Okay. Good afternoon everyone and thank you for joining the Sidoti June 2025 small cap conference. My name is Julio Romero and I'm the Industrials, Building Products and ENC Analyst here at Sidoti & Company. Really pleased to be able to host Arcosa. Their ticker is ACA. With us today is Gail Peck, Chief Financial Officer, and Aaron Drabek, Director of Investor Relations. The format of this is going to be a fireside chat. If you do have any questions for Arcosa, feel free to type them into the Q and A section at the bottom of your screen and I'm happy to ask on your behalf. With that, Gail and Aaron, thanks so much for being here.
Thank you.
Maybe we could just start off with a, you know, high level overview of the business and just, you know, folks who are newer to the story. Just a quick overview of what Arcosa does.
I'll start there. Julio. I think it's good to just give a base since we are in a number of different businesses, but, you know, at a high level. Arcosa is a Dallas-based company. We had LTM March revenues and adjusted EBITDA of about $2.6 billion and $465 million respectively. We operate in three segments serving the construction, engineered structures, and transportation markets. We believe we're well positioned against favorable infrastructure-related demand drivers. We're a U.S.-focused company with over 140 locations that we operate. Only one of our construction mines is in Canada and we have two manufacturing plants in Mexico. Otherwise everything else is in the U.S. Many of you may know we spun out from our former parent over six years ago and we've spent that time creating a more resilient, faster-growing, higher-margin portfolio of businesses.
Our adjusted EBITDA has grown from about $185 million at stake spin to about $530 million LTM March if you give the full year effects of recent acquisitions and divestitures we've made. We've achieved this growth through a combination of organic initiatives and roughly $3 billion of core infrastructure acquisitions within our construction products and engineered structures businesses to really reposition our portfolio. When you think about our three segments, the construction products segment has been the primary focus of our growth strategy and currently accounts for about 43% of our revenues and 59% of our adjusted EBITDA. Excluding corporate costs, it's the highest adjusted EBITDA margin segment at 25%. In this segment, we believe it's the most stable and resilient of our three segments and we have three primary businesses.
I'll kind of run through those in descending revenue share. Aggregates, which includes natural and recycled, is our largest business. That represents about 60% of this segment's revenues. We have primary exposure to Texas, New Jersey, Oklahoma, Arizona, Tennessee, and other Gulf Coast locations. Our specialty materials and asphalt business represent about 30% of the segment's revenues. Construction site support, which is our trench shoring business, makes up the remainder. You move to our next largest segment, or really almost equally from a revenue perspective, which is our engineered structures segment. That accounts for 42% of our revenues and 31% of our adjusted EBITDA. We've got five product lines: utility transmission and distribution poles for electricity, wind towers, traffic structures, lighting poles, and telecom structures. This segment has reported margins of 17% adjusted EBITDA margin on an LTM basis.
That leaves our transportation products segment, the third segment that's the smallest of our three, accounting for less than 15% of revenues and about 10% of our adjusted EBITDA. It's also a mid-teen margin business. It has about 16% EBITDA margins. We've got one business in this segment, we ManU. We're the leading manufacturer of inland barges and marine components, and in keeping with our strategy to simplify our portfolio, we divested our steel components business in the third quarter of last year, which was historically included in this segment. Our long-term vision has been pretty consistent since spin. We have five pillars: growing in attractive markets and reducing the cyclicality and complexity of our business while improving return on invested capital, integrating sustainability, and maintaining a healthy balance sheet through prudent deleveraging.
We added the fifth pillar in conjunction with the announcement of the $1.2 billion acquisition of Stavola last August, which did add leverage to our balance sheet above our long term target. The acquisition, which closed in October, was transformative for our construction materials business, expanding our aggregates footprint into the nation's largest MSA, the New York-New Jersey MSA, with increased exposure to less cyclical infrastructure-led markets. When you look at the actions Arcosa has taken since our inception in 2018, you'll see that they aim to consistently advance our strategy. We believe today we're larger, more resilient, and less cyclical company. With construction products accounting for nearly 60% of our adjusted EBITDA, nearly double the third it contributed in 2018, we're well positioned to navigate the current environment. We expect strong growth in 2025.
