Arcosa, Inc.

Good morning, ladies and gentlemen, and welcome to ARCOSA Inc.' 's third quarter 2021 earnings conference call. My name is Corliss, 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, Aaron Drabeck, Director of Investor Relations for ARCOSA. Ms. Drabeck, you may begin.

Good morning, everyone, and thank you for joining ARCOSA's third quarter 2021 earnings call. With me today are Antonio Carrillo, President and CEO, and Gail Peck, CFO. A question and answer session will follow their prepared remarks. A copy of yesterday's press release and the slide presentation for this morning's call are posted on our Investor Relations website, 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 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. I would now like to turn the call over to Antonio.

Thank you, Erin. Good morning, and thank you for joining today's call. Starting on slide four, having just passed our third anniversary as an independent public company, We are pleased to report strong third quarter results, which reflect the success of the efforts we have undertaken to build our business in attractive markets. Barcosa generated double-digit growth in third quarter revenue and adjusted EBITDA, led by gains in both our construction products and engineer structure segments, more than offsetting lower year-over-year results in transportation products. Now, we'll discuss several key takes away from our third quarter. The evolution and transformation of our portfolio toward faster growth, higher margin businesses is evident in our record third quarter results, and I'll provide additional context on the following slides. Construction Products continues to experience healthy market fundamentals supported by contributions from both organic initiatives and recent acquisitions. Order activity within our utility structures and related product lines was healthy during the quarter, and we were pleased to receive approximately 175 million of wind tower orders. We continue to manage inflationary pressures, mitigating the impact through proactive price adjustments in most of our businesses. High steel prices remain a headwind to order volumes in our barge business and to a lesser extent in our wind tower business. As we look to the fourth quarter of 2021 and into 2022, we continue to see favorable market drivers in our construction and engineering structure businesses supporting our outlook. At the same time, our wind tower and barge business continue to face short-term headwinds. Please turn to slide seven. Since becoming an independent public company, we have generated strong revenue increases and margin expansion through the successful execution of our strategy. We have been able to grow even when some of our larger and more cyclical businesses are navigating at the bottom of their cycles. Over this timeframe, our third quarter adjusted EBITDA has increased at a 21% compounded annual growth rate, while we have improved our margin by 240 basis points, or nearly 20%. We have achieved this through the evolution of our portfolio toward faster growth and higher margin businesses, and by improving operational efficiencies. Please turn to slide eight. Today, Arcosa is a fundamentally stronger, more focused, and more resilient company. In just three years, our construction product business has expanded organically and through acquisitions to represent nearly 60% of our adjusted EBITDA in the third quarter. Equally important, construction product represents our highest margin business, elevating Arcosa's overall margin potential. We also have successfully expanded our engineer structures business, and reduce our reliance on wind towers via operational improvements and the expansion into adjacent products with positive market fundamentals. Together, the investments we have made in the engineering structures and construction businesses have produced a more resilient company focused on attractive infrastructure markets. Turning to slide nine, I would like to remind you of our long-term strategy. I am proud of the substantial progress we have made as an organization in advancing our long-term vision in these three years. We have been able to make significant progress despite some of our more cyclical businesses being near at the bottom of their cycles. The acquisitions we have made have created a stronger, less cyclical company with much higher growth potential. As we discussed on our last call, having completed two sizable acquisitions already this year, Stone Point and Southwest Rock, we intend to focus our near-term efforts on integrating these great businesses, executing on organic opportunities, and simplifying our overall portfolio to reduce the complexity of our COSA. We look forward to sharing some additional progress on future calls. I will now turn over the call to Gail to discuss our segment performance, and then I will return to update you on the outlook of the business.

