Arcosa, Inc.

Good morning, ladies and gentlemen, and welcome to the ARCOSA Incorporated fourth quarter and full year 2022 earnings conference call. My name is Todd, 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. Mr. Drabeck, you may begin.

Good morning, everyone, and thank you for joining ARCOSA's fourth quarter and full year 2022 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, 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 their 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-K we expect to file later today. I would now like to turn the call over to Antonio.

Thank you, Erin. Good morning and thank you for joining us to discuss our fourth quarter and full year 2022 results and our outlook for 2023. I will start with a few key messages. ARCOSA achieved solid financial performance in the fourth quarter and fall of 2022. generating strong growth in both revenue and adjusted EBITDA. I am proud of the Arcosa team for successfully navigating a challenging operating environment and delivering financial performance consistent with our guidance. Despite facing persistent inflationary pressures and headwinds in our cyclical businesses, we effectively compensated for them while expanding our growth businesses, both organically and through an acquisition. We also achieved significant strategic progress in 2022. Through the divestiture of our storage tank business, we took another step toward optimizing our asset portfolio and reducing the complexity of our business. With the proceeds from this transaction, we strengthened our balance sheet, enhanced our financial flexibility, and realized significant value for shareholders. For 2022, ARCOSA grew revenue and adjusted EBITDA in each of our business segments. underscoring our ability to execute consistently despite challenging market conditions. Within our growth business in construction products and engineering structures, adjusted EBITDA improved by a combined 20%, reflecting proactive pricing actions to offset inflationary pressures. At the same time, our cyclical businesses performed better than we had anticipated, largely due to our focus on managing costs and generating operational efficiencies in a demand-constrained environment. Slide 9 summarizes the considerable progress we have achieved in advancing our strategic transformation. Our actions, which have included focused M&A, organic growth initiatives, and asset optimization, have enhanced our resiliency and increased our participation in higher growth markets. ARCOSA today is a stronger, more focused company that is better positioned to capitalize the multiple long-term growth opportunities in front of us. In addition, federal infrastructure spending is expected to provide a multi-year tailwind to many of our business. Turn to slide 11 to review our fourth quarter results. Excluding storage tanks, fourth quarter consolidated adjusted EBITDA increased 13% from prior year periods. outpacing revenue growth and driving a 50 basis point improvement in margins. The improvements in adjusted EBITDA reflect growth in each of our business segments, led by a more than doubling of transportation product EBITDA. Strong organic pricing gains help compensate for lower volumes in construction products, while engineered structures benefit from elevated steel pricing, even as overall segment volumes decline. Looking at full year results on slide 12, Our COSA generated revenue of $2.24 billion, an increase of 14%, which met the operating end of our guidance. Adjusted EBITDA was $325 million, up 19% year-over-year, normalizing for the sale of storage tanks, and was right in line with the midpoint of our updated guidance range. I will now turn over the call to Gail to discuss our segment performance, and then I will return to update you on our 2023 outlook. Gail?

