ACA

Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. First Quarter 2026 Earnings Conference Call. My name is Chloe, 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, Erin Drabek, Vice President of Investor Relations for Arcosa. Ms. Drabek, you may begin.

Good morning, everyone, and thank you for joining Arcosa's First Quarter 2026 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 the press release issued yesterday and a 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 2 weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for 1 year on our website under the News and Events tab. Today's comments and presentation slides contain financial measures that have not been prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. In addition, today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's SEC filings for more information on these risks and uncertainties, including the press release we filed yesterday and our Form 10-Q expected to be filed later today. I would now like to turn the call over to Antonio.

Thank you, Erin. Good morning, everyone, and thank you for joining us for a discussion of our first quarter results and 2026 outlook. I am very pleased with our performance. We kicked off the year with strong results, made meaningful progress on our strategic transformation, and increased our full year guidance for continuing operations. In the first quarter, we delivered adjusted EBITDA growth of 10% from continuing operations, double our revenue growth, and expanded margin by 100 basis points. The strong performance was driven by robust double-digit top line growth and strong margin uplift in utility structures. Despite typical seasonality and winter weather impacts, Construction Products contributed solid results, and we were pleased to see performance improved as the quarter progressed. Importantly, we recently reached a key milestone in our transformation. On April 1, we announced the completion of the $450 million barge divestiture, a pivotal step in simplifying our portfolio. Now with 2 segments, we're fully focused on Construction Products and Engineered Structures, both well positioned to benefit from infrastructure investment and power market tailwinds in the U.S. We intend to use the net proceeds from the barge sale to reinvest in our growth platforms and manage our debt. In March, we completed a $60 million acquisition of a natural aggregates operation located in Florida with accretive margins that enhance our platform in this attractive market. We continue to have an active bolt-on M&A pipeline complemented by a healthy set of high-return organic growth projects. Our balance sheet is in great shape. And at the end of the first quarter, pro forma for the barge divestiture, net debt-to-adjusted EBITDA decreased to 1.9x, slightly below our target range, providing for both flexibility and capacity to support continued growth. Turning to the outlook. Our full year 2026 guidance now reflects continuing operations only. At the midpoint of our guidance range, we expect adjusted EBITDA of $565 million, up $22.5 million from our previous guidance range, representing 11% growth year-over-year. In Construction Products, our demand outlook remains broadly consistent with the start of the year with new uncertainty created by the conflict in the Middle East, which commenced the day after our February earnings call. While geopolitical volatility is elevated and oil prices have risen sharply, we have not seen that translate into weaker demand in our construction footprint. Within Engineered Structures, our first quarter performance in utility structures exceeded expectations. Momentum has been building in the demand environment for some time, and this strength is aligned with the excellent commercial and operational execution by our team, driving record margin performance in the quarter. As a result, we have raised our expectations for the balance of the year. Reflecting on our journey as a stand-alone public company, we have never been better positioned. Our objective at the time of the spin-off was to grow in attractive markets while simplifying the portfolio and reducing cyclicality. We have succeeded in doing this while strengthening our margin profile and enhancing the company's overall resilience. Across our simplified portfolio, we are aligned to capitalize on durable multiyear U.S. infrastructure-related tailwinds. We're confident that these advantages, combined with disciplined capital deployment and consistent execution, position us to deliver continued shareholder value creation. I will now turn the call over to Gail to provide additional details on our first quarter segment results.

