Arcosa Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2023

There are 9 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Arcosa Inc. 2nd Quarter 2023 Earnings Conference Call.

Speaker 1

My name is Shelby, and I will

Operator

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.

Operator

Good morning, everyone, and thank you for joining Arcosa's 2nd quarter 2023 earnings call. With me today are Antonio Carrillo, President and CEO and Gail Peck, CFO. 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. Instructions Today's comments and presentation slides contain financial measures that have not been prepared in accordance with GAAP.

Operator

Reconciliations of non GAAP financial measures to the closest GAAP measure are included in the appendix of this 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.

Speaker 2

Thank you, Aaron. Good morning and thank you for joining us to discuss our Q2 results and our updated outlook for 2023. Please turn to Slide 4. I will start with a few key messages. Our Q2 financial performance was consistent with our expectations Cycle Aggregates, while transportation products performance highlighted a significant operating leverage in this segment from higher production volumes.

Speaker 2

These solid results were partially offset by expected softness from Engineered Structures, reflecting a less favorable mix of utility structures projects booked in 2022. I am pleased with our performance through the first half of the year. We have achieved double digit growth in revenue and adjusted EBITDA normalizing for storage tanks and expanded margins approximately 100 basis points, excluding the Q1 land sale. This strengthened profitability reflects Productive pricing actions, effective cost management and improved operating leverage in transportation products. Through disciplined working capital management, 2nd quarter cash program in 2023 that includes a broad set of organic growth initiatives.

Speaker 2

As we look ahead, our cyclical business Our voice for accelerated growth and profitability next year, driven by improved production volume. Our Engineered Structures backlog has more than tripled over the last year, While our transportation products backlog has more than doubled. Additionally, order inquiries for dry cargo barges remain strong and hot rolled coil steel prices Have recruited from the recent highs. In Construction Products, we remain committed to prioritizing value over volume, Focusing on increasing unit profitability and expanding margins, the overall pricing environment remains supportive aided by favorable demand conditions in our geographic markets And we continue to work proactively to mitigate inflationary pressures. Our solid first half financial performance and improved visibility for our cyclical businesses has increased our confidence in the second half outlook.

Speaker 2

As a result, we're raising the low ends of both our revenue and adjusted EBITDA guidance Gail will now provide detail on our financial results for the Q2 and I will return to discuss our updated outlook. Gail?

Speaker 3

Thank you, Antonio. I'll begin on Slide 11 to discuss our 2nd quarter segment results. Starting with Construction Products, Revenues increased 8% driven by higher volumes and pricing growth in recycled aggregates as well as organic growth and as higher pricing was offset primarily by lower volumes. Adjusted segment EBITDA increased 5% year over year. Strong pricing gains and reduced inflationary cost pressures drove higher unit profitability in our aggregates businesses.

Speaker 3

Adjusted segment EBITDA margins declined 50 basis points as operating inefficiencies in Specialty Materials offset margin expansion in our other businesses. Turning to natural aggregates, we continued to experience broad pricing strength across our markets with average organic pricing up mid teens on a freight adjusted basis led by our West region. Natural Aggregates volumes were down mid single digits, an improvement from the pace of decline over the last couple of quarters. Continued pricing momentum coupled with an easing and inflationary pressures, particularly lower diesel costs resulted in higher unit profitability and solid year over year margin expansion. In recycled aggregates, we continue to see strong demand, particularly in our Houston and DFW markets with organic volumes up about 20% and pricing up low double digits.

Speaker 3

The combination of the two drivers resulted in significant margin expansion for recycled aggregates in the Q2. Within Specialty Materials, Overall demand remains healthy, particularly for our plaster and lightweight aggregates product lines. However, 2nd quarter profitability was impacted by several items resulting in lower business unit EBITDA and margins. Skilled labor availability at a few specific locations continued to be a challenge. We have taken steps to address and are seeing improved hiring and retention.

Speaker 3

Unplanned maintenance and downtime Also limited production volumes, which was further impacted by long lead times on certain repair parts. Our expansion at our plaster plant continues We are focused on improving business unit profitability in the quarters ahead. Finally, revenues in our Trent shoring business grew 27% more than offsetting acquisition integration costs. Overall customer confidence is strong and our backlog and inquiry levels remain supportive of growth in 2020 Moving to Engineered Structures, Slide 12 shows the impact of the storage tanks business that was sold in October 2022 on the prior period results. During the Q2, revenues for utility wind and related structures were flat as higher volumes in utility structures were offset by lower volumes in wind towers.