Thank you, Antonio. I'll start on slide 11 and touch briefly on our COSA's consolidated results before moving on to the segment discussion. As Antonio mentioned, we deliver double-digit revenue and EBITDA expansion led by our growth businesses. Like other companies, we are monitoring inflation, supply chain disruptions, and COVID and its impact across our portfolio of businesses. The positive news is we have been proactively raising prices to mitigate the impact on our overall margins. our consolidated EBITDA margins remained relatively flat during the quarter compared to year-ago levels. Turning to construction products on slide 12, revenues grew 55% and adjusted EBITDA increased 48%, led by acquisition and organic contributions. Segment EBITDA margin increased 190 basis points sequentially from the second quarter to 24%, but decreased from 25.1% in the prior year. Construction activity was strong overall in the third quarter. In our natural aggregates business, the additions of Stone Point and Southwest Rock increased our volumes, and we saw a healthy organic increase as well. We experienced pricing gains across most markets supported by strengthening product demand and attractive fundamentals. Looking at Texas, north and central Texas had strong volume growth driven by consistent residential demand and a healthy pipeline of project work. In Houston and along the Gulf Coast, Volume was impacted by weather, but was up overall in the quarter. We are seeing some lingering impacts from Hurricane Ida on volumes in Louisiana, as ongoing storm recovery efforts are impacting truck driver availability. Our recycled aggregates operation continues to perform well and is a nice complement to our natural aggregates platform. Turning to specialty materials, revenues in EBITDA were higher year over year, driven by price and gains on roughly flat volumes. The demand outlook remains favorable, looking across the diverse end markets we serve, with a portion of current volumes being impacted by construction delays. We were pleased to see another quarter of strong revenue trends in our trench shoring business, which is performing at pre-COVID levels. Overall, the segment delivered strong performance in the third quarter. Looking at segment margins, the team did a good job mitigating fuel and raw material inflationary pressures as we are focused on remaining diligent. While accretive to ARCOSA's overall margin, Stone Point's margins are currently dilutive to this segment, and that contributed to the year-over-year decline. Turning to engineered structures on slide 13, revenue increased 12% and adjusted EBITDA increased 13% to $32 million, resulting in roughly flat margins compared to last year. On the positive side, our utility structures business performed well with higher sequential and year-over-year EBITDA and margins from improved mix, our successful efforts to mitigate high steel prices and increase throughput. Our storage tank product line in the U.S. and Mexico is also a bright spot, with 48 percent higher revenue during the quarter and higher margins year over year. We benefited from strong residential and commercial demand for propane tanks. As a primarily build-to-stock business, we continue to closely monitor steel prices and have been successful thus far passing through increases as the demand environment remains conducive. Strong results from these businesses were partially offset by lower wind tower volumes and margins in the quarter as expected. As a reminder, second quarter revenue and EBITDA were helped by a $7.7 million favorable resolution of a customer dispute. As we mentioned in yesterday's release, we are taking additional steps in the fourth quarter to align our wind tower capacity with near-term demand uncertainties. Antonio will provide additional commentary in his remarks. During the quarter, We were also impacted by operational challenges in our traffic structures business as we ramped up to meet higher volumes. Roland expects segment EBITDA margins of approximately 10% in the fourth quarter for engineered structures below our 12% target range. I'll wrap up engineered structures with some comments on our backlog visibility and the order environment. At the end of the quarter, the combined backlog for utility wind and related structures was approximately $466 million. up from approximately $349 million at the end of the second quarter, driven by a strong 1.6 times book to bill. As Antonio mentioned, we received a large wind tower order during the quarter for 2022 production, where previously we had none. The order has low expected profitability but provides a base level of production visibility. During the quarter, The combined order activity for utility and related structures was healthy, keeping pace with strong year-over-year revenue increases and underpinning our positive outlook for these businesses. Moving to transportation products on slide 14, both revenue and adjusted EBITDA were significantly lower year-over-year, primarily due to a 41% decrease in barge revenue and lower utilization. While still operating at trough volumes, we were pleased to see year-over-year revenue improvement in our components business. marking the first quarter of growth since our spinoff as conditions in the North American rail industry slowly improve. Still, prices continue to suppress new order volumes in our barge business. We received orders of $50 million, representing a book-to-bill of just under one time on a low level of revenues. Pricing of new orders reflect weak market conditions, with orders adding to our base level of production in 2022. Our backlog was approximately $130 million for our barge business at the end of the quarter, with roughly $86 million scheduled for delivery in 2022. The idling of our Madisonville, Louisiana plant was delayed slightly due to Hurricane Ida and was completed in October. Our backlog provides continuity for our two open facilities into next year while we remain flexible for an anticipated recovery. Turning to our components business, we were pleased to see third-quarter rail car orders for the industry exceed bookings for the third consecutive quarter, and the number of idle rail cars in storage continue to decline. Third-party expectations continue to point to higher industry deliveries next year. Wrapping up on slide 15, I'll conclude with a few comments on our balance sheet liquidity and free cash flow. As we discussed previously, we used cash on hand and $100 million of borrowings under our revolving credit facility to fund the Southwest Rock acquisition that closed in August. We ended the quarter where we expected from a leverage standpoint with net debt to adjusted EBITDA of 2.3 times. We continue to maintain a healthy liquidity position and have no material near-term debt maturities. We generated approximately $6 million of free cash flow during the quarter. which came in below our expectations due to our higher use of working capital. Working capital was a $34 million use of cash during the quarter, primarily due to an increase in accounts receivables. A portion of the increase was due to timing, as we had certain customers delay payments at the end of the quarter, which has subsequently been collected. However, most of the increase reflects higher sales volumes in our utility structures business. For the fourth quarter, we expect working capital to be a source of cash. Based on year-to-date CapEx investment of approximately $61 million, we now see full-year CapEx of approximately $90 to $100 million, about $20 million lower than our previous range. We continue to see attractive opportunities to deploy capital organically, and our range reflects a slightly higher growth CapEx outlook for the year. Our expectation for maintenance cap is lower, generally driven by long lead times for equipment, the decision to lease certain equipment versus buy, and overall timing. I will now turn the call back over to Antonio for more discussion on our business outlook.

