Good morning, ladies and gentlemen, and welcome to Arcosa Inc. Third Quarter 2022 Earnings Conference Call. My name is Catherine 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 2022 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, everyone, and thank you for joining today's call. Starting on Slide 4, I'll begin with our third quarter highlights. Arcosa delivered strong results, led by excellent performance in Engineered Structures that helped to drive an 11% increase in consolidated adjusted EBITDA. Favorable demand and pricing actions along with our continual efforts to improve operational efficiency and effectively manage costs in response to inflationary pressures contributed to strong earnings growth and improved cash flow. Engineered Structures was a standout segment this quarter, generating double-digit revenue and segment adjusted EBITDA growth that led to 360 basis points of margin expansion, primarily coming from improved pricing in our utility structures and storage tank business. Results in Construction Products reflected continuous healthy construction activity and strong pricing gains to address inflationary pressures although overall volumes in the quarter were impacted by a number of constraints that contributed to essentially flat segment adjusted EBITDA year-over-year. We are pleased to maintain segment margins consistent with the second quarter. Our Transportation Products segment performed in line with our expectations. EBITDA was down as growth in steel components was offset by lower profitability in March. Cash flow generation and strengthening our balance sheet flexibility continues to be top priority, and we have made significant progress this year. Free cash flow conversion was 120% in the third quarter, a significant improvement from last year. We ended the quarter slightly below our long-term leverage target, and we further strengthened our balance sheet and liquidity position in October with the completion of the storage tank divestiture. Based on our strong year-to-date financial performance and taking the divestiture into account, we are updating our 2022 financial guidance. We now anticipate 15% adjusted EBITDA growth in the midpoint of our guidance range. Turning to Slide 8, we have…

Thank you, Antonio. I'll begin on Slide 11 with Arcosa's consolidated results. Third quarter revenues increased 8%, driven by solid organic growth. Adjusted EBITDA improved 11%, outpacing the increase in revenues and driving 30 basis points of margin expansion, despite inflationary pressures, and ongoing challenges within our wind towers and barge businesses. Turning to Construction Products on Slide 12. Segment revenues increased 7%, reflecting strong pricing gains, partially offset by lower natural aggregates volumes. Inflationary pressures led to higher diesel, process fuels and cement prices in the quarter, increasing segment cost of sales by approximately $9 million. As a result, adjusted segment EBITDA was about flat compared to last year. As the quarter progressed, we experienced consistent improvements in profitability with segment margins up sequentially each month and a strong finish in September. Overall demand trends were healthy and contributed to broad pricing strength. Average organic pricing in natural aggregates increased about mid-teens and we now anticipate a low double-digit increase for full year 2022, ahead of our previous guidance. Pricing trends were also favorable in recycled aggregates and specialty materials. Overall, volumes in the quarter were strained by several factors; wet weather in Texas, the Gulf Coast and Phoenix, cement shortages impacting our ready mix customers and the timing of projects in certain markets, and a deceleration in single family residential construction activity that impacted natural aggregates volume. In the third quarter, adjusted organic volumes in natural aggregates were down mid-to-high single-digits. As a result, we now anticipate full year 2022 volumes to be flat to slightly down, below our expectations at the beginning of the year. Total volumes in recycled aggregates benefited from the acquisition of RAMCO, the integration of which is progressing very well. Within Specialty Materials, we continue to see favorable momentum in multi-family residential construction,…

