Arcosa Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 8 speakers on the call.

Operator

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.

Operator

Ms. Drabek, you may begin.

Speaker 1

Good morning, everyone, and thank you for joining Arcosa's Q3 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 2 weeks.

Speaker 1

Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for 1 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.

Speaker 1

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.

Speaker 2

Thank you, Aaron. Good morning. Thank you for joining us to discuss our Q3 results and the 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.

Speaker 2

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 3 bolt on acquisitions in construction products. In September, we acquired a stabilized sand producer, enhancing Our presence in the fast growing North Houston market.

Speaker 2

Following quarter end, we acquired 2 recycled aggregate producers, Expanding our presence in Phoenix and entering the Florida recycled market. Our newly acquired businesses in Florida has 6 locations predominantly in Central Florida from Orlando to Tampa. Combined, these three acquisitions represent an investment of approximately $41,000,000 at an attractive multiple of roughly 7 times EBITDA. We continue to have an attractive pipeline of additional bolt on opportunities. While Engineered Structures revenue increased, segment profitability was below our expectations.

Speaker 2

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 3rd 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 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.

Speaker 2

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 businesses both through M and A and organic products projects. At the same time, we position our cyclical businesses to capitalize On the expected improvement in market fundamentals next year.

Speaker 2

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?

Speaker 3

Thank you, Antonio. I'll begin on Slide 11 to discuss our Q3 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 Trent Shoring. Adjusted segment EBITDA increased 9% year over year, reflecting strong pricing gains and reduced inflationary cost pressures. Freight adjusted segment EBITDA margin was flat as higher margins in natural and recycled aggregates were offset by lower margins in Specialty Materials.

Speaker 3

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, 3rd quarter natural aggregates volumes increased by high single digits driven by strong growth in our Gulf Coast in Texas region, 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 3rd quarter, driving year over year margin expansion despite a decline in volume trends. Within Specialty Materials, overall demand remained healthy, particularly for our industrial and flooring, plaster and lightweight aggregates.

Speaker 3

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. 3rd quarter margins decreased year over year, but improved significantly from the 2nd 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 Trent shoring business grew 25% on higher organic volumes as well as contribution from the Houston acquisition that closed earlier in the year.

Speaker 3

Margins also expanded slightly and our backlog and inquiry levels remain supportive of growth in 2024. Moving to Engineered Structures on Slide 12, adjusted segment EBITDA declined 6% and margins were 140 basis points lower year over year, normalizing for the storage tanks divestiture. Our wind towers business performed well and benefited as anticipated from $5,600,000 of net AMP tax credits, which more than offset the impact from lower wind tower volume. Results for our Utility Structures business were below our expectations. Although revenues grew at a solid double digit pace led by strong unit volume growth, Several factors impacted segment profitability during the quarter.

Speaker 3

There was a shift in product mix and certain higher margin projects were pushed into 2024 and were substituted with lower margin bid work. From an operational standpoint, equipment downtime at several locations resulted in additional expense and production inefficiencies. Lastly, a stronger peso impacted the profitability of our manufacturing operations in Mexico. The peso began appreciating relative to the dollar earlier in the year and was up more than 15% in the 3rd quarter compared to year ago levels. In prior quarters, we overcame negative currency effects through operating efficiencies.

Speaker 3

Turning to our backlog, we ended the quarter with combined backlog for utility wind and related structures of $1,500,000,000 approximately in line with the 2nd quarter as order activity and utility structures kept pace with shipments. Moving to Transportation Products on Slide 13, segment revenues were up 30% driven by volume growth and improved pricing in both our barge and Steel components businesses. Adjusted segment EBITDA more than tripled with margins reaching a 3 year high. This significant improvement was accretive to our consolidated Margin, reflecting the significant operating leverage in these businesses. We received barge orders of $21,000,000 predominantly for hopper barges, representing a book to bill of 0.3.

Speaker 3

We ended the quarter with total barge backlog of $240,000,000 approximately 75% of which we expect to deliver during 2024. I'll conclude on Slide 14 with some comments on our cash flow and balance sheet position. We generated $44,000,000 of operating cash flow during the quarter, which was down year over year due to a $29,000,000 increase in working capital, primarily driven by higher overall volumes and the timing of collection of receivables. We anticipate a moderation in working capital needs in the 4th quarter, but our expectation is that working capital will be a use of cash for the full year. As we continue to make progress on the organic projects underway in Construction Products and Engineered Structures, net capital expenditures were $42,000,000 during the quarter, an increase of $12,000,000 year over year.