Our execution in the first quarter was solid and it's giving us additional confidence in our full year 2025 guidance that we provided at the outset of the year in February. At the midpoint of our range we see revenue growth of 17%, adjusted EBITDA growth of 30% in 2025 and the full year acquisitions. Full year impact of acquisitions, namely Stavola, will be complemented by double digit growth in our legacy or organic operations. I said infrastructure well positioned. We think we're very well positioned to benefit from the continued investment in the nation's aging infrastructure and really the new era of growth for power in the U.S. market. Macro policy, you know policy in Washington continues to evolve rapidly but we believe we're in a very good position to navigate the environment. Our teams are managing the business well.
Most of our end markets continue to demonstrate resilience and really our backlogs across many of our businesses provide solid visibility. Excited to talk more about the business today, but at a very high level. We're very well positioned.
Excellent. Thank you, Gail. Great rundown. To your point, very, very consistent with the strategy since spin of 2018. I guess just maybe just to level set the tariff issue for folks as well because you do have a lot of different businesses within the portfolio. Just at a high level, discuss Arcosa's direct tariffs versus indirect tariff exposure, which you did a good job of outlining on your first quarter call. Then we just dive into which segments are USMCA compliant.
Sure. You know, as I just said in my opening remarks, we're a very U.S.-centric company. We have a large footprint of construction materials, mines, and manufacturing plants, really all of which but a few, a handful, are located outside the U.S. So very little. And we have a very U.S.-focused supply chain and our revenues are sourced predominantly in the U.S. So very little direct tariff impacts for Arcosa as a company. We did talk about, you know, where we do have manufacturing presence in Mexico and we have two plants in Mexico, two of our eight plants that support our utility structures business. The other six are located in the U.S. We do manufacture products that are USMCA compliant, so we are not experiencing any impacts there. We did talk about some very immaterial impacts that we had related to the steel tariffs.
We had a little bit of non-U.S. source steel on the ground. At the end of last year we made the decision to switch to 100% U.S. steel. So we're working through that. As you saw in our first quarter results, we had very strong margins in our engineered structures segment. So we were able to overcome that immaterial impact very easily. So very minimal direct tariff impacts, you know, indirect impacts. I would say, you know, we're watching closely on the agricultural side, how that may impact our barge customers. A fair amount of grain that travels the inland waterways is exported, so that would be corn and soybean. So the discussions with China are important from a tariff perspective and how that impacts the sentiment of our customers.
Steel prices in general and the tariffs implemented on steel, while steel down year over year, did cause a creep in steel prices early in the year. That is impactful on our customer sentiment within BARGE. Outside of that, from an indirect, it is really how it impacts the macro and the business environment in levels of business confidence and certainty. I do not think that is unique to Arcosa. I think you are muted. Muted. Excuse me. Yeah, sure.
Excellent. I'm going to hop into some of the segments here. Maybe starting with the construction products segment where you did the Stavola acquisition, which you completed, I believe, on October 1 of 2024.
That's right.
Just, you know, where are you with regards to the integration? You know, what are the key integration milestones and the anticipated milestones for the remainder of 2025?
The integration is going very well. We had been talking with Stavola for some time, so a very highly diligent transaction. We also had a little bit of a, you know, maybe a longer runway between announce and close than we've had in some of our other transactions. As I mentioned in my comments, we did add leverage to the balance sheet. You did have that time before close where we were doing the financing for Stavola. That was valuable time too from a head start perspective. Integration going very well from an operational perspective. Financially, really, you know, no surprises. You know, from a negative surprise perspective, things going very much according to plan and, you know, the price tag of Stavola was high relative to the other acquisitions that we've done.
From a complexity standpoint, you know, you're talking about five, you know, larger mines and 12 asphalt plants. Not all in a very concentrated geographic area. From an integration perspective, not, not overly tasking to the company. We kept the management team too. That obviously adds, you know, increases the ease of transition and integration.
Yep, good context there, very helpful. Could you maybe discuss the unique seasonality of Stavola relative to the rest of the construction product segment? That is something that is a little bit different than I think folks who have followed you in the past are used to. Also talk about how Stavola's kind of profits are expected to be sequenced throughout the remaining three quarters of fiscal 2025.