Thank you Gail, Please turn to Slide 17. As Gail discussed, Arcosa has performed well both in the third quarter and on a year-to-date basis, benefiting from positive fundamentals in our infrastructure driven businesses, particularly construction products, and utility structures, while effectively managing the cyclicality in our wind barge and rail component businesses. I am pleased with our solid financial performance this year, which is evident in our significantly improved earnings and cash flow as well as in the strength of our balance sheet. At the same time, we have advanced our strategic objectives, expanding our geographic footprint in recycled aggregates with the ramp acquisition, while reducing the cyclicality and simplifying our portfolio through the timely divestiture of the storage tank business. Turning to the macroeconomic environment, we continue to monitor and stay ahead of inflationary pressures while still remaining price competitive in our markets. Meanwhile, we have experienced an improvement in labor availability easing some of the labor related constraints we faced earlier in the year. We're encouraged by the positive fundamentals in our infrastructure businesses, yet to remain mindful of the potential impacts arising from the heightened economic uncertainty and higher interest rates. In the near-term, we expect the deceleration in single family residential construction in some of our markets to continue. However, a favorable pricing dynamic should continue to compensate for the volume impact. Our medium term view on single family residential remains positive given the shortage in housing supply and attractive population growth trends in our markets. Our spending outlets, largely from the infrastructure bill become more widespread, we expect to transition volume from residential projects to more infrastructure oriented ones over the next few quarters. At the same time, we remain focused on value over volume prioritizing our discipline pricing strategy. We continue to see…

[Operator Instructions] We'll take our first question today from Julio Romero with Sidoti & Company. Your line is open.

Just start on the Engineered Structures business. If you could just talk about, some of the big drivers in 2Q, it looks like they continued into the third quarter albeit not at the same rate and just talk about maybe the outlook for the fourth quarter on those same drivers?

Sure. I think everything you see around the Utility Structures business is favorable, not only favorable, Julio I would say any forecast you see in the industry trends point to an industry that's good, but it's getting better all the time. You look at forecasting all the market studies and every six months or so that they present new forecast -- the industry gets stronger and stronger in terms of the forecast for the next several years. It's not a one year deal. So, I think as a company, we will prepare that. We are not operating at full capacity. We have capacity to ramp up. And as our volume grows, the plants become more efficient. We can do better planning and allocate the better projects to the plants where they are supposed to be made. So very excited about what's going on there. And I would tell you, I mentioned it in my remarks, one of the things that probably is holding back the industry somewhere, some of the projects are getting held up with labor constraints. There has been some shortage of other inputs for the industry that are holding back some projects. So as those things get sorted out, I think the industry we set up for acceleration. So excited about what's going on there.

Excellent. And I guess to follow up just to clarify, as I understood it, the second quarter Utility Structures business benefited somewhat from the availability of -- from better availability of labor. So, is that -- has the availability of labor and utility structures changed at all?

Yes. I mean, Julio, we have seen better availability. It is not perfect. We are not getting lines of people wanted to work, but we can get the people we need. I'm referring more to our customers. What we are seeing in discussions with our customers is some bottlenecks in their availability for building the projects in the middle of rural Latin America. Now, it's the cruise et cetera, that's what's holding it back a little bit.

We'll go next to Ian Zaffino with Oppenheimer. Your line is open.

Great. I just wanted to key in on wind towers a little bit. Can you maybe just go over that I've read the IRA, but wanted to see what your take was on what's in the IRA and what does that necessarily mean for you? I know there is significantly tax credit. DO you think you will be able to keep the tax credits? I mean, are they going to go back as far as negotiations with the customer? How do we think about that in general or maybe even the magnitude? Thanks.

Yes. No, that's a very good question. Let me first start by saying we are still figuring it out. There is -- the rules are still not very clear. There was -- there is a period for us sending comments that we are waiting for that period to happen and getting back some clarification. So as far as, I'll tell you my point of view as of today with the information we have today. First of all, I think this -- the IRA is an incredible catalyst for Arcosa because it provides a very long period for production tax credits for wind towers. That is the most important piece. It's the length of the IRA because every time we have seen a longer tax credit, the industry starts ramping up and it takes a while for the industry to ramp up. So, the longer this tax credit extension is the better because it allows our customers and the industry to do planning to do their projects, which take a long time with better planning. So that's one. On the tax credits, several things are important. One, there's a concept of you have to build a building in America. And again, there's still some clarification that needs to happen. But we're the largest wind tower manufacturer here in the country and we're very well set up. Right now, we have two plants operating, but as you know, we shut down one in 2021. So, we have the ability to ramp up capacity relatively easy. On the tax part, this is the first time that one of these bills contains a tax rate for the manufacturers. Historically, this has been a tax credit for developer. Now, the tax credit includes -- this bill includes tax credits for the developer, for the turbine…

