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.

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.

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 have 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, 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 outsourcing of some processes at higher costs. During the quarter, we began implementing correcting actions that enabled initial margin improvement in 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.

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 contributions 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 margins 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 recycled volumes. 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 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 in 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.

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 tank 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 and 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 following significant levels of 5G investment. Overall, order activity and backlog visibility remain 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 strengthened 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 weighed 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, Arcosa 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 a 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, and I’m 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 five years. Now, I would like to open the call for questions.

Thank you. We will take our first question from Garik Shmois with Loop Capital.

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

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-residential doing well. And residential is okay. We're seeing some new neighborhoods in the North and South DFW 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.

One thing I want to highlight is that we experienced significant disruptions due to the heat throughout the country during the quarter. In Texas specifically, the extreme temperatures greatly slowed construction activities and affected our portfolio in various ways, including increased plant turnover and absenteeism. I believe the weather had a considerable impact on this third quarter, although I don’t have a specific figure to share.

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.

Thanks for the detailed information. I wanted to inquire about the acquisitions you announced. Although they are relatively small, I'm particularly interested in your entrance into Florida. Do you believe this could develop into a new platform for your business, or is it simply an opportunistic acquisition with no long-term significance?

We previously established a small operation in Florida as part of our Stone Point acquisition a few years back. We like this market, as there is minimal consolidation, particularly in the recycled sector. Once we enter a market, we tend to see an increase in our pipeline due to higher interest from local small companies. Therefore, we view this as a platform we want to develop. It's a market we are genuinely interested in, and we already have further opportunities lined up.

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?

Yes, I would not limit this to just utilities. The industry is thriving, and the demand is exceptionally high. Similar to the situation with wind towers, where projects are announced and generate significant attention, once these projects begin, the reality sets in. Despite discussions about layoffs, there remains no shortage of jobs in the blue-collar labor market. However, obtaining permits for transmission power and wind tower farms is proving to be time-consuming. Therefore, I believe our growth will not follow a simple upward trajectory. We will likely experience fluctuations as we navigate through this current bottleneck. To me, this is the most significant challenge we are facing.

Understood. Thanks for that and best of luck.

Thank you.

And we'll take our next question from Trey Grooms with Stephens.

Hey good morning Antonio and Gail.

Good morning.

I guess I wanted to touch on sticking with 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?

I believe that what we're hearing from our peers and competitors reflects our own strategy. We are currently implementing price increases, with another one planned for January. Our aim is to prioritize pricing over volume while also identifying areas where we can achieve both, which would be ideal. Our focus is on maximizing our margins. Although inflation has decreased, the price of natural gas has started to rise again, and inflation isn’t fully under control, so we must keep pushing our pricing.

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 still kind of be a factor going forward? And I guess I'll just stop there.

Yes. In the second quarter, Specialty Materials faced significant challenges due to various factors. While there were cost issues, the primary concern was related to throughput. The complexity of our specialty materials operations is greater than that of industrial plants. During the second quarter, we encountered maintenance problems, along with high absenteeism and turnover. However, things are improving, and we have been able to retain our staff more effectively. There has been a notable improvement in Specialty Materials in the third quarter, which is very encouraging. The trend is positive, as performance in August and September showed sequential growth. I am pleased with the team's efforts, and the demand for our product remains strong. We have the opportunity to implement our improvement plan successfully, supported by a dedicated team and favorable margins, positioning us to enhance profitability and strengthen this segment of our business.

Thanks for the additional insight. I apologize if this has already been addressed, but could you provide a bit more detail on the transportation aspect? You mentioned low river levels, which I believe affected orders. Considering where we are in the cycle, how do you view that business as we look towards 2024?

Yes, let me first discuss the river levels. Statistically, the last few months have been historically very low, but seasonally, this occurrence is normal. Fortunately, we've received some rain recently, and the levels are rising significantly. We don’t anticipate it being a problem for the rest of the year or early 2024. In more cyclical businesses like ours, I notice that customer reactions tend to be more volatile compared to other sectors. When times are tough in a quarter, there's a tendency to feel pessimistic, and conversely, when things are going well, optimism prevails. We expect improvements ahead. Importantly, fundamental aspects of the business remain strong; the replacement market is available, demand is present, and customer sentiment is positive regarding the need for replacements. We have a solid backlog extending into 2024, with a considerable portion of our sales already secured, which allows us to coordinate with our customers on timing without compromising our capacity. Our focus will be on maintaining our margins. We have the time to collaborate with our customers on new orders, and I am confident that demand will continue, leading to sufficient orders to meet our needs in 2024, which should be a better year overall.

Got it. Thanks Antonio for all the information. Much appreciated and best of luck as we go through the rest of the year.

Thank you very much.

And we'll take our next question from Brent Thielman with D.A. Davidson.

Hey Great. Thanks. Good morning. Antonio, could you speak a little more to the issues in the Engineered Structures segment? I mean it sounded like there was a mix issue, but maybe some inefficiencies in the system, maybe how long does it take for you to work through that, and get the facilities where you want them to be? And then I guess, how do we think about the margin profile of the business? Is it any different as they move into 2024?

Yes. Let me start with a concern that we have faced this year. As Gail mentioned earlier, two of our largest plants are in Mexico. When you consider manufacturing costs, salaries, depreciation, and maintenance in pesos and convert them to dollars, the exchange rate has changed significantly. A year ago, the peso was at 21 to the dollar, and now it’s at 18, having recently dipped below 17, which is quite unusual historically. Despite this challenge throughout the year, we have managed to address it effectively through efficiencies and solid margin orders, allowing us to not focus on the issue. This quarter was no different, though the peso appreciated further. We are also dealing with operational issues, as some equipment in our facilities is down, prompting us to outsource certain tasks. Additionally, larger margin orders have been pushed into 2024. I anticipate margin improvements in the fourth quarter, aided by the stronger peso and by ramping up facilities that have been temporarily shut down, although not all the equipment will be ready. Thus, we expect gradual margin enhancements over time, and as we shift towards larger margin orders and decrease the smaller-margin ones in 2024, we should return to more normalized margins. Some of the challenges we faced were self-inflicted, and we have lessons to learn. However, I believe the potential margin profile of the business remains strong.