Speaker 3

3rd quarter free cash flow was $2,000,000 With 1 quarter remaining, we have tightened our full year CapEx range to $200,000,000 to $210,000,000 We ended the quarter with net debt to adjusted EBITDA of one time and available liquidity of $633,000,000 During the quarter, we amended our credit facility to increase our revolver from $500,000,000 to $600,000,000 Extend the maturity date to 2028 and repay in full our $135,000,000 term loan. Pricing and financial covenants remained unchanged. Our healthy balance sheet and liquidity continue to provide ample flexibility to pursue disciplined capital allocation. I will now turn the call back over to Antonio for an update on our outlook.

Speaker 2

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 Given our solid year to date performance and our visibility into the Q4, we're confident in our 2023 revenue and adjusted EBITDA guidance. At the midpoint of our guidance ranges, we forecast 11% revenue growth and 30% adjusted EBITDA growth on a year over year basis, Normalizing for the storage tank divestiture. Consistent with our prior guidance, our 2023 adjusted EBITDA forecast assumes Estimated wind related net tax credits of between $17,000,000 $22,000,000 pending final clarification from the IRS.

Speaker 2

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, Non residential 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.

Speaker 2

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 5 gs investment. Overall, order activity and backlog visibility remains strong, reinforcing our positive view. As I mentioned before, we are already executing on the improvement Let's turn now to our cyclical businesses starting on slide 18. Aided By incentives from the Inflation Reduction Act, the wind industry is expected to enter a multiyear upcycle.

Speaker 2

In this environment, we're making necessary preparations Across our footprint to optimize production capacity. Our new Brownfields facility in New Mexico, we're staffing key plant personnel and working on building modifications. Our expectation remains that we will deliver towers from this facility starting in mid-twenty 24. In addition to these efforts, we are making incremental investments across our existing plants to further enhance our manufacturing efficiency and flexibility. During the Q3, we were pleased to receive a small qualification order from a new customer for 2 towers with delivery expected late 2024.

Speaker 2

We continue to have productive conversations with our customers for additional projects with deliveries beyond 2024. We remain confident in the growth outlook for the wind tower business, which serves only the onshore market. While order fulfillment is complex and requires time to negotiate, our backlog of about $1,100,000,000 supports our expectation for increased production volumes and strengthened profitability next year. Turning to Slide 19, our Transportation Products Segment performed well in the 3rd quarter with the barge business still in the early stages of a cyclicalopter. March backlog at the end of the quarter was up 87% on a year over year basis underscoring the growing demand for our barges and strengthening Our production visibility into 2024.

Speaker 2

While we remain confident in the midterm outlook for this business, some customers recently have delayed Purchasing decisions. Unusually low water levels of the Mississippi River system, which should be temporary and higher interest rates weighted on the demand for the quarter. We do not believe these concerns are reflective of the fundamental shift in customer sentiment. In this environment, we have taken actions to maintain our manufacturing flexibility and we continue to have strong visibility into our production schedule for 2024. In closing, Arcosa is well positioned for continued growth in the Q4 and into 2024, with significantly improved visibility in our cyclical businesses, While our growth businesses benefit from healthy pricing and demand environment, we're confident in our outlook.

Speaker 2

We remain focused on the execution of our strategy And strengthening our capabilities to deliver on the many growth opportunities across our portfolio. Before I open the call to questions, I want to recognize all the Arcosa Thank you for their hard work. Yesterday was our 5th anniversary as an independent public company and it is easy to forget how much this Company has changed in just a short period of time. We have come a long way, but I'm convinced that the best is yet to come. I also want to thank all the Arcosa stakeholders, our employees, customers, investors and suppliers for their support and confidence during these 5 years.

Speaker 2

Now I would like to open the call for questions.

Operator

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

Speaker 4

Hi, thank you. Wondering first off just on Construction Products. You cited some volume growth, which is stronger than we had anticipated, Recognizing you had some favorable geographic mix, but just wondering if you can go maybe a little bit more detail by end markets and what you were seeing that was driving some of The volume gains.

Speaker 3

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.

Speaker 3

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 2nd quarter. So seeing some continuation of positives there. Certainly positive lettings in the state.

