Arcosa, Inc.

Good morning and welcome to the Acosta Inc. second quarter 2021 earnings conference call. My name is Gretchen and I will be your conference call coordinator today. A copy of yesterday's press release and the slide presentation for this morning's call are posted on the company's investor relations website, www.ir.arcosa.com. All participants are now in a listen-only mode. A question and answer session will be followed the company's prepared remarks As a reminder, today's call is being recorded. Instructions for accessing the replay number are included in the press release. A replay of the website will be available for one year on the company's website. Now I would like to turn the call over to your host, Gail Peck, CFO for Arcosa. Ms. Peck, you may begin.

Good morning, everyone, and thank you for joining Arcosa's second quarter 2021 earnings call. With me today is Antonio Carrillo, President and CEO. Let me begin with some important reminders. Today's comments and presentation slides contain financial measures that have not been prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. In addition, today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's SEC filings for more information on these risks and uncertainties, including the press release we filed yesterday and our Form 10-Q, expected to be filed later today. Antonio will begin today's call with a discussion of our overall second quarter performance and the acquisition of Southwest Rock products that we were pleased to announce in yesterday's release. I would now like to turn the call over to Antonio.

Thank you, Gail. Good morning and thank you for joining today's call. Starting on slide four, ARCOSA executed well in the second quarter, generating 3% revenue growth over the prior year and reporting adjusted EBITDA in line with last year's record. Despite the headwinds we faced in the quarter, our solid financial performance underscores the resilience of our business and the benefit of strategic investments we have made to expand our business into attractive new markets. Let me discuss a few key takeaways from the quarter. The construction products business, which now represents more than 50% of our adjusted EBITDA, continues to benefit from strong activity and the outlook remains positive. The segment generated 17% growth in the second quarter adjusted EBITDA, even after the impact of excessive rainfall. We're managing our continued steel price inflation through proactive price increases across our operations. However, in our barge business and, to a lesser extent, wind towers, high steel prices are limiting the conversion of inquiries into new orders, weighing on our near-term expectations for this business. Engineering Structures continues to experience a healthy level of order activity, driven by three key trends. Increased utility spending to improve the reliability of the electric grid. the connection of renewable energy sources to the power grid, and continued federal and state investments in road infrastructure. Finally, I'm excited to announce today our acquisition of Southwest Rock Products. The transaction, which follows our purchase of Stone Point materials this past April, exemplifies how we are successfully executing on our long-term strategy by evolving our portfolio towards higher margins, faster growth, and less cyclical products. Turning to slide 7, let's look at our consolidated results for the second quarter. Revenue increased 3% from the prior year, reflecting strength in our construction products and engineer structural segments, partially offset by continued softness in the transportation product segment. Adjusted EBITDA was approximately even compared to the record level in last year's second quarter. benefiting in part from the contribution from recent acquisitions in construction products and favorable product mix in engineered structures. Second quarter adjusted net income declined 18%, primarily due to the increase in non-cash expenses, specifically depreciation and amortization from recent acquisitions. Please turn to slide eight. We're excited about the acquisition of Southwest Rock, a leading pure play aggregates producer serving the greater metropolitan Phoenix market. Aggregates business of Southwest Rock's scale and quality are scarce, and we couldn't be more pleased that their experienced team is joining our cause. With five active sand and gravel locations and one hard rock quarry location, Southwest Rock produces approximately 5 million tons of aggregates annually and is backed by an attractive reserve profile. Southwest Rock expands our footprint into one of the fastest growing construction markets in the U.S. and strengthens our position as a leading aggregate supplier. The acquisition should take our cost of production to over 35 million tons of aggregates and specialty materials, plus between 3 and 4 million tons of recycled aggregates. From a financial perspective, Southwest Roth generated trailing 12 months revenue of approximately $36 million and adjusted EBITDA of approximately $14 million as of May 31, 2021. Given this high level of profitability, Southwest adjusted EBITDA margins are accretive to our construction product segment and to our cost overall. Importantly, the acquisition was sourced from StonePoint's pipeline of deals, highlighting the advantages of our increased scale and the follow-on benefits this acquisition strategy can provide. Turning to slide 9, we're particularly enthusiastic about the significant growth opportunity that Southwest Rock adds to our construction materials platform. As I mentioned earlier, the Finnish metropolitan market is one of the fastest-growing construction markets in the nation, underpinned by robust, large-scale investment needs to support population growth. In fact, Arizona is ranked number one in infrastructure spending on highway contracts over the past five years, underscoring the compelling growth opportunity for Arcosa as we enter this market at scale. Since becoming an independent public company almost three years ago, we have invested approximately $1.3 billion in strategic construction materials acquisitions that reposition ARCOSA to our higher growth and higher margin infrastructure opportunities. Having announced two sizable acquisitions, Stone Point and Southwest Rock, already this year, we intend to focus our efforts over the next few quarters on integration, organic growth opportunities, and simplifying ARCOSA's overall portfolio. I will now turn over the call to Gail to discuss our segment performance, and then I will return to update you on our outlook for our business.

