Arcosa, Inc. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Business Momentum: Second quarter consolidated revenues increased 14%, and adjusted EBITDA grew 31%, reflecting 230 basis points of margin expansion. On an organic basis, strong double-digit adjusted EBITDA growth was led by market recoveries in cyclical businesses and operating improvements in specialty materials and utility structures. Recent acquisitions like Ameron Pole Products and aggregate bolt-ons contributed accretively.
• Portfolio Optimization: Announced the $1.2 billion acquisition of Stavola, a leading construction materials provider, and divestment of the Steel Components business. Stavola enhances the Construction Products platform with high-margin vertically-integrated aggregates and asphalt operations. Divestitures aim to optimize the portfolio and enhance earnings quality.
• Transformational Acquisition: The Stavola acquisition is transformative, expected to be immediately accretive to free cash flow per share, neutral to cash EPS in 2025, and accretive in 2026. Focus is on deleveraging post-acquisition while leveraging Stavola's stable infrastructure-led market position.

Segment Performance

• Construction Products: Second quarter revenues increased 4% year-over-year. On a freight-adjusted basis, revenues rose 6%, with growth split evenly between organic and acquisition contribution. Adjusted segment EBITDA increased 22%, primarily due to accretive acquisitions and operating improvements in Specialty Materials and trench shoring businesses. Freight-adjusted segment EBITDA margin expanded to 28%, up 360 basis points year-over-year and 160 basis points sequentially from the first quarter. Aggregates saw strong pricing momentum with average organic pricing up low double digits, though volumes were down due to elevated rainfall. Specialty Materials had freight-adjusted revenues up low double digits driven by pricing gains in lightweight aggregates and plaster. Trench shoring revenues increased on higher volumes with operating improvements boosting adjusted EBITDA.
• Engineered Structures: Revenues increased 33% due to higher utility structure and wind tower volumes, including the contribution from the recently acquired Ameron business. Adjusted segment EBITDA grew 48%, outpacing revenue growth, with margin expanding 160 basis points. Organic growth in wind towers and utility structures was supplemented by Ameron's accretive impact. Backlog for utility, wind, and related structures was $1.3 billion at the end of the quarter, with expectation to deliver 37% during the remainder of 2024.
• Transportation Products: Segment revenues were roughly flat as higher barge revenue was mostly offset by lower Steel Components revenue. Barge revenues increased 4% driven by higher hopper barge volumes. Adjusted segment EBITDA increased 7% and margin expanded by 90 basis points. Barge orders totaled approximately $33 million during the quarter, with a backlog of $252 million at quarter end, expecting to deliver approximately 70% during the remainder of 2024.

Guidance

• Raised the low end of the 2024 full year adjusted EBITDA range. The new adjusted EBITDA midpoint is $430 million, representing 24% year-over-year growth (adjusting for land sale gain) with 120 basis points of anticipated margin expansion. Guidance is before any adjustment for the newly announced strategic actions. Post-Stavola acquisition, Construction Products is expected to account for roughly two-thirds of total adjusted EBITDA.

Risks

• Forward-looking statements are subject to risks and uncertainties outlined in SEC filings, including weather impacts on volumes (e.g., elevated rainfall in Texas affecting aggregates volume). Market cyclicality and competition in various segments pose risks to financial performance.

Question and Answer

Q: On Stavola acquisition, market location and consolidation opportunities?

A: Antonio Carrillo stated it's a very stable market with opportunities to consolidate in the NY-NJ area, focusing on deleveraging now with future growth opportunities through organic growth and potential bolt-on acquisitions.

Q: Wind orders and barge steel prices?

A: Antonio Carrillo mentioned wind orders take time due to market consolidation, but there's ongoing discussions with customers. Barge demand is robust, and steel prices down are aiding margins, with good visibility into 2025.

Q: Portfolio simplification and deleveraging?

A: Alex Hantman asked about further portfolio simplification. Antonio Carrillo replied they'll continue simplifying, focusing on deleveraging by reducing growth CapEx, finishing plants, and working capital reductions, with plans to resume M&A after deleveraging.

Q: IIJA impact and Stavola margin sustainability?

A: Gail Peck noted IIJA impact seen in more bidding, while Reid Essl stated Stavola's margin is expected to remain consistent, driven by infrastructure and replacement demand in its stable market.

Q: Construction Products margin sustainability and second half outlook?

A: Gail Peck mentioned margin improvement in Construction Products from Specialty Materials, shoring products, and aggregates. The second half is expected to be stronger with ramp-up in Engineered Structures, particularly from the Belen, New Mexico plant and Florida concrete pole plant ramp-up.