Q3 2021 Arcosa Inc Earnings Call
[noise], good morning, ladies and gentlemen, and welcome to our Kosta.
Inks third quarter 2021 earnings Conference call. My name is <unk> 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 Dre back director of Investor Relations for our Kosta is straight back you may begin.
Good morning, everyone and thank you for joining our coaches third quarter, 20th 21 earnings call with me today are Antonio Korea, President and CEO and Gail Peck C. F. L. A question and answer session will follow their prepared my remark.
Copy of yesterday's press release and the slide presentation for this morning's call are posted on our Investor Relations website, Www Dot I R. R Kosta Dot 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 really.
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 the closest gap 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 very good morning, and thank you for joining today's cool [laughter].
Starting on slide four.
Having just bust our third anniversary that's an independent public company. We are pleased to report strung third quarter results, which reflect the success or the air force, we have undertaken to build our business and attractive markets.
Of course, I generated a double digit growth in the third quarter revenue and adjusted EBITDA led but by games in both our construction products that engineered structures segments.
More than offsetting lower year over year resulted in transportation problems.
That will discuss several keep takes away from our third quarter.
The evolution and transformation of our portfolio to work faster growth higher margin business as you say evident in a regular third quarter results are they will provide additional context on the following slides.
Construction products continues to experience healthy market fundamentals supported by contributions from both organic initiatives in recent acquisitions.
One of their activity within the utility structures unrelated probe lines, what's healthy during the quarter and we were pleased to receive approximately $175 million a winter orders.
We continue to manage inflationary pressures mitigating the impact through proactive price adjustments in most of our businesses.
Still prices remain a headwind for their volumes in our barge business and to a lesser extent windpower business.
As we look forward a little as we look to the fourth quarter of 2021 and into 2022, we continue to see favorable market drivers you know construction and engineered structure businesses supporting our outlook at the same time or Windpower Embarge business continued to face short term headwinds.
Let's turn to slide seven.
Since becoming an independent public company, we have generated strong revenue increase in margin expansion through the successful execution of our strategy.
We have been able to grow even when some of our larger and more cyclical businesses are navigating at the bottom of the cycles.
Or this time frame are third quarter adjusted EBITDA has increased 21% compounded annual growth rate, while we have improved our margin by 240 basis points or nearly 20 per cent.
We have achieved this through the evolution of our portfolio to work faster growth and higher margin businesses on by improving operational efficiencies.
Please turn to slide eight.
Today are of course is a fundamentally stronger more focused on Morris healing company in just three years or construction business has expanded organically and through acquisitions to represent nearly 60% of our adjusted EBITDA in the third quarter.
Equally important construction project represents our highest margin business elevating our closest overall margin potential.
We also have successfully expanded engineered structures business.
And reduced a receipt reliance on winter hours via operational improvements on the expansion into adjacent rows with positive market fundamentals.
Together the investments we have made in the engineer's structures in construction businesses have produced a more resilient company focus on attractive infrastructure markets.
Turning to slide nine I would like to remind you of our long term strategy I am proud of the substantial progress we have made US an organization in advancing our long term vision in these three years.
We have been able to make significant progress despite some of our more cyclical businesses beer being near at the bottom of their cycles.
The acquisitions, we have made have great a stronger less cyclical company with much higher growth potential as we discussed on our last call having completed two sizable acquisitions already this year stone point and saw was rock we intend to focus our near term efforts on integrating these great businesses executing organic opportunities and simply.
Sighing or overload overall portfolio to reduce the complexity of our culture.
We look forward to sharing some additional progress on future calls I.
I will now turn over to the call to Gail to discuss our segment performance and then I will return to update you on the outlook of the business.
Thank you Antonio I'll start on site 11 in touch briefly on our cause is consolidated results before moving onto the segment discussion.
As Antonio mentioned, we delivered double digit revenue and EBITDA expansion led by our growth businesses like other companies, we are monitoring inflation supply chain disruption in COVID-19 and its impact across our portfolio businesses.
Positive news as we have been proactively raising prices to mitigate the impact on our overall margins are consolidated EBITDA margins remained relatively flat during the quarter compared to a year ago levels.
Turning to construction products on 512 revenues grew 55% and adjusted EBITDA increased 48%.
By acquisition and organic contributions segment EBITDA margin increased 190 basis points sequentially from the second quarter to 24%, but decreased from 25.1% in the prior year.
Construction activity was strong overall in the third quarter and our natural aggregates business. The editions of stone point in southwest rock increased our volumes and we saw a healthy organic increase as well we.
