Good morning ladies and gentlemen and welcome to the Arcosa Inc. Third Quarter 2019 Earnings Conference Call. My name is Ashley and I will be your conference call operator today. [Operator Instructions] Now I would like to turn the call over to your host Gail Peck. Ms. Peck you may begin.

Good morning everyone. Thank you for joining our third quarter 2019 earnings call. With me today are Antonio Carrillo President and CEO; and Scott Beasley 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 at our website www.arcosa.com. You can access the presentation by going to the Events tab under the Investors section of the website. 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. Today's comments and presentation slides contains financial measures that have not been prepared in accordance with generally accepted accounting principles. reconciliations of non GAAP financial measures to the closest gap measure are included in the appendix of the slide presentation. Let me also remind you that 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 including its Form 10-K for more information on these risks and uncertainties. I would now like to turn the call over to Antonio.

Thank you Gail. Good morning and thank you for joining today's call to discuss Arcosa's third quarter results and business outlook. Once again we are pleased to report strong results. Demand trends remain positive across our infrastructure markets and our leadership positions in key products together with internal margin improvement programs are driving significant operating leverage. Please turn to slide four. Broadly our business has continued to perform well and we are successfully executing on the long-term strategy. This strong third quarter performance was led by margin improvement in the Energy Equipment business the revenue contribution from the ACG material acquisition and higher revenue on an earnings contribution from the barge business. It is important to mention that all the activity was strong in the third quarter in utility structures when towers and barges. One year-to-date -- our year-to-date results give us confidence that we will achieve the 2019 adjusted EBITDA guidance of $230 million to $240 million with the likelihood that we will be at the upper end of this range keeping in mind that we increased our -- this range when we reported first half results in August. Tomorrow is the 1-year anniversary of Arcosa as an independent public company. We have come a long way since completing the spin-off last November standing up the organization and implementing our stage 1 priorities. Importantly as we were establishing the new company will define the culture needed to support the long term strategy. For the last 12 months, we have made significant progress in building these new culture into Oracle's more than this topic later in the call. Now, let's turn to slide five for an overview of our causes third quarter results. revenue increased 18% year over year, representing a mix of organic and acquisition growth. operating leverage was evident by the 35% growth in adjusted net income and the 40% growth in adjusted EBITDA, more than twice our revenue growth. Scott Beasley will now provide financial review of the third quarter. Scott?

Thank you Antonio and good morning everyone. I'll walk through the third quarter results for each segment and then give additional color on capital allocation and liquidity. Starting on Page 6. Construction Products had an excellent quarter of revenue growth increasing 60% to $115.9 million. Our legacy aggregates and specialty businesses both had higher revenue driven by strong volume growth. Weather was clear for most of Q3 in our core markets and healthy customer demand resulted in higher volumes. Additionally overall pricing was relatively flat sequentially but down a bit versus the stronger third quarter of 2018. Pricing in most of our markets was up versus 2018 but was lower as expected in the DFW market. Finally the ACG acquisition contributed the largest portion of our year-over-year revenue growth. Segment EBITDA of $26.2 million was almost $6 million higher than last year. Our adjusted EBITDA margin of 22.6% was very healthy but was 5.6 points lower than last year. Three main factors contributed to the margin decline. As we have discussed over the last several quarters AC geez historic margins are higher than our Kostas overall margins, but lower than historic segment margins. So there has been some expected dilution to segment margins from the acquisition. Additionally ACG's aggregates plants serving energy infrastructure in the Permian Eagle Ford and STACK basins in Texas and Oklahoma experienced volume and pricing declines related to lower drilling activity. We mentioned this slowdown on our last call and it continued in the third quarter. Finally while revenue improved in our legacy aggregates and specialty businesses our production cost increased with some onetime start-up costs in the legacy business and the production slowdown that I mentioned in our oil and gas markets. Finishing up the segment our Construction Site Support business posted another solid quarter.…