And then also glad to hear that indications of interest on the barge side is improving, I mean, it looks like, I mean maybe can you comment on your steel input costs? I mean, I'm able to follow the pricing through the services, but it seems like steel prices are pretty close to where they were unsure inputs of steel are pretty close to pre-COVID. Is that the level need to stimulate the pre-COVID demand? Or how do we think about where input costs are vis-à-vis what their demand and order book might look like? Thanks?

Yes. So, steel prices, there's really two markets for carbon steel, flat carbon steel. There's more than two but the two that we follow are a hot roll coil and plate, and they are different markets historically. What we use to build a bar this is plate. The capacity in the U.S. is much more for plate and for coil. And historically, there's a difference of about $150 between the plate price and the coil price, plate being more expensive by $150. Right now, the coil price is for the last six months have been dropping very fast and they are relatively close to pre-COVID levels with hot roll coils. As I mentioned, we don't use coils for building barges. We use mainly plate. Plate barges stayed stubbornly high during this period until about maybe a month ago, a month and a half. They started falling at relatively good pace. There's capacity coming online in the fourth quarter, and the utilization of the mills is falling. So prices, my expectation is that they will continue to fall at a relatively fast pace over the next few months. And in the next few months, we should be able to get to a place where prices are become an appeal for our customers to start ordering. What's exciting about the industry, again, the inquiries are very strong. We have significant capacity to ramp up. And our experience is that once the orders start coming in, everyone jumps in because they want to secure their capacity slot. So, that's why I mentioned in my remarks that I -- the good news is that we have good backlog that issues visibility and allows us to make the right pricing decisions. We are not going to be giving away our capacity. And that's going to be our focus in trying to sell all the seeds the beginning with good margins.

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

I'm just wondering, if you could dive in a little bit more as to what drove the sequential improvement in construction product margins as the third quarter progressed? Was it additional pricing actions? We see cost pressures started to alleviate, just wondering, if you can dive in a little bit more?

I'll be honest with you. I think we had a very slow start. July was not a good month. Lots of things and I don't want to go into all the details. Gail mentioned a few constraints and rain and all the things. But we had many things that we did not perform well in July, internally. Externally, we have some other factors like rain and other things. So, I think we've had a very slow start. The team really did a fantastic job in order to pick the rhythm back up. And then in September, we had phenomenal month. So I think, the quarter, I think reflects is a little bit of the external factors. But we had a really slow start, and let's say, it was not our best our July. So, I think part of it is our pricing started kicking in we did pricing increases. Part of it was that we perform better. And during the quarter, we increased prices several times in several of our businesses. So, I think the pricing momentum for the fourth quarter is very strong.

I know we're not formally in 2023 yet, but I was wondering if you can maybe sketch out how you're starting to think about construction products for next year. The question would be on both on the volume and on the margin side. Would you anticipate growth and infrastructure to offset residential weakness, and conversely, we anticipate margins to expand just based on the momentum that you have from the late quarter performance?

We're not ready to give guidance on for '23 yet, I think still early. We're still going through our budget process, so we don't have numbers for 2023. But I'll tell you my perspective is that the residential will continue to slow we mentioned it in the comments. I'm optimistic that we're going to be able to allocate partially all the volume to infrastructure projects as the infrastructure bill starts kicking in. Arrival to the businesses of the construction segment is the one that has the most housing exposure. The rest of the business are more infrastructure oriented, so I think that the infrastructure bill becomes more a reality in terms of projects. I think we have a lot of opportunity to grow with all those projects. So, it's going to take some time. I think over the next few quarters, we will know more how fast we can redeploy the volumes towards infrastructure. And as I mentioned, housing I think is going to be a slowdown, but we are very optimistic about the medium and long-term housing projects.

