Arcosa, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Arcosa Inc. Fourth Quarter 2020 Earnings Conference Call. My name is Gretchen, and I will be your conference call coordinator today. As a reminder today's call is being recorded. Now I would like to turn the call over to your host Gail Peck, SVP, Finance and Treasurer for Arcosa. Please Ms. Peck you may begin.

[Gail Peck:]

Good morning, everyone. Thank you for joining our fourth quarter and full year 2020 earnings call. With me today are Antonio Carrillo, President and CEO; and Scott Beasley, CFO. A question-and-answer session will follow their prepared remarks. A copy of yesterday’s press release and the slide presentation for this morning’s call are posted at our Investor Relations website www.ir.arcosa.com.

[Antonio Carrillo:]

Thank you Gail. Good morning and thank you for joining us to discuss Arcosa's fourth quarter and 2020 results and the outlook for 2021. Let me start with a few key messages on slide 4. First and foremost, we managed effectively through very difficult business conditions in 2020 and succeeded in posting record revenue and EBITDA for the year along with strong free cash flow generation. This performance underscores the resilience of our business model and the strength of our portfolio of products, which we continue to reposition around core infrastructure products. These results could not have been possible without the tremendous effort of the Arcosa team. The entire organization came together to enable us to stay operational throughout the worst days of the pandemic, while adhering to strict health and safety protocols. It is important to look back at the COVID case statistics across the country from October to January and to realize that the fourth quarter, we operated in an environment that was extremely -- with extremely high case counts and significant absenteeism due to quarantine protocols. There is no question that COVID-19 had an impact on our business. But we're getting through it together and we're able to continue to grow organically and via acquisitions despite the challenges of 2020. Second, we continue to make progress building a strong cash culture. Our 2020 free cash flow of $178 million marks another year of well over 100% conversion.

[Scott Beasley:]

Thank you, Antonio and good morning, everyone. I'll start on slide 11 and review our segment results from the fourth quarter and the full year. In the fourth quarter, Construction Products revenue grew 46% to $149.1 million and adjusted EBITDA increased 73% to $31 million. Segment EBITDA margin of 20.8% was up over 300 basis points from last year's fourth quarter, continuing a strong trend of margin improvement that we maintained all year. A few highlights from the quarter. Volumes in our legacy natural aggregates business were up significantly, driven by higher infrastructure-related work in Texas and the benefit of several bolt-on acquisitions. We continued our trend of lower cost per ton through a combination of operating efficiencies, lower maintenance costs and lower fuel costs.

[Antonio Carrillo:]

Thank you, Scott. Before we go into our guidance and outlook I would like to take a moment to review with you our long-term strategy. If you remember, since we became an independent company, we defined Construction Products and Engineered Structures as the businesses where we were going to allocate capital for growth. The growth capital would come from the rest of the Arcosa businesses. Over the last couple of years we have been able to allocate capital generated internally to reposition the portfolio completely. As you can see on slide 17, Arcosa is a completely different company than it was in 2018. As our aggregates and specialty materials revenue has more than doubled in the last few years, Arcosa has become a more resilient less cyclical company. As we look ahead into 2021, this strategy will not change. We will continue to allocate capital to Construction Products and Engineered Structures by generating cash in the rest of the businesses. We think 2021 will be a year where Arcosa repositioning becomes even more apparent. As you will see in our guidance in 2021, we expect a good year for our growth businesses Construction Products and Engineered Structures. On the other hand, we believe our barge business will still generate good cash flow and EBITDA, but less than 2020.

[Operator:]

Our first question comes from Brent Thielman from D.A. Davidson. Your line is open. Please go ahead.

[Brent Thielman:]

Great. Thank you. Antonio or Scott, does the guidance imply you effectively don't see any kind of meaningful back half rebound in either barge or wind-related, I guess, earnings or revenue? And if not is that still possible, if we were to see orders accelerate here in the first half?

[Scott Beasley:]

Sure, Brent. This is Scott. I'll take that question. So let me give you a little a cadence – color on the cadence of 2021 and then get to your back half question. In Construction Products, we expect it to follow a normal seasonal trend where Q1 would be the lowest meaningful step-up in Q2 and Q3, and then a bit of a step down in Q4. That's likely to be even more pronounced this year because of the February winter storm in Texas, but it will follow the normal seasonal pattern. In Engineered Structures, we do expect a bit of a ramp-up throughout the year as we increased production out of the newly reopened facility. So Q1 would be the lowest followed by a step-up in Q2 through Q4. We do have some unsold capacity in the fourth quarter, but we're encouraged by our inquiry levels across all the product lines and don't expect a problem filling out that capacity. And then in Transportation Products, Q1 likely will be the lowest because of our production schedule, but then relatively flat Q2 through Q4. We – there's the possibility of upside in the back half, if demand conditions improve significantly. That would require a meaningful step down in steel prices in the pretty short term, because of the lead time required to sell barges and then get them in the production schedule. So that's all incorporated in our guidance range. And the top end of the guidance range probably would suggest a quicker rebound in barge.