Thank you, Antonio. Good morning, everyone. My comments today will focus on continuing operations. First quarter results for the barge business are included in discontinued operations, and we have eliminated segment reporting for Transportation Products. Starting with Construction Products. First quarter results finished largely in line with our expectations, overcoming a slow start to the quarter due to severe winter weather across our footprint in January. Segment revenues increased 5% and adjusted segment EBITDA decreased slightly. Adjusted EBITDA growth in aggregates and trench shoring was offset by pronounced seasonality in asphalt and lower cost absorption in Specialty Materials. For aggregates, freight-adjusted revenues increased roughly 6%, driven by 2% pricing growth and 4% volume. Adjusted cash gross profit margin increased 220 basis points and adjusted cash gross profit per ton increased 7%. Performance this quarter was led by our Texas region, which benefited from favorable weather in February and March that more than offset the harsh winter conditions throughout the quarter in our East region. Turning to Specialty Materials and Asphalt. Revenues decreased 4%, primarily due to lower asphalt volumes. Revenues for Specialty Materials increased slightly, driven by higher lightweight aggregates volume. Costs were higher year-over-year due to planned maintenance downtime at one of our lightweight plants and a larger seasonal impact from asphalt. The result was lower adjusted EBITDA for the quarter. We expect to see earnings growth and margin improvement for both product lines for the remainder of the year. Finally, our trench shoring business completed another strong quarter of growth with both revenues and adjusted EBITDA up about 26%. Record order levels converted into higher volumes, and customer sentiment remains very positive. Moving to Engineered Structures. Segment revenues increased 4%, led by mid-teen growth in our utility and related structures businesses, more than compensating for lower wind tower revenues, which were expected. Utility structures revenue accelerated north of 15%, supported by both volume and pricing. Significant margin expansion drove a 21% increase in adjusted segment EBITDA. Segment margin increased to a record 21.1%, up 300 basis points year-over-year due to strong utility structures performance. During the quarter, the team successfully executed strategic capacity expansion projects to drive volume and accelerate the delivery of more favorable product mix. We ended the quarter with record backlog for utility and related structures of $558 million, up 28% from the start of the year. Order activity continued to be strong and included a couple of orders for long-term projects that extend into 2028. Customer reservations, which are not included in reported backlog, are also robust. For wind towers, we received orders of $43 million during the quarter for delivery in 2026 and 2027. We ended the quarter with backlog of $600 million and expect to recognize 36% in 2026 and 59% in 2027. I'll now provide some comments on our cash flow performance and balance sheet position. During the quarter, we generated $58 million of operating cash flow from continuing operations, which compared favorably to last year's $21 million use of cash. The increase was driven by higher earnings and a $53 million reduction in the use of cash for working capital. CapEx for continuing operations for the first quarter was $44 million compared to $33 million in the prior year period, which reflects increased investment in our core growth platforms. Free cash flow from continuing operations was $21 million, up from negative $49 million in the prior period. Additional cash activity in the quarter included the investment of $60 million for the bolt-on natural aggregates acquisition and $18 million of share repurchase to offset dilution. Our balance sheet and liquidity position were enhanced by the barge sale. Pro forma for the April 1 closing, net debt-to-adjusted EBITDA is 1.9x compared to 2.3x at quarter end. This reflects $370 million of estimated after-tax net proceeds, of which $83 million was used to prepay a portion of the outstanding term loan balance in April. Pro forma liquidity is estimated at $1.1 billion, including full availability under our $700 million revolver. I'll wrap up with guidance updates on a few items to reflect continuing operations now that the barge divestiture has closed. We now expect full year CapEx of $215 million to $240 million, a slight reduction from the prior range. We anticipate a full year effective tax rate of 16% to 18%, down 1.5 points due to a lower expected state tax rate for continuing operations. The first quarter tax rate of 5.3% was favorably impacted by onetime discrete items. So our guidance implies a quarterly effective rate slightly above the top end of the range for the balance of the year. And finally, we anticipate the full year corporate cost impact to adjusted EBITDA to be approximately $60 million at the midpoint of our guidance range, roughly flat with 2025 as we offset barge stranded costs. I will now turn the call back to Antonio for more discussion on our 2026 outlook.

