Good morning, ladies and gentlemen and welcome to Arcosa Inc.'s Third Quarter 2021 Earnings Conference Call. My name is Corlas 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.

Good morning, everyone, and thank you for joining Arcosa's third quarter 2021 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 www.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.

Thank you, Erin. Good morning and thank you for joining today's call. Starting on slide four. Having just passed our third anniversary as an independent public company, we are pleased to report strong third quarter results, which reflect the success of the efforts we have undertaken to build our business in attractive markets. Our costs have generated double-digit growth in third quarter revenue and adjusted EBITDA, led by gains in both our Construction Products and Engineered Structures segments, more than offsetting lower year-over-year results in Transportation Products. Now, I'll discuss several key takeaways from our third quarter. The evolution and transformation of our portfolio towards faster growth higher margin businesses is evident in our record third quarter results and I'll provide additional context on the following slides. Construction Products continues to experience healthy market fundamentals, supported by contributions from both organic initiatives and recent acquisitions. Order activity within our Utility Structures and related product lines was healthy during the quarter and we were pleased to receive approximately $175 million of wind tower orders. We continue to manage inflationary pressures, mitigating the impact through proactive price adjustments in most of our businesses. High steel prices remain a headwind to order volumes in our barge business and to a lesser extent in our wind tower business. As we look forward to the fourth quarter of 2021 and into 2022, we continue to see favorable market drivers in our Construction and Engineered Structures businesses supporting our outlook. At the same time, our wind tower and barge business continue to face short-term headwinds. Please turn to slide seven. Since becoming an independent public company, we have generated strong revenue increases and margin expansion through the successful execution of our strategy. We have been able to grow even when some of our larger and more cyclical businesses are navigating at the bottom of their cycles. Over this time frame, our third quarter adjusted EBITDA has increased at a 21% compounded annual growth rate, while we have improved our margin by 240 basis points or nearly 20%. We have achieved this through the evolution of our portfolio towards faster growth and higher-margin businesses and by improving operational efficiencies. Please turn to slide eight. Today, Arcosa is a fundamentally stronger, more focused and more resilient company. In just three years, our Construction Products business has expanded organically and through acquisitions to represent nearly 60% of our adjusted EBITDA in the third quarter. Equally important, Construction Products represents our highest margin business, elevating Arcosa's overall margin potential. We also have successfully expanded our Engineered Structures business and reduced our reliance on wind towers via operational improvements and the expansion into adjacent products with positive market fundamentals. Together, the investments we have made in the Engineered Structures and Construction businesses have produced a more resilient company focused on attractive infrastructure markets. Turning to slide 9, I would like to remind you of our long-term strategy. I am proud of the substantial progress we have made as an organization in advancing our long-term vision in these three years. We have been able to make significant progress despite some of our more cyclical businesses being near the bottom of their cycles. The acquisitions we have made have created a stronger, less cyclical company with much higher growth potential. As we discussed on our last call, having completed two sizable acquisitions already this year, StonePoint and Southwest Rock, we intend to focus our near-term efforts on integrating these businesses, executing on organic opportunities and simplifying our overall portfolio to reduce the complexity of Arcosa. We look forward to sharing some additional progress on future calls. I will now turn over the call to Gail to discuss our segment performance and then I will return to update you on the outlook of the business.

