Arcosa, Inc. Q3 FY2024 earnings call

Key Takeaways

• Third quarter performance and profitability were strong with adjusted EBITDA growing faster than top line, and $107M free cash flow generated. Strategic transformation completed with divestiture of steel components and acquisition of Stavola. Adjusted EBITDA guidance for 2024 increased.

Third Quarter Results

• Profitability strong relative to prior year, benefiting from acquisitions, divestitures, organic growth, and efficient operations. Construction Products had flat revenues but adjusted EBITDA up, Engineered Structures had revenue and EBITDA growth, Transportation Products impacted by steel components divestiture. Weather events affected operations but teams recovered quickly.

Cash Flow and Balance Sheet

• Strong operating cash flow of $135M, adjusted CapEx guidance revised to $180M-$195M from $190M-$205M. Net debt to adjusted EBITDA at 1.2x, pro forma for Stavola net leverage 3.4x, down from 3.7x at acquisition announcement.

Construction Products

• Third quarter revenues were roughly flat year-over-year. Excluding factors like freight revenue decline and a small asphalt business divestiture, segment revenues increased 7% y-o-y. Adjusted segment EBITDA increased 21% due to accretive acquisitions, higher unit profitability in aggregates, and operational improvements in Specialty Materials and Trench Shoring. Aggregates had strong pricing with average organic pricing up low-double-digits, Specialty Materials had freight-adjusted revenues up low-double-digits, and Trench Shoring had revenue decrease but adjusted EBITDA up due to operating efficiencies.

Engineered Structures

• Revenues increased 26% due to higher wind tower volumes and the Ameron acquisition. Adjusted segment EBITDA grew 74%, outpacing revenue growth with 450 basis points of margin expansion. This was driven by organic growth from wind towers, improved product mix in utility structures, lower steel costs, and the accretive contribution from Ameron.

Transportation Products

• Impacted by the mid-quarter divestiture of the steel components business. Barge business revenues increased 21% primarily due to higher tank barge deliveries, but adjusted EBITDA increased 8% with margin down 190 basis points due to a planned changeover in barge production.

2024 Financial Outlook

• Increased 2024 revenues to $2.56B-$2.63B and adjusted EBITDA to $435M-$450M. CapEx guidance adjusted, focusing on growth projects and deleveraging towards target net leverage of 2x to 2.5x within 18 months. Stavola's seasonality impacts considered, with second and third quarters typically strongest for existing construction materials business.

Risks

• Weather events can impact operations and business. Uncertainty around U.S. elections may delay large projects. Interest rate changes can affect borrowing costs and project financing. Market conditions for steel and other commodities can fluctuate, impacting margins.

Q: Trey Grooms asked about early thoughts on 2025 demand outlook across Construction Products, free cash flow flow-through, and margin expansion direction for 2025.

A: Antonio Carrillo noted optimism for 2025 but mentioned election uncertainty impacting project pulls, while Gail Peck discussed cash flow focus, CapEx control, and interest expense step-up in Q4. Antonio also highlighted pricing strategy, acquisitions, and portfolio pruning as drivers of margin expansion.

Q: Garik Shmois asked about Stavola synergies and weather impact on Construction Products.

A: Antonio Carrillo said Stavola integration is progressing well with 5 quarries and 12 asphalt plants, and weather had minimal severe impact on plants but some business disruption. Gail Peck added Utility Structures plants in the Southeast were affected by storm recovery timing.

Q: Ian Zaffino asked about wind tower order timing, storm impacts, and Engineered Structures growth.

A: Antonio Carrillo discussed ongoing conversations with wind tower customers, expecting orders in 2025 leading to 2026 installations. Gail Peck mentioned good visibility for wind in 2025 with Belen ramped up. Ian also asked about storm impacts on Utility Structures, addressed by Gail.

Q: Brent Thielman asked about Engineered Structures growth in 2025 and barge capacity.

A: Gail Peck said wind expected to be a larger share of Engineered Structures sales with Ameron full-year impact and Belen efficiencies. Antonio Carrillo noted barge backlog with tank barges fully booked for 2025 and hopper barges into July 2026, providing flexibility for margin focus.

Q: Alex asked about Stavola cross-selling and net leverage pacing.

A: Antonio Carrillo discussed potential for recycled aggregates cross-selling in Stavola's footprint, noting ongoing learning. He also explained net leverage pacing goal of reaching 2x-2.5x within 18 months through cash flow generation, CapEx control, and growth projects.