Arcosa, Inc.

Good morning, ladies and gentlemen, and welcome to the Arcoza Incorporated Third Quarter 2020 Earnings Conference Call. My name is Nikki, 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, Gail Peck, Senior Vice President, Finance and Treasurer for Arcoza. Ms. Peck, you may begin.

Good morning, everyone. Thank you for joining our third quarter 2020 earnings call. With me today are Antonio Carrillo, President and CEO, and Scott Beasley, CFO. A question and answer session will follow their prepared remarks. A copy of yesterday's press release and the slide presentation for this morning's call are posted at our investor relations website, www.ir.arcosa.com. A replay of today's call will be available for the next two weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for one year on our website under the News and Events tab. Today's comments and presentation slides contain financial measures that have not been prepared in accordance with generally accepted accounting principles. Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. Let me also remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's SEC filings for more information on these risks and uncertainties, including our Form 10-K, the earnings press release we filed yesterday, and in our Form 10-Q for the third quarter expected to be filed later today. I would now like to turn the call over to Antonio.

Thank you, Gail. Good morning, and thank you for joining today's call to discuss our causes, third quarter results, and our business outlook. Beginning with the key messages on slide four. First, our highest priority has been the safety of our employees as we continue to operate in the COVID-19 environment. Our businesses remain fully operational as essential services, and we continually update our protocols to meet or exceed CDC guidelines and ensure the safety of every one of our employees. We're grateful to our employees and our communities for their dedication during this challenging time. Next, our cost and result continue to highlight the resilience of our business model and the repositioning of our company around infrastructure products. Double-digit growth in revenues and EBITDA was led by strong performance of our construction product segment. We executed well in the third quarter despite a record hurricane season causing some revenue and profit headwinds and ongoing challenges associated with the pandemic. New order activity was mostly positive. Construction activity remained healthy and would have been stronger had weather events not been so prevalent. Additionally, we booked 154 million in wind tower orders, and we have seen increased project-based wind tower inquiries. For utility structures, demand remains robust, and our primary constraint remains production capacity. Demand for traffic structures in our new Florida business has exceeded our expectations. Our Mexico business received good orders for infrastructure projects. In the liquid barge market, utilization rates continue to be low for our customers. but conditions in the dry cargo market have improved, with higher grain volumes and freight rates at very attractive steel prices. Even though we only received $18 million in new orders during the quarter, in the last few weeks we have seen significant improvement in inquiries and have closed $32 million of additional barge orders for 2021. We're building a strong cash culture at Arcosa. The impressive $93 million of free cash flow in the third quarter brings our year-to-date total to $170 million. as we focus on reducing our working capital and operating more efficiently. This cash culture is helping us deploy growth capital into attractive markets while maintaining low leverage. We still have opportunities to improve, especially in the inventory and accounts payable management, but I'm excited with the progress made to date. Finally, we're pleased with the strategic investments we have made to grow our business, centered around construction products and engineered structures. A key accomplishment was the $87 million acquisition of Strata Materials, a leading producer of recycled and natural aggregates in the Dallas-Fort Worth market that we closed in October. This transaction adds to the two smaller acquisitions we closed during the quarter. First, the telecom structure company we had previously disclosed, and the natural aggregate small-town in Texas. We paid around $53 million for these two acquisitions at very attractive multiples. Slide 8 is an overview of our third quarter performance. Construction posts, followed by energy equipment, were the key drivers of our 10% year-on-year revenue growth. EBITDA growth and margin expansion were driven by cherry acquisition as well as strong operating performances in our aggregates and barge businesses. Scott will review the performance of our different segments, and then I will come back to discuss our business outlook.