Sure. You know, construction's an outdoor business. We had seasonality in our business prior to the acquisition of Stavola with Q1 being the lowest. That got magnified with Stavola. About 60% of its EBITDA is aggregates and the other 40% is asphalt. Asphalt essentially shuts down in the winter months. You're not doing much asphalt paving work in the winter months. Q1 for the business and likewise for aggregates, you're not doing much, but you might have some stockpiling and selling of material if you get a warm winter or weather is accommodating. Generally for Stavola, Q1 for the company is EBITDA break even, slight EBITDA loss, maybe slight EBITDA profit if weather is warmer.
What we saw in Q1 is very much what we would have anticipated, which was a $2 million EBITDA loss for the business. Just to provide context, at the time we closed, Stavola was about a $100 million EBITDA business. You are losing EBITDA or breaking even in the first quarter. Your Q2s and Q3s are your seasonally strongest. Q4 is a good quarter. You saw that for the company in Q4 of last year where Stavola added about $25-$30 million of EBITDA. We disclosed the number. I cannot remember it exactly. A good contributor in the fourth quarter, a little bit more weather dependent than Q2 and Q3, but that is the seasonality pattern to Stavola.
It was dilutive both to EBITDA dollars and margin, you know, to the tune of maybe 300 basis points to the segment margin in Q1. We expect it to be highly accretive on a full year basis to, to the segment.
Very helpful, that. Thanks for level setting that, that unique seasonality there.
Sure,
for sure. Maybe if we could talk a little bit about aggregates pricing for Stavola and maybe compare the current pricing environment for Stavola versus what you're seeing in the rest of the aggregates portfolio.
Yeah, pricing is behaving, I'd say, very similarly to, from a, from a. Maybe I'd say first, Stavola is accretive to our ASP. We did acquire five hard rock quarries up in New Jersey. The ASPs generally in that area of the country are higher, and then hard rock tends to be at a higher price point. A very accretive acquisition. From an ASP perspective, the pricing trends have been very similar in terms of rate of growth that we've seen generally across the portfolio. Healthy price environment. Just that Stavola adds a bit of accretion to our overall ASP.
Great. What are the key drivers supporting your pricing momentum? You know, despite some volume weakness out there in the market at this point?
Yeah, I'd say to Stavola in particular or more across the portfolio,
you could do both.
Okay.
Yeah.
I guess what I was going to say, which you will not be surprised to hear is it is a very local, it is a very local business. Not all markets are behaving exactly the same. Stavola market, very, very healthy, very solid letting activities, solid quoting activities. Just for a reminder of those listening, very infrastructure replacement driven market to the tune of say 3/4 of Stavola's revenue are sourced by infrastructure replacement demand drivers. Healthy environment, volume growth generally tends to be fairly stable. Looking historically, peaks maybe not as high as peaks have been nationally, but trough certainly above, less negative as we look through time. Much a very stable market. That is kind of what we are feeling up in the New York-New Jersey market right now. Stable outlook, pricing opportunities.
January we talked about on our earnings call went through well and we'll selectively look at opportunities, you know, as the year advances and then as I move across the other logical place to, to maybe comment on is Texas. Texas is our largest market from an aggregates perspective. We're up in the Dallas-Fort Worth market. We're in Central Texas, we're down in the Houston area. Really kind of the triangle of Texas. I would say, you know, the markets depends where you are. As we've mentioned on our earnings call, Houston, we've still seen a relatively stable residential market. Volumes have held up quite well in that market. A little bit of opportunity within Central Texas from the housing perspective. Dallas-Fort Worth I'd say is a little bit slower on the residential side but data center activity, warehouse activity.
It's a bit of a mixed. I think we have good exposure to all end markets in Texas. Different areas of the state are behaving differently, but overall very healthy. Of course, the long-term outlook for our biggest state is very, very favorable. As you move away from Texas, I'd say probably the next biggest market for us would be Arizona and the Phoenix area. Very good industrial demand, manufacturing drivers in the Phoenix area. Residential has been soft, you know, no surprise there. The outlook, particularly given the level of investment in and around where our quarries are, is very favorable from kind of the medium-term view of residential returning to the general Phoenix area.