Thank you, Gail. Turning now to the near-term outlook on slide 17, we believe our construction products and engineer structure businesses are well positioned for continued growth in the fourth quarter, with market challenges within our barge and wind tower business moderating these expected gains. First, we anticipate our construction business will benefit from favorable market fundamentals, with strength expected to continue in our key markets, Texas, Gulf Coast, Arizona, and Tennessee. Infrastructure spending trends overall remain positive, and we see potential near-term upside in this business from increased federal funding above existing FAST Act levels. As we continue to integrate the acquired companies and streamline our operations, we recently sold the assets of an asphalt operation which came with StonePoint and was determined not to be strategic for our COSA. Within the engineered structures, positive market fundamentals continue to drive strength from several key markets, including electric transmission, wireless communication, traffic structures, and storage tanks. We're very excited about the fundamental strength of these markets. At the same time, our wind tower business faces near-term challenges. We believe renewable energy has a very attractive future. However, high steel prices and uncertainty around the tax incentives are delaying customer orders in some regions. Given the short-term headwinds, we are taking actions to appropriately manage costs, including the idling of our Clinton-Illinois facility in the fourth quarter. This will allow us to keep our manufacturing capacity in the areas of the country with the highest demand potential. Given the related cost of these actions, we expect break-even EBITDA for wind towers in the fourth quarter with a return to profitability at the start of 2022. While we're in the early stages of planning for next year, the orders we received in the third quarter provide a good base of business for 2022, helping us navigate short-term headwinds and providing continuity while we wait for the market to stabilize and start growing again. Our transportation product segment continues to face soft market conditions primarily driven by the impact of COVID and high steel prices on barge demand. The orders in our batch backlog will allow us to maintain positive EBITDA and give us flexibility to ramp up capacity when the market recovers. We continue to see positive signs of our recovery in the North American railcar market, suggesting that 2021 will be a tough year for this business with an initial recovery starting in 2022. Please turn to slide 18. We're encouraged by the broader national conversation surrounding federal investment in infrastructure and believe that the passage of the current legislative packages being discussed by Congress could accelerate our growth starting in late 22 and into 2023. As a company serving a broad spectrum of infrastructure markets, we believe our cost is uniquely positioned to benefit, whether from additional investment in the aging transportation infrastructure and electrical grid, the wireless and broadband build-out, the ongoing shift towards renewable energy sources, or the improvement in our ports and waterways. Because these packages have not been signed into law, we have not included in our outlook any potential impact from these bills, but are very encouraged by them. Please turn to slide 19. Now for our 2021 outlook. Based on our year-to-date performance and our expectations for the fourth quarter, we are tightening our guidance range for 2021. We now expect adjusted EBITDA of $272 million to $280 million compared to our prior range of $270 to $290 million. Our revised forecast primarily reflects our expectations for reduced wind tower profitability in the fourth quarter in light of the near-term challenges I discussed earlier. Overall, I am pleased with our expectation to nearly match last year's performance, despite an expected 53 million EBITDA headwind from our transportation products year-over-year. At the mean point of our revised guidance range, we forecast a 22% increase in adjusted EBITDA on a year-over-year basis in our two growth segments, construction products and engineer structures. Our anticipated 2021 performance in this business reflects our continued progress in expanding our construction product segments organically and through acquisitions, while enhancing our engineer structural segment. As we look towards 2022, we remain committed to our long-term strategy of growing the construction product segment and engineer structural business, and are very encouraged by the potential outlook for significant growth as the more cyclical businesses start to turn around in the future. Please turn to slide 20. Before I wrap up, I'd like to spend a moment highlighting the progress we have made in incorporating ESG initiatives into our business and operations. ESG has been a fundamental component of our long-term strategy, and we continue to build on this commitment. I'm pleased to announce that effective November 1st, we welcome Kimberly Lubell, former Chairman, President, and CEO of CST Brands, to our Board of Directors. We welcome her broad expertise and insights as we advance our long-term strategy and vision. While I will not enumerate all the ESG efforts we are undertaking, as you can see from this slide, we are fully committed to building a culture around ESG. And at the same time, we recognize that we're just getting started and that the building of a new culture takes time. In closer over the last three years, I think you can see that ARCOSA has executed successfully our strategic priorities and made considerable progress in advancing our long-term vision. I want to take this opportunity to thank our employees for their support and efforts. I would also like to thank our shareholders for their confidence in our strategy. Operator, please open the call for questions.