Scott? Thank you, Antonio, and good morning, everyone. I'll start on slide nine and review our segment results from the third quarter. Construction products revenue grew 27% to $147 million, and adjusted EBITDA increased 40% to $36.8 million. Both revenue and EBITDA were roughly even versus this year's record second quarter, despite an extraordinary number of major weather events in Houston and the Gulf Coast that impacted construction activity and our operations in those areas. Segment EBITDA margin of 25.1% was up roughly 250 basis points from last year's third quarter, a result of strong execution by our operating teams. I'll give a few highlights from the quarter. Our cherry business in Houston performed well despite major weather events. Both recycled aggregates and natural aggregates have grown since last year, and we are expanding our reserve positions to continue growing in the attractive Houston markets. In our legacy natural aggregates business that serves construction markets, volumes were up at a healthy level versus last year as we supplied major infrastructure projects in the Texas Triangle, experienced strong residential activity, and benefited from several bolt-on acquisitions. We also improved margins significantly through operating efficiencies, lower maintenance costs, and lower fuel costs. Our mixed shift resulted in a lower ASP, but gross profit per ton was up nicely. Our aggregate plants in south and west Texas serving the oil and gas markets continued to be down versus last year, but were stable sequentially. We recorded an impairment charge of $800,000 as we right-sized our south Texas footprint and redeployed equipment to more stable demand markets. Our overall volumes and aggregates were roughly flat versus last year, as we replaced more volatile oil and gas exposure with more stable construction market exposure. Our specialty products business has also performed well, but has dealt with pockets of COVID-related softness. Our plaster product line has experienced strong demand in certain geographies, but softer demand in the northeast and west coast. Light white aggregate revenue has also been lower this year, primarily from delayed or reduced demand in large non-residential construction projects. Finally, revenue from our trench shoring product line was down slightly versus last year, but higher sequentially, as customers gained confidence and resumed more normal purchasing patterns. Overall, our construction products team did an exceptional job executing in the quarter, and our strategy to deploy capital into this resilient sector has paid dividends in the midst of COVID-related challenges. Moving to energy equipment on slide 10, revenue grew 6% to $223 million. Adjusted EBITDA of $28.5 million was down from last year, but the margin of 12.8% was towards the top end of the 12% to 13% margin range that we expected at the beginning of the year. Within our wind tatters and utility structures revenue line, about half of the $22 million of revenue growth was from organic improvement. The other half was from our newly acquired traffic and telecom structures product lines, which both performed well during the quarter and were accretive to our segment margins. While demand remained healthy, adjusted EBITDA margins in our utility structures business were lower than we expected in the quarter due to operational challenges related to COVID-19. We had lower production in two plants due to higher community rates of COVID-19, but we have since returned to more normal levels and believe we are past the major impact of these issues. Finally, while revenues were down year over year in our storage tanks business, we've seen improved demand in recent months. Demand for our residential and commercial propane tanks has remained stable, and we have recently won several new orders for large infrastructure projects in Mexico. Turning to slide 11, transportation products revenue was even versus 2019, but improved margins in our barge business led to 38% adjusted EBITDA growth. In the barge business, our revenues were up 28% due to increased dry barge deliveries. The team did a fantastic job driving operating efficiencies and controlling costs during the quarter, generating margins ahead of our expectations. All three of our plants delivered exceptional operating results. Revenue in rail components declined year over year, but was flat sequentially. New rail cars continue to be weak across the industry, but picked up a bit in Q3, so we are hopeful that we have reached a low point in the cycle. We have been EBITDA positive throughout the downturn and have had additional success in winning new orders for the more stable maintenance and non-rail markets. We are optimistic about the business's growth prospects once the rail car market improves. On page 12, we show several additional financial items from the quarter. Our corporate expenses of $17 million were higher than our normal $13 million run rate due to $2.5 million of non-recurring legal expenses from a pre-spinoff matter, as well as $1.4 million of acquisition and integration-related expenses, including for the Strata acquisition that we closed in October. Turning to slide 13, our $93 million of free cash flow was a highlight of the quarter and reflects the strength of our growing cash culture across our businesses. $38 million of our free cash flow came from working capital improvements. Our operating teams have been tightly focused on reducing receivables and inventory and extending our payable terms to industry norms. The very strong cash flow we have had this year has helped fund more than $140 million worth of acquisitions since the end of the first quarter while maintaining the same level of net debt to adjusted EBITDA. We ended Q1 with a 0.5 leverage ratio, and we remain at roughly the same level after the strata acquisition, still below our long-term target of 2 to 2.5 times. Our balance sheet gives us a great deal of financial flexibility to continue to invest in and the disciplined organic and acquisition growth that Antonio will discuss in more detail. I will now turn the call back over to Antonio.