Thank you, Antonio. I'll begin on slide 13 to discuss fourth quarter segment results. In construction products, revenues increased 5% due to accelerated pricing in the quarter, which offset organic volume declines, as well as the addition of Ramco, the Southern California recycled aggregates producer we acquired in the second quarter of 2022. Revenue growth was split roughly evenly between the organic drivers and the contribution from Ramco. wet and extreme cold weather across our footprint, along with the continued deceleration in single family residential construction activity were the main headwinds to segment volume during the quarter. Approximately 45% of segment revenues are Texas sourced, and we experienced a 75% increase year over year in bad weather days in the state during the quarter. We believe supply chain constraints while abating also had an impact on segment volumes during the quarter. Our discipline pricing strategies were successful in mitigating ongoing inflationary pressures. In addition, our focus on operational efficiency enabled a 50 basis point reduction in segment SG&A as a percent of revenue. As a result, we reported a 6% increase in segment adjusted EBITDA slightly ahead of revenue growth with a 20 basis point increase in margin. Higher diesel, processed fuels, and cement prices increased segment cost of sales by approximately $8 million, or 5% during the quarter. The full year effect of these cost headwinds was approximately $31 million, reducing segment margins by over 300 basis points in 2022. Turning to natural aggregates, we experienced broad pricing strength across our markets, with average organic pricing up more than 20% in the fourth quarter, slightly ahead of volume declines. With a disciplined pricing strategy, we achieved strong unit profitability gains in the fourth quarter and higher year-over-year natural aggregates margins. For the full year, we had organic pricing growth in the mid-teens, positioning us favorably for 2023. On a full year basis, total volumes increased about 10% with organic volumes down high single digits. In recycled aggregates, total volumes in the quarter benefited from the acquisition of Ramco. Largely attributed to unfavorable weather in Texas, organic volumes in our legacy Dallas and Houston operations declined low double digits. Fourth quarter pricing gains were healthy. Within specialty materials, we continued to see favorable momentum in multifamily residential construction, benefiting our plaster business, where average selling prices and volumes were up solidly during the quarter. Our customers' project backlogs remain healthy, and the capacity expansion underway at our plaster plant in Oklahoma is scheduled for completion early in the second quarter. Fourth quarter volumes and lightweight aggregates were down slightly, but pricing strength compensated for the declines. Overall, we saw single-digit top-line growth in specialty materials and flat margins year-over-year in the fourth quarter. Finally, our trench shoring business reported an 11% increase in revenues on higher volumes in the fourth quarter. Order inquiry levels were healthy, and our customers' CapEx expectations remained supportive for growth in 2023. Moving to engineered structures, slide 14 shows segment results on an as-reported basis and excluding the effect of storage tanks that was sold on the first business day of the quarter. In connection with the sale, we recognized a pre-tax gain of $189 million, which has been excluded from adjusted segment EBITDA. Revenues for our utility wind and related structures businesses increased 18%, largely due to elevated steel prices partially offset by lower volumes. Adjusted EBITDA for these businesses increased 2%, even as margins declined, which was primarily due to a change in product mix and production inefficiencies in our utility structures business. We have since resolved these inefficiencies, enabling segment margins to return to more normalized levels in January. During the quarter, our wind towers business performed better than our breakeven expectations, generating positive EBITDA. We were encouraged to receive wind tower orders of $371 million, which extends our backlog with a base level of production into 2025. We ended the year with combined backlog for utility wind in related structures of $671 million, up 53% from the end of 2021. Turning to transportation products, on slide 15, segment revenues were down 4% as increased volume in steel components was offset by lower barge revenues. On a positive note, adjusted segment EBITDA increased and margins expanded to 11.4%, representing the segment's highest quarterly margin in two years. Both our barge and steel components businesses contributed to the margin improvement by managing costs and generating operating efficiencies. Our barge business benefited from improved pricing despite lower volumes, exceeding our expectation for the quarter. We received barge orders of $134 million during the quarter, all for 2023 delivery, which substantially fills our planned production capacity for the year. These orders were primarily for hopper barges. We ended the year with barge backlog of $225 million, up substantially from $93 million at the end of 2021. I'll conclude on slide 17 with some comments on our cash flow and balance sheet position. We ended the year with net debt to adjusted EBITDA of 1.2 times, down from 1.8 times at the end of the third quarter. During the fourth quarter, we used $155 million of the storage tank proceeds to repay the outstanding borrowings under our revolving credit facility. We started 2023 with an exceptionally strong balance sheet with available liquidity of $635 million and no material debt maturities. In 2022, working capital consumed about $65 million of cash flow, a $15 million increase year over year. Working capital came in below our initial expectations at the start of the year, primarily due to inflationary impacts. Capital expenditures in 2022 were $138 million, in line with the high end of our annual guidance, as we made solid progress on the growth project underway in construction products and engineered structures. For 2023, we see full-year CapEx of $140 million to $160 million, including $40 million to $50 million for growth CapEx projects. In yesterday's release, we highlighted the $22 million land sale gain that is included in our 2023 guidance range and will be recognized in the first quarter. Although we do not anticipate a sale of this magnitude to repeat in the near term, land sales are a normal part of our construction materials operations. We are pleased to be able to monetize a depleted asset when the timing was right and reinvest the proceeds to help offset gross CapEx. Summing it up, we generated $36 million of free cash flow in 2022, down from last year primarily due to the $53 million increase in CapEx, largely related to projects that will enhance our long-term growth opportunity. As a reminder, in December, we authorized our $50 million share repurchase program for another two years. A balance sheet and liquidity strengths are valuable assets and provide considerable financial flexibility for our COSA during this heightened level of macro uncertainty. I will now turn the call back over to Antonio for more discussion on our 2023 outlook.