[Antonio Carrillo:]

Just to expand a little bit. I mentioned in my script that, we got some orders for wind towers in the first quarter and these are for this year. So there is still time for additional orders to materialize. Our assumption is that there's not much happening this year in terms of additional barge and wind tower orders. There is still some time but I think we're building a model that shows our best expectations for the moment.

[Brent Thielman:]

Okay. Great. And then I guess the follow-up is on barge. Just thinking about the business overall, I mean it would appear to me some of the fundamental drivers behind it are looking like they're improving and I would think that helps your customers at least over time. So I guess the question is do, we need to wait out these elevated through steel prices before we see some sort of recovery in orders? Just be curious what your customers are telling you.

[Antonio Carrillo:]

Yes. I think that's the important piece of the conversation that you're just touching on. I think that's the key message. The key message we're seeing from our customers especially on the dry cargo side there is a significant need for new barges. The replacement cycle seems strong. Agricultural prices have gone up. Transportation margins have gone up. The prices of commodities have gone up. The size of the crop was very large. So the fundamentals of the barge recovery cycle especially on the dry side are very strong. Steel prices as you know 2020, everyone in the pandemic freaked out basically and slowed down production of steel. Then the rebound came faster than anyone expected, especially in automotive and some other industries. That created a huge, huge demand for steel and prices just went through the roof. That's compounded with all this weather events that's hitting the steel mill. So prices should stabilize sometime later this year probably in the summer late summer. And as that happens, I think we'll be able to sell some additional barges because they are needed. On the liquid side, the prices of oil have continued to improve and that should be really good for the industry. There's other things happening that are -- should help barge. The pipelines for example the cancellation of the pipeline could mean that there is more oil being moved in barges et cetera. So I think once volumes come back that's the important piece. Prices have come back, but volumes continue to be below 2019 levels. Once volumes come back barge utilization should go up and then the replacement cycle starts. So that's why we mentioned in my script that our key for 2021 is stay flexible. We're going to take all the actions needed to reduce our cost structure, but we're going to try to stay flexible to respond to the additional demand when it comes back because we believe it's going to come back.

[Brent Thielman:]

Thank you.

[Operator:]

The next question comes from Ian Zaffino from Oppenheimer. Your line is open. Please go ahead.

[Ian Zaffino:]

Hey guys, thank you very much for taking my question. Question would be on the growth CapEx. You touched upon it a little bit. Can you give us a little bit more color on that? Where is that going to be going? Why are you doing it? And what should we really be expecting from that investment? And I have a follow-up. Thanks.

[Antonio Carrillo:]

Sure. Thank you, Ian. Let me give you some color on where we're seeing the growth CapEx. And the -- let's say the color on this growth CapEx is that, the good news for Arcosa is that we have more projects than money to invest in terms of organic CapEx. We're being disciplined as we've always said in the capital allocation. And having several projects to invest means we can choose the best ones. And these projects we're investing in, if you remember last year we bought a small telecom business and we bought also a concrete poll business to support our Engineered Structures product offerings. As we said at that time our goal is to expand those small business across some of our footprint. And a lot of the CapEx we're investing in 2021 will go towards that so expanding our footprint for those new product offerings across our coast. We're also investing some in our Construction segment specialty materials on our plaster plant. We are doing some investments there. But those are the two biggest projects where we're investing. As we've said the two growth areas for Arcosa are Engineered Structures and Construction Products and that's where the capital is going.

[Ian Zaffino:]

Okay great. And then as a follow-up I know you have a lot of exposure to Texas in aggregates. You're trying to get the infrastructure bill winding its way through. Can you remind us as far as Texas expenditures, how much of these projects is driven by state level spend versus federal level spend, or what tends to be the mix? I'm just trying to get a sense of if we start to see incremental federal dollars how much of an uptick would that translate into to your Texas exposure?

[Scott Beasley:]

Sure. Ian, this is Scott. Thanks for the question. So in Texas, Texas actually has a lower amount of federal reimbursement than the national average. So it's more reliant on state spending. And that's good because the state fiscal health is very strong plus you have the upside from a potential federal infrastructure bill. For example, Texas lettings were up in 2020 versus 2019, which was one of the -- it was one of the stronger states. The American Road and Transportation Builders Association forecast for 2021 has Texas as a stable and growing state. And then recently the state DoT reconfirmed its 10-year, $75 billion Unified Transportation Program. So, all signs at the state level are positive in Texas. And then we could see some potential upside from a federal bill although, that would likely be a nine to 12-month lag time. So, more likely a 2022 impact for us.