Thank you Scott. Now I will provide you with further insight into market dynamics and developments at each one of the business segments. Please turn to slide 12. Construction Products had an active third quarter with several points worth noting. We saw healthy demand in the aggregates and Specialty Materials product lines. As we approach the end of 2019 and for 2020 we remain very optimistic about the fundamentals of our market positions our business model and regional infrastructure spending trends. While we're expecting continued softness in the ACG business that has exposure to the oil fields in Texas and Oklahoma we see a robust infrastructure environment that should create opportunities for organic volume growth and pricing improvements. On the M&A side we completed two bolt-on acquisitions during the third quarter. What's important is that we continue to see opportunities to expand the current platforms at relatively low multiples. It's a slow process but strong market positions take time to get built. Continuing with M&A as we approach the 1-year mark of owning ACG we are pleased to report that the business integration has gone extremely well. The team has done a great job of integrating and mining this business for organic and acquisition expansion opportunities. Part of the M&A pipeline we're working on came from the ACG acquisition as well as a healthy list of organic growth opportunities that we will be working on in 2020. So overall I'm very happy with the integration and opportunity that ACG has brought. And also with the learning curve that the whole organization has gone through in bringing in this type of platform acquisition. At the moment we are quite active on the M&A front working through a large pipeline of potential targets in both aggregates and Specialty Materials which includes small…

[Operator Instructions] We'll take our first question from Brent Thielman with D.A. Davidson. Your line is open.

Great, thank you. Antonio on barge you made the comments about healthy mix of dry and liquid in the orders. I know you've been waiting for the dry side to come around for a long time. I understand it's early to call kind of a sustained rebound. But any comments on the inquiry activity out there on the dry side? Is it still at elevated levels? Or any trends you can point to into the fourth quarter?

So -- Brent thank you for the question. So yes as I said we were encouraged to see not only orders but also a healthy mix of orders in terms of customers and which was a very -- a very good news for us. We continue to see good inquiries. As I mentioned in my remarks steel prices are I think good news for the barge business. I think there's still some uncertainty around the -- all the China tariffs and the export for grains. The rates in the river for the dry cargo have not been really good over the last few months. So I think there is a kind of a -- some positives on the steel side some negatives or uncertainties around it. But overall I -- we see more and more inquiries. And just to give you a little more color we talk a lot about the steel prices being a catalyst for dry cargo barges. There's a need for replacement for sure. But it's also a catalyst for liquid barges. The impact on steel prices on a liquid barge is much larger than on a dry cargo barge. So overall steel prices are good news for both. We continue to see healthy inquiries also on the liquid side. So let's see -- of course the comparables are going to be much tougher because as we ramp up our revenue the book-to-bill we need to be very active to be able to have a larger book-to-bill ratio. But overall we're positive on what we've done. The plants have been -- done very well. We expect our plant that we opened this year to become profitable in the fourth quarter. So overall I think it's a very positive story on our barge business.

Okay. And then on Construction Products. Just curious kind of how large if you can couch it the -- kind of the oil and gas or energy pieces for the segment and kind of what you see ahead for that? And whether the kind of the remainder of the business can kind of overcome some of those challenges?

Sure Brent. This is Scott. Overall on the Construction Products segment the oil and gas exposure is not a large portion of it. If you look at the time of the ACG acquisition we said that oil and gas probably constituted about 20% of ACG's end market exposure. So as a total segment it's less than 5% to 7%. But again in a single quarter when you have a big kind of demand shift you tend to have to slow down production manage your inventories down so it tends to have an outsized impact on the first quarter or two. I think the good news is like you said we see a lot of health in the infrastructure markets. So I think we do have the opportunity to potentially offset most of that slowdown with healthy growth in both volumes and pricing in our infrastructure markets. But it is a bit of a drag right now.

Okay. And just finally on Energy Equipment. I appreciate you've got 2 sort of different trends that are going on in structure -- utility structures and wind towers from a margin perspective. But it does sound like the utility structure bid environment and pricing has been quite a bit better. I guess two parts to that. One is that -- can that be big enough to offset wind in any given quarter with the trends you see in wind? And I guess as you're looking into the fourth quarter? Are you -- Scott are you still kind of thinking about that 12% to 13% EBITDA margin for this segment?

Sure. Let me answer first and then Antonio can give more color on the overall piece. I think that sounds in the right ballpark. We talked about the second half being a few hundred basis points below the first half and more of that kind of downdraft will be in the fourth quarter. So it sounds like the right ballpark because we're -- in the fourth quarter we will be building more of the lower-priced towers and we had the changeover that we talked about. In terms of the ability of utility structures to offset softness in wind towers looking forward I think that's -- that would be a big offset. I think our goal is to offset as much of it as possible but given the size of the wind towers and then the magnitude of pricing declines that we're starting to see in the fourth quarter and then into next year I think offsetting the full amount would be a pretty tough task.