Thank you, Gail. Turning to slide 19. As we look forward, we anticipate 2023 will be an important transition year. Despite macro uncertainty, we expect consistent expansion in our growth business and gradually improvement fundamentals in our cyclical business. Normalizing for the sale of storage tanks, we expect 2023 revenue at the midpoint of our guidance to be $2.2 billion, up 7% compared to 2022. Our 2023 adjusted EBITDA forecast at the midpoint of our guidance is $325 million, up 17% compared to 2022. Excluding the positive impact from the land sale gale noted, we forecast 9% adjusted EBITDA growth at the midpoint of our range. Turn to slide 20 to review the outlook of our growth businesses. We believe construction products will benefit from continued favorable pricing and healthy highway construction activity aided by infrastructure spending at both the federal and state levels. I would note that the DOT letting activity is now well above the five-year average in many of our key markets. reflecting healthy state budgets and federal funding from the infrastructure and jobs act. We also expect to benefit from continued solid demand in multifamily as well as heavy non-residential construction, which together with the continued demand from the surface transportation sector has the potential to offset weakness in single-family residential volumes. In 2023, we anticipate favorable pricing to continue, particularly in the first half of the year, as we benefit from the sharp acceleration in prices in 2022. Although we are not providing volume guidance for 2023, we expect to compensate for any volume softness with higher unit pricing and profitability, as we demonstrated in the fourth quarter. We will continue to focus on driving margins higher in 2023. We expect utility structures We'll have another strong year as electric utilities continue to invest in upgrading and hardening the electrical grid. Our positive outlook is supported by a high level of backlog visibility in both our utility and traffic structures business. In addition, we anticipate federal infrastructure funding and increased energy capacity needs will boost demand for our products, especially given the growing shift towards electric vehicles and the need to connect renewable energy sources to the grid. Based on customer projected timing, we anticipate utility structures revenue will be more heavily weighted toward the second half of 2023. Our customers' capex expectations continue to rise. However, lingering supply chain constraints may affect the timing of projects. Turning to slide 21, we anticipate 2023 adjusted EBITDA in our cyclical businesses will be slightly ahead of 2022 as rail components and barge continue to move off their cyclical lows. As demonstrated by orders received in the fourth quarter, the fundamentals of our barge and wind tower business continues to improve. As a result, we expect to ramp up production capacity in 2023 in anticipation of higher growth in 2024. In barge, we spurred significant customer demand for hopper barges in the fourth quarter by substituting lower cost hot rods coil for plate steel. This innovation delivers significant cost savings for our customers and proves that with reasonable steel prices, the demand for barges is strong. The orders we received are the largest quarterly barge orders in the past two years and have allowed us to fill our production ramp of schedule for the year. With this production ramp in 2023, we expect to end the year with higher production capacity to be able to capitalize on the demand we expect in 2024. I am proud of our team's effort to drive innovation and enhance our manufacturing flexibility. As additional steel capacity comes online this year, third party forecasts project steel prices will come down, which should help convert high level of current inquiries into additional barge orders for delivery in 2024 and beyond. With the average age of the barge fleet at historically high levels, we believe moderation steel prices will help kick start the long overdue barge fleet replacement cycle. More recently, we're also starting to see significant inquiries for smaller tank barges. Lower steel prices would also help turn those inquiries into orders. As we have noted, the expiration of the PTC at the end of 2021 created a lapse in demand for wind towers. With the passage of the Inflation Reduction Act in August, which includes a 10-year extension of the PTC, demand for wind towers is picking up and is expected to stay strong for many years. We expect 2023 to be an important transition year as we build our backlog to drive earnings growth in 2024 and beyond. The renewed strength in wind tower demand can be seen in the backlog we booked in the fourth quarter and the additional orders booked in January. The backlog is scheduled to be delivered in the next three years with approximately 40% to be delivered in 2023. Although order profitability in 2023 is low, likely leading to breakeven year for our wind tower business, we are preparing for a multi-year recovery. In addition to the PTC, the IRA also includes a new manufacturer's tax credit, which we believe will have a significant positive impact on our wind tower business. Our assumption is that all the backlog we have built for 2023 and beyond will qualify for this tax credit, but we have not included the benefit in our guidance as we await further clarification from the IRS. With strong demand for the foreseeable future, and improve the economics, we're working with our customers to accelerate our growth in the wind power industry. We expect these efforts will help create significant value for our shareholders. Finally, in our steel components business, market forecasts indicate continuous growth in North American rail car deliveries in 2023, although at a more moderate pace following the sharp recovery last year. With railcar deliveries forecasted to increase 10% in 2023, we anticipate steel components will deliver another year of solid growth. Given these positive forward-looking indicators, we expect to continue to build our order backlogs in our cyclical businesses through 2023, setting the stage for accelerated growth in 2024. During 2022, ARCOSA remains committed to corporate responsibility through the integration of ESG into our long-term strategy and culture. Our annual sustainability report, which we plan to publish in the next few months, will highlight many accomplishments in 2022 that built on our progress from the prior year. In closing, 2022 was a productive and successful year for Ocosa. Through the divestiture of storage stands, we monetized a non-core asset to deliver significant value for shareholders while advancing our strategic transformation, and despite facing Challenging market conditions in our cyclical businesses, the ARCOSA team navigated this effectively, generating efficiencies and delivering solid financial results. Looking ahead, we are entering an exciting period for ARCOSA. Our growth businesses remain poised for continued solid performance, supported by healthy market fundamentals and a tailwind from federal infrastructure spending. At the same time, we believe our cyclical businesses are on the cusp of entering a strong multi-year upcycle, driven by growing market demand for both wind towers and barges. With the strategic actions we have taken over the past several years, our COSA is entering this exciting period with a strong balance sheet to be able to support the opportunities ahead of us. Now I would like to open the call for questions.