Thank you, Antonio. I'll start on slide 11 and touch briefly on Arcosa's consolidated results before moving on to the segment discussion. As Antonio mentioned, we delivered double-digit revenue and EBITDA expansion led by our growth businesses. Like other companies, we are monitoring inflation, supply chain disruptions and COVID and its impact across our portfolio of businesses. The positive news is we have been proactively raising prices to mitigate the impact on our overall margins. Our consolidated EBITDA margins remained relatively flat during the quarter compared to year-ago levels. Turning to Construction Products on slide 12. Revenues grew 55% and adjusted EBITDA increased 48%, led by acquisition and organic contributions. Segment EBITDA margin increased 190 basis points sequentially from the second quarter to 24%, but decreased from 25.1% in the prior year. Construction activity was strong overall in the third quarter. In our natural aggregates business, the additions of StonePoint and Southwest Rock increased our volumes and we saw a healthy organic increase as well. We experienced pricing gains across most markets supported by strengthening product demand and attractive fundamentals. Looking at Texas, North and Central Texas had strong volume growth, driven by consistent residential demand and a healthy pipeline of project work. In Houston and along the Gulf Coast, volume was impacted by weather, but was up overall in the quarter. We are seeing some lingering impacts from Hurricane Ida on volumes in Louisiana as ongoing storm recovery efforts are impacting truck driver availability. Our recycled aggregates operation continues to perform well and is a nice complement to our natural aggregates platform. Turning to Specialty Materials, revenues and EBITDA were higher year-over-year driven by pricing gains on roughly flat volumes. The demand outlook remains favorable looking across the diverse end markets we serve with a portion of current volumes being impacted by construction delays. We were pleased to see another quarter of strong revenue trends in our trench shoring business, which is performing at pre-COVID levels. Overall the segment delivered strong performance in the third quarter. Looking at segment margins, the team did a good job mitigating fuel and raw material inflationary pressures, as we are focused on remaining diligent. While accretive to Arcosa's overall margin, StonePoint's margins are currently dilutive to the segment and that contributed to the year-over-year decline. Turning to Engineered Structures on slide 13. Revenue increased 12% and adjusted EBITDA increased 13% to $32 million, resulting in roughly flat margins compared to last year. On the positive side, our utility structures business performed well with higher sequential and year-over-year EBITDA and margins from improved mix, our successful efforts to mitigate high steel prices and increased throughput. Our storage tank product line in the US and Mexico is also a bright spot with 48% higher revenue during the quarter and higher margins year-over-year. We benefited from strong residential and commercial demand for propane tanks. As a primarily build to stock business, we continue to closely monitor steel prices and have been successful thus far passing through increases, as the demand environment remains conducive. Strong results from these businesses were partially offset by lower wind tower volumes and margins in the quarter as expected. As a reminder, second quarter revenue and EBITDA were helped by a $7.7 million favorable resolution of a customer dispute. As we mentioned in yesterday's release, we are taking additional steps in the fourth quarter to align our wind tower capacity with near-term demand uncertainties. During the quarter, we were also impacted by operational challenges in our traffic structures business as we ramped up to meet higher volumes. We expect segment EBITDA margins of approximately 10% in the fourth quarter for Engineered Structures below our target range. I'll wrap up Engineered Structures with some comments on our backlog visibility and the order environment. At the end of the quarter, the combined backlog for utility wind and related structures was approximately $466 million, up from approximately $349 million at the end of the second quarter driven by a strong 1.6x book-to-bill. As Antonio mentioned, we received a large wind tower order during the quarter for 2022 production, where previously we had none. The order has low expected profitability but provides a base level of production visibility. During the quarter, the combined order activity for utility and related structures was healthy keeping pace with strong year-over-year revenue increases and underpinning our positive outlook for these businesses. Moving to Transportation Products on Slide 14. Both revenue and adjusted EBITDA were significantly lower year-over-year, primarily due to a 41% decrease in barge revenue and lower utilization. While still operating at trough volumes, we are pleased to see year-over-year revenue improvement in our components business marking the first quarter of growth since our spin-off as conditions in the North American rail industry slowly improve. Steel prices continue to suppress new order volumes in our barge business. We received orders of $50 million representing a book-to-bill of just under 1x on a low level of revenues. Pricing of new orders reflects weak market conditions with orders adding to our base level of production in 2022. Our backlog was approximately $130 million for our barge business at the end of the quarter with roughly $86 million scheduled for delivery in 2022. The idling of our Madisonville Louisiana plant was delayed slightly due to Hurricane Ida and was completed in October. Our backlog provides continuity for our two open facilities into next year, while we remain flexible for an anticipated recovery. Turning to our Components business, we were pleased to see third quarter railcar orders for the industry exceed bookings for the third consecutive quarter and the number of idle railcars in storage continue to decline. Third-party expectations continue to point to higher industry deliveries next year. Wrapping up on Slide 15, I'll conclude with a few comments on our balance sheet liquidity and free cash flow. As we discussed previously, we used cash on hand and $100 million of borrowings under our revolving credit facility to fund the Southwest Rock acquisition that closed in August. We ended the quarter where we expected from a leverage standpoint with net debt to adjusted EBITDA of 2.3x. We continue to maintain a healthy liquidity position and have no material near-term debt maturities. We generated approximately $6 million of free cash flow during the quarter which came in below our expectations due to a higher use of working capital. Working capital was a $34 million use of cash during the quarter primarily due to an increase in accounts receivables. A portion of the increase was due to timing as we had certain customers delayed payments at the end of the quarter which have subsequently been collected. However, most of the increase reflects higher sales volumes in our utility structures business. For the fourth quarter, we expect working capital to be a source of cash. Based on year-to-date CapEx investment of approximately $61 million, we now see full year CapEx of approximately $90 million to $100 million about $20 million lower than our previous range. We continue to see attractive opportunities to deploy capital organically and our range reflects a slightly higher growth CapEx outlook for the year. Our expectation for maintenance cap is lower, generally driven by long lead times for equipment, the decision to lease certain equipment versus buy and overall timing. I will now turn the call back over to Antonio for a more discussion on our business outlook.