I'd say the thing that's been a little bit, and you've probably heard this from some of the other companies you cover, weather has been, you know, this is the rain season. I mean, first quarter's cold and can be wet and cold, and then, you know, 2Q is always a little bit of a shoulder season in terms of the construction season getting going, which we're very optimistic about. We've had some weeks of weather here. It's been a wet week here in Texas this week. New Jersey's been a little wet. We're kind of parsing through some of that, you know, just some of that slow and slowness you get associated with weather and then ramping back up on the better days. When the weather is solid and normal, demand seems very healthy.
Great. Thank you for running through kind of all the different end markets there and the drivers. Maybe turning to the engineered structures segment, which was the kind of crown jewel out performer of the first quarter, at least from an expectations perspective, from the street perspective I should say. You know, maybe you could talk about the segment margin outperformance and the profit dollar outperformance that you realized in engineered structures in the quarter and what the key puts and takes are there.
Yeah, I'd say I, you know, very pleased with the performance for the segment really across the board. I mentioned in my remarks, we've got five lines of business in that segment, you know, two bigger ones, but five. Really across the board we executed extremely well. Very good execution in the quarter. The biggest drivers would be the performance within utility structures. You would imagine the biggest business in that segment and then the continued ramp in our wind towers business. Last year, this time of year we were still ramping our New Mexico brownfield facility for wind towers. Q1, we were finishing that ramp.
The year over year benefit of not having those startup costs associated with the Belen, New Mexico facility certainly was helpful for the quarter. I would attribute it to that as well as to the performance within utility structures, better product mix year over year, which we had anticipated, and very solid execution within the utility structures business. The one small thing that we talked about that's just sort of a, maybe an anomaly in the quarter is just the timing of when we sell our wind tower tax credits. We have expectations to sell our 2025 wind tower tax credits the first quarter. Sales settled in April, so we did not accrue the small loss in Q1, just really from a timing perspective. That might have been a point to margin. Still outstanding performance for the segment year over year.
Yeah. You know, you talked about the utility structures piece, you know, and the volume outperformance there in the quarter. Can you just talk about what's driving that volume strength and maybe current demand trends and future demand catalysts for the utility structures piece of the business?
Sure, it's something we're very excited about. We had double-digit unit growth in that business in the quarter, but we've had very good volume growth in that business really over the last, you know, three to five years. The drivers there have really been grid hardening. You know, think, you know, the tragic fires in California that we had several years ago, the grid hardening, grid resiliency, connecting renewables to the grid. That created a very healthy demand market that we've been in really for almost since spin, the last six years. What you're seeing now is the transition into load growth expectations. For the last couple of decades in the U.S. we've been in a, you know, a very low to no load growth environment, still having brownouts and challenges with our grid.
The expectations are for load growth over the next 10 years associated with all of the things that you would expect. The data center AI, increased electrification. The combination with continued focus on grid hardening and grid resiliency along with growth expectations is creating a very robust demand outlook for our utility structures business. We commented on our last earnings call that we are evaluating transitioning an idled wind tower facility to utility structures in the U.S. as we look at the demand outlook and the need for additional capacity in a very measured way within the industry. Very, very optimistic on the utility structures business.
Yeah, that part is fascinating because there's so many secular trends it's exposed to. You didn't even touch on broadband, I think, which is another area that,
that's right.
You know, telecom is small for us, but you know, growing at a, you know, I think the industry got started, then there is a little bit of a pause and we are encouraged by some of the movement we are seeing in that business. I want to caution people it is still a relatively small business for Arcosa, but we do play in that space as well.
Excellent. Yeah, very exciting there. Maybe if we could talk about the wind business a little bit within the segment, maybe just touch on where that is along the cost curve. You know, what are you excited about in wind? And then also if you could tie in a little bit about what, you know, the risk is from, you know, potential curbing of tax credits from the new potential administration on the wind business as well.
I'd say wind fits very well with the narrative around utility structures and really the narrative around growth of power in the U.S., and so, you know, as you know Julio, we've been in the wind business for a couple of decades now and our CEO Antonio has been around that business for really that entire length of time. It's interesting to hear his perspective. You know, wind has always been a nice to have, you know, provides energy, intermittent source of energy, aligns with sustainability goals. It's been a nice complement. What we feel like we've moved into is an environment where there is such increased need for new generation that it absolutely needs to be an all of the above strategy and renewables need to play a role and those that can fill that gap sooner is wind and solar.