Speaker 3

Adjusted segment EBITDA and margin decreased year over year, primarily on less favorable product mix in utility structures. We expect the margin in utility structures to normalize in the second half of this year. Segment margin was positively impacted by $5,900,000 of net benefit from AMP tax credits provided for in the Inflation Reduction Act, which more than offset the impact from lower wind tower volumes. Order activity for utility and related structures continues to be healthy and order levels kept pace with shipments. While no new wind tower orders were booked this quarter, customer inquiries indicate strong interest.

Speaker 3

We ended the quarter with combined backlog for utility wind and related structures of $1,500,000,000 unchanged from the Q1. Turning to Transportation Products on Slide 13, segment revenues were up 28% driven by solid volume growth and improved pricing in both our barge and steel components businesses. Adjusted segment EBITDA more than doubled Margins expanded over 500 basis points, reflecting the significant operating leverage inherent in these businesses. We received barge orders of $81,000,000 predominantly for hopper barges, which kept backlog about flat and extended our visibility into mid-twenty 24. We ended the quarter with total barge backlog of $287,000,000 of which we expect to deliver approximately 55% during 2024.

Speaker 3

I'll conclude on Slide 14 with some comments on our cash flow and balance sheet position. We generated $76,000,000 of free cash flow during the quarter, up 11%, driven by a nearly 50% increase in operating cash flow. Solid working capital management resulted in a $41,000,000 source of cash for the quarter, helping to recover most of the first quarter's $55,000,000 use of cash. As our growth businesses continue to expand And our cyclical businesses recover, we expect working capital to be a slight use of cash for the year. Our 2nd quarter free cash flow generation is all the more impressive Considering capital expenditures were $53,000,000 almost double the prior year level.

Speaker 3

We continue to make progress on the organic projects underway in Construction Products and Engineered Structures. As a reminder, our full year CapEx guidance is $185,000,000 to $210,000,000 which includes $85,000,000 to $100,000,000 of growth CapEx in 2023. We ended the quarter with net debt to adjusted EBITDA of 1 times and available liquidity of $673,000,000 Our healthy balance sheet and liquidity continue to provide ample flexibility to pursue disciplined capital allocation. I'll now turn the call back over to Antonio for an update on our outlook.

Speaker 2

Thank you, Gail. Please turn to Slide 16. We're pleased with our performance through the first half of twenty twenty three as our growth businesses have performed well and our cyclical businesses have outperformed relative to our At the start of the year. As a result, we're raising the low end of our 2023 revenue guidance range to $2,250,000,000 from $2,200,000,000 previously. At the midpoint of our revised range, we now forecast 11% revenue growth as compared 2022.

Speaker 2

We're also raising the low end of our adjusted EBITDA guidance range by $10,000,000 to 355,000,000 I'm maintaining the high end of the range at $370,000,000 This represents a 30% year over year adjusted EBITDA growth at the midpoint of our revised range. Consistent with our prior guidance, our 2023 adjusted EBITDA forecast assumes wind related tax credits of approximately 20,000,000 as we await final clarification from the IRS. Now please turn to Slide 17 to review the outlook for our growth businesses. Increased infrastructure spending at both the federal and local level support continued positive outlook for construction products. While we have seen some pressure on volume in the single family residential market, this has been more than offset by robust organic pricing and solid demand from the non residential multifamily and public infrastructure end markets.

Speaker 2

We're encouraged by the recent pickup in single family permits and starts and are beginning to see that translate into stabilization of volumes. Spendings from the infrastructure bill and inflation reduction act as well as healthy state budgets are providing a tailwind for our Construction Products business that we expect to continue to benefit our performance. We continue to actively pursue potential acquisitions. Our current M and A pipeline includes several attractive bolt on opportunities that would complement and expand our geographic footprint. In Engineered Structures, The strength of our utility structures backlog reaffirms our view that customer demand and pricing remains solid.

