remained strong. Public construction activity is accelerating at both the federal and local levels, and we are seeing healthy demand in multifamily, nonresidential and heavy industrial construction. Although volume in single-family residential has stabilized in recent months, the near-term outlook for this specific market is less clear, given higher mortgage rates. In Engineered Structures, market fundamentals remain positive, as major growth drivers are intact. Utilities continue to allocate significant CapEx towards grid hardening initiatives, an infrastructure that connects renewable sources to the grid. In addition, road infrastructure spending continues to fuel demand for our traffic structures products.

In telecom, we have seen order softness due to carriers reducing CapEx pending — following significant levels of 5G investment. Overall, order activity and backlog visibility remains strong, reinforcing our positive view. As I mentioned before, we are already executing on the improvement plan to increase our margins and are seeing early signs of progress. We expect margins to improve in the fourth quarter, even though some equipment will not be operating at 100% capacity. Let’s turn now to our cyclical businesses, starting on Slide 18. Aided by incentives from the Inflation Reduction Act, the wind industry is expected to enter a multiyear up cycle. In this environment, we’re making necessary preparations across our footprint to optimize production capacity.

Our new brownfield facility in New Mexico, we’re staffing deep plant personnel and working on building modifications. Our expectation remains that we will deliver towers from this facility starting in mid-2024. In addition to these efforts, we are making incremental investments across our existing plants to further enhance our manufacturing efficiency and flexibility. During the third quarter, we were pleased to receive a small qualification order from a new customer for two towers, with delivery expected late 2024. We continue to have productive conversations with our customers for additional projects with deliveries beyond 2024. We remain confident in the growth outlook for the wind tower business, which serves only the onshore market. While order fulfillment is complex and requires time to negotiate our backlog of about $1.1 billion, supports our expectation for increased production volumes and strengthen profitability next year.

Turning to Slide 19. Our Transportation Products segment performed well in the third quarter, with the barge business still in the early stages of a cyclical upturn. Barge backlog at the end of the quarter was up 87% on a year-over-year basis, underscoring the growing demand for our barges and strengthening our production visibility into 2024. While we remain confident in the midterm outlook for this business, some customers recently have delayed purchasing decisions. Unusually low water levels on the Mississippi River system, which should be temporary and higher interest rates, weighted on the demand for the quarter. We do not believe these concerns are reflective of the fundamental shift in customer sentiment. In this environment, we have taken action to maintain our manufacturing flexibility, and we continue to have strong visibility into our production schedule for 2024.

In closing, our cost is well positioned for continued growth in the fourth quarter and into 2024, with significantly improved visibility in our cyclical businesses, while our growth businesses benefit from healthy pricing and demand environment. We’re confident in our outlook. We remain focused on the execution of our strategy and strengthening our capabilities to deliver on the many growth opportunities across our portfolio. Before I open the call to questions, I want to recognize all the Arcosa team for their hard work. Yesterday was our fifth anniversary as an independent public company, and it is easy to forget how much this company has changed in just a short period of time. We have come a long way, we convinced that the best is yet to come.

I also want to thank all the Arcosa stakeholders, our employees, customers, investors and suppliers for their support and confidence during these 5 years. Now, I would like to open the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And we’ll take our first question from Garik Shmois with Loop Capital.

Garik Shmois: Hi thank you. Wondering first up on Construction Products. You said the some volume growth, which is stronger than we had anticipated, recognizing you had some favorable geographic mix. But just wondering if you could maybe a little bit more detail by end markets? And what you were seeing that was driving some of the volume gains?

Gail Peck: Sure. Good morning Garik, this is Gail. I’ll take that. Yes, we were pleased. As we mentioned in my comments, volumes for natural aggregates were up high single digits. That’s the first volume increase we’ve seen really in about a year. So, to your question, looking at the markets, the volumes were up in Texas. If you recall, we said volumes were flat in the second quarter. So seeing some continuation of positives there. Certainly, positive lettings in the state. Non-res doing well. And resi is okay. We’re seeing some new neighborhoods in the North and South DSW area. So, we were encouraged by that. We did have a new greenfield in Texas that we didn’t have last year that is performing well. And we had good stabilized volumes down in Houston.

In the Gulf region, we also had volumes up. They were up in the second quarter as well. LNG and refinery project work is healthy. DOT work is healthy. There’s a limited gravel availability in the Gulf Coast that’s also helping our volumes. Where we did see volumes down, as I mentioned, was in the Ohio River Valley in the West, but they were down slightly. So we did see volumes up sequentially. So, we’re encouraged. It’s early. As I said, it’s the first quarter in the year, but we’re encouraged with what we’re seeing from a volume perspective.