Thank you, Gail. Turning now to the near-term outlook on Slide 17. We believe our Construction Products and Engineered Structures businesses are well-positioned for continued growth in the fourth quarter with market challenges within our barge and wind tower business moderating these expected gains. First, we anticipate our Construction business will benefit from favorable market fundamentals with strength expected to continue in our key markets: Texas, Gulf Coast, Arizona and Tennessee. Infrastructure spending trends overall remain positive and we see potential near-term upside in this business from increased federal funding above existing FAST Act levels. As we continue to integrate the acquired companies and streamline our operations, we recently sold the assets of an asphalt operation, which came with StonePoint and was determined not to be strategic for Arcosa. Within the Engineering Structures, positive market fundamentals continue to drive strength from several key markets including electric transmission, wireless communication, traffic structures and storage tanks. We're very excited about the fundamental strength of these markets. At the same time, our wind tower business faces near-term challenges. We believe renewable energy has a very attractive future. However, high steel prices and uncertainty around the tax incentives are delaying customer orders in some regions. Given the short-term headwinds, we are taking actions to appropriately manage costs including the idling of our Clinton Illinois facility in the fourth quarter. This will allow us to keep our manufacturing capacity in the areas of the country with the highest demand potential. Given the related cost of these actions, we expect breakeven EBITDA for wind towers in the fourth quarter with a return to profitability at the start of 2022. While we're in the early stages of planning for next year, the orders we received in the third quarter provide a good base of business for 2022, helping us navigate short-term headwinds and providing continuity while we wait for the market to stabilize and start growing again. Our Transportation Products segment continues to face soft market conditions primarily driven by the impact of COVID and high steel prices from barge demand. The orders in our barge backlog will allow us to maintain positive EBITDA and give us flexibility to ramp up capacity when the market recovers. We continue to see positive signs of our recovery in the North American rail car market suggesting that 2021 will be a trough year for this business, with an initial recovery starting in 2022. Please turn to Slide 18. We're encouraged by the broader national conversations surrounding federal investment in infrastructure and believe that the passage of the current legislative package as being discussed by Congress could accelerate our growth starting in late 2022 and into 2023. As a company serving a broad spectrum of infrastructure markets, we believe Arcosa is uniquely positioned to benefit whether from additional investment in the aging transportation infrastructure and electrical grid, the wireless and broadband build-out, the ongoing shift towards renewable energy sources or the improvement in our ports and waterways. Because these packages have not been signed into law, we have not included in our outlook any potential impact from these builds, but are very encouraged by them. Please turn to Slide 19. Now for our 2021 outlook. Based on our year-to-date performance and our expectations for the fourth quarter, we are tightening our guidance range for 2021. We now expect adjusted EBITDA of $272 million to $280 million compared to our prior range of $270 million to $290 million. Our revised forecast primarily reflects our expectations for reduced wind tower profitability in the fourth quarter in light of the near-term challenges I discussed earlier. Overall, I am pleased with our expectation to nearly match last year's performance, despite an expected $53 million EBITDA headwind from our Transportation Products year-over-year. At the midpoint of our revised guidance range, we forecast a 22% increase in adjusted EBITDA on a year-over-year basis in our two growth segments Construction Products and Engineered Structures. Our anticipated 2021 performance in this business reflects our continued progress in expanding our Construction Products segment organically and through acquisitions while enhancing our Engineered Structures segment. As we look towards 2022, we remain committed to our long-term strategy of growing the Construction Products segment and Engineered Structures business and are very encouraged by the potential outlook for significant growth as the more cyclical businesses start to turn around in the future. Please turn to Slide 20. Before I wrap up, I'd like to spend a moment highlighting the progress we have made in incorporating ESG initiatives into our business and operations. ESG has been a fundamental component of our long-term strategy, and we continue to build on this commitment. I'm pleased to announce that effective November 1, we welcome Kimberly Lubel, former Chairman, President and CEO of CST Brands to our Board of Directors. We welcome her broad expertise and insights as we advance our long-term strategy and vision. While I will not enumerate all the ESG efforts we are undertaking as you can see from this slide we are fully committed to building a culture around ESG. At the same time, we recognize that we're just getting started and that building a new culture takes time. In closure, over the last three years I think you can see that Arcosa has executed successfully in our strategic priorities and made considerable progress in advancing our long-term vision. I want to take this opportunity to thank our employees for their support and efforts. I would also like to thank our shareholders for their confidence in our strategy. Operator, please open the call for questions.