Absolutely. At this time, if you would like to ask a question, please press star 1 on your touchtone phone. You may remove yourself from the queue by pressing the pound key. Once again, that's star 1 to ask a question. We will take our first question. From Brent Thielman, DA, Davidson. Your line is open. Brent Thielman, DA, Davidson. Your line is open. Brent Thielman, DA, Davidson. Your line is open.

Great. Thank you. Good morning. Good morning. Antonio, you're obviously planning for the wind portion of the structures business to be down in 22. I guess the question is, do you think some of these other areas like utility, telecom, and traffic can offset that, and can you sustain these? kind of 11% to 13% EBITDA margins, even with the weaker wind business?

Well, it's a really good question, Brent. As you know, and I mentioned in my remarks, we're still in the planning for 2022. We don't have budgets finished yet. We're still working through that. The facility we're idling in Illinois is also a flexible facility. Most of our wind tower facilities, most of our steel facilities are relatively flexible around product lines. As you know, we bought a few businesses in the utility sector, in the traffic structures, et cetera, and we're working to expand those. We've been very successfully getting additional work for them. We see very strong demand in all of these businesses. The tank business is doing very well also. So and as I said, we have a good backlog for 2022 in wind towers. I think we have good visibility. It allows us to plan. There's still time to get some additional orders for wind towers. So I will tell you that I'm encouraged by the demand factors in the other businesses. We still have opportunities in the wind towers. So I think if you put it all together, we're encouraged that we have a potential to still match that margin. There's still time to do it, and that would be our goal, no?

And, Brent, good morning. This is Gail. I might add, too, you know, we did guide for the segment in my remarks to a 10% EBITDA margin in the fourth quarter, and that does reflect some one-time costs as we wind down our Clinton, Illinois facility and that we've right-sized our capacity as we head into 2022. Yep.

And just to finish, we do expect profitability to start coming back for wind towers in early 2022.

Got it. Okay, and I guess one on barge because it seems like the low-hanging fruit here for some sort of inflection. But, you know, look, the fundamental drivers seem to be pretty good. Here scrap rates are up. I guess what's the temperature of customers today? Are there any indications? inquiries are improving that might give us some hope for a turn next year.

Sure, and I think that's what you mentioned. I think the key thing to watch here is the fundamentals for the market are really, really good. The scrap rates have gone up in terms of the number of barges being scrapped to produce. The hurricane did a lot of damage to many barges. There's about 1,000 barges being scrapped. being repaired and some are heavily damaged. We've had four or five years of less production than build out. The grain exports are doing very well. The rates have gone up. Oil demand is coming back. So everything seems to be ready for this business to grow again. I think there's a really strong pent up demand that's being generated. At the same time, steel prices continue to be very, very high. And that is not only the problem. The problem is that there's a significant disconnect right now between what steel mills are saying. If you sit down with a steel mill and they tell you that 2022 is going to be a very strong year in terms of pricing. On the other hand, you see every steel analyst predicting a very sharp drop in steel prices early in 2022, in the first quarter or second quarter. So when you have those, if you're a customer that can wait six months, they're waiting because they think they can buy a barge at half price a year from now. So I think that is the fundamental thing that needs to get solved. And I think we'll start seeing something develop probably early in 2022, depending on who you believe in, in terms of the steel prices. We are acting as a company, assuming that steel prices are coming down. We're trying to reduce our inventories as much as possible. so we don't end up with a lot of high steel prices. But once this starts unraveling, and think about, sorry I'm extending a little bit on this, but if you think about when we are trying to negotiate prices for the second quarter of 22 right now for barges and things like that, so to negotiate a price in this environment is very difficult, and that's something that for our customers is difficult to accept, that we don't have clarity around steel prices for the second half of next year.

Understood. Thank you, Antonio and Gail.

We will take our next question from Ian Zaffino with Oppenheimer. Your line is open.

Hi. Good morning. Good morning. You know, question would be on the aggregate side. You know, can you talk to us about pricing a little bit? You know, how frequently, you know, given kind of the market, how frequently are you able to, take price, you know, maybe how many times have you taken price already this year? You know, what do you think going forward? And, you know, I know you can't give me, like, perfect details, but maybe directionally or just in color as it relates to that. Thanks.