Speaker 2

Utilities continue to invest heavily to strengthen the resilience of the electrical grid as well as to expand their infrastructure to connect new renewable energy sources to their networks. The step down in 2nd quarter profitability was not indicative of current market conditions, but instead was related to specific orders booked in 2022. Looking at the second half of the year, we expect utility margins to reflect an improved project mix. We're seeing continued demand for telecom towers to support the ongoing build out of 5 gs networks and traffic structures is benefiting from increased surface transportation investment. Shifting now to the outlook of our cyclical businesses on Slide 18.

Speaker 2

This is an exciting time for Arcosa As our cyclical businesses enter into what we believe will be a sustained multiyear upcycle, we're already seeing a glimpse of the financial impact these business Can deliver as production volume scales and drives improved operating leverage. As we expect our production rates to increase further in 2024, Our cyclical businesses are poised to generate strong growth in revenue, margins and cash flow, leading to improved returns on invested capital. In wind towers, our current capacity utilization remains relatively low, consistent with the pause in demand that we anticipated for this year. However, through our continued focus on driving operating efficiencies, we now expect wind towers business to perform above breakeven in 2023 Before considering the net benefits of tax credits, as you know, we're currently investing approximately $60,000,000 in our New Mexico facility, We should start delivering wind towers in mid-twenty 24. As production ramps up in New Mexico and other facilities, We should see steady improving profitability.

Speaker 2

Even as our wind backlog has grown substantially over the past year, Customer interest remains strong and the market is very active, reinforcing our view that wind is poised for sustained period of expansion. Order fulfillment in this market is complex, taking time to negotiate. Therefore, we do not expect to announce new orders every quarter, But we do expect order levels to trend higher. Although we expect to continue to operate with relatively low capacity utilization in 2023, We have the flexibility to increase our throughput to meet improving market demand with minimal operational CapEx. Please turn to Slide 19.

Speaker 2

With our March backlog having reached nearly $300,000,000 we're increasingly confident in the near to mid term outlook for this business. Our production visibility now extends well into 2024, allowing us to be more selective with respect to the With the profitability of orders we pursue, we're focused on driving margin improvement through efficient cost management, generating Operating leverage as volume scales. Over the last couple of months, hot rolled coil steel prices have declined, While plate steel prices remain elevated, this difference in prices is starting to create attractive market conditions for barges made with coil. Given tight capacity and the aging fleet, we expect cost of interest to remain high for these products. Our Steel Components business continues to perform well While we do not anticipate a meaningful strengthening in the market demand For the remainder of this year, the forecast for the next several years are promising.

Speaker 2

1 of the main products of our Steel Components business are railcar couplers. Our total profitability in this market has been pressured from railcar coppers produced in China and Mexico. Trade remedy investigations by the federal government led to the recent establishment of duties of more than 400% on imported couplers from China. In the second half of this year, the government is also to make final terminations on potential duties for imported couplers from Mexico. These trade remedies help level the playing field and Should enable our steel components business to generate higher volumes and drive improved efficiencies.

Speaker 2

In closing, Our first half of twenty twenty three results are a testament to the quality of our talented team as we effectively navigate challenging market conditions. Looking ahead, we're optimistic about the outlook for both our growth and cyclical businesses. Arcosa remains well positioned Given our broad exposure to infrastructure markets that we believe will benefit from multiyear tailwinds, our strong balance sheet provides ample flexibility as we continue to pursue Attractive organic and inorganic opportunities. We remain committed to expanding margin, generating strong cash flow and allocating capital to build long term shareholder value. I would like to open the call for questions.

Speaker 1

Thank you. We will pause for a moment to allow questions to queue. And we'll take our first question from Noah Matuszka with Stephens, your line is open.

Speaker 4

Good morning and thanks for taking my questions.

Speaker 2

Good morning.

Speaker 4

First, I wanted to talk about the Construction Products segment and how you're thinking about that in the back half of the year. It sounds like pricing needs to be very Strong. And granted there's some volume headwinds there, but I think the expectation also for the back half is some of the cost to ease. So Ultimately, I'm just trying to figure out how you're thinking about margins in the back half and if we should see year on year expansion.

Speaker 2

Sure. Let me give you some color. I think since the beginning of the year, even from last year, we expected the second half of the year To start seeing some volume pick up as housing is expected to start recovering. So we are optimistic about the housing recovery starting sometime in 2nd half. We continue to see strong pricing momentum in our business.