Thank you, Antonio. I'll start on slide 10 and review our segment results from the second quarter. Construction products revenue grew 38%, and adjusted EBITDA increased 17%, led by the contribution from the Stone Point acquisition that closed in early April. Segment EBITDA margin was 22.1%, down from 26% a year ago. There were several factors driving the margin decline. As Antonio noted, excessive rainfall in Texas, our largest exposure, and along the Gulf Coast reduced segment adjusted EBITDA by approximately $3 to $4 million in the quarter. Construction activity returned to healthy levels in June once the weather improved. We had strong shipment levels on days not impacted by wet weather, but overall volumes were lower than expected due to rainfall. Higher diesel costs also impacted margins for the quarter. Lastly, the inclusion of Stone Point was also dilutive to margins, as we now include their revenues on a gross basis, inclusive of pass-through freight, in line with our legacy businesses. We experienced pricing gains across most markets, supported by strengthening product demand and attractive fundamentals. Mid-year price increases have also been announced, which should provide further support heading into next year. Our two businesses that were most impacted by COVID, lightweight aggregates and trench shoring products, generated strong results during the quarter, with EBITDA above year-ago levels and demand tracking at a pre-pandemic pace. The integration of StonePoint is advancing well, and our synergy realization is progressing as planned. Despite adverse weather in the second quarter, StonePoint is on track to meet our adjusted EBITDA expectations for 2021. The integration into our legacy Texas and Louisiana footprint is well underway and nearly complete from an operational standpoint. A focus area going forward is systems integration as we move to consolidate our entire construction materials platform onto one common ERP. Turning to engineered structures on slide 11. Revenue increased 9% and adjusted EBITDA increased 25% to $38 million. We were helped during the quarter by a $7.7 million resolution of a customer dispute from 2019 in our wind towers business. The associated towers were removed from our backlog in 2020, and we were pleased to reach a settlement agreement. We are currently building towers for this customer, and we maintain a good commercial relationship. Without this benefit, our adjusted EBITDA margin would have been 12.9% in line with our overall expectations for the segments. We experienced higher sequential EBITDA and margins in our utility structures business from improved mix, our successful efforts to mitigate high steel prices, and further progress on our Mexico plant reopening. Utility structure orders were healthy, leading to a book-to-bill above one during the quarter. We also saw favorable order trends in traffic structures, and we continue to see positive demand drivers for telecom structures, though order volumes were lower in the quarter. Our wind tower business performed largely in line with our expectations. As Antonio will discuss, order activity was muted as our customers delayed purchase decisions seeking more clarity on near-term fundamentals. The combined backlog for utility, wind, and related structures was $348.5 million at the end of the quarter, about flat with year-ago levels. Our storage tank product line in the U.S. and Mexico continued to perform well. with higher margins year-over-year as we benefited from strong residential and commercial demand for propane tanks. Moving to transportation products on slide 12, both revenue and adjusted EBITDA were significantly lower year-over-year, reflecting the cyclical downturns in both our barge and rail component businesses. Revenue was down 47 percent and adjusted EBITDA decreased 73 percent as margins compressed due to lower utilization in both businesses. Steel prices continued to advance in the second quarter, suppressing new order volumes in our barge business. We received orders of $55 million, representing a book to bill of 1.1 times on a low level of revenues. Pricing of new orders reflect weak market conditions, with orders helping to provide a base level of production in 2022 to remain flexible and provide time for a recovery. Our backlog was $139.4 million at the end of the quarter, with approximately $47 million scheduled for delivery in 2022. We are optimistic regarding our market recovery in our steel components business, and our recent results exhibit signs of troughing. The railcar OEMs had a second consecutive quarter of a book to bill above one, and third-party expectations continue to point to higher North American railcar deliveries next year. As we wait for a much-anticipated recovery, We have been successfully diversifying into new markets, attracting new customers, and controlling costs to maintain positive EBITDA. Wrapping up on slide 13, I'll conclude with a few comments on our balance sheet liquidity and free cash flow. As we discussed previously, we issued $400 million of low-coupon long-term debt in April to fund the Stone Point acquisition. To fund yesterday's closing of Southwest Rock, We used cash on hand and $100 million of borrowing under our revolving credit facility. Following the acquisition, our net debt to adjusted EBITDA stands at roughly 2.4 times within our long-term target of 2 to 2.5 times, even as our transportation product EBITDA is cyclically depressed. As I noted, acquisition integration is a key focus area, and we will likely take a pause on additional acquisitions near term as we focus on completing those efforts. We continue to see attractive opportunities to deploy capital organically, and we are maintaining our CapEx guidance of $110 to $120 million, which should cover any anticipated needs from Southwest Rock. Post-acquisition, we have more than $300 million of available liquidity and no near-term debt maturities. As we maintain our cash-focused culture, we improved our working capital management by $41 million relative to the first quarter. This helped us return to a positive free cash flow position, generating $29 million in the quarter. I will now turn the call back over to Antonio for more discussion on our business outlook.