Good morning, Ian. This is Gail. I'll take that. As we talked about on our 2Q call, we did have some midyear price increases. So those are working their way through. In some other select markets, we might have some opportunity in the fourth quarter, but really it's about sending notices out for 2022 at this point in time. Looking at our natural aggregates business across the markets, price was up broadly, similar to volumes. We haven't talked about volumes yet. I'd say from a weakness perspective, we didn't see a lot of weakness with pricing trending up. We had some softness in as you might expect in south and west Texas, just given as those markets continue to recover. But those are a pretty small piece of the mix. Away from natural aggregates, we saw roughly flat volumes in our specialty materials business, but saw a nice gross profit per unit gains on strong pricing. So I'd say all in all, as we looked at the quarter, We saw similar pricing in line with some of our larger peers. The pricing environment continues to be healthy.

Okay. So I guess as far as new pricing, that would really more flow through kind of first quarter of 2022? That's right. That's right. Perfect. And then, you know, as far as the portfolio, can you talk to us about the portfolio, how you're thinking about that now? The rail business is perking back up. It's kind of troughing out, so it's on the recovery. So, yeah, how do you think about the portfolio there? And then also just uses of cash, you know, at the moment now. Thanks.

Sure. This is Antonio. So on the portfolio side, I mentioned in my remarks, we remain committed to growing our construction segment and engineering structures. The other businesses are all very good businesses, and we like them all. At the same time, our commitment is to try to reduce the cyclicality of the company and the complexity. We've talked in the past about timing of these things, and timing is never perfect. It's difficult to plan. But our commitment is that we're going to continue to watch as these markets evolve so that we can find the right time to start executing some of these strategies. During the quarter, we did sell a small business in asphalt. not during the quarter, after the quarter. So this quarter, we sold a small asset of a national business that came with StonePoint, and we really determined it was not strategic for us, given the geographic presence, et cetera. So we will continue to look at our portfolio and evaluate it, and it's something that I said during the call. We're going to be focused over the next few quarters in as we integrate this business and On uses of cash, my goal would be to try to generate as much cash as possible during the fourth quarter. And if we do any additional sales of businesses, reduce debt and prepare the balance sheet to continue to grow and redeploy capital to our growth business.

Okay, perfect. Thank you so much.

We'll take our next question from Daniel Wang. with Barenburg. Your line is open.

Hey, good morning. Morning. Can you just remind us how significant that wind tower's portion of your business is, maybe as a proportion of total segment sales?

This is Gail. I'll take that one. As you know, in our external reporting, we report wind utility and related structures on one line item. You know, we have given color in the past, you know, heading out of spin in our, you know, kind of early part of our life cycle was about half wind, half utility. And certainly as the wind market has come down, you've seen utility take a bigger share of that revenue line. That's probably about as specific as I can be at this point. But keep in mind, we do, as we said in our In our commentary, we did receive a $175 million order for wind, and that is all for 2022 production. So that gives you a good sense of where we are heading into 2022 right now as it relates to wind.

Perfect. And just secondly, I guess, how should we think about longer-term wind tower demand, assuming there is no renewal of any federal tax incentives? Do we see a modest decline next year and a recovery from there on out, or do Do the incoming orders partially offset that? Just any color would be appreciated.

Sure, absolutely. I'll give you a little sense of the cadence of how this business normally works. This reduction is not new. Many times when the PTC expires or is getting ready to expire, we see this reduction in volumes. When things get renewed and we're confident something will happen there, normally a wind farm takes about 12 to 18 months to build. So what happens when these tax incentives are uncertain, there's uncertainty around them, you create kind of this air pocket in the demand, and it takes a while for it to come back. And once there's some clarity, you start working on orders, and maybe we will be negotiating orders for 12 months ahead or for 18 months ahead, probably sometime late 2022 or mid-2022, depending on what happens. So my guess is that wind towers will be relatively slow in 2022. We still have time to get more orders. I'm not throwing it away. There's still time to get more orders, and we expect to get more orders if things work out as we are looking at it. But at the same time, we need some clarity around both steel and some of the tax incentives. In the longer term, we're very encouraged by wind towers. You know, the shift towards renewable energy is a fact. It's coming. This is a business where the disconnect between, you know, what you read in the news that everything is moving towards renewable and the reality that we're seeing in the market is very different. But eventually we're going to get there, and it's longer term. We're very optimistic about this business.

Okay, thank you.

And we'll take our next question from Derek Shamus with Loop Capital. Your line is now open.

Thanks for taking my question. I wanted to follow up on construction products pricing, recognizing you put through media price increases in several markets, which should help kick off pricing growth for next year. But, you know, several of your construction product peers have been talking about aggregates pricing, both conceptually and in their preliminary guidance for 2022. So I'd just love to get your view on pricing, your outlook more broadly into next year and maybe beyond. Should we expect pricing to accelerate for you as well?