Speaker 2

And Ideally, as volume recovers and pricing keeps its strength, we should continue to see some margin expansion in natural aggregates And our goal for the second half of the year is to improve our margins in specialty materials would hit us hard in the second quarter. So I think we're optimistic. I think the fundamental aspects of the market are strong. So we do expect to see a strong second half of the year. Of course, we're going through a summer that's been extremely hot that creates issues like Some projects are shutting down early to make sure people are stay healthy, etcetera.

Speaker 2

But those are temporary things. I think overall, The pricing environment and the volume recovery should help us in the Q2.

Speaker 4

Got it. That makes sense.

Speaker 2

The second half, sorry, second half.

Speaker 4

Yes, yes. And then for my follow-up, in switching gears to the wind towers business. In prior cycles when there was much more wind tower demand, what did the EBIT or EBITDA margins for wind towers look like? Or maybe just put another way, how should we be thinking about margins for that segment once you start delivering on this increase in orders.

Speaker 3

Good morning. This is Gail. I'll take that. As we think about the wind business, We're certainly in a ramp up. We've taken, as you're aware, the more than $1,000,000,000 of orders since The Inflation Reduction Act almost a year ago.

Speaker 3

So our backlog is strong. We have $1,500,000,000 of backlog for wind Utility, most of that being for our wind businesses, we don't book long term backlog for utilities. So we're in a strong position. As I look To 2024, about 25% of that backlog is coming out in 2024. Our plants Based on the backlog that we have today, certainly aren't at full utilization.

Speaker 3

So we would expect from a margin perspective to see improvements in our Win margin next year and as Antonio mentioned in his script, our anticipation is with the Inflation Reduction Act is to have additional Potentially larger orders over the course of this Inflation Reduction Act will certainly help to Increase our volumes and push our margins up regardless of the tax credit. When we think about normalized margins that we've seen For the wind business in the past, they're in that healthy kind of 10% plus range. The tax credit certainly would be additive on top of that. So, as our volume builds, as our We would expect to see our wind margins continue to improve.

Speaker 2

To give you a sense more or less, I think its highest EBITDA number we reported, when it's somewhere around $90,000,000 when we were at the peak of the previous cycle or around that number. So and with probably a little higher margin. So it's a very it's a business that's very sensitive to volume. So that's why we're excited about volume in this business.

Speaker 4

Got it. That's really helpful color. I appreciate it. Thanks for the time and I'll leave it there.

Speaker 1

Thank you. We'll take our next question from Ian Zaffino with Oppenheimer. Your line is open.

Speaker 5

Hi, great. I actually just wanted to kind of follow-up on that question. We're deeper into discussions on the wind side. How are you thinking about the tax credits and maybe the sharing mechanism of those tax credits? And then also the discussions that you're talking about on wind, what's typically the lead time?

Speaker 5

So when will we see it hit the backlog? Thanks.

Speaker 2

Yes. So let me start with the tax credits. The tax credits we mentioned before in the current backlog we have, We did give a portion of the smaller portion of the tax credits to our customers as part of the negotiations. Ideally, going forward, that number becomes smaller, but we are keeping the majority of the tax credits. So The tax credits, the way I see it is, it should be an enhancement to our market.

Speaker 2

So if you look at the previous cycles, when you add the tax rates, our margins this time should be much better and you see it in the results even start looking at this quarter. To your second question, when you get orders, if you look at the order we got in the Q1, These are larger orders. So that's why I mentioned in my prepared remarks that they take time to negotiate. You're not negotiating for We're not a company that historically has built 10 towers of this and 5 towers of that. And we normally like We're very good at repetitive manufacturing.

Speaker 2

So what we like is longer term orders. And So if you look at how long it would take if we get backlog this quarter, let's say, my guess is it would be For production to start sometime in mid next year or Q1 of next year, sometime around that. So it takes at least 6 months From the time you receive an order to really start delivering on that order. And remember, we already have a backlog. So any order that we receive would imply we have Hire people, train people, etcetera, etcetera.

Speaker 2

So it takes a ramp up to get us there.

Speaker 5

Okay. Thank you. So I guess just To clarify, roughly speaking, we could probably take historical margins and let's just say an incremental $85,000 Per tower, it seems like. Okay. And then also, it seems like most of the businesses now are really recovering and doing very well.