We will take our first question from Brent Thielman, D.A. Davidson. Your line is open.

Great. Thank you. Good morning.

Good morning.

Antonio, you're obviously planning for the wind portion of the structures business to be down in 2022. I guess, the question is, do you think some of these other areas like utility, telecom and traffic can offset that? And can you sustain these kinds of 11% to 13% EBITDA margins, even with the weaker wind business?

That's a great question, Brent. As I mentioned earlier, we are still in the planning phase for 2022 and our budgets are not finalized yet. The facility we are temporarily shutting down in Illinois is quite flexible, just like most of our wind tower and steel facilities, which can easily adapt to different product lines. We have acquired a few businesses in the utility sector, including traffic structures, and we are actively working to expand these operations. We have had significant success in securing additional work, and we are experiencing strong demand across all these segments. The tank business is also performing very well, and we have a solid backlog for 2022 in wind towers. This gives us good visibility for our planning. There’s still time to secure more orders for wind towers, and I feel positive about the demand in our other businesses. We still have opportunities in the wind tower segment as well, so overall, I am optimistic that we can potentially maintain our margins. There is still time to reach that goal, and that is what we aim for.

And Brent, good morning, this is Gail. I might add too, we did guide for the segment in my remarks to a 10% EBITDA margin in the fourth quarter. And that does reflect some one-time costs, as we wind down our Clinton, Illinois facility and as we right-size our capacity as we head into 2022.

And just to finish, we do expect profitability to start coming back for wind towers in early 2022.

Got it. Okay. And I guess one on barge. It seems like the low-hanging fruit here for - in some sort of inflection. But, look, the fundamental drivers seem to be pretty good. Your scrap rates are up. I guess, what's the temperature of customers today? Is there any indications inquiries are improving that might give us some hope for return next year?

Sure. The key point to observe is that the market fundamentals are very strong. Scrap rates have increased in terms of the number of barges being scrapped relative to production. The hurricane caused significant damage to many barges, with around 1,000 currently under repair, some suffering major damage. We’ve experienced four to five years of lower production than build-out. Grain exports are performing well, and rates have risen. Oil demand is also returning, indicating favorable conditions for business growth. There appears to be significant pent-up demand building. However, steel prices remain very high, which creates complications. There’s a notable disconnect between the steel mills’ expectations, which predict a strong year for pricing in 2022, and the forecasts from analysts who anticipate a sharp decline in steel prices in the early quarters of 2022. Customers who can afford to wait are hesitating, believing they might buy a barge at a much lower price in the future. This issue needs resolution. We expect some developments early in 2022, but that will depend on various beliefs regarding steel prices. As a company, we are preparing for a decrease in steel prices and trying to reduce inventories to avoid holding onto expensive steel. Negotiating prices for the second quarter of 2022 is challenging in this environment, which complicates acceptance for our customers, as there’s no clarity on steel prices for the latter half of next year.

Understood. Thank you, Antonio and Gail.

