Good morning, ladies and gentlemen, and welcome to the Arcosa Incorporated First Quarter 2020 Earnings Conference Call. My name is Nicky and I will be your conference call coordinator today. As a reminder today's call is being recorded. Now, I will like to turn the call over to your host, Gail Peck. Ms. Peck, you may begin.

Good morning, everyone. Thank you for joining our first quarter 2020 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 today. 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 Generally Accepted Accounting Principles. Reconciliations of non-GAAP financial measures to the closest GAAP 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 for more information on these risks and uncertainties including our Form 10-K, the earnings press release we filed yesterday, and our Form 10-Q for the first quarter expected to be filed later today. 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 first quarter results and business outlook. I will provide you with the current conditions within our markets, the highlights of our first quarter performance and later discuss our business line expectations, while Scott will update you on the first quarter financials. Please move to slide 4. There are several key messages I would like you to take away from today's call. First, Arcosa's business continues to operate well within the COVID-19 environment. We have been designated an essential business and our facilities are operational. Second, we have implemented business continuity plans and have adopted protocols to protect the health and safety of our employees and the community in which we operate. This is our priority and I would like to recognize all of our teams for how quickly and effectively these protocols were put in place. Third, Arcosa's strong financial quarter performance shows the earnings power we have and our strong balance sheet provides us with flexibility in this uncertain time and the capacity for significant growth opportunities for the future. And fourth, while we expect lower demand for some of our product lines in some others we continue to see strong fundamentals and have substantial backlogs that provide good visibility. On page 5, you can find the agenda for today's call. Let's start by discussing our priorities during the COVID-19 health crisis on slide 7. First and foremost, our top priority is the health and safety of our 6,300 employees and the community in which we operate. To that end, we immediately put in place safeguards at our facilities consistent with CDC guidelines. We also implemented work from home protocols for our office staff and are making plans for how we return to our…

Thank you, Antonio, and good morning everyone. I'll start on slide 10 of the presentation and walk through our results from the quarter and then discuss our financial strength and capital allocation plans in more depth. Starting with Construction Products revenue grew 41% to $149 million and adjusted EBITDA increased 49% to $32.1 million. EBITDA margins increased to 21.5% more than 100 basis points better than last year's first quarter. The legacy businesses performed well during the quarter and the Cherry acquisition exceeded our expectations. Volumes in our legacy business were higher for both our natural aggregates and specialty lightweight aggregates businesses, as Dallas-Fort Worth and Texas end markets remained robust throughout the quarter. Additionally the Cherry acquisition exceeded our expectations. The Houston construction market remains solid and the team did an excellent job executing during the integration. The only weak spot in the segment was continued softness in our West Texas and Oklahoma aggregate plants serving oil and gas infrastructure but that exposure is a small part of our revenue in the segment. And the segment still posted strong revenue and margin improvements even with the exposure. Moving to Energy Equipment on Slide 11, revenue grew 7% to $223 million and adjusted EBITDA was roughly flat once we adjust for a onetime bad debt recovery in 2019. Higher volumes in both wind towers and utility structures drove our increased revenue which was even more impressive given that lower pass-through steel prices were a pricing headwind for utility structures in the quarter. The wind towers team continued to execute well and delivered a higher unit count than the first quarter of 2019 including the successful delivery of a run of a larger tower type. Pricing as expected was lower in the quarter than last year's first quarter, but in line…

Thank you, Scott. For the first quarter our business experienced only minor disruption from COVID-19. But we do expect the resulting economic downturn to impact some of our product lines. And we have already seen some indications of that. We continue to be encouraged by the momentum we have in many of our businesses. However, the very fluid and uncertain economic environment has caused us to suspend earnings guidance. We intend to share Arcosa's outlook with you today. So you can understand what we're currently experiencing in each of the business lines. Given the uncertainty on the depth and length of the slowdown in the economy, I will try to be as transparent as I can with the information available today. Turning to page 19, let's start with Construction Products. Construction performed very well in the first quarter. In most states construction is considered an essential service. As such, demand has held up well. In addition to the new Cherry acquisition and its recycled aggregates business have performed ahead of plan. We have seen some softness in the construction site support business, since most of the customers are rental companies, who have begun to cut back on delay or delayed CapEx in this environment. Still this product line only accounted for 12% of group revenue on a pro forma basis which includes Cherry. While the Construction Products business performed well in the first quarter, we have been supplying projects that were already underway. As we move forward, we expect weaker demand in the construction sector, especially in the residential market. As this business line operates with shorter lead times and does not have the benefit of backlog, it is much harder to forecast in this environment. Also, the second and third quarters are the busiest for this business line. So…

[Operator Instructions] And we'll take our first question from Brent Thielman with D.A. Davidson. Please go ahead.