Speaker 3

Non res doing well, and resi is okay. We're seeing some new neighborhoods in the North and South DFW W 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.

Speaker 3

They were up in the Q2 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.

Speaker 3

So we did see volumes up sequentially. So we're encouraged. It's early. As I said, It's the Q1 in a year, but we're encouraged with what we're seeing from a volume perspective.

Speaker 2

One thing I'd like to mention that it was told in my remarks, but I think we also had during the quarter across our portfolio in the U. S. A significant Disruptions from the heat that we experienced throughout the country. And when the We have a significant amount of hot base here in Texas specifically and that slowed construction a lot. And It created all sorts of impacts across our portfolio even in our plants.

Speaker 2

Now turnover increased, absenteeism increased. I think we saw during the quarter and this is just I don't have a number to give you before, but I think that this third quarter had Quite of an impact related to weather.

Speaker 3

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 in recycled in the Dallas Fort Worth area in

Speaker 4

the quarter. Understood. Thanks for all the detail. I wanted to ask just on the acquisitions that you have 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.

Speaker 2

We had a small operation already in Florida that came with our Stone Point acquisition a few years ago. So and it's a market that we really like. There is 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.

Speaker 2

So It is a platform that we want to develop. It's in our market we're really interested in and we always have additional opportunities in the pipeline.

Speaker 4

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 story.

Speaker 2

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.

Speaker 2

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 There has not been a shortage of jobs. So there's still it's hard to get people permitting For transmission towers, for wind tower farms, for all these things, it's taking time. So the way I would think about this, our growth It's not going to be a straight line. I think we're going to see these ups and downs as we get go through these bottlenecks that we have We'll be breaking as we grow.

Speaker 2

So that's to me that is the biggest deal the biggest issue happening.

Speaker 4

Understood. Thanks for that and best of luck.

Speaker 5

Thank you.

Operator

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

Speaker 5

Hey, good morning, Antonio and Gil.

Speaker 2

Good morning.

Speaker 5

I guess I wanted to touch on kind of sticking with construction products here. Pricing has been strong. It sounds Like generally the outlook in the market is that 2024 could be another good year for pricing. Is there any Color that you could give us on how you're thinking about your pricing outlook on the construction product side of business?

Speaker 2

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.

Speaker 2

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 is picking back up a little bit and inflation is not completely under control. So we have Continue to push our pricing.

Speaker 5

Yes. Yes. All right. That makes sense. And I guess on speaking of costs, you mentioned elevated costs in Specialty Materials.

Speaker 5

And it sounds like that's getting a little bit better, but is that going to be still going to be a factor going forward? And I guess I'll just stop there.

Speaker 2

Yes. So Specialty Materials, we mentioned in the second quarter. We had a really, really bad Q2 for Specialty Materials. Lots of factors 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 plants for Specialty Materials are much more complex.

Speaker 2

They are industrial plants. And we have some Maintenance issues and other things that a lot of absenteeism and turnover during the Q2, that's improving. We are We were able to keep our people much more. Our plants are improving quite a bit in terms Gail mentioned, we had a significant improvement in Specialty Materials pretty significant improvement in the Q3. So I was very pleased and the trend continues to look well.

Speaker 2

It was not only that it was Better in the 3rd than the second, but the trend throughout the Q3 sequentially, August and September, September was better than August, etcetera. 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 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 and 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.

Speaker 5

Right. Yes. Okay. Thanks for that color. And then I'm sorry if you touched on it.

Speaker 5

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 are you kind of thinking about just given where we are in the cycle? How are you thinking about that business as we kind of look in 'twenty four directionally?

Speaker 2

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 the normal season for this to happen. So since a couple of weeks, we've received rain and The levels are coming up quite a bit.

Speaker 2

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, these more cyclical businesses, I would characterize the mood 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 a we expect it to become better.

Speaker 2

As we have the important aspect, I'll go back to the fundamentals of the business. The replacement market is there, the demand is there, The customer sentiment is positive that barges 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.

Speaker 2

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 etcetera. 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.

Speaker 5

Got it. Thanks Antonio for all the color. Much appreciated and

Speaker 2

best of

Speaker 5

luck for the as we go through the rest of the year.

Speaker 2

Thank you very much.

Operator

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

Speaker 6

Hey, great. Thanks. Good morning. Antonio, could you speak a little more to the issues in the Engineered Structure 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, if any different, As we move into 2024.

