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 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?

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…

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%…

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

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?

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.

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.

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.

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?

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.

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'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.

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, 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?

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.

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.

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. So, I was very pleased. And the trend continues to look well. It was not only that it was better in the third than the second. But the trend throughout the third quarter sequentially, August and September was better than August, et cetera. So, I'm pretty happy with what the team there is doing, but the important piece here is that the demand for the product is very, very strong. So it's really in our hands to continue to drive this improvement plan that we have. We have a great team. And demand is there and the margins are there, everything is ready for us to continue to improve margins there and take it back to become a business that can be accretive to our margins.

Right. Yes. Okay. Thanks for that color. And then I'm sorry if you touched on this. I know you touched on it, but -- so sorry to come back to it again. But for just a little bit more detail on the transportation side. You called out low river levels. I think orders kind of impacted orders a little bit. But how do you kind of think about just given where we are in the cycle. How are you thinking about that business as we kind of look in 2024 directionally?

Yes. Let me talk first about the river levels. When you look at statistically, I mean, the last couple of months have been very, very low historically. But if you look seasonally, it's a normal season for this to happen. So, since a couple of weeks, we've received rain and levels are coming up quite a bit. So, I think we don't expect it to be an issue going forward in the year or early 2024. So -- but when that happens, this more cyclical businesses, I would characterize the move in our customers as more volatile than in other businesses. So, when things go by in a quarter, you will get all pessimistic. When things go great, you get all optimistic. So it's we expect it to become better as we -- the important aspect, I will go back to the fundamentals of the business. The replacement market is there, the demand is there the customer sentiment is positive that margins need to be replaced. We have a good backlog into 2024. We have a significant portion of our sales already, let's say, secured. And that allows us to work with our customers on timing, on -- but I don't want to give away my capacity. So we want to focus on our margins. And we're going to -- we have time to work with our customers on getting new orders, et cetera. So, we have time. I'm confident that the demand is there, and we're going to get the orders to fill 2024 and that is going to be a better year.

Got it. Thanks Antonio for all the color. Much appreciated and best of luck for the -- 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, 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 any different as they move into 2024?

Yes. So, let me start with one that has been cooking for the year. As Gail mentioned in her script, the -- two of our biggest plants are in Mexico. And when you have manufacturing expenses, salaries, everything, depreciation, maintenance, et cetera -- in pesos when you translate it into dollars and the dollar a year ago was at 21, and now it's at 18. But during the quarter, it grew below 17 per dollar. So it appreciated pretty significantly. If you look historically -- and from Mexico, if you look historically, that's once in a lifetime thing that happens, but it happened. And that's okay. So throughout the year, it has been hitting us, but through efficiencies and really good margin orders, we have been able to not even talk about it. If you remember our call, we haven't even talked about it because we have been able to overcome it -- this quarter, I mean, it was no different, except that the peso appreciated more. And we have these operational issues that I mentioned. We have several equipment down in a few facilities that forced us to go outside and outsource pieces. And also the larger margin orders that moved into 2024. As I mentioned in my remarks, I expect margins to improve in the fourth quarter as we -- the peso has improved a little bit, that should help. Also, as we ramp up our facilities that have been shut down in some equipment, I mentioned we will not have all our equipment ready for the fourth quarter. So the margin improvement should be, let's say, over time, we should see improvement. And then into 2024, as we get into the bigger margin orders and reduce the smaller margin orders, we should return to the more normalized margins. So -- so this is -- some of the problem was self-inflicted. We have things to do there, and we have to learn the lesson, some others outside. But I think the margin potential, the margin profile for the business should not change.

Okay. And then can you talk about the demand climate you're seeing for when, 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. And I'm going to start by saying what's -- I think so the obvious, but I want to reiterate it because when I sit down with people sometimes, they ask me about offshore wind. And we are not involved in offshore wind. Offshore wind it's a very complex environment, and we were not participating in this, and that's a good thing. So, we are only in offshore wind. And in onshore wind, things are different. -- going back a year, year and a half ago, we had no tax credits. The industry was slowing down. And if you remember at that time, I had mentioned when the inflation reduction act got approved, I -- my expectation was that it would take longer for it to really kick in. We didn't expect these larger orders at the beginning of the year, and we thought it was going to be sometime 12 to 18 months for the industry to start working through permitting and all those things. We got this big order in the beginning. We're starting our new facility. We expect to start delivering towers in mid-2024, and we have a good backlog for 2024 for 2001 plants. Having said so, there are still things to work out in terms of the tax rate has not been completely defined by the IRS. And the industry is starting to go through this permitting and bottlenecks in the system. So, it's going to be choppy. I don't expect this to be -- every quarter, we get a big order. I think we're going to go through a few quarters where the orders and suddenly we get a big order. The fundamental aspect is that what I said in my remarks -- we are set up for better 2024 than 2023 given our production and margin profile. And we have time with our plants in good shape to be able to -- for those bigger orders to materialize and grow beyond 2024. So 2024 should be better than 2023 and then we should be ready to continue to ramp up as we move along.