We're very encouraged on the demand outlook and what wind, you know, we've been around it a long time. Policy always matters, right? We had a period of time of uncertainty and not a lot of activity in the wind industry around the time before the passage of the Inflation Reduction of Act excuse me Inflation Reduction Act. Go back to summer of 2022, you know, not a lot of activity. We thought the PTC was going to go away. There was conversation around the Build Back Better plan. You had the IRA 10-year long runway and then, you know, fast forward another two years. Maybe just to take a step back. We took over $1 billion of orders once the IRA was passed. We had uncertainty again with the change in the administration.
What we have been saying is we need to pair this very positive demand outlook with more stability on the policy side. We are encouraged. You asked about the policy within the House. We are encouraged by maybe having some clarity this summer. The House gave us insight into potential changes. Yes, there was a rollback on wind, but it gives us a very good runway for three years. The PTC as proposed in the House bill would phase out after 2028. The 45X that Arcosa receives would phase out after 2027. Having that runway and that ability to plan and to execute, and it is shortened relative to the original time frame, we really, you know, what it means to us is we are going to see a pull forward of demand.
What we need first is to see this get through the Senate. You know, as I said, most view the House as a floor. You know, do we see things improved in the Senate? There is a view that we will see that. Either way, having that clarity and being able to move forward is very important. You know, outlook, very positive policy clarity. We are very hopeful. I will tell you after the House bill, we have had more conversation with our customers. I think, you know, these are the things that we need to see to get action moving. We are watching it closely and, you know, hopefully late July, early August, before summer recess, we will have some conclusions.
Great context there. Thank you, Gail. Just maybe thinking a little more broadly about the portfolio and the deleveraging path and, you know, whether you remain on track to bring down leverage within the 18 months post close of Stavola.
Yeah, I think we've, you know, at announcement of Stavola last August, we were pro forma 3.7 times net debt to EBITDA above our 2-2.5 times target. I think we've shown, you know, at that time we gave a goal of 18 months from close, which is the end of Q1 2026, to get back to the 2-2.5. We've made excellent progress since then. We ended the year, we fully repaid our revolver, ended the year at 2.9 times. We maintained that in our seasonally slow Q1. We expect to have further deleveraging in the back half of the year. I'll remind folks that that deleveraging target is organic. It's not inclusive of any divestitures or potential, you know, proceeds from sales of assets.
It is a purely organic path to deleveraging that we feel very confident in.
Absolutely. With about a minute left, I'm going to try to squeeze two in here quickly.
Sure.
The first one is just, you know, you've been very consistent as you said at the beginning as to where the portfolio has been going since the spin, kind of remarkably consistent message since that time. You know, can you just discuss any ways in which the thought process as to the direction of the portfolio has evolved, if at all, since spin?
I, you know, you said it Julio. I think we've been very consistent in our articulating what our strategy is and then executing against that strategy. Timing always, you know, you can be off a little bit in general timing. Things happen like a COVID out of your control. You know, there are things that might get you off or unanticipated policy changes. Directionally though, strategy has not changed. Arcosa wants to simplify. We're three segments today. You know, will we be two segments at some point? I absolutely think so. We'll, you know, continue to look to grow in our growth businesses, aggregates led, focus around utility structures in the engineered structures segment. We'll simplify and reducing the cyclicality. We have some great businesses in our portfolio, some of which are just deeply cyclical for various reasons.
and our goal is to simplify, reduce the cyclicality, and continue to grow in which we think are very attractive markets with some excellent long term growth drivers for us.
Excellent. I guess you know, that portfolio simplification, where does that take you as from a business perspective? You know, if someone's looking at your business five to 10 years out.
Look, you know we have construction is 60% of our adjusted EBITDA today. We'd like to see that bigger. You know I mentioned I think we'd be disappointed if we were not a two segment company someday. I think and then, you know, we will, we will see. I, I, it is really about maximizing the value of the businesses while we own them. We love our businesses, we are just not in love with them. We are, you know, our goal within the corporate office is to generate cash, allocate cash and that is what we have been about and going about in a very disciplined manner at Arcosa.
Well said, Gail. Aaron, thanks so much for taking the time.
Yeah, thank you, Julio. Bye.
Bye bye.