Yeah, this is Antonio Garrick. So I think what you see in our construction peers when we read all the comments and everything, and in many markets we see them and we're competitors, and I think we see similar market conditions than they see. in in many of our markets here in texas where we have a large share i i i think we see the same trends when we have the same goals we have there's a lot of inflation happening and we have to pass through price increases and that's going to be our goal for for early for for as we as we talk and into 2022 but i think conceptually the way you should think about our aggregates portion of our business is very similar to what you hear from our competitors. That's our goal, to continue to raise prices and volumes and take advantage of the current environment. So there's nothing different from our business than what you hear from our competitors.

Great, I appreciate that. And then just my follow-up question also staying on construction products. I was wondering if you could probably give a little more color on the organic sales growth in the quarter versus the sales that were derived from the acquired assets.

Yeah, good morning, Garrick. I'll take that at scale. You know, kind of parsing through the segment for the quarter, you know, maybe start with what's maybe easier for you to see is our trench shoring business, which is reported as other And we saw very nice revenue growth in that business, all organic, year over year, close to 40% revenue growth, recognizing it's a smaller piece of the segment. Looking at our aggregates and our specialty materials, the primary driver, given the fact that we did our largest acquisition in the company's history in April, followed by Southwest Rock, from a revenue perspective, was the addition of those two to the portfolio. We did have a little lift from... a late Q, early Q4 acquisition last year. But stripping those away, we saw very solid organic revenue growth in our legacy materials business, both on the specialty side as well as on the natural aggregate side.

Anecdotally, when you talk to our team in our meetings to follow up on how they're seeing the market, several of them are seeing very strong project letting in many areas. Texas is one, for example, but also Arizona, Tennessee, where they're seeing very, very strong lettings and new projects being awarded. So I think what's important to me is the sentiment of our team is a very optimistic, very strong market at the moment.

Maybe just to add on to that, Garrett, to help with the math a little bit, and we'll disclose, you'll see Stone Point's revenues in the queue. So if you back off Stone Point and make an assumption on Southwest Rock based on what we've provided externally, you know, you're somewhere around the $150 million-ish area X, those two, and that compares to about $129 million last year. So nice growth on the organic side.

Perfect. Thanks for that, and I'll pass it on.

We'll take our next question from Stephanos Chris with CJS Securities. Your line is now open.

Hey, good morning. Good morning. You know, speaking of, you know, the acquisitions of StonePoint and, you know, more recently Southwest, can you just give us some more color on the integration of those, anything unexpected in terms of synergies or costs that we should be thinking about?

No, Stefanos, I think it's going very well. We're very happy with both acquisitions. As I mentioned, when you buy bigger companies like StonePoint specifically, they come sometimes with 99% or 95% of what they have you like, and 5% is not strategic, and that's why we sold this asphalt. There was nothing wrong with it. It was just that it didn't fit. But for the rest, it's going very well. I think... As a company, these two acquisitions, and that's why we're taking the time to integrate them well. As a company, I mentioned it's almost 60% of our EBITDA now in this quarter came from construction products. We're becoming a more construction product-centric company. So these two integrations are very important. We are implementing a new ERP system very specifically for our construction segment that will allow us To manage the business differently from a manufacturing company that we were three years ago, basically, is going to take us a while. It's going to take us probably 2022 complete to finish that implementation. But that will allow us to get more data, to be able to analyze our business better, to report better for you, to become a more – a construction-centric reporting company, more similar to our peers. We are clear that's where we need to go, and that's where we're going. It's going to take us some time, but we're using these two integrations as a model to continue moving forward, and we're very excited. I'll tell you, not only excited about the business, but excited about the talent we brought with the businesses. We brought incredible talent that's allowing us to reshape our internal structure towards four different regions now in our aggregates business and be able to be very diligent and very disciplined around our pricing, our volume. So overall, very excited about not only the business and themselves, but also what these businesses are allowing us to turn our COSA into. So very excited about both.

That's great, Collar. Thank you. And then You know, leverage is 2.3 times within your long-term range. How comfortable are you going above that, you know, in terms of M&A if there's the right opportunity presents itself?

So as we've said, you know, 2.3, there's nothing magic around that. It's just or 2.5 is where we feel comfortable given the cyclicality of some of our businesses. That's why we are conservative around our leverage ratio. We've always said it's 2.5 with some sort of a mid-cycle, cyclical businesses. So in that sense, we are at the bottom of the cycle, so we have some leverage. If something great would happen, we might think about it. But at the moment, as I've said, the focus is not there. We continue to analyze our markets, and we have very specific, let's say, fielders looking for opportunities in the markets we like. But at the moment, the focus is going to be, first, we need to generate cash in the fourth quarter. That's been, I will tell you, some of the focus that we're going to have in the fourth quarter is generating cash. Second, we're going to be focusing on the integration of the business. And third, there's some really great organic opportunities that we have internally that we need to finalize and get going to start investing in them in the beginning of 2022. And then finally, as I've said and I responded to the previous question, some of the simplification of the portfolio so that we can deploy, reduce some of our debt and continue to redeploy that capital into our construction segment. So I think you're going to see us probably six to nine months working on these projects. But at the same time, we're going to continue to fill the market and see if there's any interesting opportunities things that we can start working on. These deals take time, so I think we have good time in front of us.