Thank you, Gail. Please turn to slide 15. As Gail discussed, Arcosa delivered solid Q2 results, led by growth in our construction products and engineered structure businesses. despite the impact of abnormally wet weather in our largest market and continued softness in our transportation product segment. The outlook for construction products remains positive, driven by strong demand for aggregates in our key markets in Texas as well as Tennessee, and solid recovery of our specialty materials and shoring products. An area of weakness we continue to see is Pennsylvania, where we have some exposure to natural gas infrastructure spending. Overall, we expect a strong second half for our construction product segment, reflecting continued positive market fundamentals, favorable pricing, and positive contribution from our two new recent acquisitions. In our engineer structure segment, we expect to see year-over-year growth in the second half of the year in most of our businesses. In utility structures, we are seeing strong demand as our customers direct capital spending towards electric grid hardening and reliability projects. Department of Transportation spending in Florida and throughout the Southeast remains favorable, leading to healthy order growth and raising customer demand for our traffic structures, while telecom customers continue to build out 5G networks. In our storage tank business, we are experiencing strong pricing power, giving steady demand, primarily reflecting continued housing market growth and the trend towards de-urbanization. In our wind tower business, We have seen a recent pause in new orders in light of growing uncertainty surrounding potential extension of the U.S. potential tax credit for new wind farm developments. High steel prices and a late June extension of the PTC for wind farms currently under construction have also contributed to the delay in customer decisions. As a result, our unsold production slots for the fourth quarter are expected to remain unfilled. Given our positive view of the market beyond this anticipated short-term slowdown, we're working to extend some backlog into 2022 to allow time for the market to rebound. Our main priorities during this period will be to prudently manage our costs while at the same time preserve our manufacturing flexibility in order to serve our customers when demand picks back up. The long-term fundamentals for wind energy remain positive, and our leading manufacturing presence North American presence positions us well for the future. In our transportation product segment, market conditions remain challenging in our barge business, impacted by the COVID-19-related downturn and high steel prices that have reduced order activity for both dry and liquid tank barges. In addition to the idling of our Louisiana plant in the third quarter, which we previously announced, we are extending our barge-related backlog into 2022 to maintain manufacturing continuity. At the same time, given this slowdown in the market, we foresee significant pent-up demand. Therefore, maintaining our manufacturing flexibility during this period will be critical to be able to serve the market as it recovers. For a steel components business serving North American rail car industry, we believe that 2021 is likely to mark the trough of the cycle. We're encouraged by the signs of improvement we have seen in this business, as new rail car orders are outpaced shipments in the second quarter, and we expect further growth in the second half of the year and into fiscal 2022. As we look longer term, there has been positive movement on the national infrastructure debate and the potential for increased stimulus. We're encouraged by the recent positive traction in the Senate to advance a new infrastructure framework, We're also cautiously optimistic concerning the reauthorization of the FAST Act at higher spending levels. Please turn to slide 16. Turning now to our financial guidance for the year, our consolidated adjusted EBITDA guidance of $270 to $290 million for 2021 is unchanged, which keeps us in pace to meet or exceed last year's record performance, led by strength in construction products and engineer structures. On a more granular level, our new forecast includes the results of Southwest Rock from the date of the acquisition. It also includes a reduction in our full-year adjusted EBITDA outlook in the transportation product segment to approximately $25 million, down from $35 to $40 million we previously expected. In summary, I'm pleased with the progress we're making in executing our long-term vision. At our investor day in 2018, we communicated that the focus of our COSA would be to grow in construction product segment and enhance our engineer structure business. We have executed on those strategies, and our financial strength and reduced cyclicality show the results. Through acquisitions and organic growth, we have significantly scaled our construction products business, strengthening our market position. broadening our capabilities and enhancing our growth potential while reducing overall cyclicality. Southwest Rock is an exciting addition to our aggregates business, expanding our footprint into one of the fastest-growing metropolitan regions in the country. Also, the outlook for the engineer structure business remains favorable, as ARCOSA retains a leading position supplying essential infrastructure to the renewable energy, utility, telecom, and road construction markets. In short, we continue to advance on our long-term plan to grow in attractive markets with sustainable competitive advantages while reducing the cyclicality of our business and improving our returns. At the same time, we continue to work on our ESG efforts. ESG is becoming part of our culture, and as we evolve and learn, we should be able to accelerate our pace. As always, the health and safety of our employees continues to be the most important aspect of what we do every day. With the increased COVID cases we have recently seen in some of the regions where we operate, we will continue to monitor the situation and follow the CDC guidelines in our operations. Operator, 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 remove yourself from the queue at any time by pressing the pound key. We do ask that you only ask one question and one follow-up question. Once again, that is star and one to ask a question. We'll pause for a moment to allow questions to queue. And we'll take our first question from Ian Zafona from Oppenheimer. Your line is open. Please go ahead.