Thank you. 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 star 2. Once again, that is star and 1 to ask a question. We'll take our first question from N. Zafino with Oppenheimer. Hi, Greg.

Thank you very much. Good call. You know, question would be, Antonio, I know you mentioned on the pricing side on aggregates. You're talking about the strength of pricing in the first half of the year. That's just the anniversary of existing price increases, and if that's the case, are there any more in store, or how do we think about pricing in aggregates into 2023? Thanks.

Ian, good morning. It's Gail. I'll take that and let Antonio add if he has anything further. When we think about pricing, I mentioned in my script on the natural aggregate side pricing gains in the fourth quarter were more than 20 percent so clearly a lot of pricing momentum and as you look at how pricing has accelerated through the year certainly the quarter benefited from the sequential momentum we did have select price increases in the quarter so that certainly helped as well and I think it's important to note too we have had nice pricing synergies in the acquisitions that we've made. So all in all, that really captured a nice outcome for us in the fourth quarter, and we would expect, you know, full-year pricing for us was mid-teen strength, so we think that sets up well for 2023. We do have our annual pricing letters in aggregate set, and I think we'll continue to watch the market very closely, but right now we're planning for our annual increases.

To add a little more color, Ian, Because we believe in this uncertain environment with the volumes down in housing and whether we have – there's a lot of uncertainty in the volume. What I think is important is for our investors and you to understand the focus of the company this year is going to be on margins. And therefore, the pricing situation is going to be very important, not only in agriculture, I think throughout the company. And we've added to our compensation philosophy this year in our short-term incentive to all the business leaders margining to their compensation. So I think it's going to be an effort not only in aggregates but across the company.

Okay, thank you. And then just as a follow-up, have you guys quantified what the headwind was or the weather impact was in Texas? How bad was it? And any color you could give there would be helpful.

We didn't put a number on it, Ian. It's a little bit difficult to measure. And with weather, the good thing is you don't lose the volumes. But we did not put a precise number on it. I mentioned the step-up certainly in Texas and in other areas of our footprint during the quarter. The freezing temperatures certainly impacted our operations in the Midwest. And then the excessive rains in California had an impact on our specialty materials business. It was a meaningful impact. I would say, you know, January, you hate to talk about weather. We certainly had some freezing and ice here in the Dallas area, and that had an impact. But I would say when the weather is dry and normal and seasonal, our volumes have been as planned. But to put a dollar impact on it, you know, our volumes were down significantly. slightly less than our price increases. So we did see some significant volume declines in the quarter.