Speaker 5

How are you now thinking about portfolio optimization in this now environment that You're seeing significantly improved fundamentals. Thanks.

Speaker 2

Absolutely. So just to answer your first comment on the 85,000. Remember, the tax rate is relative to the size of the tower. So depending on the size of the tower, that $85,000 can be less or more. It's based on the power of the terminal on top of the tower.

Speaker 2

So that will vary and I think there is a range, But $85,000,000 should be more or less in range. To your second question, I think it's that is a really good question because The reality is our strategy has not changed. This company we're going to continue to allocate most of our capital to Engineered Structures and Construction Products because that's where we believe that the growth potential is. And As we this business improve, I think what happens is they just become more valuable for us and they so The strategy has not changed. We continue to believe that this company is moving towards engineered structures and construction products.

Speaker 2

We are intentionally moving that way. And as our businesses improve, we might or might not decide to optimize the portfolio In the shorter term, my goal would be to continue to simplify the story and focus so that we can even make your life easier As an analyst, no, we are a complex story and for our size, we're too complex.

Speaker 5

Okay. Thank you very much.

Speaker 1

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

Speaker 6

Hi. Thanks for taking my questions. I was hoping you can quantify the impact of the inefficiencies in the specialty aggregates business. How much of a margin drag was it specifically

Speaker 7

in the quarter?

Speaker 3

I'll take that one. Good morning, Garik. As you know, we didn't put a number In the press release, there are comments on that. I will comment that margins were down in the segment 50 basis points year over year despite some meaningful margin expansion within our aggregates natural recycled as well as our shoring business. We spent some time talking through some of the challenges there because they had a meaningful impact on the performance of the segment overall for the quarter.

Speaker 3

So an exact number, the Specialty Materials business, it's about a 3rd of our revenue in and around that ballpark. So, we were not happy with the margin

Speaker 6

Okay. Looking to the second half of the year and the steps that you're taking to remedy some of the inefficiencies in the second quarter, Would you anticipate that margins in this segment will be still challenged in the second half of the year? Or do you anticipate margin expansion In the back half, just given some of the pricing and hopefully improving volumes and lower costs that you're seeing on the broader part of the Construction Products business.

Speaker 3

Well, I guess I'd maybe Quickly summarize some of the comments Antonio already made with regard to construction's performance in the second half. We're very optimistic about our potential in the second half. The market dynamics are favorable. We certainly have pricing strengths. We've talked about some challenges with some tough comps in the back half.

Speaker 3

Think we're probably high teens pricing that we're comping against for the second half, but we've had select July price increases, Some August ones announced, so I think we feel pretty good from a pricing perspective. We're continuing to manage costs well. And With regard to specialty, as we said, we're taking steps to address. We have taken a number of steps and our expectation is we'll see Profitability improved in the quarters ahead, so we're very optimistic about the back half in construction.

Speaker 6

Okay, great. My follow-up question is related to Engineered Structures. Just want a little bit more clarity on the margin outlook there as well. I think you mentioned I think you expect to return to normalized margins in the second half of the year. Is that related to wind specifically or is that also related to the broader segment?

Speaker 2

This is Antonio. Just to the Q2 profitability in this segment was not reflective of current market conditions In the utility structures, last year when we some of our customers have holes in their needs And we have to fill the backlog with what's called a bid market, so lower margin products and that's what we produced during the Q2. As we enter the Q3, those orders are gone and we return to our, let's say, more profitable backlog with our traditional customers. And so we expect improved profitability in our utility structures business and the wind tower production Continues to improve and accelerate. As we mentioned, we now expect that business to be above breakeven for the year And that's proving as they improve their efficiencies that should help engineer structures and if you add the tax credit, we should see improved margins for the second half of the year.

Speaker 6

Understood. Thanks for taking my questions and I'll pass it on.

Speaker 1

And we'll take our next question from Julio Romero with Sidoti. Your line is open.

Speaker 8

Hi, good morning, Antonio and Gail. This is Alex Hammond on for Julio.

Speaker 2

Good morning.

Speaker 8

Good morning. My first question is around transportation products. Could you talk about the inquiries that you're seeing in the barge business? With steel prices trending lower, what's your sense of whether that helps inquiries on the fence convert into orders in the near future?