[Ian Zaffino:]

Got you. Okay. Thank you very much. Good quarter. Thanks for all the color and guidance. Thank you.

[Antonio Carrillo:]

Thanks, Ian.

[Operator:]

The next question comes from Stefanos Crist from CJS Securities. Your line is open. Please go ahead.

[Stefanos Crist:]

Antonio and Scott, good morning.

[Antonio Carrillo:]

Good morning.

[Scott Beasley:]

Good morning.

[Stefanos Crist:]

So the Construction Products segment isn't performing really well. Can you give us a sense of the organic growth in the Aggregates business?

[Scott Beasley:]

Sure, Stef, this is Scott. So the organic growth was very strong in Aggregates. We said volumes up significantly so high single-digits. A lot of that was organic through improved infrastructure-related work in Central and North Texas. And then part of that growth was with several bolt-on acquisitions really more like organic where we've added single mines to expand our geographic footprint in the Texas Triangle. So, very healthy organic rate plus some nice bolt-on acquisitions.

[Antonio Carrillo:]

The other piece that's important to remember Stefanos is in 2019 if you compare the quarter -- fourth quarter of 2019 versus the fourth quarter of 2020 our -- we have good oil exposure in West Texas and Oklahoma. And we started to have significant volumes there in 2019 while in 2020, it's come down significantly. So those numbers sometimes create some cloudiness across the volumes. Our volumes were actually stronger to -- if you look beyond that oil exposure.

[Stefanos Crist:]

That's great. Thank you. And just as a follow-up. Antonio you mentioned 5G in the Engineering Structures. Can you give us a little more detail on that? Is that a current percentage of revenue? And where do you see that being in the next three to five years?

[Antonio Carrillo:]

Well, for us Stefanos, we bought a small company in 2020, that company made very specific large sales structures and very regionally in Oklahoma. So part of the capital that we're deploying this year is to expand those offerings in other parts of our footprint. We are in the learning stage, I would tell you. We are getting our feet wet on this product line. I think there's great opportunities. We are -- we have a really good management team and we are, let's say, throwing resource of this business to expand it. I don't want to promise you a significant number over the next three to six months or a year. But I think the message I'd like for you to take is that we are very intrigued and very excited about the potential of the business. And I think there's great opportunities for us to expand. So that's -- it's -- think about it right now as just -- we're just getting started.

[Stefanos Crist:]

Great. Thanks for taking my questions.

[Operator:]

Our next question comes from Justin Bergner from G.Research. Your line is open. Please go ahead.

[Justin Bergner:]

Good morning, Antonio. Good morning, Scott.

[Antonio Carrillo:]

Good morning.

[Scott Beasley:]

Good morning.

[Justin Bergner:]

I guess to start just thinking about the guidance should I think about the entire revenue decline as coming from the barge business or maybe even greater than 100% of the revenue decline, given you have some inorganic contribution in the other businesses and sort of similarly for the EBITDA?

[Scott Beasley:]

Sure Justin. I'll take that. I think you're right. In terms of the revenue guidance essentially all of the decline, maybe even more than 100% of the decline we've guided to will be in Transportation Products. Almost all of that is in barge just given the magnitude of the drop that we've talked about in barge. Construction Products we see healthy revenue and EBITDA growth. And then Engineered Structures likely given the organic projects that we've talked about plus some of the growth of the acquisitions we did in telecom and traffic, revenue flat to slightly up and then we'd expect EBITDA in the same range that we had this year where a number of the organic growth projects would offset some potential headwinds in wind towers. So, you're right that the decline both in revenue and EBITDA is almost all in Transportation Products.

[Justin Bergner:]

Okay, great. And the 12% to 13% adjusted EBITDA margin range that you're guiding for in Engineered Structures, I realized that's just a 2021 range. But what would cause that to inflect higher or lower as we look out into later 2021 and in 2022 and beyond?

[Antonio Carrillo:]

Yes. So, Justin this is Antonio. I would like to give you some color on that. I think the business has performed really well. If you see how we've done over the last few years, it's improved pretty significantly. There's two big things there. One is wind towers. And wind towers is driven I would say by volume and by the conditions of the market. And in the last few years we've been very I would say aggressive in terms of focusing that those wind towers need to compete on a level-playing field with other countries. There were significant number of towers coming into the US market taking advantage of some still tariffs and trying -- and basically dumping towers into the US market. So, one thing has to -- that has helped the margin and will help the margin in the future I think is making sure that the US competes head-to-head on a level-playing field with other countries. And we think that the conditions are here that that will happen. Also as the wind industry becomes more important that's our expectations over the next few years, demand should improve and that should also help us and that should help us keep good margins in wind tower. So, that's to me positive tailwinds for margin improvement over the next few years on the wind side. On the utility side, I think volumes are good. I think demand is pretty robust. I think that's on our side. I think that's an internal thing that we have to continue to work. We have expanded capacity in Mexico last year. We're going through the ramp-up. Our utility structures business has been probably the most affected by COVID in terms of number of cases and ramping up a facility in another country with new equipment, with technicians not being able to travel and those things have been probably the toughest piece for Arcosa. So, I think as we ramp up our business I think that's also positive for our margins in the future. So, I think you have a combination of outside markets that are robust and we have to execute. And that should take us to a current guidance that Scott gave you. But I think there's good potential to continue to grow those margins in the future as we execute better.