Thank you very much. You know, I just kind of wanted to ask you about, you know, the barge business. On the steel side, you know, is there a magic number steel needs to fall to that you think is going to, you know, improve the order flow? Is it a matter of just seeing directionally that it's going down? Does it need to fall below a threshold? You know, how do you kind of think about that?

Yeah. Thank you, Ian. Let me try to give you some more color around this issue. So as you saw in the quarter, even at these levels, we sold barges. We had a nice barge and ordered a few large barge orders. And the problem with selling at these prices is that the margins are low. So I think that it's not about a magic number. Every forecast that you see out there, or most of the forecasts that I've seen, show price for steel slowing down sometime late this year, early next year. And what happens then is we have – there's two pieces here. One is we have to make sure that – I don't think prices will go down to $500 that we were seeing last year because the economy was shut down. But at the same time, I don't think the prices should stay at $1,700. There is a bunch of capacity coming online in 2022, both on the coil and the plate side. And that will lead us to believe that there's going to be a price reduction at some point in time. So I think two things need to happen. First, customers need to understand that we're not seeing $500 again in the near term. And second, you know, the conditions, there's two different markets here, the dry cargo market and the liquid cargo market. And they are at different stages in their cycles. On the dry cargo side, everything looks very positive for significant orders to come back. There's been very low replacement of barges over the last four or five years. There is a lot of scrapping going on with high scrap prices at this moment. There's a lot of scrapping of barges happening. So everything seems to be pointing to a very robust comeback of that market. On the liquid side, and the dry cargo didn't see a lot of impact from COVID. Grains continue to ship and everything happened well. On the liquid side, it's a little different story. They faced two different problems. One is drought. A reduction in oil demand and oil derivatives, and at the same time, still prices high. So I think, as you've seen, oil has continued to come back. We're still not at the levels we were in 2019, but it's starting to come back. And then steel prices are still high, so I think that's going to take a little longer. So we expect first a recovery on the dry cargo side and then on the liquid side. The good news is that we have a pretty strong backlog that will carry us through this time. I don't think this is a thing that will take years to solve itself. We know how to navigate these down cycles. We know how to manage our costs. And I think we're in a really good position now. as we've moved our portfolio toward construction pros to withstand this slowdown. And then when it comes back, it's going to come back very strong. That's our expectation.