Thank you, Scott. Let's turn to slide 15 for a discussion on our business outlook, starting with construction products. The overall outlook for this segment is positive, and I'll touch on three factors that underpin this outlook. Attractive end market fundamentals, resiliency of margins, and a robust pipeline to deploy capital. First, infrastructure and residential markets have shown strong demand, which has offset softness in non-residential construction and COVID-related CAPEX deferrals from our customers. The majority of the aggregate business is located in high-growth geographies, particularly Texas, where construction activity has remained robust. In the short term, lower state budgets could dampen infrastructure spending. but a federal stimulus plan, including infrastructure investment, could offer upside. We were pleased to see the one-year extension of the FAST Act. Second is margin resiliency. A large portion of the construction segment costs are variable, which allows the business to adjust their cost structures as demand fluctuates. In the markets where demand has softened because of COVID, primarily lightweight aggregates and shoring products, we have been able to reduce our cost structure and maintain healthy margins. Even with slowdowns in those businesses, we were able to increase segment margins by 250 basis points in the quarter. Finally, we continue to be optimistic on our ability to deploy capital in aggregates and specialty materials, both organically and through acquisitions. An example of this disciplined capital allocation was the October acquisition of Strata Materials. The bulk of Strata revenue comes from recycled aggregates, which is a key area of focus for us that started with the acquisition of Cherry earlier this year. The acquisition is an excellent strategic fit with our current footprint as it brings on six new locations in the Dallas-Fort Worth market, including five recycled aggregates plants and one natural aggregate plant. With this acquisition, we will be able to offer our DFW customers both recycled and natural aggregates and accelerate our growth. We continue to build on our pipeline of additional acquisitions with aggregates and specialty materials. Turning to energy equipment, the utility structure market is extremely strong with demand outpacing our current production capacity. Utility customers continue to implement grid hardening and reliability initiatives, as well as invest in renewable connections. To meet this increased demand, we have started delivering products from our plant in Mexico, where we have invested roughly $20 million over the last year. We're very excited about the possibilities and the ramp-up we expect to see over the next several quarters. Our new acquisitions of traffic and telecom structures and concrete poles are doing well, with strong backlogs and positive trends. We're in the beginning stages of this integration and have started to achieve early commercial and operational synergies. At the same time, our goal continues to be to grow by replicating these new product lines across our footprint. Moving to our wind tower business. As we have discussed before, we expected the wind tower market to become project-based as the production tax rate phases out, and this is what we're seeing. We booked 154 million of new wind tower orders in the third quarter, and we continue to see good project-based inquiries. With these orders, we have good visibility for the 2021 production plans, supporting our thesis of an orderly step down from PPP subsidies. As we have also discussed in the past, wind towers have gotten much larger. In 2021, we're scheduled to produce some of the larger wind towers in our Illinois plant, which is not set up for those towers. Therefore, over the next few months, we will be investing in retooling that plant. As a result, we plan to reduce our production in the Illinois plant during the fourth quarter to ramp up back in the middle of the first quarter. Having to retool one of our plants due to improved demand for larger wind towers is a positive development for our wind tower business. But we expect this temporary shutdown to impact the forecourt results roughly in $2 or $3 million of additional expenses and lost profit. Although we remain optimistic about additional orders in the next few months, we expect 2021 to be a transition year for the industry given the expiration of the PTC, and we do expect lower wind tower deliveries than 2020. If we look beyond next year, the fundamentals for the wind tower industry remain strong. Turning to transportation, COVID-19 has slowed the positive barge momentum that we experienced earlier this year, but we're still optimistic on the medium and long term. Long-term fundamentals for both dry and liquid barges remain quite strong, giving an aging fleet, the natural replacement cycle, and higher grain movements. We're encouraged by the uptake in dry barge inquiries, but we expect that the liquid market will take longer to recover. Given our conviction in the long-term fundamentals of the market, our main focus is to maintain our flexibility to efficiently ramp up production when more significant order activity resumes. We have taken steps to extend our backlog and slow down production at our three plants in anticipation of lower volumes next year. We have worked with customers to extend roughly 27 million in orders from Q4 into 2021, which will reduce Q4 results, but will allow us time for confidence to return and for new orders to materialize. At the same time, we're working to promote new ways of utilizing barges to move additional cargo on the river system. Containers have traditionally been moved by rail and truck, but not but only a small percentage by inland barge. We recently completed the design of a container-specific barge which can move up over 50% more containers than traditional hopper barges. This improvement could generate significant cost reductions in container logistics by barge and create a strong incentive to invest in the needed infrastructure. Over the next few months, we will be making two container barges and have worked with a couple of customers who will start testing them. This is a medium-term project that we believe will have very attractive economic benefits for our customers, while at the same time generating significant environmental benefits as well. For our rail components business, where demand has been weak, we continue to expand our products and customer base to non-rail markets and expect to benefit from an added volume once the rail car demand normalizes. Finishing up on slide 18, in a few days we will mark our second anniversary as an independent public company. In reviewing our overall performance in the first two years, three key takeaways come to mind. First, we have transformed our business, repositioning around core infrastructure products that enhance our resiliency, reduce our cyclicality, and expand our potential for long-term sustainable growth. It has been accomplished through a combination of organic initiatives and more than 800 million of strategic acquisitions that we targeted for their attractive market characteristics and alignment with ESG initiatives. We have accomplished this transformation using very modest leverage, giving our strong free cash flow. We continue to have the balance sheet capacity and appetite to pursue additional acquisitions. Next, I would like to highlight that this transformation has progressed successfully despite the backdrop of the economic slowdown of the last seven months that has impacted a number of our businesses. The pandemic has made operating and completing deals more challenging, but we have continued to move forward, albeit at a slower pace than we would have liked. We remain committed to taking further steps towards our long-term strategic goal of simplifying our business. Finally, and most important takeaway, is that the fundamentals of our business remain strong. There is likely some volatility in front of us given the uncertainty COVID creates, but the markets where we are focused have strong fundamentals with positive long-term sustainable growth. At Arcosa, disciplined capital allocation is a key priority, and we expect to continue investing in those businesses that help us fulfill our long-term vision to grow in attractive markets with competitive advantages, reduce the complexity and cyclicality of our business, improve our long-term returns, and integrate ESG into our business. With only two years as an independent company, we're just getting started. There is still a lot to do, and we believe we have tremendous opportunities ahead of us and look forward to continuing to build our cause. I would like to open the call for questions.