Thank you, Gail. We have started the year on solid footing, completing the barge divestiture, delivering strong financial and operational results and raising guidance. As a result, Arcosa is well positioned to deliver another year of record financial results for our 2 remaining segments. Our outlook for the year has improved, driven by the strength in utility structures as well as solid execution in the first quarter. At the midpoint of our guidance range, we anticipate revenues of $2.65 billion, up 6% year-over-year and adjusted EBITDA of $565 million, up 11% year-over-year. We expect margin to expand to a record 21.3%. In Construction Products, we anticipate another record year of revenues and adjusted segment EBITDA. In our guidance range, we continue to expect mid-single-digit adjusted EBITDA growth for the segment. For the aggregates business, we are incorporating low single-digit volume growth and mid-single-digit pricing improvement consistent with our February guidance. On the cost side, we're managing increases in oil-related inputs. We're actively deploying fuel surcharges and loading fees in the aggregates operations to combat higher diesel costs and the asphalt pricing is indexed to changes in liquid AC. We're maintaining strong pricing discipline to support solid unit profitability gains consistent with actions we took to address high inflation. Our 2026 outlook is underpinned by infrastructure and heavy nonresidential demand. In Texas, our largest market, we delivered above-average volume and pricing gains in the quarter, driven by healthy demand and favorable weather conditions in much of February and March. While highway lettings have been trending off peak levels recently in Texas, the outlook for state spending growth over the next several years is very positive. In New Jersey, our second largest regional market, the demand outlook is also favorable, as both the Department of Transportation and the Transit Authority have approved budget increases for 2026. We're ramping up for the spring construction season after a very cold start to the year. We believe there is pent-up demand as customers are ready to start their projects and make repairs caused by the harsh winter weather. There is also progress in advancing a multiyear surface transportation reauthorization with initial language expected to be released by the House Transportation and Infrastructure Committee later this month. Within heavy nonresidential, volumes continue to benefit from data center development, reshoring activities in certain areas, and overall demand for new power generation. Additionally, we see continued momentum related to LNG opportunities in the Gulf Coast. Residential remains challenged by affordability, and the recent rise in oil prices has weakened consumer confidence. With a soft start to the spring selling season, we see residential volume recovery pushing out to 2027, and anticipate flat to slightly down residential volume in aggregates this year. We service attractive markets and expect our footprint to benefit when the housing market recovers. In summary, our construction outlook continues to be supported by infrastructure and heavy nonresidential activity in 2026. With the winter season behind us, we're optimistic about a solid construction activity in the quarters ahead, led by healthy demand fundamentals in our largest markets. Moving next to Engineered Structures. We had an excellent start to the year, exceeding expectations for the segment, with outperformance driven by utility structures, our largest business in the segment. Regarding the market outlook, conditions remain very healthy. As we have discussed before, the expansion of data centers and the rise in electricity consumption across the U.S. continues to drive a significant and sustained increase in power demand. Our utility customers have made large multiyear capital commitments to power investments along with ongoing efforts to modernize the grid. As a result, our backlog continues to increase and we are optimizing pricing. We're successfully addressing the recently implemented steel tariffs. Previously, we were exempt from Section 232, as we source our steel from the U.S. for the manufacture of utility structures in Mexico to be sold in the U.S. Effective April 6, these imported structures are subject to a new 10% steel tariff on the full value of the finished products. We have contractual protection in place to effectively pass through the impact. We're optimistic that the joint review of the USMCA later this year will create certainty in the commercial relationships between U.S. and Mexico and avoid tariffs on products made in Mexico that comply with USMCA and are made of U.S. steel. We're advancing several high-return investments in utility structures to align capacity with strong demand, while at the same time, focusing on efficiencies and throughput enhancements within our footprint. We're ahead of schedule with the conversion of the Illinois wind tower plant, which had been idle for several years to a utility pole plant. With critical equipment being installed and commercial success filling our backlog, we now expect to produce large utility poles from this facility by the end of the second quarter. Our new galvanizing facility in Mexico completed its first dip in April, and we should be commercially operational in the second quarter as well. Our expectations are that the expected cost savings from the galvanizing facility will help offset start-up costs in Illinois. Additionally, planning continues for the transition of a second wind tower facility in Oklahoma to produce utility poles. In that plant, current wind tower backlog extends through 2027. We can run both product lines in parallel, and we expect to be moving our people to produce utility poles as wind tower orders are fulfilled. Within wind towers, which represent roughly 10% of full year total company revenues, the team performed well while transitioning to lower volumes. We now have 3 customers in our backlog with the orders received in the quarter, and we're planning for a volume recovery back to 2025 levels next year based on the backlog already in place. With power demand rising and wind energy remaining competitive source of generation, we're optimistic that there will be demand for wind towers after the tax credits expire. With 2 of our 4 wind tower plants under active conversion to produce utility structures, Arcosa will be well positioned to deliver strong returns on the capital invested in the wind business while retaining a great optionality to further expand capacity for utility poles if demand continues to strengthen. Our first quarter beat and guidance raise highlights the significant strength in utility structures that serve as a backbone of the grid modernization. Electricity demand is expanding at a pace not seen in a generation. We now anticipate segment adjusted EBITDA growth of approximately 10% at the midpoint of our guidance range with utility structures more than compensating for a transition year in wind towers. As it relates to our capital allocation priorities, we have an active pipeline of additional bolt-on opportunities, both in natural and recycled aggregates, and expect to deploy capital towards the highest value opportunities. While not reflected in our midpoint of our guidance, we are confident that we can execute on several bolt-ons this year. In closing, we're entering the second quarter with strong momentum and improved balance sheet and additional confidence underpinned by increasing our guidance. The divestiture of our barge business is a significant milestone in our company's evolution and will sharpen our focus on our key growth businesses. We remain proactive in our value creation strategy and are always seeking for ways to deliver more value for our stakeholders. I'm extremely proud of our team's excellent start to the year. We're now ready for your questions.