Okay, great. And then, you know, the second question would be, and maybe this is like a little bit of a two-part question, but I wanted to ask you about guidance because, you know, unchanged here on the EBITDA line, But then you're adding in stone points. So kind of help us understand, you know, maybe your outlook for aggregates is similar to what you were originally thinking. It seems that way. But also maybe you could unpack your comments about the FASAC extension or maybe wrap that around, you know, an infrastructure bill discussion as well and how that would help the construction products business. Thanks.

Yeah, good morning, Ian. This is Gail. Let me take the first part of that. Maybe I'll turn it back over to Antonio for the FASTAC implications. You know, on the guidance topic, as you pointed out, we did maintain our guidance range of $270 to $290 million of EBITDA. You know, essentially looking at it in total, there were some goes in and goes out that balanced out within the range. You know, we're pleased to see the full year EBITDA still tracking on pace with last year's strong results, and that's despite more than a $50 million headwind year over year that we're having from transportation products. Some of the minuses clearly were the impact of steel continuing to press higher ahead of our expectations. That's impacted our order decisions, customers' orders decisions, as Antonio said, on barge and wind tower customers, so leaving some production slots unfilled in the fourth quarter. Adverse weather clearly impacted construction decisions, We know weather is always a variable, but the rain we had this past quarter was excessive. To your question, Ian, the outlook for construction remains very much intact. We had a very strong June. When the weather is normal and dry, we're very pleased with what we're seeing. To the plus, we also had the wind tower settlement and then the earnings coming from Southwest Rock. The net of all these, essentially, I think is falling within the range. and we're very excited about keeping our guidance maintained.

And again, the second piece, just to clarify also on the guidance, Stone Point was already in our guidance in the previous quarter. What we added was Southwest Rock, and you see the number in the presentation. It's somewhere, I think, $4 to $5 million that we added to the guidance, but we subtracted the barge piece. So as Gail said, We are very pleased with our construction segment. We had a very, very, very wet April, especially May in Houston and in Dallas, and that slowed us down. We gave a number of $3 to $4 million of impact for the quarter. But when the rain subsided and it became a more normal weather pattern, We saw incredible demand come back, and we had a very, very strong June with very strong margins. We saw pricing power to push through our costs. So we were very pleased with the rebound in June. And we see very strong backlogs and very strong demand in most of the regions where we operate. So the FAST Act, you know, it has to be extended, and we expect it to be extended, hopefully at a higher level. But what we're seeing both with the FAST Act and with the infrastructure package that's been discussed, I think those are really good things. But we are seeing very strong demand at the moment with or without them. So I'm very encouraged by what we're seeing in the market, and we're very happy with the performance of our construction product segment, especially also now that – The other two pieces of the segment, which were shoring and specialty materials, have recovered very well. We saw very nice pricing and very nice volumes for the quarter.

Okay, perfect. Thank you very much.

We'll take our next question from Brett Sealing from DA Davidson. Your line is open. Please go ahead.

Hi, good morning. Antonio, it looks like you've been able to manage this steel environment pretty well in the energy structures business. Can we continue to expect this level of margin performance, I guess, X, the customer dispute, you know, into the second half? And I guess going forward, I guess what I'm asking, is there any catch-up in higher steel prices or some of these supply chain constraints that might impact the segment going forward?

Yes. You know, it's a really good question. I think we've been doing very well with it. I think in the previous call I described our three types of businesses we have. And let me try to describe them again. Each one has their own special circumstances. So we have, I would tell you, the one that we've been spending most of our time is our engineer structures, our transmission business. where we have contracts with customers that allow us to pass through the additional costs of steel, but they allow us to do it normally with some delay. So there are some revisions that happen depending on the contract, monthly, quarterly, etc., So what you're seeing, we have those impacts already in our margins today. So we've been absorbing part of that increase through the delay. So as we – price of steel has continued to go up, but in much smaller numbers. So I think now we're at a relatively stable place in steel prices. So I think the margins should start normalizing, and we should start seeing – probably some positive momentum in our utility structure business. The second part is the second piece of the products that we produce is the ones that we make built to order, no? So those are our tanks. And on the tank side, as I mentioned in my prepared remarks, we're seeing very, very strong pricing power. There's a lot of demand for tanks. Normally during the summer there's not a lot of demand for tanks, and we're seeing incredible demand. Our backlogs are very strong, and pricing is very, very strong. So we're very happy with what we're seeing in our tank business. The third piece is wind towers and barges, which are contracted prices. We normally sell the towers or the barges, and we have a contract of steel attached to it. And those, there's a pass-through, and I'm not concerned about those margins related to the contracts. So I will tell you, if anything, we have some positive momentum on the utility structure and tanks. The other ones I'm not concerned about. I don't see any supply issues in terms of volumes. But remember that we have said in our remarks that we are pushing some of the wind tower and barge volume to 2022. So you will see some reduced volumes in the second half of the year to try to maintain our flexibility. And what you will see is the impact of that margin because of that, not because we're seeing we cannot manage our costs. It's simply because the volume is going to come down a little bit there.