That's great. Thank you for taking my questions.

We'll take our next question from Leo Romero with Cerati and Company. Your line is open.

Hey, good morning, Antonio and Gail. Thanks for taking the questions.

Good morning.

Hey, so I wanted to ask more on the construction product segment, and you touched on the ERP that you're implementing. Are you moving the recent acquisitions into an existing ERP, or is this a completely new ERP system you're implementing? And then secondly, Antonio, you mentioned, I believe, that it should be completed, the integration, by end of year 22. That seems pretty fast. So is that correct in that you should see full-year benefits in 2023 from ERP?

Yes. So the ERP, we're not implementing a completely new one. That's, as I've said, you know, we are a unique company in terms of the way we approach acquisitions. I think that we – I think there's great things that Arcosa brings to the table when we acquire companies, but we're also looking always to see what the acquisitions bring to Arcosa. not only in terms of talent that I already mentioned, but if you think about most of the acquisitions we bought came from another acquisition. So we bought ACG. Cherry came from an idea from ACG. Recently, Southwest Rock was already in the works for Stone Point. So when we approach acquisitions, we approach them not only as a part of the business, but also we approach them looking for things they have that are very valuable and try to execute on them and add value to the ideas that they already have. In that sense, ACG already had a good ERP system, and when we saw it, it's much better than what we had for our construction segment. So we are bolting on the businesses to the ACG ERP system, and that's why it's going to be probably faster than a normal 100% implementation, also much cheaper. And at the same time, we already have it. We know it. We've tested it. So, we are very happy with being able to bring on a system that's working into ARCOSA.

Understood. And then, secondly, the press release, and I believe in your commentary you mentioned you touched on the reorganization of your aggregates into four regions. Can you talk about what that reorganization does for ARCOSA, either from a synergy perspective or from a communication perspective?

Sure. I think it's very important. We've grown a lot. I'm convinced that structure follows strategy, and the structure that we are creating is the structure that will be able to support our growth strategy. If you think about it, we had about 25 mines three years ago. We have over 100 today. You need You need more supervision. You need more, I would say, thinking around strategic opportunities in each one of the regions. You need to think about organic growth. You need to think about pricing. You need to think about synergies in each one of the regions. So we now have four regions. We have the west region. We have Texas. We have the Gulf Coast. And we have the Ohio River Valley region. with great management, all very experienced management. Each will have their controller and we're working towards developing the financial structure internally to be able to manage it that way. But I think it's going to be very important for us as we grow to have this structure and continue to grow to support the growth strategy that we have. So I think as we stair-step the growth of our goals. So this was very important to create so that we take the next step, you know? And for the integration, it's also important.

Understood. If I could sneak one more in here. The receivables balance ticked up a bit in the quarter, and I think you mentioned part of that was the higher sales volumes in utility structures. Does that business have a structurally longer cash conversion cycle, and how does DSOs trend over the next couple of quarters?

Good morning, Julio. This is Gail. Yeah, that's a very good question. We did talk about a couple of things as it relates to AR in the quarter. Some collections that were a little bit delayed, those came through at the early part of the fourth quarter. And then the higher mix, really, of the utility structures receivables. And they do carry a slightly longer DSO relative to some of our other businesses. So you're seeing that, all very strong, high-quality customers, utility customers, but they do have a little bit of an industry norm, longer DSO than some of our other businesses. So rolling that through their cash conversion cycle is a little bit longer.

I'll add a little bit. Throughout the last year and a half, I would say since the pandemic started, that was something that we – I've been putting a lot of attention on our collections, especially when there's an economic slowdown like we had last year. That's always something we watch. I'll tell you, qualitatively, we have an incredibly good AR process, and we have a very solid – we don't have a problem with collections. This was just a deal of some delays. But qualitatively, we have a very, very healthy – AR collections right now.

I guess I just, as it specifically relates to utility, Julio, I think if you were to look at some peer comparisons, our DSO isn't anything different from what you would see in other peers in the industry.

Got it. Thanks again for taking the questions.

We'll take our next question from Noah Markosko. With Steven, your line is now open.