We will take our next question from Ian Zaffino with Oppenheimer. Your line is open.

Hi. Good morning.

Good morning.

Can you discuss pricing on the aggregate side? How often are you able to increase prices given the current market conditions? How many times have you raised prices so far this year, and what are your expectations moving forward? I understand you can't provide exact figures, but any directional insights or context would be appreciated. Thank you.

Good morning, Ian. This is Gail. I'll take that. As we mentioned in our second-quarter call, we did implement some mid-year price increases, which are currently being reflected. In a few selected markets, there may be more opportunities in the fourth quarter. Right now, the focus is on sending out notices for 2022. Regarding our natural aggregates business across various markets, prices have generally risen in line with volumes. While we haven't discussed volumes yet, I can say that we didn't observe significant weakness, and pricing has been increasing. There has been some softness in South and West Texas as those markets recover, but they represent a small portion of our overall business. Outside of natural aggregates, our Specialty Materials business saw roughly stable volumes but enjoyed good gross profit per unit due to strong pricing. Overall, as we look ahead to the quarter, our pricing aligns closely with some of our larger competitors, and the pricing environment remains robust.

Okay. So I guess, as far as new pricing that would really more flow through kind of first quarter of 2022?

That's right. That's right.

Perfect. And then as far as the portfolio, can you talk to us about the portfolio? How you're thinking about that now? The rail business is perking back up. It's kind of troughing out, so it's on the recovery. So how are you thinking about the portfolio there, and then also just uses of cash at the moment now. Thanks.

Sure. This is Antonio. On the portfolio side, we remain committed to growing our Construction segment and Engineered Structures. We have a strong appreciation for our other businesses as well. Our focus is on reducing the company's cyclicality and complexity. While we’ve discussed the timing of these changes in the past and acknowledged that perfect timing is challenging to achieve, we are dedicated to monitoring market developments to identify the right moment for execution of our strategies. Recently, we sold a small asset from the asphalt business associated with StonePoint, as it was not strategic for us due to its geographical presence. We will continue to assess our portfolio over the coming quarters as we integrate this business. Regarding cash usage, my objective is to generate as much cash as possible in the fourth quarter. If we pursue any further business sales, we aim to reduce debt and strengthen our balance sheet to facilitate growth and reinvest capital into our growth initiatives.

Okay, perfect. Thank you so much.

We'll take our next question from Daniel Wang with Berenberg. Your line is open.

Hey, good morning.

Good morning.

Just – can you just remind us how significant that wind towers portion of your business is maybe as a proportion of total segment sales?

This is Gail. I'll take that one. As you know in our external reporting, we report wind utility and related structures on one line item. We have given color in the past heading out of the spin in our kind of early part of our life cycle was about half wind, half utility. And certainly, as the wind market has come down, you've seen utility take a bigger share of that revenue line. That's probably about as specific, as I can be at this point. But keep in mind, we do – as we said in our commentary, we did receive a $175 million order for wind that is all for 2022 production. So that gives you a good sense of where we are heading into 2022 right now as it relates to wind.

Perfect. And just secondly, I guess, how should we think about longer-term wind tower demand assuming there is no renewal of any federal tax incentives? Do we see a modest decline next year and a recovery from there on out, or do the incoming orders partially offset that? Just any color would be appreciated.

Sure, absolutely. I'll give you a little sense of the cadence of how this business normally works. This reduction is not new. Many times when the PTC expires or is getting ready to expire we see this reduction in volumes, when things get renewed and we are confident something will happen there. Normally, a wind farm takes about 12 to 18 months to build. So what happens when these tax incentives are – there's uncertainty around them you create kind of this air pocket in the demand. And it takes a while for it to come back. And whilst there is some clarity, you start working on orders and it takes – maybe we will be negotiating orders for 12 months ahead or for 18 months ahead, probably sometime late 2022 or mid-2022 depending on what happens. So my guess is that wind towers will be relatively slow in 2022. We still have time to get more orders. I'm not throwing it away. There's still time to get more orders. And we expect to get more orders if things work out as we are looking at it. But at the same time, we need some clarity around both steel and some of the tax incentives. In the longer term, we're very encouraged by wind towers. The shift towards renewable energy is a fact. It's coming. This is a business where the disconnect between what you read in the news that everything is moving towards renewable and the reality that we're seeing in the market is very different. But eventually, we're going to get there and it's – longer term, we're very optimistic about this business.