Antonio Carrillo: One thing I’d like to mention that it was told me in my remarks, but I think we also had during the quarter across our portfolio in the US, a significant disruptions from the heat that we experienced throughout the country. And when we have a significant amount of hot base here in Texas specifically, and that slowed construction a lot. And it creates all sorts of impacts across our portfolio, even in a plant turnover increased, absenteeism increased. So, I think we saw during the quarter, and this is just — I don’t have a number to give you for — but I think that this third quarter had quite of an impact related to weather.

Gail Peck: Yes and maybe just to add on to that a little bit more color. The weather side, we probably saw that even more pronounced in our recycled aggregates business. We did see volumes down and recycled in the Dallas-Fort Worth area in the quarter.

Garik Shmois: Understood. Thanks for all the detail. I wanted to ask, just on the acquisitions that you had announced, recognizing they’re relatively small, but wondering — particularly interested actually on the entrance into Florida. Do you think that this could be a new platform for you? Or is that opportunity just a bit of a one-off and an opportunistic acquisition more than anything?

Antonio Carrillo: We had a small operation already in Florida that came with our Stone Point acquisition a few years ago. So it’s a market that we really like. There’s not a lot of consolidation, especially in the recycled side. But we do see — once we enter into a market, we start seeing our pipeline increase. We just simply get more calls from local small companies that are interested. So, it is a platform that we want to develop. It’s in a market we’re really interested in. And we already have additional opportunities in the pipeline.

Garik Shmois: Got it. Last question for me. Just on the project delays and utility structures. Any visibility as to what was driving that and potentially the timing of when the volume ships, recognizing it’s probably more of a 2024 store?

Antonio Carrillo: Yes, I’ll tell you, I wouldn’t say it’s only utilities. I would say you will see this as — I mean the industry is hot. The demand is very, very strong. just like we’re seeing with wind towers, where sometimes projects get announced and there’s a lot of noise around them. When projects start hitting the ground, you face reality and even though people say, well, now there’s more layoffs happening and things like that. The reality is that in the blue collar labor force, there has not been a shortage of jobs. So there’s still — it’s hard to get people permitting for transmission power for wind tower farms, for all these things is taking time. So the way I would think about this — our growth is not going to be a straight line. I think we’re going to see these ups and downs as we get — go through this bottlenecks that we have to be breaking as we grow. So that’s — to me, that is the biggest deal — the biggest issue happening.

Garik Shmois: Understood. Thanks for that and best of luck.

Antonio Carrillo: Thank you.

Operator: And we’ll take our next question from Trey Grooms with Stephens.

Trey Grooms: Hey good morning Antonio and Gail.

Antonio Carrillo: Good morning.

Trey Grooms: I guess I wanted to touch on sticking, Construction Products here. Pricing has been strong. It sounds like generally, the outlook in the market is that 2024 could be another good year for pricing. Is there any color that you could give us on how you’re thinking about your pricing outlook on the construction product side of the business?

Antonio Carrillo: The — I think what you hear from our peers and our competitors is similar to what we were trying to do. I think we have pricing out increases right now. We have another pricing increase for January. We’re going to try to continue pushing pricing and prioritizing pricing over volume. We will see some areas where we can get both, and that’s going to be great. But we’re going to be trying to focus on maximizing our margins. And even though — again, people say, well, inflation is down, yes, but still natural gas picking back up a little bit. And the inflation is not completely under control. So we have to continue to push our pricing.

Trey Grooms: Yes. Yes. All right. That makes sense. And I guess on speaking of costs, you mentioned elevated costs in Specialty Materials. And it sounds like that’s getting a little bit better, but is that going to be still kind of be a factor going forward? And I guess I’ll just stop there.

Antonio Carrillo: Yes. So Specialty Materials, we mentioned in the second quarter, we had a really, really bad second quarter for Specialty Materials. Lots of actors came in and — but I would say more — there is a cost factor there, but I would say it’s more a throughput factor. When you look at — the plans for specialty materials are much more complex their industrial plants. And we had some maintenance issues and other things that — a lot of absenteeism and turnover during the second quarter. That’s improving. We are — we were able to keep our people much more. Our plans are improving quite a bit in terms of Gail mentioned, we had a significant improvement in Specialty Materials, pretty significant improvement in the third quarter.