At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may ask one question and a follow-up. Once again, to ask a question, please press the star and 1 on your touchtone phone. And we will pause a moment to allow questions to queue. And we will take our first question from Julia Romero with Sudati. Please go ahead. Your line is open.

Hey, good morning. Hope you all are well.

Thank you, Julio. You too.

I wanted to ask about the barge business. You mentioned that orders in October were better than 3Q in total. What do you think is driving the uptick recently in Do you expect orders and inquiry activity to kind of remain at that same level in November and December or maybe better than the pace in October?

Yes, this is Antonio Julio. Let me give you some color on this. If you remember, we had a very good first quarter in orders, and then after COVID hit, I think like most businesses, our customers started looking at their capex and trying to figure out how to conserve cash And that's the first impact we saw people were trying to avoid large capex. And then you had, of course, the uncertainty of how much the merchandise was going to be moving on the river system. So you have two different dynamics here. On the liquid barge, we said we have not seen an uptick in demand. We continue to see very slow inquiries. Utilization rates are very, very low. So that's why we're saying that it's going to take longer to recover. On the dry cargo side, you've seen a very healthy crop. You've seen China importing more grain, and they're still far away from the target that they have set. Rates have gone up. The opening of the Illinois River in October is going to help. So I think there's a lot of positive signs for the dry cargo market. And if you remember over the last five years, the dry cargo market has been the one that has replaced their barges more slowly. So there's more potential for replacement in the dry side and in the liquid side. And that's why, because of this uncertainty on the amount of orders that we will receive, and we are positive in the ones that we're receiving, and we continue to see inquiries as of this morning, I think that that's why we said that our priority is to remain flexible in our production footprint so that we can react when our customers need us to deliver these barges because if you remember in 2018 when demand picked up, we were not ready and we were slow to ramp up. We need to ramp up much faster, and that's the focus we have going forward.

Got it. And nice job on the cash flow in the quarter. I think you mentioned in your prepared remarks about extending payables or working to extend payables to more of industry norm. So can you just talk about that, and is days payable in that mid-30s range kind of where you expect to be in the future?

Sure, Julio. This is Scott. I think – The biggest thing we've done is create a focus on cash culture where everybody is very focused on cash. When we spun off from our former parent company, that hadn't been a priority, and so over the last two years we've been trying to build the cultural foundation. We've seen a lot of success, and we've generated about $170 million of free cash flow this year thus far, $93 million in the quarter overall. I'd say we've made the most progress in our accounts receivable. We have made progress in accounts payable, have room to go. And then inventory remains probably the biggest opportunity where it's a little harder to get because it involves more full kind of operational redesigns, but we think that we have opportunities in inventory too. So, across inventory and AP, I think we still have room to improve working capital, and we're optimistic that we can do that next year.

Appreciate the comprehensive answer. I'll hop back into queue.

Thanks. And we will take our next question from Bascom Majors with South Canada. Please go ahead. Your line is open.

Yeah, thanks for taking my questions. You made some preliminary commentary on next year in the wind power business. I was hoping that we could pull it back a little more, and at least for those businesses where you do have backlog and some visibility, just directionally think about what next year might look like or at least start like from where we sit today.