Good morning, and thanks for taking my question. I apologize in advance if this has already been asked and answered. I dialed in a little late. But I was hoping to talk a little bit longer term outlook for the construction products EBITDA margins. You know, if we're entering a period of strong demand and we start to see improving price and volumes and you get these acquisitions fully integrated, What sort of EBITDA margins could we see out of that segment?

Good morning, Noah. This is Gail. I think that's a good question. We're very focused, as I said in some of my commentary earlier, you may have missed, on expanding our gross profit per unit, and certainly that's helpful to margins. At the same time, we are in an inflationary environment, and we are trying to mitigate the impacts of that. So we had a very healthy margin in the quarter, 24% for the segment. You'll see some normal seasonality as we head into Q4, but our outlook overall is generally positive as it relates to our construction margins. We're doing everything we can to enhance expansion, enhance pricing, and expand that gross profit per unit. I don't think I can give you a specific target, but I think the first half of the year, if you recall, was difficult from a weather perspective. with the winter storm, Yuri, and then the excessive rainfall we had in Q2. So as we look to 2022, you know, we would hope to see a slightly better first half from a weather perspective. But, you know, we'll see.

No, this is Antonio. Just to add, to build on Gail's comment, if you think about the construction products, the two areas that we saw the most weakness in 2020, given COVID, We're assuring some of our lightweight business and also some of our specialty materials business. As we continue to grow the aggregates portion of our business, that piece is, let's say, easier to forecast because, as I said, we're similar to the rest of our competitors. We should see similar margins. We should see similar dynamics. On the specialty materials, Gail mentioned the shoring piece has recovered to pre-pandemic levels, and we're encouraged and we're very happy with the growth we're seeing. Lightweight aggregate has recovered and is having a great year, and we're seeing very good demand and very strong fundamentals and margins there. Specialty materials, even though we're growing, it's still slower than we expected, and it's affecting a little bit of our margin. And finally, we've mentioned in the past in some of our calls, we did have some oil and gas exposure in some of the oil fields, which was a headwind for us in the last few, probably last couple of years. And now we're seeing some drilling come back into West Texas where we have operations. We're seeing some drilling come back in Pennsylvania where we have operations. So that should also help us accelerate margin expansion, which is our goal. So that's probably a little too much color, but the goal is to accelerate our margin growth, behave very similar to our competitors in our aggregates, and work on our specialty materials and lightweight ensuring to be accretive to our overall construction margins.

Thanks, thanks. That's really helpful color. And then just switching gears here for my follow-up, if the engineered structures, you know, revenues are seeing higher prices because of steel inflation, will we start to see pricing decline if we see steel prices crash, or can you hold on to those higher prices? You know, I guess what's happened historically, and if you do, if it is the case that you give back some price, what does that mean for the margins in that segment?

Yeah. We have three types of businesses in steel. that are very different in the way they use steel. I'll start with the engineer structures, which is where you started. That business has, we have contracts with customers. Significant portion of our business is longer term contracts or agreements, let's not call it contracts, agreements for volume for the year. where we have a pass-through under certain terms. So if the price goes up or down more than X, we can pass it through up or down over a certain period of time. So sometimes when prices are going up, this business may suffer for a quarter or so if they've not been able to pass it through. We've been very successful at doing it. Our margins are overall in utility structures are higher within the mix than they were years ago. A year ago or two years ago, they're going up and they're looking very good. As they come down, you will see prices coming down, not immediately, but maybe in the next quarter, just like when it goes up, it's quarter by quarter or more by month, depending on the customer. So you will see prices come down. And that's why I've been saying that we're focusing on inventories, because it's important that you carry a lot of inventories as it still comes down. That's one type of business. We have a second type of business where there is complete pass-through, and that is barges and wind towers where we basically have agreements with the customer and the steel mills, and we negotiate longer-term contracts with both, and we pass it through completely. So you will see prices coming down there, and there is kind of a built-in margin into our contracts, so you will see margins going up as steel prices come down. And the third one is the bill to stock that Gail talked about, for example, in our tank business. Those are businesses where it's a little more, I'm going to call it speculative, because you buy the steel, you make the tanks and wait for someone to order. There's really no backlog there. And those are the ones that you run a lot of risk when it's coming up because you might be able, you might, if you're not fast enough in raising prices, you might be caught up. We've been very successful. Our margins have gone up quite a bit during last year, and I think this is the business where when prices come down, you can hold on to the margin more because prices will come down and you will not bring down the prices as fast, or you might not bring them down at all depending on the market demand. So I think within the three of them, as prices come down, my expectation would be margins to continue to hold or even expand a little bit but we have to be very agile in doing it. I hope I gave you enough color and steel.

Yes, that was really helpful. I appreciate it and I'll leave it there.

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

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

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