Okay. And then can you talk about the demand climate you're seeing for wind, I guess, outside of the large order that is tied to the New Mexico investment? What does it look like outside of that from a customer demand perspective?

Sure. I want to start by reiterating an important point about offshore wind. We are not involved in offshore wind, which is a complex area, and I believe that is a positive aspect for us. We are solely focused on onshore wind, where the situation differs. If we look back about a year or a year and a half ago, the industry was experiencing a slowdown and we had no tax credits available. At that time, I had anticipated that the effects of the Inflation Reduction Act would take longer to materialize than we thought, estimating around 12 to 18 months for the industry to navigate through permitting and related issues. Contrary to our expectations, we received a significant order at the beginning of the year and we are in the process of starting our new facility. We aim to begin delivering towers by mid-2024 and we have a solid backlog for our plants for that year. However, we still need to address some uncertainties, such as the tax rate not being fully defined by the IRS, and the industry is facing permitting challenges and systemic bottlenecks. Therefore, I expect some variability in our order flow. While I don't foresee a large order every quarter, we may experience periods of fewer orders interspersed with larger ones. The key point I want to emphasize is that we are positioned for a stronger 2024 compared to 2023, given our production capabilities and margin outlook. Our plants are in good condition, allowing us to be prepared for those larger orders to materialize and grow beyond 2024. Thus, I expect 2024 to be an improvement over 2023, and we should be poised to continue ramping up as we progress.

Okay. I have one more question about Construction Products, particularly the natural aggregates business. Given the apparent increase in volume this quarter, do you feel more confident about being able to boost volumes in 2024 for that business?

As Gail mentioned earlier, we experienced flat volumes in the second quarter, but this quarter saw an increase. We have more companies than some of our peers, which probably leads to greater volatility in our regional businesses compared to those with broader geographic diversification. We're located in strong markets, which suggests we have solid demand fundamentals, although there remains a lot of uncertainty. We believe the infrastructure bill will start to take effect and help offset reduced volumes in housing and other areas where we see significant manufacturing activity in our regions. Overall, we're optimistic about certain demand factors, though others are not as robust. We have strong confidence in our pricing strategy, which we believe will assist in improving volumes, aiming for a favorable mix of pricing and volume for 2024, along with an increase in our margins. Additionally, regarding wind towers, I neglected to mention that we've received a small order for two towers. This is a crucial development for Arcosa, as the industry has few customers. Securing a new large customer with a strong US presence is vital for us to qualify and potentially secure more major orders in the future, and I'm excited about that.

Understood. Thank you, Antonio.

We'll take our next question from Julio Romero with Sidoti & Company.

Good morning Antonio and Gail. This is Alex Hantman on for Julio.

Good morning.

Good morning.

My first question is on something asked a little earlier. On macro, can you speak to the broader impact of higher interest rates and the general economic uncertainty across the portfolio? For example, I'm thinking about just which business units are most affected vs. resilience at the moment.

This is Antonio. The biggest impact is clearly in housing, where mortgage rates continue to influence demand. For customers that rely on borrowing, this is significant. Barges are likely one affected area. In terms of transmission hours, utilities use leverage but remain relatively insulated, and the demand is strong. Wind towers are similar in that respect. Most of our projects have strong fundamentals driving demand, even though interest rates impact the overall economy. I’m not saying they don't have an effect, but they aren't the sole deciding factor for purchasing a barge or transmission tower. On the construction side, higher rates impact housing and multifamily projects as well. While we are aware of the new interest rate environment, our backlog and diversification put us in a solid position to navigate through this. Regarding our balance sheet, it's robust; as Gail mentioned, we’ve paid down some debt, placing us in a good position to allocate capital effectively. In this climate, a strong balance sheet presents opportunities that may be more challenging for other companies and some private equity firms to compete with. So, we recognize both the risks and the opportunities ahead.

Yes, very helpful color. Thank you, Antonio. We've spoken a lot about the margin impacts today. So, I wanted to just touch on the barge business. Could you give us a sense of how orders might trend in the fourth quarter?

I mentioned earlier that the river was an issue during the third quarter, but we don't anticipate it impacting the latter part of the fourth quarter. Our customers are in need of the barges, and they are looking for them. Additionally, steel prices have decreased significantly, which I should have pointed out earlier. In the third quarter, we reached an attractive price for steel, although it's risen slightly since then. The market conditions are favorable for us to initiate new bodies. The price of hot-rolled coil has increased a bit, but we are still close to the levels we experienced a year ago when we finalized those barge orders. It's important to note that this won't be a straightforward situation like the wind market; we won't see a consistent one-to-one book-to-bill ratio each quarter. However, I am confident that demand exists, and we have sufficient time to respond. As I mentioned, a substantial portion of our production is already scheduled. We'll proceed cautiously as we ramp up production, but we are optimistic about the midterm demand for the business.

Thank you for the color. Very helpful. That’s it from us today.

Thank you.

And it appears that we have no further questions at this time. I will now turn the program back over to Erin Drabek for closing remarks.

Thank you for joining us today at our third quarter earnings conference call. We look forward to providing an additional update next quarter.

And that concludes today's teleconference. Thank you for your participation. You may now disconnect.