Speaker 2

Sure. So yes, the inquiries are high, especially on the dry cargo side. As you know, there's 2 different markets, dry cargo and liquid. Liquid has been more quiet. Most of the orders we have right now are for dry cargo.

Speaker 2

But we are seeing inquiries for both liquid and dry, mostly dry, but some liquid also. And there's different dynamics going On both markets, the utilization rate for barge is extremely, extremely high. And as you know, we've had several years of very, very low production, well below replacement, The replacement needed just to keep the fleet where it needs to be. So the demand we perceive it, it's out there and we'll see it in inquiries. As steel prices come down and I mentioned in my prepared remarks that oil prices have come down quite a bit over the last few months and plate prices continue high.

Speaker 2

This is starting to create that wider gap between those two prices that allows us to start producing and bidding barges With Coil, Ryan and Platon that should help us on the converting inquiries into orders. At the same time, as I mentioned, we have backlog until mid-twenty 24. And we are focused on margin. We don't want to give the barges away. We believe that there is a strong demand coming.

Speaker 2

So we are being very disciplined about the pricing we use and the timing for those for delivery. And we're planning our ramp up in our facilities in a way that we can improve efficiency. So think we're in a really good position to be able to capitalize on the market conditions, our current backlog and the steel pricing that's becoming More beneficial to convert inquiries into orders.

Speaker 8

Noted. Thank you, Antonio. And quick follow-up on transportation. Is the strong margin performance that you're seeing in the segment Solely a function of operating leverage or are there other tailwinds or efficiencies that you're seeing with the segment margins?

Speaker 2

I think it has mostly to do with operating leverage. It's not only in barge. If you look at our margins in our steel components, Even though, as I mentioned, they're operating at a relatively low capacity, their margins have been very nice. And As we ramp up and I mentioned the trade case against China right now, that should help us improve our volumes over the next several quarters. So as volumes trend up, there's significant operating leverage in these businesses.

Speaker 2

And it's not a It doesn't take much to move the margins. The only thing that happens with this business is you increase margins. So they also are They don't require a lot of CapEx, so their cash flow profile is very, very good. So return on capital should be helped by the recovery in these businesses By a significant amount.

Speaker 8

Got it. Thank you. And looking at Another segment, Engineered Structures. Can you talk about the project mix in utility structures? How does the component of bid customers in the 3rd quarter compare to what you realized in the 2nd quarter?

Speaker 2

We don't give specific guidance on the type of customers, but historically the majority of our orders go to a group of customers that are what we call our alliance customers. And the way that works is you have an agreement with these customers A certain amount of backlog for a certain period of time, but it's not defined. So you don't have a definition of what type of towers you're building. That backlog is pretty large, but we don't consider it backlog until it converts into an actual design and an actual pole we're going to deliver. And that's the majority of our backlog.

Speaker 2

That's what we report once we have clarity on the type of pole that we will be delivering. And we also every quarter we produce a certain number, a smaller portion to the bid market. In the second quarter specifically, the portion of the bid market was Much larger than normal. So starting the Q3, as I mentioned, that should normalize and we expect the second half that should be much

Speaker 8

Thank you. You have very helpful context around Alliance First bid. My last question is around the balance sheet. I noticed that you're holding around $200,000,000 of cash, which is somewhat higher than what you typically carry. How should we think about capital allocation over the next few quarters?

Speaker 3

Yes. That's a great question. We're certainly pleased with the strength of our balance sheet, the strength of our liquidity position. And I think we've been, as you've seen in our track record since then, very active allocators of capital. Most of our capital has been allocated towards acquisition and organic investments.

Speaker 3

So that's Where we see the focus, at the same time, we continue to maintain a $50,000,000 share repurchase, so we'll be opportunistic there. But The liquidity is something we view as an asset and we'll continue to allocate our capital towards Acquisitions and organic growth. We've got a number of large projects that we have underway on the organic side in construction and engineered structures. And as Antonio mentioned, we have an active pipeline of bolt on acquisition opportunities that we're considering.

Speaker 8

Thank you, Gail. Very helpful. And thank you, Antonio. Great context. That's all from me.

Speaker 2

Thank you. Great.

Speaker 1

And we'll take our last question from John Ramirez with D. A. Davidson. Your line is open.

Speaker 7

Hi, this is John from Brent Thielman. Thank you for taking my question.