Thank you.

We'll take our next question from Garik Shmois with Loop Capital. Your line is now open.

Hi. Thanks for taking my question. I wanted to follow-up on Construction Products pricing recognizing you put through media price increases in several markets which should help kick off pricing growth for next year. But several of your construction product peers have been talking about aggregates pricing both conceptually and in their preliminary guidance for 2022. So I just love to get your view on pricing your outlook more broadly into next year and maybe beyond. Should we expect pricing to accelerate for you as well?

Yes. This is Antonio, Garik. So I think what you see in our construction peers when we read out the comments and everything, and in many markets, we see them and we are competitors. And I think we see similar market conditions than they see in many of our markets here in Texas, where we have a large share. I think we see the same trends. When we have the same goals we have – there's a lot of inflation happening and we have to pass through price increases and that's going to be our goal for early – for as we talk into 2022. But I think conceptually, the way you should think about our aggregates portion of their business is very similar to what you hear from our competitors. That's our goal to continue to raise prices and volumes as – take advantage of the current environment. So there's nothing different from our business than what you hear from our competitors.

Great. I appreciate that. And then just my follow-up question also staying on Construction Products. I was wondering if you could probably put a little more color on the organic sales growth in the quarter versus the sales that were derived from the acquired assets?

Good morning, Garik. I'll address that. It's Gail. To start with the trench shoring business, which we report in the 'other' category, we experienced impressive revenue growth of nearly 40% year-over-year, all organic, even though it represents a smaller share of the segment. Regarding our aggregates and Specialty Materials, the major factor in our growth came from our largest acquisition in the company's history in April, along with the addition of Southwest Rock. Additionally, we saw a bit of an increase from a late acquisition last year in early Q4. However, excluding those acquisitions, we still achieved solid organic revenue growth in our legacy materials business, both in the specialty and natural aggregate sectors.

When speaking with our team during meetings to assess their views on the market, many have reported strong project-letting in several regions. For instance, Texas, along with Arizona and Tennessee, are experiencing significant project awards. It’s clear that our team's sentiment is very optimistic, reflecting a robust market at this time.

And maybe just to add on to that Garik to help with the math a little bit. And we'll disclose you'll see StonePoint's revenues in the Q. So if you back off StonePoint and make an assumption on Southwest Rock based on what we've provided externally, you're somewhere around the $150 million-ish area ex those two and that compares to about $129 million last year. So nice growth on the organic side.

Okay. Thanks for that. And I'll pass it on.

We'll take our next question from Stefanos Crist with CJS Securities. Your line is now open.

Hey, good morning.

Good morning.

Speaking of the acquisitions of StonePoint and more recently Southwest, could you just give us some more color on the integration of those? Anything unexpected in terms of synergies or costs that we should be thinking about?

I think the integrations are going very well, and we are pleased with both acquisitions. When purchasing larger companies like StonePoint, they often come with a significant portion of their operations that may not align with our strategy, which is why we decided to divest the asphalt segment. Despite being a functional part of the business, it simply didn't fit our long-term vision. Overall, the remaining aspects of the acquisitions are performing excellently. Currently, nearly 60% of our EBITDA this quarter is derived from Construction Products, indicating our shift towards a more construction-focused business model. The integrations of these two companies are crucial for us, as we are also implementing a new ERP system tailored for our Construction segment. This will enable us to better manage our operations compared to three years ago when we primarily functioned as a manufacturing entity. The implementation will likely take until 2022, but it will enhance our data capabilities, allowing for improved analysis and reporting. We recognize the need to evolve into a more construction-centric reporting company, aligning ourselves more closely with our peers. Although this transition will take time, we consider these integrations as a framework for future advancements. We are genuinely excited—not just about the business opportunities but also about the exceptional talent we have acquired, which is helping us restructure our aggregates business into four distinct regions. This will enable us to maintain diligent and disciplined pricing and volume strategies. Overall, we are very optimistic about the direction we are heading.

That's great to hear. Thank you. Leverage is at 2.3 times within your long-term range. How comfortable are you with going above that for M&A if the right opportunity arises?