Sir, let me give you some color. We're still in October, almost the end of October, so we still have ways to go. We haven't even done our budgeting, so it's hard for me to give you a lot of color. But I'll tell you where things are playing out and how I see our markets for 2021 just directionally. We're very, very positive on our construction segment. You know, we will have Strata for the full year. We will have all these small acquisitions that we did for the full year. And we have organic growth. We've invested in the Houston area, as Scott mentioned. We are investing around the Dallas-Fort Worth area. We're investing around some other operations. The shoring business is looking better than we have. We had a really bad year. It doesn't show in our numbers because some of our businesses have done fantastic. But our lightweight aggregates and our shoring pros did not do well in terms of revenue and growth. They kept their margins, and that's what we like them, but they did not have a good year, and they're struggling because of a lot of COVID project delays, especially in the areas where they're located. So I think the construction segment, if you put all of those together, we're very positive about growing it in 2021 at a very healthy level. On the energy side, As we said, our utility structure continues to be strong, and we continue to see it as a very strong market for 2021. We will have our acquisitions for the full year next year, which will allow us to grow there. We have these projects to replicate these acquisitions in other areas, so you will see us deploy capital there. And we have the new plant in Mexico, which will be ramping up, and that plant should allow us to continue to grow volumes for 2021. So very optimistic there. The tank business in Mexico should be relatively stable. And then on the wind tower side of what I mentioned is that we have said this probably since before we spun off. We expected 2021 to be a transition year as the PTC expires. And my comment there has always been that I expect the industry in general to kind of go through this reinvention of being in an industry with no production tax credit. It's an industry that's been used to having it. I think there's significant differences now that technology is allowing wind towers to compete. head-to-head without the PTC, et cetera. But it's still a big change for the industry. So that's why we're saying we're very happy that we got the orders. We continue to receive inquiries. We're very optimistic about additional orders for 2021. We don't think that's it. But we do expect that 2021 is going to be lower than 2020. If you remember, to the Liberal Tower, to install a wind farm in 2021, you basically need to deliver the towers halfway through the year. So that's why I think we have relatively good visibility. Things can change. We can still get a lot of orders, and we are operating our three plants, and we still have a plant in Mexico that we're not using. So I think there's opportunities. I will tell you directionally, the two areas of big opportunities for changes are barges and wind towers because that's where we have a little more uncertainty in terms of how big the orders we can expect. But overall, we're very positive on the wind tower fundamentals for the long term. For 2021, we do expect a little slowdown. Then on the transportation side, that's where we have the most volatility, let's say. I think On the rail component, we are at the bottom. The business is performing very well at the bottom. It's generating positive EBITDA, as Scott said, and we saw some positive orders compared to the second quarter in the rail industry. We've grown our non-rail customers quite a bit and non-rail products quite a bit, and we're very optimistic about the prospect of continuing to grow there. But the rail industry is cyclical, as you very well know. If the rail industry recovers, I think we have a very nice uptake in our business because we've been able to cut our costs so much. And then the barge industry, I think we, as I mentioned before in the previous question, we're very optimistic on the dry cargo orders. We're keeping our plants flexible. Liquid barges are a different story. We are not so sure where that's going to go, how long it's going to take to recover. Probably sometime in 2021. What I can tell you is that we will have the capacity to to ramp up as orders materialize. And that's why I said that we are building this container barges in one of our plants that allows us to extend some of our plants operating for a longer period of time to allow time for those orders to materialize. Hopefully I gave you lots of information that hopefully that's what you were expecting.

That's tremendously helpful and I appreciate your candid discussion before you've gone and set your budget. One more, and then I'll pass it on. I recall with the nature of a tax-free SPIN, there's some limitations, at least at the parent company with the IRS and what you can do from a capital allocation standpoint until you hit that two-year anniversary. With that two-year anniversary for ARCOSA as the SPIN code, Was anything restricted in the last two years and, you know, starting next week as you lap that? Is there more optionality or opportunity on some things you can do with capital allocation next week that you couldn't do this week?

I'm not the lawyer in the room, but I'll tell you that there were some limitations from the tax to allow the spin-off to be tax-free. I will tell you that there's quite a bit of limitations. The biggest limitation we had was on the energy equipment segment, which was considered our main segment as we spun out because of its size. But there were some other limitations. What we mentioned in my prepared remarks is that we continue to be committed to simplifying the business as we have discussed before. You know, I also mentioned that we have continued to move forward with our initiatives with the pandemic and everything, but things have slowed down. And, you know, we didn't expect, for example, the drop in the rail market as fast as it did this year, starting last year, and some other things that have slowed us down in making some decisions. So the comment I can tell you is that I think after November 1st, a lot of limitations go away, but that has not been the primary issue. let's say, bottleneck for us to do things. I think it was there, but it was not the primary focus. I think the business conditions have to be what drives us, and the business conditions have been relatively uncertain over the last year or so. But we are still committed with what we said day one from the spinoff.

Thank you very much.

And we will take our next question from Stephanos Christ with CJS Security. Please go ahead. Your line is open.

Good morning, and thanks for taking my questions. First, you know, you talked about operational challenges in the utility structures business due to COVID. Could you go a little more detail on what those challenges are and maybe how long you expect those to linger?

Sure, Stephanos. This is Antonio. Let me give you some color. And it's The challenges were mainly in the first half of the third quarter. They've been improving since then. But two of our big plans were in communities where COVID cases were going pretty significantly. And we had to isolate a lot of people because of that. And as you start isolating people, you know, absenteeism goes up tremendously. And even though... You don't realize it, but we try to operate in a very lean organization, so we don't have a significant backup. If you send five people home in a certain area, you don't have people to substitute them. So two of our plans were basically brought to their knees for a few weeks, and since then things have improved. So those two plans have started to come back, and in September they behaved much better than August and July. So I think we're moving ahead and we are mostly out of the woods, so things are starting to perform very well again. But that's one of the examples of what COVID can create for one of your plants, you know, if something happens in the community. It's mainly in the communities and then they bring it into the plant. So I think that was the case, but it did impact us pretty significantly in our utility structure for the quarter. We are optimistic and we are very positive on the fourth quarter. Now you see the structure. And the good news is that these are not like hotel rooms where if you don't sleep in it, it goes away. You know, the orders are still there. The customers are still there. We need to deliver. So that's probably the good news around this.