When weather hits, Ian, you have several problems. First, you shut down the plants and your cost structure starts eating into you. So it's a pretty significant impact. We also had, as Gail said, in the fourth quarter, December, freeze across our operations. We had shutdowns based on natural gas curtailments. We had several plants, et cetera. So it was a Pretty significant impact, I would say, in the fourth quarter. Okay.

Thank you very much.

Thank you. Our next question comes from Brent Filman with DA Davidson.

Hey, thank you. Good morning. Congrats on the quarter year as well. I guess the question just on the, I guess, both wind and barge, I mean, the order pickup here is notable. And it seems like, I guess, in particular, Antonio, there's some real momentum in the industry building and the wind side. I know the IRA does a lot for the industry, but I guess I would have thought more of an impact later this year, maybe 2024 in terms of kind of demand recovery. How would you characterize the levels of interest out there, I guess, on the wind and barge side? And do you feel like we're sort of in a sustained order recovery right now or maybe customers just being opportunistic?

There are different markets. Let me take each one, start with wind. Wind is a business that's very sensitive to tax credits. And we've seen it go from very strong demand to nothing in periods where the tax credit goes away. The IRA, what it does, the most important thing it does is it provides long-term visibility. It gives you 10 years of visibility, which is when people are investing in long-term projects when they have visibility. So that's an incredible thing. And having 10 years of visibility gives us, let's say, a very good visibility into what the business should be doing for a long period of time. So the fundamentals for a long upcycle are there. This time, for the first time, the IRA included tax credits, not only for the developer, which used to be the traditional tax credits. This time, the turbine manufacturer, the blade manufacturer, and the tower manufacturer get something called the manufacturer's tax credit. And that is a unique situation. Of course, it improves the economics for wind. That's our perception today. And that's everything we've analyzed tells us that. However, we're still waiting for the IRS to come back with specific rules sometime later this year. And that's why I mentioned in my remarks that we did not include it in our projections and our guidance any impact from this tax credit. But we believe it's going to be very significant. So when you add long-term fundamentals of the business improving and the economics improving, we went from a period in except in July, where our view for 2023 was basically we could think about shutting down the business. There was no demand for 2023 to a situation where there is significant discussions with customers about how can we increase capacity, how can we get more towers into the market. And of course, what I said, this 2023 is going to be probably a break-even year because we're going to be ramping up and the orders we sold have low profitability. But the goal is to end the year with stronger, let's say, production capacity and run rates to be able to capitalize on this over the next several years. So very exciting position to be in the wind towers. Barge, a little different. Barge, as I mentioned, for the age of especially the dry cargo fleet, the hopper barges, is at historical high levels. Very few have been replaced over the last uh several years scrapping had con has continued and we were able in the fourth quarter to to redesign our barges with cheaper steel and immediately we were able to get customers to buy so the demand is there the inquiries are there we believe the demand is going to be very strong we need prices to stabilize right now they're going back up again a little bit the uncertainty in ukraine and the war always creates this issue But there is significant capacity coming online in the U.S. in the next couple of years that leads not only us, but every forecast to believe that steel prices are coming down. And as steel prices come down, we are setting up our barge business also for several years of good recovery. That's our expectation. We'll see now. Hope I answered your question.

Yeah, I guess as a follow-up, and I appreciate all that, maybe just back to WEND, I mean, it seems like a lot of the projects and and you can see what the utilities are planning on doing, are sort of slated for kind of 2024 and beyond. Should we – and I know quarter to quarter you're going to see some gyration in your backlog and orders. But as we sort of get towards the – I mean, considering all that and what you're seeing out there as we get towards the end of the year, do you anticipate that wind backlog to be even higher?

Yes, I think you should expect our wind backlog to be higher before the end of the year. To be honest, I was surprised at how fast the industry started, let's say, giving us orders. I always expected the projects to take longer for them to start turning into actual orders for us, and it's accelerating fast. I do think we don't have anything at the moment, but I do think that you should expect us to have higher backlog or to receive more orders, let's put it that way, throughout this year. Yeah. Okay, thank you.

I'll pass it on. Thank you. Our next question comes from Trey Grooms with Stevens.

Hey, good morning, everyone, and I have to say congrats on the nice quarter.

Thank you.

Antonio, you pointed out that the focus of the company this year will be on margin. And you mentioned pricing clearly, but can you talk about some of the other levers that you can pull to improve margin? And as you look across the segments, where do you see the most opportunity on the margin front this year?