Speaker 2

Good morning. Good morning. I'll

Speaker 7

start with a 2 part question. So looking at aggregates this quarter, To what degree was growth constrained by weather in Texas versus other factors like housing? And when do you expect to see an inflection in volume? Yes,

Speaker 2

that's

Speaker 3

a good question. In Texas specifically, we were pleased with how we saw our volumes for the quarter. Overall for aggregates, we were down mid single digits. I'd say Texas, we were probably a little closer to flat. So encouraged with what we're seeing in Texas.

Speaker 3

From a weather perspective, all we can think about right now is heat in Texas. But we did have a little bit of wetness, I guess, at the beginning of the quarter. But I'd say we're encouraged by the pace of lettings on the infrastructure side. We're still continuing to see some good commercial health in Texas. And Overall, as it relates to housing, starting to see some stabilization.

Speaker 3

So our comps unlike price On the volume side, they're a little bit in our favor on the second half. So, we're optimistic And, but I'd also say that we continue to focus on price and continue to focus on volume over volume. But overall, the Texas market performed well for us in the second quarter.

Speaker 7

So regarding then that volume, so is it more heavily weighted like towards 4th quarter or is it just evenly throughout the second half where we should see a gradual growth?

Speaker 3

Yes. Well, I mean, just as you think about seasonality, 4th quarter can be a little seasonally slower just with weather, getting a little bit Cooler and approaching the winter months. So generally, you see volumes are better in Q2 and Q3. But I would say at the same time, you've got some momentum going on that you didn't have earlier in the year as it relates to infrastructure lettings and some stabilization on the single family side.

Speaker 7

Got it. And I know there's been a lot of questions about wind, but I want to touch a little bit about Production, I know you don't mention how many wind towers you produce, but I Just ballpark, do you expect to finish 2023 In levels of 2022 production, just based on what we think You're producing that here.

Speaker 3

I think the way we think about wind is with the orders that we've booked and the orders that we have in backlog right now looking at 2024 From a volume perspective, it would be up relative to 2023. And as we've talked about, Similarly in our barge and our wind businesses, we expect to exit 2023 with a higher level of production capacity that we had at beginning of the year as we're ramping up in those businesses.

Speaker 5

Okay.

Speaker 3

Does that I want to make sure I

Speaker 7

Yes. I just wanted to because there was a you had, I guess, based on commentary in 2020, There was a notion that it was a good year for at least the wind towers. So I just wanted to see what is the end of 202320 24 look like compared to that in terms of how many wind towers you produced.

Speaker 2

Let me give you Some color comparing 2022 and 2023. So 2022 until July

Speaker 7

or 2020.

Speaker 2

20 or 2022?

Speaker 7

Yes, sorry, 2020 versus 2023. That's what I wanted to

Speaker 2

So our wind business since we spun in 2018 has been coming down. It's pretty drastic downward curve. When you look at and there's A page in the presentation that shows our cyclical businesses when we spun, we're close to 70% of our EBITDA. And this year, there will be less than 10%. So wind is considered within our cyclical businesses.

Speaker 2

So Wind, barge, rail components, barge had a small spike in the middle. But overall, the growth in Arcosa Has been really through our construction segment and engineered structure. So it's been a really a cliff dive for wind since we spun. As we touch 2023 and the inflation reduction had kicked in, you're going to see a pretty steep going back the other way As we get more orders, right now the backlog is not supported for a steep, let's say, hockey stick, But we are building the foundation for additional orders to come on top of it. So that's why we're excited about the business.

Speaker 7

Got it. And regarding The Engineered Structures, are the margins that we're seeing right now a sustainable floor Or should mix be more of a benefit for the rest of the year?

Speaker 2

So As I mentioned, the Q2 is not reflective of the current margins. The project mix for the second half is much healthier. So we should See some improved margins in the utility structures and with improved ramp up in wind towers Plus the tax credit, ideally, you should see the second half of the year with stronger margins. Okay. Thank you so much.

Speaker 2

I appreciate the time.

Speaker 3

Thank you.

Speaker 1

Thank you. That concludes today's teleconference. Thank you for your participation. You may now disconnect and have a wonderful day.

Powered by Quartr
Earnings Conference Call
Arcosa Q2 2023
00:00 / 00:00