[Operator Instructions] And we'll take our first question from Julio Romero with Sidoti & Company.

So on utility structures and maybe the Engineered Structures segment overall, the segment margins are very strong here in the first quarter, at a record level, I believe. Can you just help us understand what's driving the margin strength, particularly how much of that is driven by utility structures? And just help us think about how sustainable that margin performance is for the balance of '26?

So let me give you some color. I think we mentioned in our scripts, but the 2 businesses, let's say, it's a K-shape segment. Utility structures are going up pretty significantly. And as we've mentioned before, we expect the wind to come down given that we see 2026 as a transition year. So utility structures has been overcompensating for the reduction in wind. As Gail mentioned, our revenues went up over 15% in the quarter. And margins were extremely strong. Our team performed incredibly well. As volumes come up and we've been able to tweak our capacity across our footprint, the margin has continued to go up. So it was mainly driven by utility structures. On the wind side, I also mentioned we expect this to be a transition year. In the second half of the year, we're going to start ramping up, because we already have the backlog in 2027 to go back to 2026 (sic) [ 2025 ] levels. So ideally, as the year goes by, we should continue to see utility structures continue to perform and accelerate, and wind should, at the end of the year, start accelerating to be able to fulfill our strong 2027 backlog.

And Julio, I think you asked for some guidance as we look forward in the sustainability of the margin. As you pointed out, the segment did report record margins in the quarter. So fantastic performance. Really, all the businesses were in line with our expectations and the outperformance was utility driven. So as we look through the balance of the year, we have raised our margin expectations for the year versus where we were here in February. You can see that in the guide with the EBITDA. The incremental margin on that EBITDA raise is pretty strong. So we do have some -- we are ramping up our Clinton, as we mentioned, that will be operational at the end of the second quarter. But we do still have some start-up costs that we'll incur in Q2, along with some continuing start-up costs on the galvanizer. Those will probably hit their peak level in Q2 before they start abating in the back half of the year. So a long-winded way of saying our margin expectation for this segment has increased, and we would see an annual margin in the 20% range sustainable for the year.

Excellent. Really helpful there. And then second question is, you mentioned that customer reservations for utility structures, which aren't included in the backlog, are also robust. Can you maybe expand on that commentary and how those have been trending relative to historical? And then kind of related to that, you also mentioned in the script about advancing several high-return investments related to capacity and utility structures. Does that go beyond the current conversions of Illinois and Tulsa? Yes, that's my 2-part question there.