Thank you. That makes sense. And then could you maybe give us a little more color on organic growth in aggregates?

Sure. So Scott mentioned we have invested quite a bit in increasing our reserve base around Houston. Houston still has a lot of potential for us. When we bought Cherry, they had a very nice strategic plan already laid out of how to expand towards the areas where Houston is growing. So Houston has been one of our big organic areas. Around DFW, again, we continue to expand, and we've gone through some land acquisition mainly, but more the bolt-on acquisitions have been – those are inorganic but have helped us. When you start combining a few bolt-ons, you start generating synergies between them that we consider that part organic. And then on the specialty materials, as Scott said, I think the highlight is our plaster business that continues to grow. We saw a slowdown in the second quarter, but it started to grow again, and we have nice organic opportunities there. So overall, I would say that it's been around Houston, Dallas, and some of the specialty materials.

All right, thank you, and I'll jump back in queue.

We will move next with Ian Zaffino with Upper Hummer. Please go ahead. Your line is open.

Hi, Grace. Thank you. You know, Scott, I don't know if I heard an actual organic growth number for the agri-based business. So I wonder if you can maybe give that. And also maybe just can you talk about just the conversations you're having with customers? I guess Texas has a massive rainy day fund. is that large enough to maybe, you know, cover them for the next couple of years? Or how do we think about it as we look into next year and maybe do some state budget shortfalls, but then they also have rainy day funds? So do you think maybe give us some color there, have people in the industry are, like, thinking about this and what your customers are saying? Thanks. Thanks.

Sure, Ian. This is Scott. I'll take those separately. So on the organic growth rate in aggregates, we had roughly offsetting factors. So the legacy businesses driven by strong construction market exposure was up, call it mid-single digits in terms of volumes. That was offset by the oil and gas exposure that we had, primarily South Texas and West Texas. So the two of those offset each other into roughly flat volumes. But We talked about replacing the more volatile oil and gas exposure with more stable construction market exposure. So we think that's a better mix, even though volumes are roughly flat. On your second question of Texas fundamentals, I would agree with your premise that Texas is in a very good fiscal position. So when we look at indicators, there's a healthy state budget. There's a $9 billion rainy day fund that the comptroller said was is not expected to have to be used, but could be used if it needed to for this fiscal year. You've seen healthy population growth, particularly as de-urbanization has increased in Houston and Dallas, and the outskirts have been a beneficiary of that. We've seen major improvement in housing starts, particularly in Houston and Dallas. And as Antonio said, about two-thirds of our construction products exposure is in Texas, and we're very bullish on the state and the fundamentals there.

Okay, thanks. And then just as a follow-up on the M&A front, you've been doing a lot of acquisitions. At the same time, the M&A market is relatively robust here. I mean, is this an opportunity to take advantage of anything inside the portfolio, maybe to you know, achieve the goals of making the business a little bit more, I guess, streamlined and a little bit more focused?

Yes, and this is Antonio. Yes, as I said, we remain committed to that. So, there are opportunities. I think there are opportunities to simplify the portfolio and at the same time, we have really nice opportunities in the pipeline to deploy additional funds that we could get by simplifying. So, Yes, I think there are. As I've said before, and I am a firm believer, you know, M&A has a life of its own, and sometimes it happens when you least want it, and sometimes it doesn't happen when you more want it. Also, there's always – you need a tool to that, and at some point – I'm sure we're going to have opportunities both on the buying side and the simplifying side. But we remain committed to both, and we remain with appetite for both.

Perfect. Thank you very much.

And we will take our next question from Bill Baldwin with Baldwin & Denise Security. Please go ahead.

Thank you very much, and thank you for taking my call. Antonio, can you offer a little bit of insight into the utility structures market regarding, you know, how to split between your alliance customers or the alliance market and kind of the bid market and where you see the most opportunity for Arcoso's, you know, new business growth, say, over the coming, you know, coming year or so?

Yes, Bill – I'll give you some color on that. Historically, the business we have that we bought in 2014 as part of trading, it was mainly concentrated on Alliance customers. That has been the focus of the business. I think there's several opportunities. I'm going to talk about three big opportunities. One is expanding our Alliance customers. We've been focusing on that. We have a we have great opportunities to expand those. And I think I'm very excited about what I'm seeing and talking to the team about expanding that part of the business. The second one, probably the biggest by far, is the bid market because we have historically participated very little. As we expand our capacity, I think the bid market has to be part of our portfolio where we play and part of our priorities to deploy some of our capacity there. It offers great things. It offers a lot of volume, but it's less reassuring. Let's say you have less visibility around it, and therefore you have to be much more flexible in your manufacturing footprint to attack it, and that's what we're building. And then the third piece of growth is expanding our product line to offer to both the alliance and the bid market, and that's why we're expanding our portfolio significantly. with these concrete poles, with distribution poles, with other kind of structures that they need. So I think both markets are important, and if we add the additional product line to our opportunities, I think we're very excited about our future there.