As we've mentioned, 2.3 isn't a significant figure; 2.5 is where we feel at ease considering the cyclicality of some of our businesses. That's why we maintain a conservative approach toward our leverage ratio, which we regard as 2.5 for our mid-cycle cyclical businesses. Given that we are currently at the bottom of the cycle, we do have some leverage available. If an outstanding opportunity arises, we might consider it. However, at this time, our primary focus is not on that. We are actively analyzing our markets and have specific teams seeking opportunities in areas we prefer. For now, our priorities are to generate cash in the fourth quarter, which will be a major focus for us, and to concentrate on the business integration. Additionally, we have excellent organic opportunities that we intend to finalize and start investing in at the beginning of 2022. Lastly, we need to simplify our portfolio to redeploy that capital into our construction segment. You can expect us to work on these projects for about six to nine months, while we also keep an eye on the market for any intriguing possibilities. These deals require time, but we believe we have a good timeframe ahead of us.

That's great. Thank you for taking my question.

We'll take our next question from Julio Romero with Sidoti & Company. Your line is open.

Hey, good morning Antonio. Thanks for taking the questions.

Good morning.

So I wanted to ask more on the Construction Products segment. And you touched on the ERP that you're implementing. Are you moving recent acquisitions into an existing ERP, or is this a completely new ERP system you're implementing? And then secondly, Antonio you mentioned I believe that it should be completed the integration by the end of the year 2022. That seems pretty fast. So is that correct and that you should see full year benefits in 2023 from ERP?

We are not implementing a completely new ERP system. We have a unique approach to acquisitions, which means we always consider what the acquisitions can add to Arcosa. Most of our acquisitions, like ACG and Cherry, have connections through previous acquisitions. Southwest Rock was already in progress through StonePoint. When we evaluate acquisitions, we focus not only on integrating them into our business but also on identifying their valuable assets and enhancing existing ideas. ACG had a strong ERP system that we found to be superior to what we currently have for our Construction segment. Therefore, we are integrating the businesses into ACG's ERP system, which will likely allow for a faster and more cost-effective implementation than a typical system. We are familiar with this system, have tested it, and are excited to bring a functioning system into Arcosa.

Understood. Can you discuss the reorganization of your aggregates into four regions and how this benefits Arcosa in terms of synergy or communication?

I believe this is very significant. We have seen substantial growth, and I'm confident that our organizational structure is aligned with our growth strategy. Three years ago, we had about 25 mines, and now we exceed 100. This requires increased supervision and a more strategic approach to opportunities in each region. We need to focus on organic growth, pricing, and synergies across the regions. We now have four regions: the West, Texas, the Gulf Coast, and the Ohio River Valley, all managed by experienced teams, each with their own controller. We are working on developing the internal financial structure to support this management. It is crucial for us to have this framework as we continue to grow and advance our strategy. This structure is essential for the next phase of Arcosa's growth and for successful integration.

Understood. If I could just sneak one more in here. The receivables balance ticked up a bit in the quarter. And I think you mentioned, part of that was the higher sales volumes in the utility structures. Does that business have a structurally longer cash conversion cycle? And how does DSOs trend over the next couple of quarters?

Good morning, Julio. This is Gail. Yes that's a very good question. We did talk about a couple of things as it relates to AR in the quarter. We had some collections that were a little bit delayed. Those came through at the early part of the fourth quarter and then the higher mix really of the utility structures receivables. And they do carry a slightly longer DSO relative to some of our other businesses. So you're seeing that all very strong high-quality customers, utility customers but they do have a little bit of an industry norm longer DSO than some of our other businesses. So rolling that through, their cash conversion cycle is a little bit longer.

Yes. I'll add a bit more. Over the past 1.5 years, particularly since the pandemic began, we have focused significantly on our collections, especially during the economic slowdown we experienced last year. It's something we continuously monitor. I can confidently say that we have an excellent accounts receivable process in place, and we do not face issues with collections. This situation was simply a matter of some delays. Overall, our accounts receivable collections are currently very healthy.

And I guess, I'll just add, that specifically relates to utility, Julio. I think if you were to look at some peer comparisons our DSO isn't anything different from what you would see in other peers in the industry.

Got it. Thank you, guys for taking the questions.