Let me start with the first one. As we've always said, we have long-term contracts with our customers. And as our customers' utilities determine exactly what they need, the designs on the poles, et cetera, that's when we include them in our backlog. So as our backlog grows, normally, the reservations also grow. Normally, the reservation piece is about the same size as our backlog. This time, it's probably a little smaller, because we have some additional orders that were outside of our normal contracts. But they normally grow in parallel, both the backlog and the reservations. And we continue to see very strong demand and very strong customer sentiment on what's coming. So very excited about what we're seeing on utility structures. On the 2 main projects that we have, which are the conversion of the 2 plants and the galvanizing -- 3 projects, 2 conversions and the galvanizing, those are the main projects in utility structures. We do have a lot of smaller projects that Gail mentioned in her script that we are trying to maximize our throughput in our plants; for 2 things, one is to maximize the margin profile of the products we are producing in a very tight market; and second, to try to increase our throughput. So lots of small projects in addition to the large projects.

We'll move next to Trey Grooms with Stephens.

This is Ethan on for Trey. Great job on the quarter. I wanted to touch on maybe your cost outlook. Any more detail on how to think about the energy exposure across your Construction Products business, how you're navigating that? And any expectations on timing impacts on the margin as we progress through the year, and perhaps in the Engineered Structures business as well, any other inflationary inputs that you're looking at would be great.

Sure. I'll give you conceptually and let Gail give you some numbers. So we use between 10 million and 11 million gallons of diesel in the footprint. And what we've been doing since this conflict started is passing through fuel surcharges and loading fees. So I think we have taken all the actions that we need to take to mitigate all these impacts. And I think we're in good shape. That's on the construction side. On the utility structures and wind, the impact is negligible. We don't have a lot of exposure to diesel. Our main exposure is natural gas. And as you've seen, natural gas, it went up a little bit, but it hasn't had a huge impact. So we don't expect a significant amount of impact there. And I'll let Gail give you some more color.

Yes. And Antonio mentioned the consumption that we have in aggregates, which is obviously clearly our most intensive diesel user. And so we've seen -- as you've heard from others, we didn't see much impact in Q1 as prices started to spike in March. But we're seeing diesel prices up about $1.50 a gallon in our footprint. So if these prices remained at this elevated level, we'd estimate about a 4% to 5% headwind to cash unit profitability for 2026, and that's unabated. So as Antonio just discussed, we have actively implemented surcharges and steps to mitigate that impact. So happy to provide any more color.

A couple of additional comments. I mentioned in my script, but we only have one large operation for asphalt in the Northeast, and our prices are indexed to liquid AC costs. So that's something that we're covered. So overall, I think we are in good shape. One more thing that differentiates Arcosa from many of the peers. We don't have ready-mix. We don't distribute our products. We don't deliver them. For the most part, the diesel is consumed inside our facilities. We don't have a large footprint in trucks delivering asphalt or aggregates or ready-mix or cement or anything like that. So we are, I think, a lot more insulated.

Got it. That's all very helpful color. So I appreciate that. And maybe shifting gears a little bit back to utility structures. At a higher level, how long of a tail do you think that this level of utility power demand has? I mean you mentioned in the prepared remarks that some of these contracts extend into 2028. So how long of a tail do you think this has? And of course, what are you seeing here that gives you confidence in raising the guide here in the earlier part of the year?

Yes. Let me start with your second question. We're raising the guide for 2 reasons. Performance has been very good. But we have the backlog already in place to support our guidance. So we have a lot of confidence in what our team is doing, and we have the orders to support our guidance. So that's on the guidance piece. On what gives us confidence? So when you look at -- let's go back 7 years, 6 years, there's always this forecast of investment by utilities in the grid. And the forecast has been strong. And that's why we, 8 years ago, almost when we spun off, we decided this was going to be one of our growth businesses, because we saw significant investment in utility infrastructure that was coming and it was coming fast. But what has happened is that every year since then, things have gotten, let's say, more optimistic about the amount of investment going into the grid. And then AI came and that simply, let's say, supercharged the demand for transmission towers and the investment companies have to do to support growth in power demand. So things have gotten -- they were already looking good and they have gotten better. We recently did market studies to support our expansions. We are not doing them blindly. We talk to our customers. We ask about their demand. We ask about their forecast for the next several years. And our forecast suggests that this has a very long tailwind of sustained demand for many years to come. So I think we're in a really strong position.