Thank you, Antonio. That does offer some good insight. But do you see the – with the hurricanes, you know, being a negative obviously for a lot of operations, but do you see that as a impetus to demand for some of your utility tower products here that you need to replace what's been destroyed? Is that going to be a meaningful market, I guess is what I'm saying. Is that going to be a source of demand here in 2021?

That's a really good question and something we don't talk enough about, but it's You know, weather events are becoming more and more prevalent, and there is a few of our businesses that are very well positioned to be very relevant in the rebuilding. One is the utility structures and distribution poles, as you said. All the structures in general, the one that we bought in Florida for traffic structures also gets additional volume. And also, you know, our business around the Gold Coast Cherry and some of our agri-ex business, There's significant demand that comes back when there's weather events you have to rebuild, especially in Houston, for example, the levees and all those things. There's significant demand that comes from those. We've been preparing for those. I mentioned in the last conference call we're starting to import riprap from Mexico to try to help our business. So I think we're optimistic. As I mentioned to Bascom in his question around 2021, you know, The ups and downs of all of our businesses, we're optimistic about 2021. And as weather events come, I think that's an additional, let's say, driver for our demand in some of our products.

Thank you. Very helpful. On your acquisitions and traffic structures and telecom structures, your objective is to replicate that and expand the footprint to – I guess, a more national marketplace. Part of the main challenge is, Antonio, in taking those smaller, you know, right now where you have concentrations in smaller markets and expanding that out to other markets in the country, what's the main challenges of doing that?

You know, it's also a very good question. I think the big challenge, if you look at the companies, to create a – a different structure as we look at the markets. Commercially, they're very different markets. If you look at the traffic structure or the telecom structure, they're very different markets from utility. The commercial face of the company has to remain very focused on each one of the markets. While the manufacturing piece is where we generate a lot of the synergies by putting these folks through a similar plan, has to be kind of a single source of manufacturing for the three markets. So that's the next challenge is to introduce these new products into our plant to generate the synergy while at the same time keeping the focus on our customers and the focus on the commercial aspect very focused.

Does it involve having to go out and acquire new customers as you go into these new markets? Does it involve any kind of regulatory requirements tests you have to pass with your products to go into different states and locales? Do you have new customer challenges and or regulatory challenges with expanding this business?

Some of the plans, depending on the product line, some of the plans have to be certified for certain DOTs and some other things. There are regulatory aspects that we have to follow. That will take some time, but it's nothing that we cannot do and we're not used to doing. On the customer side, it's like everything else. We just have to put our put our suit on and get our briefcase and travel to see the customers and convince them that we're a good option and then prove that we are the best option.

I'll bet you can do that. Lastly, I was interested. You mentioned a number of times that the storage business has large infrastructure projects in Mexico. Can you be more specific or offer color as to what the nature of those projects are?

Well, as you know, there's some... some strategic projects that the Mexican government is building, and those are large, specifically around the refining area, and there's been some opportunities there that we are starting to capture. We do not sell directly to governments. We sell everything through construction companies, large EPCs, so our main focus is serving the large EPCs that serve the infrastructure market. So we are not a direct seller to any specific project. We sell through large international EPCs.

We will move next with Justin Bertner with GuideUp Research. Please go ahead. Your line is open.

Good morning, Antonio. Good morning, Scott.

Morning.

I hopped on the call a bit late, so I apologize if anything here is redundant. On the barge side of the business, you know, you had positive comments about the outlook for dry barges, but it doesn't seem like that filtered through into orders in the quarter. And so I guess, you know, any color there would be helpful and What does the rising steel price mean, if anything, for the dry barge market?

Sure, Justin. This is Antonio Leniz. As we said in the prepared remarks, the quarter was very slow in orders. We received additional orders afterwards, and we continue to receive inquiries, as I said, even through this morning. So we're more optimistic on the dry cargo market. We're still in the pandemic, so I think a lot of the customers have still some reservations around when to deploy their capital into additional capex. But the dry cargo market has very specific dynamics that are positive, you know, grain exports that are going to China, China buying more, rates are up, the Illinois River reopening. A lot of positive things are happening there. Over the last six months, we've had really positive steel prices, as you mentioned. When you look at the steel prices, we're going through a very interesting time where when you hear steel prices are going up, it is mainly on the coil side. So for the last six months, there's been a complete, I would say, reverse trend. a trend of what traditionally has happened. Plate has been historically more expensive than coil, and over the last six months, that has reversed. Today, coil is the one that's going up, and plate has remained relatively flat. I personally believe that plate continues to be a very, very attractive price where we are today. And that's why we're saying that for us, steel prices continue to be a positive thing for barges. If steel continues to go up and it reflects on the plate side, then of course, you know, high steel prices are not good for barges because a significant portion of the cost of the barge. But overall, we're very positive on the dry cargo market. As you said, we don't have enough orders yet for 2021 to keep us at full capacity. That's why we said we're reducing our production. But at the same time, we also said we're keeping our trip lines open because we believe so strongly in the fundamentals of the market that we have to be ready when demand comes back.