Thank you. Congratulations on a great quarter.

Thank you.

The margins in Transportation Products really strong despite the fact that rail is sort of working against you. And I assume that's going to continue going forward. But just given the inland barge backlog and the embedded pricing within that, do you think you can maintain these sort of margin levels through this year?

Hey, Brent. Thanks for the question. This is Scott. The answer is yes for the full year. There'll be some unevenness through the quarters as mix changes quarter-to-quarter. But the really strong margins in the first quarter largely from better pricing and the barge backlog, no start-up costs and then excellent operational execution, we would expect that to be relatively consistent for the full year. Q2 looks like because of mix in barge might be a little lower but then it would pick back up in Q3 and Q4.

Okay. And then I guess my follow-up is on utility and wind. The book-to-bill a little slower this quarter but still pretty good backlog here. Is – are you seeing delays in bid processes or decisions to move business forward? Does that – because of COVID, or does that ultimately move some things to 2Q, 3Q in terms of bid activities? Just curious kind of what you're seeing there.

Brent, this is Antonio. There are different businesses. So let me talk about each one individually. On wind towers, as I've said, I think we have a good backlog covers most of fourth quarter. And we are seeing order inquiries from several of our customers and we expect to receive some orders before the end of the year. So I think it slowed down a little bit because there's some disruption in the installation of wind towers with all this issue going around. It's a very busy year. Based on the expiration of the tax credit, there's a significant amount of movement in the fields of installing, et cetera. But I do expect orders to come in as we've said. The margins of the orders in wind tower are lower than we had in the past. So it's important to remember that. On the -- I mean, as I've said in the past, it's a project it's going to become and we are seeing that a project-based business where our customers will come in and say, I have projects for the first half of 2021, let's bid on those rather than a blanket order for five years like we used to have in the past. It's okay. That's how we operate in most of our business. And we're not afraid of it. We are encouraged by it and we're going to be dealing with that. Utility structures is a very different business and we continue to see very strong order activity. Inquiries continue to be strong. I would tell, you both on the wind and on the utility structure the biggest question we were getting during the quarter, especially, at the end of March, beginning of April, where the uncertainty was at the highest point, the biggest question we would get was not about delays, but are you going to continue to be able to deliver these products? That was the biggest question we were getting. It's, people were worried we could not deliver. So that is -- I think that tells you a little bit of the environment we're dealing with.

That’s helpful. Thank you very much.

Next question comes from Bascome Majors with Susquehanna. Please go ahead.

Yes. Thanks for taking my questions, guys. I was hoping we could revisit the outlook for aggregates and maybe the construction products segment as a whole. You commented that it's a seasonally strong business in the summer, which is going to be disproportionately impacted by the shutdowns and it's not a backlog business. But is there any way to frame some of the stress test scenarios you've done? Just trying to think about, kind of, worst-case scenarios in your minds that might be in play here, as we look to kind of underwrite risk/reward in one of your largest EBITDA generators. Thank you.

Sure. Thank you, Bascome. Let me give you a sense. The business has really three businesses inside now, specialty materials the aggregates and the Shoring business. The Shoring business is the one that we -- where we've seen now more slowdown. And the reason for that is that they're very different. The Shoring business we sell a lot to rental companies, as I mentioned in my remarks. And for them it's CapEx and like every other company like we are doing, everyone in these uncertain times is conserving cash and we've seen some delays or -- no cancellations, really more delays of orders. And right now, what our customers are telling us is, we're delaying the orders for the third quarter or for the fourth quarter. On the aggregate piece and that's what we're seeing. So the reason we -- the uncertainty around this business and I would tell you around the construction segment especially. When you ask our customers or industry experts what do you expect and some people expect a pickup in the third quarter. Some people expect a pickup in the fourth quarter. The reality is that, I don't think anyone really knows how deep and how slow this is going to be. And that was the reason we withdrew our guidance, because we don't know. The reality is that we don't know. We are working today. We're continuing to work on projects that we're already working before. Even in the second quarter, we started the second quarter pretty strong. We're not seeing in the aggregates piece any delays, yet, any signs of stress. We are seeing some of the big projects, especially in California and Washington that where construction activity did stop. There's a few states where construction activity did stop. And those are the states where we felt a little pain and we're feeling a little pain. But worst-case scenario is, if the virus comes back. And for whatever reason we go into lockdown and construction activity ceases to be an essential business, I mean, that's a really extreme case, I would -- that's not what we have in our expectations. What we have is that, like every other slowdown, construction slows down, together with the economy. We adjust our costs. Our main priority on the aggregate side is going to maintain pricing, which is one of the characteristics of this business and just adjust our costs and move forward and look for opportunities. That's our mindset at the moment.