We'll go next to Brent Thielman with D. A. Davidson. Your line is open.

Hey, thank you. Good morning. Antonio, it looks like the core Engineered Structures business ex-storage has done EBITDA margins around 14% year-to-date, which is up from all 11% last year and notable given the challenges in wind. But could you just talk about your ability to kind of maintain a low teens EBITDA margin in the quarters ahead for what's now the core business in that segment?

Yes. So, one thing to keep in mind that, our storage tank business had performed extremely well during the year and that was pushing our margins up in the whole segment very significantly. For the fourth quarter, as we slowdown wind to stay open, let's say, for next year, I think the wind industry, the wind tower is going to weigh more on the margins on the business in the very short-term until we start getting, let's say, more volume to the wind tower business. Our goal would be to try to offset as much as possible with our retail structures and traffic and telecom, that's our goal, that's we want to do to be able to keep our target margin for the segment even with wind towers in a really bad place. But I think the wind towers is going to be a heavy weight for the next few quarters as we get through this very slow times, preparing for what's going to be a very strong time -- very, very strong period. So, our goal is to try to stay as close as possible to our guidance in terms of margins. Let's see, if we can stay close to it, but it's going to be a heavyweight to wind towers.

Brent, this is Gail. I'll just add to just a little bit more color on Q4. I mean, we would probably see wind -- we have given full year guidance for wind EBITDA of $12 million to $13 million for 2022. We'd see Q4 closer to breakeven for wind. So that's going to have some impact on Q4 margins. But to your point, the year to date ex storage at 14% we are really proud of the strength in those margins, but you are likely going to see a little step down in Q4 with the wind compression in Q4.

Okay. Thanks, Gail. And then second question, just it seems like you would sort of become the strategic acquirer of choice in recycled aggregate. You have now delevered the balance sheet in a position that look at a lot more opportunities here. Maybe can you just talk about the breadth of the pipeline in recycled? Are there other opportunities out there at scale like you have already done? Or is that list shrinking and/or are you more focused on natural aggregates now?

That's a really good question. The way I see aggregates and we see it in the Company, I think recycled and natural are a complement to each other. As you know this ESG culture now and their recycling is, it has to be part of some of the way we think about the future. So, our goal is to try to offer our customers a combination of natural and recycled aggregates, where it makes sense. There is places where it doesn't make sense. There's places where it doesn't make sense. But so we have a pipeline of acquisitions, we are working. We just hired a new M&A person, so we're excited about where we are. I know that we've been working for the last three years on the metropolitan areas. we like to try to develop a pipeline of opportunities. As I've said before, your M&A doesn't happen when you want it exactly it has it's like of its own. But we're going to be pushing hard over the next few quarters to redeploy the capital into projects that make sense that lead us to a more aggregate centric and what I mean aggregate centric is more aggregate and recycled aggregate. As a company, at the same time, we have incredible organic growth opportunities, we went through strategic planning, and we have a lot of ideas. I've mentioned before, I think a company is healthy when you have more ideas, ideas and money and we're in that spot still. So I think between organic and inorganic growth, over the next several quarters, we're going to be with deploying the capital, it might take us a little while. But the good news is when you have a lot of projects and a pipeline, you can choose the best ones, and the ones that you want, and you don't have to do the one that is in front of you. So that's where we are.

We'll go now to Stefanos Crist with CJS Securities. Your line is open.

In aggregates outside of weather, are you seeing any differences in demand across your geographies?