Margin is a combination of your pricing and your costs. So, of course, pricing is going to be important. Ideally, you know, we should be able to compensate for inflationary pressures that continue to be present. And at the same time, you know, as a company, we've always been a company focused on costs. As you've seen, when we have very cyclical businesses, and every time the cyclical businesses go down, they go down in a very steep way. And we've always been very focused on that. You saw that we mentioned our cyclical businesses exceeded our expectation last year. it's basically the way they control their costs you saw our construction segment having a tough quarter with the weather and everything and focusing on their costs on their scna also so i would say the efforts are pricing cost at the plant level and the business level and even at the corporate level this year for our for our corporate level we've included acna as part of our compensation so we're going to be focusing on on the costs across the company so On the business, I think the businesses that are ramping up that have come from very low cyclical times, rail components, barge, and a little bit of wind this year, it's going to be tougher because we're just getting started. Those businesses are very sensitive to volume. So as we ramp up, you should see some improvement in our margins. They get operational leverage real fast, and the return on capital is incredible in those businesses once they get going. On the construction segment, it's tougher. The volatility is not as high, so it's much more detailed, mind by mind, plan by plan, focusing on pricing and costs on an individual level. But there's a lot of levers we can pull there still. And finally, some of the transmission structures, the utility structures, over there, our view has changed over the last few months. We expected a faster reduction in steel prices three months ago. Steel prices have stabilized right now. So our goal right now is to try to keep our margins and increase our margins as steel prices come down. That's a tougher one because as steel prices come down, your margins are pulled down a little bit. So overall, I feel very confident as a company we can do it. Each one of their businesses has different levers and different ways of approaching it. But we have a lot of tools inside.

All right. Thanks for that, Antonio. Super helpful. And then, Gail... Sorry if I missed it, but what are you targeting for CapEx this year and any color on the free cash generation this year, you know, X the gain of the sale on land?

Sure. Yeah, I did in my comments, Trey, give the CapEx guidance for the year. So we're looking at $140 to $160 million in CapEx. Yeah, we'll get some offset to that from the $20 million give or take proceeds from the large land sale that we have in the first quarter in construction. So let's call it 120, 140 net of that. We've got about 40 to 50 million of growth CapEx included in that. You know, I'd say the most significant of that is the continuation of our concrete pole that we have going in Florida and our utility structures business, as well as finishing out our greenfields in aggregate and looking at ways to increase efficiency and slight capacity adds within our utility structures business. And as a reminder, Trey, we finished 2022 at $138 million of CapEx. So looking at free cash flow for the year, you have our EBITDA guidance. If I kind of just start at the midpoint there at $325 million, know net off 130 of capex at the midpoint after the land sale you know throw in interest you're somewhere around 165 million um 135 maybe after tax and then i think the question mark is really on working capital um working capital came in um below our expectations so it was a use in 2022. um we're very focused on managing that inflationary impacts has has had certainly had impacts in 2022 We ended with our AR a little bit higher at the end of the year. So, you know, I think we'll have a good cash flow year. I think working capital, you know, neutral to a use is where we're going to come out. We were about 20% of revenue in 2022. So if we keep that clip and we want to do better, that could be about a 40 million drain next year. So, you know, you sum all that up, you know, free cash flow in the $100 million range.

And let me just add something, because I think it's important to understand at this stage where we are. So the good news for Ocosa, we have a lot of organic projects going on. And every time we allocate capital, we go through the exercise of where is the best use of our capital. And the returns on organic growth are far greater than acquisitions at the moment. And we have a lot of projects on the drawing board. So that's good news. The second piece is as we think about the cyclical companies recovering, cyclical businesses recovering, they consume working capital because we are buying inventory, generating AR, et cetera. So it should also be good news that we are growing the businesses. They might consume some working capital, but it's basically good news.

Yep. All makes sense. Thanks for all the great detail. I'll pass it on. Thank you.

Thank you. Our next question comes from Garrett Schmoys with Loop Capital Markets.