So, I mean, is there any way to frame the degree of revenue downside that you guys are kind of working with in your planning purposes?

Yes. I think, Bascome, if you look at previous recessions and I think most people would say we're heading into some sort of recession now. You've seen a big variability where something as small as 5% to 10% revenue decline to something like the 2009, 2010 that was a bigger revenue decline. So I think it depends on how long the slowdown lasts and how deep it goes. But, I think, looking at those previous periods you can kind of book in what that might look like.

Yes. Thank you for humoring us with that. And as we look to 2021, I realize that's a really long way away right now. But I was just trying to think through your thought process on the backlog businesses, which are -- clearly back stopped to do quite well today, but also have some cyclicality where that could change in the future. Just, I don't know if you want to hit kind of your high-level thoughts on where you think structural mid-term demand could go in wind towers, utility structures and barge?

Yes. So, let me start with those three. I think those three are the big ones with backlogs. Starting with wind towers, I think fundamentally I'm a big believer in renewable power will continue to be a -- one of the sources of energy that will continue to be in demand. I think as we move forward that's going to continue. It's a trend that will not stop. As you go into the future if you are planning ahead when you look at the utilities that are giving guidance or talking about the results or the projects. A lot of them are talking about storage plans and things like that. So, I think going forward storage and renewables will be a story of -- a combined story that will continue to go together no? And we're optimistic in the long-term. The industry historically has worked on tax credits and that -- those are going away. And -- but now even with natural gas at $2 which now I know they're lower the industry is competitive. I think the technology has evolved and it continues to evolve really fast. So, I'm encouraged about it. It's something that we will have some uncertainty 2021 probably 2022 but the industry fundamentals are there for us in the long-term. Utility structure is different. That business for all -- everything that's happening even for the renewable energy and for electric cars and for everything we're doing electronically the grid hardening needs to happen and the investment in infrastructure in transmission needs to get stronger and that's what we're seeing in the market. It's a long-term demand factor that we believe is going to stay here with us for several years. The other piece is that that's why we have a relatively small market share there…

Thank you, guys.

And our next question comes from Stefanos Crist with CJS Securities. Please go ahead, your line is open.

Good morning and congrats on the quarter.

Thank you.

First, could you break out the growth in aggregates between organic and what has also contributed from Cherry?

Sure Stefanos. So, on the legacy business volumes were up pricing was relatively flat. And then the only downside was the oil and gas exposure. So, you put that all together roughly flat. Almost all of the total growth was in the Cherry acquisition that operated very well during the quarter. The integration is going smoothly and it added a lot to our results in the first quarter.

Perfect. Thanks. And then so you guys also had a lot of orders in barge $90 million. Could you maybe give us some color on how that's progressing into Q2?

Yes, I'll take that. So, we have received orders in Q2, but very few. So, we are -- right now we are going through -- basically what we're doing right now is going back to our customers with new steel pricing. And to give you a sense when steel pricing is at the current level compared to a year ago in a big barge it may be $75,000 to $100,000 in price reduction. So, that's what we're doing right now as steel prices stabilize a little bit. That's what we're going back to our customers. But we have received a few orders not much. We do receive orders in our components business. The barge components business continues to be relatively well. But barge very few.

Thank you so much and congrats again.

Thanks Stefanos.

Our next question comes from Ian Zaffino with Oppenheimer. Please go ahead.

Hi, great. Thank you. Very good news you're keeping the dividend. And also I kind of -- it was interesting that you spoke about M&A as well. What are you sort of thinking here on the M&A front? Are you -- get some targets out there that are kind of on shaky financial terms where maybe you could fins a good acquisition? Is that sort of like what you're seeing, or just kind of any color on kind of the environment and the stable targets you might have? Thanks.