We'll move next to Min Cho with Texas Capital Securities.

First, on the utility structures, Gail, can you break out kind of price versus volume in the quarter? And maybe talk to any change in mix in terms of larger structures or anything like that, that we should be aware of?

Sure. As we said, we had north of 15% revenue growth in the quarter within the utility structures product line. And really a combination of very favorable volume and price, I would say, with a tilt towards volume, but both are -- just based on the demand environment right now, we're getting a tailwind from both sides of the equation. Product mix, we've done a good job, I would say, from the margin lift with the increase in efficiencies and throughput. We've really worked through, I guess I could say it was lower-priced product, but the market is pretty attractive right now to be able to pull forward some of the improved price in our backlog. So you saw that in the margin lift as well. Maybe I'd turn it to Antonio just to give you some color on the product type and what's driving demand right now, but we're certainly seeing a movement towards larger tower structures as the increased need for transmission expands.

Yes. So I'll give you color. I think what we've seen over the last several years is a trend toward larger poles. And I would say that's our sweet spot. As a company, we pride ourselves in our engineering capacity and capabilities. And I think that's what our customers value. When you go to smaller poles, they're simpler, they're easier to make, and margins in general are lower. We've seen a large move towards larger poles, and that's our sweet spot. And that's why I think Arcosa is in a very strong position, because we are transitioning from a -- we're in a transition year for wind towers. And those towers, as you know, wind towers are very large. So the plants are very nicely suited to transform them into larger utility pole plants, which is what the market needs. And that's what we're doing right now, transforming plants that we had already in place to utility poles. As we move forward, we are very confident in our ability to ramp up Illinois. That's what we do for a living, and then transform Tulsa into another transmission tower plant. And by 2028, we'll only have 2 wind tower plants left, which gives us great optionality. If the utility pole market continues to accelerate, we'll have a lot of optionality to add capacity if the market continues to grow in that way.

Excellent. And I know there's been a push or there's been a lot of discussion about the 765 kV transmission lines, which typically require like larger lattice towers. And I believe Meyer has experience with those towers. But do you have the capability and capacity to be able to produce these types of towers for these extra high-voltage lines?

Yes. For the most part, those lines, as you said, have been lattice. As you know, most of the lattice towers are imported. There's a couple of people developing capacity here in the U.S., but for the most part, they are imported. We have the engineering capability to do it and are working on it, but we have not sold those towers in the past. But we are actively working with customers on designing and developing them. And the plants we have converted, the wind tower plants, have capabilities to build those poles if we get to that point. So I think that's one of the things that Meyer, which is our brand for utility poles, is extremely well suited for those changes that are coming, and we're actively pushing for it.

Excellent. Let's see. I know that you -- obviously, congratulations on the barge sale, strengthened your leverage here. How are you prioritizing your incremental cash? I know that you mentioned M&A and obviously, you're doing the conversions. But if you can just kind of talk about your prioritization there. And I also saw the share repurchases this quarter. So that would be helpful.

The share repurchases are normally just opportunistic. We normally try to compensate for the compensation dilution. It's not our main capital deployment. We have no plans to increase our dividend at the moment. We've kept it flat for a long time now. And the reason is we always say that we have more ideas than money, which is a sign of a healthy company. We have a robust pipeline of bolt-on opportunities, both on the aggregates and recycled aggregates, and that's always been our priority on the inorganic side. And on the utility structures, it's mainly an organic story. We have a lot of opportunities to continue to deploy capital there. So those are our 2 priorities. How do we continue to increase our footprint on natural aggregates and recycled aggregates, in great locations, with accretive margins, like the acquisition we announced in the first quarter in Florida. And then on the second side is continue to accelerate our transmission tower expansion, so that we can keep up with the market. So I think we have opportunities to deploy the capital. You will see us pay. Gail mentioned, we paid, I think, $83 million in April for our debt. So we will continue to manage our leverage profile as we see fit.

And it does appear that there are no further questions at this time. Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.