Speaker 2

Yes. So let me start with one that has been cooking for the year as Gail mentioned in her script. 2 of our biggest plants are in Mexico. And when you have manufacturing expenses, Salaries, everything, depreciation, maintenance, etcetera 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 pesos Per dollar, so it appreciated pretty significantly.

Speaker 2

If you look historically and I'm 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 calls, we haven't even talked about it We have been able to overcome it. This quarter, I mean, it was no different except that the peso appreciated more And we had these operational issues that I mentioned. We had several equipment down in a few facilities that forced us to go outside and outsource pieces.

Speaker 2

And also the larger margin orders that moved into 2024. As I mentioned in my remarks, I expect margins to improve in the Q4 as we the peso has improved a little bit that should help, but also as we The ramp of our facilities that have been shut down in some equipment, I mentioned we will not have all our equipment ready for the Q4. 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 we use the smaller margin orders, we should return to the more normalized margins. So this is some of the problem was self inflicted.

Speaker 2

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.

Speaker 6

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?

Speaker 2

Sure. And I'm going to Start by saying what's I think so 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 is a very complex environment and We were not participating in this and that's a good thing. So we are only in onshore wind. And in onshore wind, Things are different.

Speaker 2

Going back a year, a 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, 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.

Speaker 2

We expect Start delivering towers in 2020 mid-twenty 24 and we have a good backlog for 2024 for 2 of or our other 3 plants. Having said so, there's still things to work out in terms of the tax rate has not been completely defined By the IRS and the industry 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 there's no orders and suddenly we get a big order.

Speaker 2

The fundamental aspect is that what I said in my remarks, we are set up for a better 2024 than 2023 given our production and and margin profile. And we have time with our plants in good shape to be able to wait for those bigger orders to materialize And grow beyond 2024. So 2024 should be better than 23 and then we should be ready to continue to ramp up as we move along.

Speaker 6

Okay. I guess just last one on construction products through 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 more confident that you can continue to increase volumes in 2024 for that business?

Speaker 2

Well, as Gail mentioned in her comment before, We saw flattening volumes in the 2nd quarter. We saw an increase in this quarter. We are as much smaller companies that 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 build should Start kicking in and should help us compensate reduction in volumes in housing and other areas.

Speaker 2

We are seeing heavy manufacturing built Throughout the country in our regions. So I think everything is set up for some of the demand factors to be 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 continuing increasing our margins. I'm going to go back also to your question on wind towers.

Speaker 2

The other thing I forgot to mention, we mentioned a small order that we received for 2 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 U. S, 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.

Speaker 6

Understood. Thank you,

Operator

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

Speaker 7

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

Speaker 3

Good morning.

Speaker 7

My first question is expanding on something asked a little earlier. So on macro, can you speak to the broader impact Higher interest rates and the general economic uncertainty across the portfolio. For example, I'm thinking about just which business units are most

Speaker 2

This is Antonio. I would say that the biggest impact, of course, Housing, where mortgage rates continue to be A moderator of demand and then any one of our customers that 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 towers, those things are I mean, of course, the utilities have leverage and everything, but they are pretty insulated. The demand is very strong.

Speaker 2

I would say wind towers is the same thing. So most of our projects Have their own fundamentals that are most of our products have their own fundamentals outside. Let's split construction products is one 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.

Speaker 2

So I'm not saying it doesn't affect. I'm just saying it's not the deciding factor to buy a barge or to buy On the construction side, of course, housing, but also it affects multifamily and all these other projects. So we're not immune to interest rates. Of course, we're not. But I think with 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.

Speaker 2

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 high interest rates, It also presents opportunities for us to be able to take advantages that the 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 process So there is risk and there is opportunities.

Speaker 7

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 4th quarter?

Speaker 2

Yes. I mentioned in my remarks that And later that the river was an issue during the Q3. We don't expect it to be during the 2nd part of the 4th 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.

Speaker 2

And during the Q3, 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 new barges, corporate oil 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'll get a 1 to 1 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.

Speaker 2

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.

Speaker 7

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

Speaker 2

Thank you.

Operator

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.

Speaker 1

Thank you for joining us today at our Q3 earnings conference call. We look forward to providing an additional update next quarter.

Operator

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

Powered by Quartr
Earnings Conference Call
Arcosa Q3 2023
00:00 / 00:00