And let me just add a little more color on that. The so if you look at wind towers we've had incredibly good margins over the last few years coming from very large backlogs that were sold several years ago in a very different environment. That's let's say the tough comparison. On the other hand if you look forward and if you look forward beyond just this quarter let's say the whole forecasts are low let's say whole forecast for the wind industry have become more optimistic. As we look forward I think the market demand should start reflecting some of that and as you know we're also working towards an anti-dumping case against several countries. I think in terms of wind towers the margins we're going to see are lower than what we have but there is a good perspective in the future that those margins can improve. On the whole segment I think we're going to have very healthy margins. Yes wind is going to be lower than what it was. But on the whole the segment should be very positive.

Thank you. And we'll go next to Bascome Majors with Susquehanna. Your line is open.

Thanks for taking my questions here. Just wanted to see if you could give an update on free cash? It looks like you've done about $160 million year-to-date. Any stance of where that's going to end up for full 2019?

Sure Bascome this is Scott. I think it will be -- it should be better than that. And the pieces of it that we've talked about so EBITDA we said we expect to be at the top end of our guidance range. CapEx of $80 million to $85 million. We've said cash taxes in the $20 million range and then change in working capital we've generated $40 million of cash from working capital this year. Year-to-date we expect to be able to hang on to most of that because the teams have done a really good job offsetting the increase in barge inventory with improvements in payables and receivables. So you put all of those together I think you're still probably in the $160 million to $170-plus million range for the year which we feel like is a really good first year free cash flow as a public company.

And longer term I mean you're in a quite a few businesses or few different businesses and end markets for a company of your size. Can you comment a little bit on when and why you consider selling legacy businesses as well as buying new ones? And maybe just looking out two, three, four years what's really the optimal portfolio to drive real shareholder value longer term?

Bascome this is Antonio. The -- let me start with the M&A side the buying of businesses. As I said in my remarks we have a pretty active pipeline. And we've been very clear on what we're looking for. We are growing our aggregates. We're growing our specialty materials. And we've also said we are expanding our footprint in the utility structure not only in terms of capacity but also product lines. If you look at our competitors they have a much broader product line than we have. So we are looking for ways to expand our product line. Those are the areas where we're focusing let's say deployment of cash. We have other smaller opportunities but that's the major areas where we're focusing. On the divestitures I would tell you that we don't have a clear time line for doing that. As we said when we spun off each of the businesses we went through a strategic analysis and making sure that we knew the growth opportunities. We have built a great pipeline of organic opportunities in many of our businesses. Scott talked about some additional investments we're doing on the organic side improving capacity opening new plants etc. But at the same time we realized that we understand and we are clear that the story is very complex. And that's why in the long-term strategy we say we're going to simplify and we're going to reduce the cyclicality of the company. So it will depend on market conditions and other things. But at the moment we are focused on growing the businesses and we'll know when -- M&A has a lag of its own. So we'll know when it comes.

Thank you for that thoughtful answer. Antonio, if I could just slip 1 more in. I mean you gave a pretty detailed rundown of the run rate of -- at least directionally of a lot of your businesses into 2020. Tying that all together I mean The Street is looking for something like low- to mid-teens EBITDA growth next year. Does that feel unreasonable based on where you sit today?

Sure. This is Scott. I'll take that one. I think we're going to reserve specific revenue and EBITDA guidance for probably our February call. I think directionally Antonio gave some good color that we should see growth in Construction Products organically and through acquisition. Transportation, we should see growth as barge probably will certainly -- we hope it to overcome a slowdown in rail components. And then energy we'll see how much of the wind tower pricing we can offset. So we expect healthy growth next year. And I think you're right about that.

We'll take our next question from Stefanos Crist with CJ Securities. Please go ahead.

Morning guys. Congrats on the quarter. Can you talk a little bit more about what's driving the increase in dry barge demand? Is it just steel prices? Or are there other factors into that?

Thank you. Thanks. Well this is Antonio. Let me -- if you look at the fleet age the reality is that there is a need for dry barges also for liquid barges but the need for dry barges is much larger. People -- the perception that because coal has been coming down so much there's excess dry barges. It's not completely accurate. Coal has -- most of the coal barges have been converted over the last years. And also the drive -- what really drives the business is grain. It's much more than coal today. If you look at the ton miles that the grain moves compared to coal is much larger. So I think that's one of the things that we need to realize is that the grain market is what's going to drive the volume in the future. That's why I'm saying that the tariffs are still a big uncertainty but replacement needs to happen. If you look at some of the conditions of some of the barges we've seen in the last few months as we toured some of the yards etc. they're not in good shape. So I think replacement is going to be the big driver. And that's why steel prices are so important. No?