Okay. I guess just last one on Construction Products, the natural aggregates business in particular, I mean, given the fact that you've seen what seems to be sort of a volume inflection, we'll call it here this quarter. Are you -- are you more confident that you can continue to increase volumes in 2024 for that business?

Well, as Gail mentioned in her comment before, we saw flattening volumes in the second quarter. We saw an increase in this quarter. We are as much more companies than some of our peers. So we have more -- probably more volatility in our regional businesses than some of them that have a wider net and more geographic diversification. We are in great geographies. And by being in great geographies means probably we have very good demand fundamentals. But there's still a lot of uncertainty. What we also think is that the infrastructure bill should start kicking in and should help us compensate reduction in volumes in housing and other areas we are seeing heavy manufacturing builds throughout the country in our regions. So, I think everything is set up for some of the demand factors too strong, some are not as strong. I think we have a lot of confidence in our pricing. So, what I can tell you is that we are confident that our pricing will be able to help us with some volume improvements get a, let's say, a positive mix pricing volume for 2024 and continue increasing our margins. I'm going to go back also to your question on wind towers. The other thing I forgot to mention. we mentioned a small order that we received for two towers. It's a very important step for Arcosa because, as you know, we're -- the industry doesn't have many customers. So, having a new customer that's a large customer with a heavy presence in the US, it's important for us to qualify and be able to get another source of large orders in the future. So I'm excited about that.

Understood. Thank you, Antonio.

[Operator Instructions] 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 in the general economic uncertainty across the portfolio? For example, I'm thinking about just which business units are most affected versus resilience at the moment.

This is Antonio. I would say that the biggest impact, of course, is housing where mortgage rates continue to be a moderator of demand. And then any one of our customers that has leverage, I think, has -- if you have to borrow to buy things, it's an important one. So, I would say barges probably is one of them. But if you look at, for example, transmission hours, those things are -- I mean, of course, the utility have leverage and everything, but they are pretty insulated. The demand is very strong. I would say wind towers is the same thing. So, most of our projects have those fundamentals that are -- most of our products have their own fundamentals let's split construction products is 1 thing. The other ones are -- they have their own fundamentals that are really drivers of the demand. interest rates, of course, affect the whole economy. So, I'm not saying it doesn't affect. I'm just saying it's not the -- is the deciding factor to buy a barge or to buy a transmission tower. On the construction side, of course, housing, but also it affects multifamily and all these other projects. So we're not in new interest rates. Of course, we're not -- but I think we've given our backlog and given our diversification, we're in really good shape to be able to overcome this and also talk about our balance sheet. We have a strong balance sheet. Gail mentioned, we just paid down some of the debt we had and we have a very, very good balance sheet to be able to allocate our capital correctly. And also when you look at -- in this environment, having a strong balance sheet with higher interest rates. It also presents opportunities for us to be able to take advantages that other companies might not be able to do and some of the private equity firms might not be able to compete in some of the processes, et cetera. So, there's risk and there's opportunities.

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 in my remarks that -- and later that the river was an issue during the third quarter. We don't expect it to be during the second part of the fourth quarter. And I think our customers, if you talk to them, they need the barges. They want the barges steel prices, which I have not mentioned in my remarks, but it's important they have come down quite a bit. And during the third quarter, we got to a very appealing price for steel. It's picked up a little bit right now. So, the conditions are there for us to be able to replace to replace new bodies. Hot-rolled coil is coming up a little bit, but we're very close to the levels that we had a year ago when we closed all those barge orders. So, it's not going to be again just like wind. This is not going to be something that every quarter, you get a one-to-one book-to-bill. But I'm confident that the demand is there and we have time. As I said, we have a pretty significant portion of our production already scheduled. We're going to be cautious in the way we accelerate our ramp-up, but we're confident in the midterm demand factors 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.