Great. Thanks for having me on today and congrats on the quarter. I was wondering if you could speak a little bit more on aggregates volumes and different moving pieces. It sounds like you're expecting infrastructure and non-res to mostly offset new residential declines. You also have some weather here, it sounds like, in the first quarter. Maybe if you could just flesh out how you expect The shape of the year to look, you know, would you expect volumes to be a little bit more back-off weighted just given the timing of infrastructure? Just any more clarity on the aggregate volumes would be helpful.

I'll take that one at scale. Yeah, clearly we've had deceleration in single family, and that continued in the fourth quarter. You know, you look at some of our... our key markets and you look at the housing starts and you've seen some momentum in the year over year declines in the back half relative to the first half of the year. So clearly that's had an impact. We've seen an impact in, I guess maybe before I leave that point, we have had, and it's important to note, we've had success in the quarter transitioning our volumes from single family into infrastructure and commercial non-res. So Good success going on there, and we're seeing a pickup in the bidding for infrastructure projects. We shared a little bit of color in our IR materials with the DOT lettings and the strengths in our key markets as you look at those numbers compared to the five-year averages, so a lot of activity and positivity there. And we're starting to see a pickup in the heavy non-res side as well in certain of our key markets. So all of that points to the potential for these volumes to compensate for single family. I would say as I think about the trajectory or the cadence for 2023, just given the fact that our volumes were up in Q1 and Q2 of this year, we'd probably have more comp challenges in the first half of the year than we would in the second half of the year. And that tracks well with our expectations that we would see infrastructure volumes to continue to sequentially pick up this year.

Perfect.

Did that help?

No, that did. So thank you for that. I wanted to follow up on the capacity ramp on the cyclical side of the business. I'm curious, are you adding capacity for the current increase in backlog, or are you anticipating the capacity to service an increase from here in the backlogs as well? Also, just from a timing standpoint, would you anticipate that your capacity ramp would be complete by the end of 2023?

It's a complex question. I'll give you the status of our plants. Let's start with wind. We have three plants at the moment. One is shut down. That plant is not planned in this ramp-up capacity. We're only ramping up the plants that are operating. So there's not a lot of capex. It's a relatively easy ramp up. It's not something that we are going to have to put a lot of money and things like that. So it's another ramp up like many of the ones we've made before. Now, I mentioned that with the current orders, we are full for that ramp up, meaning we're going to be ramping up. There is a little more capacity we could extract this year, not a lot, but there's a little more that we could extract if we get the orders in time. But as time goes by, that window shrinks. But what I think is important is as we ramp up, we should end the year in those two plans relatively at a really good click to be able to continue to ramp up. There's more capacity that we could ramp up for 24 and 5. So it's a, I would say a trend that we expect to start picking up. And depending on the orders we receive, if we receive more orders before the end of the year that I expect to receive more, we can accelerate the ramp up to end the year at a higher production rate. So that's where we're going to be moderating our ramp up. On barge, a little different. We also have three plants. One is shut down. The other two plants are also running at low capacity. uh the the orders we got right now are for running those plants are relatively low capacity still so we still have a lot of a lot of room to go up when when if we receive more orders and we're going to be dialing it up and down depending on the orders we receive through the year so i would say the positive news is that both on barge and wind these orders provide a floor, let's say a consistent production trend for the company that allows us to then modulate our ramp up as we see fit depending on the backlog we generate through the year.

Okay, that's helpful.

Thanks for that. Thank you. Our next question comes from Julio Romero with Sudoti and Company.

Hey, good morning, Antonio and Gail. Good morning. So I wanted to ask about the barge business and you guys substituting hot rolled coil for plate steel. You know, I guess, you know, why hasn't Arcosa or other industry players kind of done that in the past? You know, what are the pros and cons of the substitution of the end customer? And does the margin profile or profit profile change for Arcosa by doing that?