Yes. And then one more question. Can you talk about the 2 construction acquisitions during the quarter? Were those specialty or legacy? And is the pipeline leaning towards one of those as well?

Yes they were both traditional aggregates in our current platform. So that's -- when you talk about bolt-ons I would say they're more on the aggregate side when you talk a little -- about a little larger pieces it will be probably on the specialty materials. But on the bolt-ons we have a healthy pipeline of bolt-ons in the aggregate side especially.

We'll take our next question from Blake Hirschman with Stephens Inc. Please go ahead.

Good morning guys. Thank you, good morning, on wind towers as we look into 2020 you talk about the pricing and some of the challenges there. Can you help frame this up a little bit more? I mean how much downside are we talking about on the margin front? Is it 50 bps 100 bps? Or is it much more than that? Just trying to get a little bit more clear sense.

Sure. Blake this is Scott. What we've said about wind towers next year we expect very healthy volumes next year. So volume is roughly flat. We're running a very lean operation now and expect that to continue and the orders to fill up our plants. Pricing will be the delta. And what we've kind of talked about is the overall downside in the segment is probably a few hundred basis points versus this year's full year average. And then looking forward to what a more normalized kind of industry-wide EBITDA margin would be. So our goal is to make up as much of that as possible with other businesses but you're still talking probably in that neighborhood of degradation in the segment margin.

Okay, got it. Thanks for that. And then also on the wind towers. Is there any momentum kind of building behind any kind of extension to the PTC? Or is a lot of that going to depend on -- in 2020 the administration that ends up being in office?

This is Antonio. No there's always this -- the possibility of a PTC being renewed. That's always on the table. On the other hand I think what's very important is that the wind energy is competitive on its own feet. And that's why I think the -- all the forecast look at the next five to 10 years with a very strong or stronger outlook than it was a year ago let's say. The other thing that's changing which is very important. It's a trend that we tend never to talk about. But as companies look more into ESG and as more investors also look more into ESG companies are very focused on improving their cargo footprint etc. If you look at the demand for wind energy it shifted dramatically over the last few years. Initially it used to be all these large utilities building or developers developing large wind farms. Now a lot of the demand for wind power is coming from large corporate Fortune 500s and large companies especially public companies. And that's what's driving a lot of the demand for renewable energy. So that's a very positive trend for the market.

Got it. And then last one on Construction kind of looking into next year it seems like others are kind of talking about low single digit mid single-digit growth for volume and price specifically on the aggregate side. But let's just say that this is what you end up seeing what kind of incrementals should we be thinking about on the margin front in that kind of growth environment?

So as Scott mentioned I think on our traditional aggregates business and legacy businesses I think that the volumes and the pricing trends that the other people are talking about we see the same thing. So I -- we're confident on that side. It should be a very good year. The trends are good. The spending is good. All the projects in the regions where we are really good. So we are positive on it. We do have a smaller headwind on the oil side -- oil and gas side in Texas and Oklahoma. But as Scott mentioned that's a smaller piece. I think the overall story is similar to what you're seeing from other people and we are very optimistic about our business going forward. And we also see good opportunities as I mentioned on the M&A side to continue building these bolt-ons and some larger opportunities.

All right, thanks a lot, guys.

We'll take our next question from Justin Bergner with G. Research. Please go ahead, your line is open.

Good morning, Scott. Nice quarter. Starting with Energy Equipment. As I look at sort of the sequential revenue over the course of '19 it's been pretty flat. But would you be able to sort of break down what -- how the underlying mix has changed between wind towers and utility towers year-to-date?

Sure. I'll give you some directional color on that Justin. The revenue split between the two has not changed as much. Our wind towers have been pretty consistent in terms of revenues same with utility structures. The delta has been on the margin side where we've been able to improve our utility structures margin as wind tower margins have declined in the second half a bit to offset that and keep it at a relatively flat segment margin.

Okay great. And then on the utility structures margin side. I mean I guess you were able to hold up margins in the third quarter versus the second quarter despite -- it seems like some more pressure on the wind pricing side. Anything that's positively surprising you in the third quarter versus the second quarter on the utility structures margins? And can we think of sort of the exit margin for the fourth quarter as being indicative for 2020?