We experienced pricing gains across most market supported by strengthening product demand and attractive fundamentals looking at Texas, North and Central Texas had strong volume growth driven by consistent residential demand and a healthy pipeline of project work in Houston and along the Gulf Coast volume was impacted by weather, but was up over on the.
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We are seeing some lingering impacts from hurricane Ida on volumes in Louisiana as ongoing storm recovery efforts are impacting truck driver availability.
Ah recycled aggregates offered operation continues to perform well and has a nice complement to our natural aggregates platform.
Turning to specialty materials revenues and EBITA were higher year over year, driven by pricing games on roughly flat volume the.
The demand outlook remains favourable looking across the diverse and markets. We served with a portion of current volumes being impacted by construction delays we.
We were pleased to see another quarter of strong revenue trends in our try insuring business, which is performing at pre COVID-19 levels.
Overall the segment delivered strong performance in the third quarter looking at segment margins. The team did a good job mitigating fuel and raw material inflationary pressures as we are focused on remaining diligent while accretive to our closest overall margin stone points margins are currently dilutive to this segment and that contributed to the year over year decline.
Turning to engineered structures on 513.
Revenue increased 12% and adjusted EBITDA increased 13% to $32 million, resulting in roughly flat margins compared to last year on the positive side, a utility structures business performed well with higher sequential and year over year EBITDA margins from improved mix are successful efforts to mitigate hi, Steve.
Prices and increased throughput.
Our storage tank product line in the U S and Mexico is also a bright spot with 48% higher revenue during the quarter and higher margins year over year, we benefited from strong residential and commercial demand for propane tanks as a primarily billed to stock business. We continue to closely monitor still prices and it had been successful thus far passing through it.
Creases as the demand environment remains conducive.
Strong results from these businesses were partially offset by lower wind tower volumes and margin in the quarter as expected.
As a reminder, second quarter revenue and EBITDA were helped by a $7.7 million favorable resolution of a customer dispute.
As we mentioned in yesterday's release, we are taking additional steps in the fourth quarter to align our wind power capacity with near term demand uncertainties Antonio will provide additional commentary in his remark.
During the quarter, we were also impacted by operational challenges in our traffic structures business as we ramped up to meet higher volume.
Rolling It all up we expect segment EBITDA margins I've approximately 10% in the fourth quarter for engineered structures below are 12% to 13% target range.
I'll wrap up engineered structures with some comments on our backlog visibility and the order environment at the end of the quarter of the combined backlog for utility wind and related structures was approximately $466 million.
Up from approximately $349 million at the end of the second quarter driven by a strong one six times book to Bill as.
Is Antonio mentioned, we received a large wind tower order during the quarter for 2022 production were previously we had none.
The order has love expected profitability, but provides a base level.
Section visibility.
During the quarter, the combined order activity for utility and related structures was healthy keeping pace with strong year over year revenue increases and underpinning are positive outlook for these businesses.
Moving to transportation product on slide 14, both revenue and adjusted EBITDA were significantly lower year over year, primarily due to a 41% decrease in barge revenue and lower utilization.
While still operating at top volumes, we are pleased to see year over year revenue improvement in our components business Mark in the first quarter growth since our spinoff as conditions in the North American rail industry slowly improve.
Prices continue to suppress new order volumes and our barge business.
We received orders of $50 million, representing a book to Bill of just under one time on a low level of revenues.
Pricing of new orders reflect weak market conditions with orders, adding to our base level of production in 2022, our backlog was approximately $130 million for our barge business at the end of the quarter with roughly $86 million scheduled for delivery in 2022 the.
The idling of our Madisonville, Louisiana plant was delayed slightly due to hurricane Ida and was completed in October.
Our backlog provides continuity for her to open facilities into next year, while we remain flexible for an anticipated recovery.
Turning to our components business, we were pleased to see third quarter railcar orders for the industry exceed bookings for the third consecutive quarter and the number of the idol railcars and storage continue to decline third party expectations continue to point to hire industry deliveries next year.
Wrapping up on 515, I'll conclude with a few comments on our balance sheet liquidity in free cash flow.
As we discussed previously we used cash on hand, and $100 million of borrowings under a revolving credit facility to fund the southwest rock acquisition that closed in August we ended the quarter, where we expected from our leverage from a leveraged standpoint with net debt to adjusted EBITDA. Two three times, we continue to maintain a healthy liquidity position and have no material.
Near term debt maturities.
We generated approximately $6 million a free cashflow during the quarter, which came in below our expectations due to a higher use of working capital.