Thank you, Julio. It's a really good question. And we have never done it before. First of all, this is for hopper barges. And we've only done it for hopper barges. And there's a whole reason for why. But for hopper barges, historically, the difference between coil and plate is somewhere between, depending on the time, $100, $150. That's the historical difference between the two products. And when you make the numbers, you have to increase your labor content to substitute coal for plate. When you do the numbers with that small difference, it's tight. So it has never made a lot of sense to put a lot of money and time behind. When the pandemic hits, steel prices go down and then they go nuts. And 2022 historically has been the year with the most volatility in steel prices in history. based on that's what CRU published a few months ago. And what happened is that plate prices stayed high at $2,000 or so, and coin prices started falling real fast in the second quarter of last year, second or third quarter of last year. So by September or October, the gap between those two prices was enormous, almost $1,000. And then we sent our team in March to start Redesigning the barges to take advantage of that and be able to offer our customers a barge that's just as good as a plate barge, just with some more welds. When you see the barge, it has a few more welds. But it's exactly the same quality of product with no disadvantages at all. It's just you have to put more welds in it. So you put more labor. So we launched our first barge in December with Coil and customers liked it and immediately started to place orders. So Coil prices have come up a little bit again. So right now we are not selling many more of them. But what's important about this is two things. First, I think we reacted to market conditions. Second, now we have flexibility. Depending on steel prices, we can modulate and decide how we build a barge with Coil or plate. And third, it also gives us negotiating strength with our steel suppliers depending on plate and coil prices. So I think it's a really good development. And let's see where steel prices come, but I think this allows us to move between two very complicated markets, let's say.

Got it. Appreciate all the color there. Maybe turning to the steel components business, you guys sounded... overall positive on the demand outlook there in 23. Is that affected at all by maybe what's going on with the East Palestine derailment and kind of any safety concerns within the industry? Just trying to think if there's any impact at all for Arcosa.

We don't see it at the moment. As you know, we only make couplers and axles. So we don't see it at the moment. I'm not sure what regulatory changes could happen based on this. What I will tell you is that at the moment, you know, our couplers and axles, we don't even finish the axles. We sell the axles to people who finish it, and then they mount it on the wheels and axles and put the bearings and everything. So we don't see any impact on our business. But as you know, this situation is very fluid, and there's changes happening and news happening every day. So I don't know what the regulatory changes could happen. At the moment, we are optimistic about it. We mentioned that the ramp for 23 is not as sharp as it was in 22, but we are seeing in our business significant operational leverage, and we saw it in the fourth quarter, as Gabe mentioned. You know, we have a significant increase in our EBITDA compared to the previous year, and we are optimistic about 23.

Really helpful. Thanks very much for taking the questions.

Thank you. Our next question comes from Stephanos Christ with CJS Securities.

Good morning. Thanks for taking my questions. Can you just talk about the customer dynamics in the large orders for Barge and Wind? Were there large orders in those or multiple customers across? Thank you.

Let me start with Barge. And with Barge it's multiple customers, so it was a good list of customers. And not only the ones we got orders, but the inquiries we're receiving, I think it's a wide variety of customers. On wind, as you know, it's a much shorter list of companies that build wind towers. At the moment, we only have with one customer. The order was basically with one. We do have quotes out there with another two companies. So it's a much shorter list of potential customers. So you should expect a much wider concentration. What we are seeing both on wind and barge is that I would say the majority of the customers are inquiring about additional orders.

That's great. Thank you. And then just on M&A, can you just talk about what you're seeing in the market right now, multiples, just opportunities? Thanks.

Sure. You know, we are seeing opportunities. We have many bolt-on opportunities, small things here and there. As we've said before, this is mainly on the bar side, sorry, on the aggregate side. And the way we've approached this, we like to build opportunities. large hubs in certain regions, for example, in Arizona where we bought, and then we look for bolt-ons around it. So we are seeing smaller bolt-ons in many of our regions. Multiples on the smaller side are reasonable. When we have seen a few of the larger ones, multiples continue to be too high, and one of the things that's important, we're going to stay disciplined even though we have a strong balance sheet. we're going to stay disciplined and continue to measure the return on capital on each project and at the moment the organic ones are seem to be a better options for us to allocate capital but we will do M&A mainly Boltons as an example you know not only in terms of a recently we did as a very small Bolton in Arizona on our own recycled aggregates a very small one that came with some land And at the same time, we're opening recycled aggregates in Arizona around our natural aggregates. So what we're looking for is to try to complement our presence in each one of the markets in natural and recycle and do bolt-ons, some larger, some smaller, but mainly bolt-ons at the moment.

Thank you. Thank you.

At this time, I show no further questions in queue. I'll turn the call back over to Erin Drabeck for any additional or closing remarks.

Thank you for joining us this morning for our fourth quarter and four-year earnings call. We look forward to talking to you again next quarter.

This concludes today's call. Thank you for your participation. You may disconnect at any time.