We'll take our next question from Noah Merkousko with Stephens. Your line is now open.

Good morning. And thanks for taking my question.

Good morning.

I apologize in advance if this has already been asked and answered. I dialed in a little late. But I was hoping to talk a little bit longer term outlook for the Construction Products EBITDA margins. If we're entering a period of strong demand and we start to see improving price and volumes and you get these acquisitions fully integrated, what sort of EBITDA margins could we see out of that segment?

Good morning, Noah. This is Gail. That's a great question. We're very focused on increasing our gross profit per unit, which definitely helps our margins. However, we are also dealing with inflation and working to minimize its effects. We achieved a healthy margin of 24% for the segment this quarter. As we approach Q4, we can expect some seasonality. Overall, our outlook for construction margins remains positive. We are striving to enhance expansion, improve pricing, and increase gross profit per unit. While I can’t provide a specific target, the first half of the year was challenging due to weather issues like Winter Storm Uri and the heavy rainfall in Q2. Looking ahead to 2022, we hope for better weather conditions in the first half, but we will have to wait and see.

Noah, this is Antonio. Just to add to what Gail mentioned, in considering our Construction products, the two areas that experienced the most struggle in 2020 due to COVID were our lightweight business and some aspects of our Specialty Materials business. As we continue to expand the aggregates segment, that part is easier to predict. Like our competitors, we expect to see similar margins and dynamics. Regarding Specialty Materials, Gail noted that the shoring segment has bounced back to pre-pandemic levels, which is encouraging, and we're pleased with the growth we are witnessing. Similar to aggregates, it has also recovered and is performing well, with strong demand and solid fundamentals and margins. However, while we are growing in Specialty Materials, the pace is slower than anticipated, which is somewhat impacting our margins. Additionally, as we've discussed in previous calls, we faced some headwinds from our oil and gas exposure in the oil fields over the last couple of years. We are now observing a resurgence in drilling in West Texas and Pennsylvania, where we operate, which should assist in boosting our margin expansion, which is our aim. That may be a bit too much detail, but the focus is on accelerating our margin growth, aligning closely with our competitors in aggregates, and enhancing our specialty materials and lightweight offerings to positively impact our overall construction margins.

Thanks, that's really helpful information. For my follow-up, if the Engineered Structures revenues are experiencing higher prices due to steel inflation, will we see pricing decline if steel prices drop, or can you maintain those higher prices? What has happened historically in such situations? Also, if you do reduce prices, what impact would that have on the margins in that segment?

Yes. We have three distinct types of businesses that utilize steel in different ways. I'll start with Engineered Structures, the area you mentioned. This business relies heavily on long-term contracts or agreements with customers for annual volume, which include provisions for adjusting prices based on certain conditions. If steel prices fluctuate beyond a specified threshold, we can adjust our pricing accordingly. Consequently, if prices rise, this business may experience a temporary setback if adjustments aren't made in time. However, we have been effective in managing this. Our margins for utility structures have improved compared to previous years and are currently performing well. As steel prices decline, we expect to see corresponding reductions in costs, albeit not immediately—possibly in the next quarter. The adjustment timing may vary depending on customer agreements and market conditions. The second type of business involves complete price passthrough, such as in barges and wind towers, where we have negotiated long-term contracts with both customers and steel mills. In this case, we can fully pass price changes through, so we anticipate seeing price reductions and corresponding margin increases as steel prices decline. The third business model is build-to-stock, like in our tank business. These operations are somewhat riskier because we purchase steel and manufacture tanks without a guaranteed backlog of orders. This model involves greater risk when prices rise, as failing to increase prices quickly enough can lead to losses. However, we've been successful in this area, and our margins have significantly improved over the past year. When prices eventually drop, this segment often allows us to maintain margins better since we may not need to lower prices as quickly, depending on market demand. Overall, as prices decline, I expect margins could remain stable or even expand, but we must be nimble in our response. I hope this provides clarity regarding our steel usage.

Yes. That was really helpful. I appreciate it and I'll leave it there.

It appears we have no further questions at this time. I will now turn the program back over to Erin Drabek for additional comments or closing remarks.

Thank you, Corlas, and thank you everyone for joining us today. We look forward to speaking to you again next quarter.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.