Yes. Ian, this is Antonio. Like everything else, I think over the last several weeks, there was a reset in the mindset of everyone. And we have been working and we have talked about having a relatively full pipeline. And Scott mentioned the three areas the aggregate the Specialty Materials and the expansion of our utilities and around that business. And I think with this slowdown, first, we have to make sure that we get some more clarity on how deep and how long this will be, no? And -- but we won't know that. The reality is we're going to be navigating these uncertainties and we just have to get comfortable with that. We have a good balance sheet. We're going to be disciplined. But we do believe that there's going to be opportunities for people who either have not such a strong balance sheet or their business are not performing well they're not operating well or they run into some specific problems. And I do believe we're going to find opportunities. I think it's a time where a strong balance sheet is going to be probably the most important thing for any company to have. And we have a good one and we're going to be looking for opportunities, no? That doesn't mean that if we find something that we believe is reasonably priced, we won't do it. It's -- we have to leave that door open, because I think we have opportunities for the company for the future that we want to take advantage of.

Okay. Thank you. And then also as far as the business being deemed essential is that each individual business, or is this the company -- the greater company itself?

It's individual business. So, when you look at the guidelines that the government provided, each one of the business is essential for different reasons but all of them fall in the essential category. Also important is that the -- there's a -- our business in Mexico have the same situation. So we have continued to operate even though there's a disparity between both countries on what's essential. We continue to operate on both sides of the border have been essential up to this point.

Okay, great. Thank you very much.

And we will take our next question from Blake Hirschman with Stephens. Please go ahead.

Hi. Good morning, guys.

Good morning.

Hi, Blake.

I was curious as to whether you guys might kind of talk about what April trends have looked like just across the segments' top line or just the margin?

Yeah. I'll give you some overall color and stay away from specific numbers. But in Energy and Transportation, April has gone according to plan. We've talked about our outlook being intact there. And then on Construction Products where we don't have a backlog, we -- volumes have been strong. The markets that we operate in have held up well in April, largely from projects that were already started when the pandemic picked up steam in March. So that's one of the questions of -- it should be a strong April. We've seen a strong April. But there's uncertainty around the rest of Q2 and Q3 as to the degree that those projects are replaced by new projects.

Got it. And if you look at Construction Products piece, I guess either in past cycles or kind of as you would expect for this one what kind of decrementals would you expect to see there? I mean assuming that the top line drops 5% to 10% or maybe even closer to like a 20% just kind of some rough template for how we should think about the decrementals there would be helpful.

Yeah. I'll give you some color around margin declines in kind of what we see in the businesses. In Energy and barge, those are more variable cost structure. So we should be able to hold margins relatively consistent by rightsizing the footprint. You do have some decline, but not particularly severe. Rail components and Construction those are highest incremental and decremental margin businesses. So we'd expect more margin increases on the upside, which we've seen in good cycles but more margin pressure on the downside of demand declines because of the higher fixed cost structure. So, if you're talking about orders of magnitude drop that you described there will be margin pressure on the downside.

Blake, and this is Antonio, just to give you a little more color on the Construction side April. The -- as I mentioned the piece that's missing here is the Shoring business, the Construction site support that's where we've seen some pushback in backlog to the third and fourth quarter. It's not huge. It's a business that as I said, it's about 12% of our revenue in Construction. But it's -- it's a good business a good margin business. We're excited about it. We like it, but it's where we've seen a little more pushback. And a couple of states Washington California where we have operations have slowed down construction. So that's where we're seeing some slowdown also.

Got it, makes sense. And then just lastly, with the COVID impact and just the broader effects that that's had. I mean do you think there's any kind of momentum for extending the wind tax credit beyond end of this year?

This is Scott. We -- from our understanding of discussions in Washington that was part of some discussions around stimulus bills, it was not included in the final bill. But those conversations are ongoing, and we'll monitor that closely. Even without production tax credit, as Antonio said, we think the wind business is competitive economically and has a lot of positive drivers both from corporate ESG and other state mandates. So a PTC extension would be a nice benefit, but not required for that business to be sound.

All right. Thanks a lot. I’ll hop back in queue.

And it appears that we have no further questions at this time. I will now turn the program back to Gail Peck.

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

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