Okay. We appreciate that. And then I guess the second question would be on the acquisition you just completed, Southwest. It looks like it produces exceptionally high margins at least relative to your core construction product segment? Is there something in particular they're doing or just a really strong environment in Phoenix right now, any color that would be helpful?

Sure. And I'll give you probably a bigger picture. We've mentioned in our calls before and our meetings with the analysts that The next stage for our growth that we developed probably a year and a half ago, first stage was growing Texas and adjacencies, and then we worked on this strategic plan to metropolitan areas would be our next stages for growth, and that's why we came up with Stone Point. And Arizona was in that list of metropolitan areas we were very interested in. When we evaluate metropolitan areas, we go through a rigorous analysis of why we like them. And there's many things, including population growth and infrastructure spending, but also what's the competitive environment in that region. And those are the things that make the metropolitan areas have better or worse market conditions. I think Arizona and Phoenix specifically in that region has all those things looking very positive. We like the market. We like the population growth. We like the infrastructure spending. We like the competitive environment there. And all of those things are shown in the margin. And that's why when we look at our long-term strategy, we say we want to grow in attractive markets with competitive advantages. I think that's how they get reflected in the margin. So we like Phoenix. It has great conditions. And the margin is high. One of the things I would tell you is that as a public company, when we come in, we normally add some costs because simply our reporting and things. We will probably drive that margin a little down based on some adding a few additional controls over that operation. But it's not major, but it's something we normally see. But very attractive, very good acquisition, great market.

Thank you.

Take our next question from Leo Romero from Sodorin. Your line is open. Go ahead.

Yes, hi, good morning, Antonio and Gail. Morning. Just wanted to follow up on the last question from Brent there on the trailing 12 month margins for Southwest Rock. It looks really strong and I don't know if you can speak to the You know, I want to dig a little more on the kind of margins you expect Southwest to contribute to ARCOSA. You know, is there a ramp to get to 39%? Is there upside to 39%? And just kind of help us understand, you know, what are normalized margins for Southwest kind of once it's under the ARCOSA umbrella.

Julio, this is Antonio. You know, as you know, we just closed on it yesterday. It was a process that we started a few months ago. As I said in my remarks, this acquisition came, was in the pipeline coming from Stone Point. So we bought Stone Point in April and we're in August closing this one. So the margins have been relatively steady for them for the last several quarters. So it's not something that It's a unique circumstance. They've performed very well over the last several, several quarters. They have different, they have sand and gravel, and they also have hard rock. But I would like to offer to you that we're going to take the operation up and understand it well, understand what additional costs we're going to have to add simply for our control environment. And maybe come back to you with some additional color on the margins. We do not expect a significant reduction. But I would say that, and we've seen that in Dallas at some points in time when there's high demand, we can get to the 39%, 40%. But in the long term, I think the margins should be more in line with our peers. They should be probably in the mid-30s in that region. I think the 39 would be the higher end of the range that I would give you for that operation.

Great. Thank you for the color there. And I guess my second question is just, you know, on barge, can you maybe – give a little more granularity on the evolution of customer thinking about capital deployment for barges. I'm just, yeah, I would think there's a reasonable expectation that maybe steel, you know, might even go up from here. So, you know, I just want to kind of ask about how customers are thinking. Are some customers capitulating or some still holding out and has that mix of customers, you know, accepting the new normal of steel versus holding out, you know, evolved at all in the last six, nine months?