Good morning. Yes, we are seeing different demand profiles across the country. Big weather away probably where we saw this sharpest decline was in Arizona. That's where we've seen more. Let's say volumes come down faster. The rest were more even compared -- the three other regions were more even in terms of volumes. Pricing, on the other hand, has been consistent across the country. We've been able to raise prices and have very strong price momentum across the country. But yes, we're seeing different demand profiles. I would say, here in the Texas region, around Dallas, biggest bottlenecks is more production than the volumes we have. We're running at full capacity here in the DFW. Of course, housing is slowing down, but we were still running at full capacity. So, the west is probably where we saw the most drop.

Stefanos, if you were to look, just that starts in the Phoenix area, I mean that contraction in the Phoenix area for us was more single family residential related. Otherwise, public and away from single family demand drivers continue to remain very, very healthy. And the outlook is very positive, but we didn't feel that in the Phoenix area during the quarter.

And then just following up on M&A. Do you have more focus or intention on a bigger acquisition or maybe smaller bolt-ons?

Well, now that the balance sheet is in good shape, we're willing to explore larger acquisitions. It's, as you know, in aggregate, there's not many, there's not a lot. But if something comes up, we'll take a look at it, you know. We've also mentioned that when you look at bigger acquisitions, especially on the aggregate side, they're not pure aggregate they come with a lot of other stuff. And we want to remain aggregate-centric, so we're going to be very careful not to buy something that takes us away from that. If it comes with a little bit of something else will we'll take it, but if it's a lot of something else, is not something we want to do, we want to stay on the upstream of that value chain.

We'll go next to Noah Merkousko with Stephens. Your line is open.

So, first, can you remind us of the end market mix between residential, non-residential and infrastructure for the construction products business? And I understand that residential is facing some headwinds today probably continue to see weakness there, at least partially offset by infrastructure. But maybe could you also touch on, what you're seeing on the non residential side and how you're thinking about that for next year?

I'd say, when we look at our mix, we look at it over a period, because there can be ebbs and flows. So when we look at the segment, we'd say about half is infrastructure for the construction product segment. And then the other split is really more or less 25 res, 25 non res. When you look into the individual businesses that make up the segment, though, I would say natural aggregates is a little bit more residential, single family residential, if you think about our lightweight aggregate, no residential exposure, there are shoring business, no residential exposure there. Our specialty, we have some multifamily. But our single family exposure is more in our natural and to an extent in our recycled aggregates business. So, that's why you saw on our commentary about volumes, we saw it on the natural aggregate side, what we saw some deterioration. So, hopefully, that's helpful. I guess I'd also say when we think about the acquisitions, we've made and very good addition to our portfolio. I would say the Southwest Rock acquisition that came with the new Phoenix geography, which we remain very, very positive on the outlook, did probably have a closer to maybe 40%-ish type residential exposure in that one particular geography.

On your second question, what we're seeing, we met with our team late last week and we're asking about how they are seeing the deployment of the volumes into infrastructure and they're very focused on that. And I will say the four regions are very optimistic about what they're seeing in terms of actual projects being beat and laid out. So, I think what we're seeing is we're starting to see more and more of the reality of the Infrastructure Act become true. So again, it might not be this quarter, but it's going to be little by little, we're going to see that kick in. And it should be good for our aggregates in terms of volumes being substituted to that market. And it's going to be great for the other businesses within the segment.

And then just as a follow-up sticking with aggregates here, you caught out cement shortages negatively impacting volumes. Is that a widespread issue or is it limited to certain geographies? And is that getting any better or will cement continue to be tight in your markets?

It was mainly in the Houston area that Texas, but mainly Houston. We have a bulk they're called stabilized sand that will we make sand with cement, and it's a very nice business for us. And throughout the month of July and August, we were an allocation we couldn't get cement. Not the amount we wanted at least. But it's not only on us. If you think about our customers already mix companies, they buy cement. So, the whole industry was on their location in Houston and around that area. So a lot of the projects simply got delayed because they couldn't get cement. In September this thing became a non-issue again, there is enough cement that you can count on cement right now. So, it was a temporary thing.

At this time, I would like to turn the program back to Erin Drabek for closing remarks.

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

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