[Justin Bergner:]

Okay, great. And then maybe just lastly. The EBITDA hit from the weather in Texas are we just talking about like a couple of million, or is it going to be more pronounced than that? Just trying to think about how that might affect the guidance range you provided today.

[Scott Beasley:]

Sure Justin. This is Scott. I think the good news is that Q1 is the slowest quarter of the year in Construction Products. And so taking a week out of production in the first quarter should have -- would have the lowest impact of any of the quarters. But we did lose a whole week across Texas and a good chunk of the footprint. So it will likely be several million dollars plus. We've restored operations we had no major damage but losing a week of production across most of the footprint will impact Q1. And typically that volume is not caught up. There are other bottlenecks in the supply chain that contractors can add labor. The construction activity just gets pushed into the next quarter and then in the next year. So we've got a number of questions about whether that's -- that gets caught up within the quarter or in Q2 and typically that's not how the impact of major weather events happens.

[Antonio Carrillo:]

Yeah. And Ian, one - Justin, sorry, just to complement. When you slow down -- when you shut down a plant, you have a double hit. You have a hit. Basically you lose revenue and those things but you also lose the absorption of your cost structure. So it's normally not only a reduction in revenue, but also it impacts your margin. The first quarter that Scott gave on the -- in terms of the cadence of the guidance, we see of course the impact of the storms in Texas. We have two ramp-ups happening in our Illinois plant for our wind towers. We have the ramp-up in our plant in Mexico for transmission towers. And there is some potential for the steel delays that Scott mentioned. Some steel mills have had significant problems with the storms. So, I think we're confident that the first quarter is going to be a little rocky. But beyond that, we're very optimistic about the second third and fourth quarter.

[Justin Bergner:]

Great. Thanks taking my questions.

[Operator:]

[.:]

[Unidentified Analyst:]

Yes. Hi, good morning.

[Antonio Carrillo:]

Good morning.

[Scott Beasley:]

Good morning.

[Unidentified Analyst:]

Could you maybe speak to demand trends for storage tanks in Mexico? I know that's something that was improving sequentially in the third quarter. I think you called it steady in the prepared remarks. So just hoping to get some additional color to see is that's still improving or maybe more in line with third quarter demand?

[Antonio Carrillo:]

Sure. Let me give you some color, because we have a pretty wide range of storage tanks in Mexico. So I'll give you -- so we make everything from a barbecue cylinder to a huge sphere that you see in refineries or petrochemical plants. So, each one of them has their own different trends right now. As you can imagine, with the cold weather, the demand for small storage propylene tanks have increased dramatically both in the US and Mexico. No, it's normally -- it normally happens during the winter months. But this year has been especially strong and we've had a really good year in the US and really good year in terms of small propane tanks in Mexico. So that's really good news. On the larger side, the US is doing well. We have good demand for large tanks. In Mexico as you know the economy is not doing well and investment is not happening. So large storage tanks are not that strong. We do have good let's say projects for the ones that are built on site those huge things you see in refineries and petrochemical plants. We have a few of those that are really good projects for 2021. But overall the majority of our revenue comes from small propylene tanker and that's done very, very well.

[Unidentified Analyst:]

Okay. And I guess for my follow-up, could you give us an update on the container-specific barges you talked about last quarter? And an idea of the potential incremental sales as a result?

[Antonio Carrillo:]

Yes. So we – I'm glad you asked about that. We – the two – we're building two container barges right now. We've been very active in go investing customers and showing them the potential. The container barges will be done probably late in the spring this year and we'll start testing them with customers. We have a few customers that have been very intrigued by them and we will be testing them. I don't think you should expect incremental revenue this year from them. This is a year of innovation and testing. But I'm very optimistic about the potential of those barges. And some customers have been very intrigued by them. So I think it's something that – as you know containers are a huge mode of transportation across the US and there's very little happening in the river. So building a container-specific barge I think the economics look really positive. And we hope it's successful.

[Unidentified Analyst:]

Great. Thanks for taking the questions and best of luck in 2021.

[Antonio Carrillo:]

Thank you.

[Operator:]

That is all the time we have for questions today. I will turn the program back over to Gail Peck for any additional or closing remarks.

[Gail Peck:]

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

[Operator:]

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