Yes. That's a good question. So, As you can imagine, steel prices and the acceptance of steel price really has to do with our customers' business model. Let me give you a couple of examples. On the utility structures, our customers are able to pass that additional steel cost through their tariffs to the customers. In the case of barges, it's a different scenario. There's relatively established barge rates for the river system. And when you plug those barge rates in the river system, that allows you to calculate how much you can pay for a barge. And those are things that don't move overnight. So I think... If the steel prices are staying at these levels over the medium and long term, which I don't believe they're going to stay at this level, but they're going to be higher than they were in the past, there needs to be some adjustment to the tariffs in the river system for them to be able to invest. And that should happen. It just takes longer time. And that's the mental aspect that they're going through. How much can I pay for a barge based on the rates in the river at the moment? That's one. The other one is the demand side, how many barges are idle and how many barges are being used. On the dry cargo side, I will tell you, the river is busy. There's a lot of movement. Of course, right now it's not the main crop season, but it's going to get busy soon, and everything points out to be a very strong market coming from the grain side. Believe it or not, the coal market has been busy with natural prices going up. There's a lot of coal movement happening. I don't expect the coal barge market to be at any point growing, but I wouldn't say it's a noise anymore. If you think about it, if you take out the coal barges from the equation, if you're really negative on them, The replacement cycle for the barges is several times what we've seen over the last few years. So there's been several years of very, very low dry cargo barges being built compared to what the market needs to be. So we are very encouraged, and that's what the customers are telling us. There's a need for barges. There's a need to replace those barges. We just need to make the numbers work for them. On the liquid side, I would say it's the same mentality. There's the rates in the river, but there's also the demand side, and demand is coming back slowly. I would say the petrochemical is coming back very strong, but the oil side is a little slower. So that's a long answer to your question, but I think the mentality is there's a need for the barges. We need to make the economics work, and they're trying to figure out what that number looks like.

Thank you. I like long answers, so I appreciate that. And thanks for taking the questions, and congrats again on the acquisition. Thank you.

And we'll take our next question from Stephanos Chris from CJS. Your line is open. Please go ahead.

Good morning, and congrats on the quarter. Thank you. Could you on – On aggregates, can you give us some more color on pricing and volume and then what organic growth is built into your guidance?

Good morning, Stephanos. This is Gail. Yeah, sure, I'll take that one. On the volume side, clearly we had the weather impact. So when weather was dry, our volume was tracking ahead of us. I think as I mentioned earlier, we saw strong aggregates volume growth in June and you know, and unit profitability. So, you know, encouraged with the attractive fundamentals, encouraged with our ability to drive price in most markets. We had price increases early in the year, and we implemented additional mid-year pricing increases. So good momentum on the pricing side, I'd say, very much in line with the market and our peers on that front. So weather being the biggest impact on natural and recycled aggregates. You know, really kind of moving away from aggregates for a bit, our specialty materials And transshoring, they're more nationwide businesses and not as impacted by the localized weather effects in Texas and on the coast that we had. So we saw strong, lightweight volumes with demand, as I mentioned, at pre-pandemic pace. So very encouraged with what we're seeing there, the ability to drive price there as well, and same on our transshoring side. So all in all, on a quarter perspective, coming back to aggregates, X the addition of stone points. So clearly we had good growth in volumes with the quarter with bringing stone point into the portfolio. We did see volume growth. I'd attribute that sum to some bolt-ons that we completed late in the year last year, but we did see a small amount of organic growth despite the weather.

Yeah. Stephanie, one more thing that we did not touch on the remarks, but the The other thing that we saw in the quarter was there was a – one of the bottlenecks in the industry, specifically in Texas, was there was cement allocations. After the storms in February, there was a shutdown of a couple of cement plants that created a significant problem of the cement industry here in Texas, and there were allocations. We consume cement in our specialty materials in our cherry business. But also, a lot of our customers, which are ready-mix companies that buy cement, were on allocation. So that created a bottleneck for the quarter. That allocation has gone away. There's imports coming into the Port of Houston and others, and there is no allocation anymore. So I think we should be a much more conducive environment in the second half of the year to be able to grow organically in Texas.

That's great color. Thank you. And then just on the Southwest acquisition, is the strategy going forward to build more in Phoenix, or do you think the strategy is more focused on finding other metropolitan areas? How should investors think about that?