Okay. That makes sense. Understood. Shifting to energy equipment, again, if you've already answered this question or it's in your preparer marks, just let me know and I'll go back and review the transcript. Orders seem predominantly weighted towards wind tower deliveries in 2021. I mean, I guess it doesn't imply sort of as much orders on the utility structure side. Is that just sort of idiosyncratic quarter-to-quarter behavior? Should I read anything into that?

I think the thing to remark is the wind towers. The utility structure continues to be very strong. I think we have a a good quarter for orders in the utility structure and the other small businesses we bought. One thing to remember in the utility structure is that a lot of the orders we receive that I mentioned in the previous call to bill from Alliance customers, because they are blanket orders for the year and don't have specifics, we cannot consider them part of the backlog. So they become backlog once we once we have enough details for us to consider them. So the utility structures, a large portion of the work we have committed for 2021, for example, is not considered in our backlog. And it will be considered as we define more specific with our customers, their needs, the timing, the pricing, et cetera. So on the wind tower side, it's the other way around. It's very specific, so we can consider it part of the backlog because it's very specific, prices, timing, deliveries, et cetera.

Okay, understood. And then lastly, I guess you've done a lot of M&A activity in the recent 12 months, and are we in sort of a digest phase? You know, is there more that you want to do in the near term? Is there more you can get done before end of year to take advantage of any tax-oriented sellers? Any color there, if you haven't already addressed this question. Sorry if you have.

No, I think we are – And the good news is that we've done a lot of M&A. Mostly this year, the big one was Cherry and then the recent one from Strata. And those are very similar businesses in locations that are relatively close. You know, I'm not worried about our ability to digest these things because we're not buying anything outside of our competency or outside of our normal reach, let's say. We're not buying something that we don't understand. So I think as long as you see us continuing to buy things that we understand and that we are focused on, I think the sizes and the deals we've done are very digestible and we are in good shape. Of course, the more time we give our team to digest them, the better. But we also see some opportunities to continue to do M&A. I wouldn't say that for the next few months you should expect something big. We need to digest Strata and get that going and start pulling it out. But we still have appetite for M&A.

Okay. And if it looks like the tax regime is going to change sort of coming, you know, looking forward a week from now, you know, do you think there's some bolt-on deals that would, you know, tax-oriented sellers that you might be able to get done before year-end? I'm just sort of curious to hear your perspective there as an industrial concern.

That's what we hope. I mean, we... That's one of the things we've been discussing, how much, especially small or medium-sized private companies, we've seen some conversations from those sellers saying, look, I'd like to get it done before the end of the year. They might want that, but, of course, at the same time, we have to be very disciplined and very, I would say, cautious about doing our due diligence and all the things we need to be doing. But I can tell you we don't have a line of people outside waiting for us to do it before the end of the year. That's not the case.

Okay. And then lastly there, are you seeing – I mean, when you do these deals, who have you competed against to buy the companies you're buying or the bolt-ons that you're buying to the extent you have a reasonable sort of intuition there?

Yes, overall in the bolt-ons, it's more – relationship oriented where you develop a relationship with the seller and i would say most of them would be the only the only company that we reach a fair price that we feel is fair for both sides and we go do it when you go to the bigger companies we have seen in some cases some of the big names in the industry but as you go to the smaller and medium size it's been mostly a handshake agreement that we come to, and then we come to terms on pricing, and then we move along together. I think that's been the history. And the big deals, of course, you see big companies evolve. When you go to smaller ones, it's more. And that's why we like those things, because we don't – I mean, the prices don't get crazy.

And we will move next with Dan Carini with DA Davidson. Please go ahead. Your line is open.

Hey, good morning, Antonio and Scott. Good morning. Good morning. Jumping for a quick little follow-up color, and apologies if this has already been covered, jumping on a little late as well, but can you talk to the construction products group activity for the quarter? in specifically looking around the pricing and demand dynamics and how they may have shifted from the beginning of the quarter to the end?

Sure. This is Scott. So I think that the big headline from construction products in the quarter was our 250 basis point improvement in margins. So we talked a bit about volumes being up in our construction market exposure, down in oil and gas exposure, some softness related to COVID. and our lightweight aggregates in our shoring businesses. But we're most pleased with the margin improvement despite some of those headwinds. Aggregates, we had strong improvement from operating efficiencies, lower fuel costs and maintenance expenses. Cherry was able to do very well despite weather events. And so, you know, overall it shows the resilience of the portfolio in the quarter when you have some softness to be able to improve margins like we did.

Okay. Definitely appreciate the comment.

We have no further questions at this time. I would now like to turn the program back to Ms. Beck for any closing remarks.

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

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