So let me start with the -- I would say the soft side of the question which is the -- what sort of -- what are the surprises. And I don't think it's a surprise. I think it's more we are a company that has traditionally focused on long-term relationship with very large customers. And we had a very small participation in a very large portion of the market that's called the bid market. And traditionally that's a more -- less predictable market and it's normally very competitive. As we focused over the last year in our improvements internal improvements operational improvements our lean manufacturing processes the team has done an incredible job increasing throughput improving our on-time delivery etcetera. And we've been able to participate with very good economics on this bid market. And the bid market is huge. And we really have a very small percentage of the market. So that's why we said we're increasing our capacity to be able to compete more effectively there. And like every other manufacturing the more volume you put through your plant the operational leverage you get is incredible. So I think it's a combination of a good market that we're participating that we have traditionally not participated and that's increasing our operational leverage. On the margin side I'll let Scott give you color but I think he was clear before.

Yes I think that's a decent -- if you look at the exit margin in the fourth quarter that's a decent starting point for where we think we'll be in 2020.

Okay, great. Thank you. Just quickly on the barge side of things I'm not sure I caught the fourth quarter versus third quarter progression. I guess you expect better barge margins to offset rail components margins but you still expect EBITDA to be up sequentially? Just maybe...

Correct. Correct Justin. So we talked about from a margin percentage perspective the increase in barge margins should offset the weakness in components margin and be able to keep that segment margin relatively flat sequentially. But we've also got the big step-up in barge revenue coming in the fourth quarter. So higher barge -- higher total segment revenue flat EBITDA margin should lead to higher EBITDA dollars in the fourth quarter. We're finally past. We feel like the fourth quarter will be really past the inflection point of the start-up costs that we've now shed and we've talked about the third plant being profitable. We're finally starting to get into some of the better priced orders that were taken in a better pricing environment and that should continue into Q1 of next year.

Okay great. So I'm inferring that you don't expect a meaningful sequential step-down in steel components either for the barge revenue uptick?

No. So we are saying that we expect a step-down in components revenue for Q4 versus Q3. The volumes that we expect are lower due to the kind of slowdown in the industry and the whole supply chain and railcar components is trying to work out the excess inventory and expectation of 25% to 30% lower builds next year. So we would expect lower revenue in components but as a whole transportation should be up in the fourth quarter.

Okay, great. Thanks for taking my questions.

We'll go next to Julio Romero with Sidoti. Please go ahead, your line is open.

Hey, good morning everyone. So wanted to ask -- wanted to follow up on the 2 bolt-ons in Construction Products. Can you talk about maybe the oil and gas end market exposure for those bolt-ons? And maybe that end market exposure for the pipeline of acquisitions you're looking at? Is it notably different than what you have in either legacy aggregates or ACG?

No. Yes -- thank you for the question. We really don't have any oil exposure in the acquisitions we did. And from the pipeline we have no oil exposure at all. It doesn't mean we are scared of the oil exposure. There's some really good -- the plans we have are really good. It's just a little more volatile but there's going to be opportunities eventually in those areas. And but at the moment we're not working on any aggregates that have oil exposure.

Understood. And on the working capital guidance you're seeing a strong free cash flow conversion. DSO has ticked down sequentially. Can you give us some color there on anything notable to call out maybe that's driving that down?

Sure Julio. As I've said we've made some really good progress on receivables and payables. And if you look we've been able to put a lot of focus on those. And the real victory so far through the year is that we've had a big ramp-up in inventories related to the barge business. So the barge business has ramped up almost 80% year-over-year. That requires a lot of extra inventory but the achievements we've been able to make on the other two fronts have more than offset that and we generated about $40 million of working capital year-to-date. So we're pleased with that. We do feel like there's additional improvement in terms of working capital as a percent of sales but we feel like we're definitely in the right trend.

And let me expand on that because I think it's important. We meet every month to look at this and the one thing that -- it's the softer side of the DSOs. But it's not only that it's dropped the quality and the strength of our receivables has become really really good. So we have good visibility and high-quality receivables.

It's helpful, thanks very much and best of luck in Q4.

It does appear that we have no further questions at this time. I'll turn the call back over to you Ms. Peck for any closing remarks.

Thank you, Ashley. Thank you everyone for joining us today. We look forward to speaking with you again next quarter.

This will conclude today's program. Thank you for your participation. You may now disconnect.