Yes, that's a great question. As I've said in my prepared remarks, I think we've done a lot of acquisitions. We've used our balance sheet to a point where we feel very comfortable where we are. As Gail said in her prepared remarks, we're measuring 2.4 times after the acquisition on net debt to EBITDA, but at a very low point in our cyclical businesses, the barge and rail components, et cetera. So we're very comfortable where we are. But at the same time, our focus over the next few quarters is going to be finishing the integration of these acquisitions. We have a lot of things to do there. extracting all the value from them, making sure we fund them well, we understand their needs and their organic needs also. All of them come with very strong management teams, but also with a lot of ideas of how to grow organically. And when we put all those ideas together, the good news is we have a lot of projects that we can choose to continue to allocate capital. So over the next few quarters, I think you should see us allocate capital to finishing the integration, Organic growth, we have some very nice organic projects that are getting to be finished. And then the way you should see each one of our platforms, Phoenix, Tennessee, Pennsylvania, Texas, is there's going to be some bolt-ons around them. Normally, we've been able to find those bolt-ons at relatively attractive prices, easy to integrate, and they allow us to grow faster. And you will see us do that before we jump into another metropolitan area. Those are larger, and we need to generate cash to be able to do that again. So the short term is more on the Bolton organic growth and integration.

That's great. Thank you, and congrats again.

Thank you.

And our next question comes from Justin Buckner from Cabelli Funds. Your line is open. Please go ahead.

Good morning, Antonio. Good morning, Gail. Good morning. A few questions on Southwest. Some quick ones. First, was it an auction? Second, what would you say is its competitive advantage? And third, given sort of the low revenue per ton, What's the backdrop there? Is it low transportation costs? And what are the CapEx needs?

Yes. Let me take a stab. So it was not a process. As I said, when we bought StonePoint, they had developed a relationship with the majority shareholder. and they were already in talks, and we were able to, let's say, continue building that trust with the owner and with the management team, and I think we reached a good agreement with the shareholders. So it was not a process, and that's what we like. We normally prefer acquisitions where there is not a process involved, and so we were very happy with that piece. The company has the competitive advantage, I would say, like every other aggregate business is, you know, their location, where the reserves are. It's always the biggest thing. And they have really good locations. They've been in that market forever. Both the owner and the operator and the management team are very experienced in the region, very experienced in the area. We're inheriting a very capable management team that knows the area very well. And it comes down to location, and that's the competitive advantage. Also, they have incredibly well-kept and well-run operations. When you go there, I can tell you I've seen a lot, and these are as good as it gets. They have an incredible clean environment. a well-maintained, well-capitalized business. We do not see significant need for any capex. Like always, what you should see us do in Phoenix, like in all the areas, our focus is going to be as we grow this business or continue to find reserves and look for additional growth in the region. Overall, no big needs for CapEx.

Yeah, Justin, I would say this scale, I would say on the CapEx front, you know, their historical run rate has been about $3 million to $4 million a year. They're, you know, from an equipment and property plant perspective, you know, in fabulous shape. They've been investing in the company, keeping up on maintenance. So we really don't see anything near term other than their normal annual needs from a CapEx perspective.

Great. Thank you. And one other question, if I may. I know you discussed sort of input cost pressures in regards to steel earlier, but is it safe to say that, you know, considering the puts and takes to your maintained, you know, $270 million, $290 million EBITDA guidance, that increased cost pressure is not, you know, one of the headwinds or larger headwinds in the current guidance than when it was sort of updated or maintained a quarter ago, or has cost pressure become more of a headwind in your maintained guide?

No, I think you're right. You know, I think we've been able to manage the cost pressure well, and I think we've found the way to do it and do it well, and our team is doing a fantastic job passing those through. The thing, you know, the biggest headwind for us is volume in barges and wind towers. Those are the two headwinds for the second quarter. We believe they're temporary and they're going to come back. And the good news is we've built an incredible platform. Our construction segment is the size of our COSA in terms of EBITDA when we spun two and a half years ago. So we've built a very strong base. And when these cyclical businesses come back, we mentioned the rail components earlier, It's coming back, and we're going to start seeing that in the second half little by little. So I think I'm very comfortable where we are, happy with what we see for the future, and happy with the way we're passing through the price increases. And once we solve this steel issue of hitting our customers' volumes, I think we're going to be in a really nice track.

Thank you. Best of luck in the second half.

Thank you.

It appears that we have no further questions at this time. I will now turn the program back over to Gail for any additional or closing remarks.

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

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