Working capital was a 34 million dollar use of cash during the quarter, primarily due to an increase in accounts receivable a portion of the increase was due to timing as we had certain customers delay payments at the end of the quarter, which has subsequently been collected however, most of the increase reflects higher sales volumes and our utility structured business for the fourth quarter, we expect.
Working capital to be a source of cash.
Based on year to date Capex investment of approximately $61 million, we now see full year capex of approximately $90 million to $100 million about $20 million lower than our previous range. We continue to see attractive opportunities to deploy capital organically and a range reflects a slightly higher growth capex.
Outlook for the year, our expectation for maintenance cap is lower generally driven by long lead times for equipment, the decision to lease certain equipment versus by and overall timing.
I will now turn the call back over to Antonio for more discussion on our business outlook.
Thank you Gail.
Turning now to the near term outlook on Slide 17, we believe our construction products on engineered structure businesses are well positioned for continued growth in the fourth quarter with Margaret challenges within our barge in Windpower business moderating these expected gains.
First we anticipate our construction business will benefit from favourable market fundamentals with strength expected to continuing our key markets fix of Gulf Coast, Arizona, Tennessee.
Infrastructure trends spending trends overall remain positive and.
And we see potential near term upside in this business from increased federal funding abawi existing prospect levels.
We continue to integrate the acquired companies on stream streamline our operations. We recently sold the assets of 'em asphalt operation, which came with stone point and was determined not to be strategic for our calls.
Within the structures positive market fundamentals continued to drive strength from several key markets, including electric drugs mission wireless communication profit structures and storage tanks were very excited about the fundamental strength of these markets.
Of the same times are Windpower business faces near term challenges, we believe renewable energy has a very attractive future. However, I still prices I'm uncertainty around the tax incentives are delaying customer orders in some regions.
Even the short term headwinds, we're tracking taking actual store appropriately managed costs, including the idling over Clinton no facility in the fourth quarter.
This will allow us to keep our manufacturing capacity in the areas of the country.
With the highest demand potential.
Given the related cost of these actions, we expect breakeven they beat therefore win in the fourth quarter with a return to profitability of the start of 2022, where where in the early stages of planning for next year. The orders were received in the third quarter provide a good base of business were 22, helping those navigate short term headwinds and providing can.
The newly be while we wait for the market stabilize and start growing again.
Or crossword patient broke segment continues to face soft market conditions, primarily driven by the impact of Covid I'm high fuel prices from barge a month.
The order is seen a barge backlog will allow us to maintain positive or beat that gave us flexibility to ramp up capacity when the market recovers. We continue to see positive signs of a recovery in the north American railcar market, suggesting that 2021 will be a crop year for this business with an initial recovery starting in 2020.
Two.
Let's turn to slide 18.
We are encouraged by the brother National conversation surrounding federal investment in infrastructure and believe that the passage of the currently just let the package is being discussed by Congress could accelerate our growth starting in late 2002 and into 2023.
As a company serving a broad spectrum of infrastructure markets. We believe our course is uniquely positioned to benefit whether from additional investment in the agent transportation infrastructure and electrical grid, the wireless and broadband Buildout didn't go in shifts towards renewable energy sources or the improvement in our ports and waterways.
Because this packages have not been signed into law. We have not included in our outlook any potential impact from these bills, but are very encouraged by them.
Please turn to slide 19.
Metal for 2021 outlook based on a year to date performance on our expectations for the fourth quarter were tightening our guidance range or 2021, we now expected expect adjusted EBITDA of 272 million to 280 million compared to our prior range of 272 $290 million a revised for.
Okay, primarily reflects our expectations for reviews winter profitability in the fourth quarter in light of the near term challenges are disclosed earlier.
Overall, I am pleased with our expectation to nearly match last year's performance. Despite unexpected 53 million a beat the headwind from our transportation gross over a year.
The main point of our revised guidance range, we forecast a 22% increase adjusted EBITDA on a year over year basis to growth segments. Construction probes engineered structures are anticipated 2021 performance in this business reflects our continued progress in expanding our construction probe segments organically and.
Through acquisitions, while enhancing are engineered structural segment as.
As we look towards 2022 will remain committed to a long term strategy of growing because broke from folks segment engineered strokes with business.
Very encouraged by the potential outlook for significant growth as a more cyclical businesses start to return to turnaround in the future.
Please turn to slide 20, before I wrap up I'd like to spend the moment highlighting the progress we have made it incorporating ESG initiatives into our business have operations <unk> has been a fundamental component of our long term strategy and we continue to build on this commitment.
I am pleased to announce that effective November for November 1st we welcome Kimberly Lubell, former chairman President and CEO of CST brands to our board of directors. We welcome her broad expertise and insights as we advance our long term strategy ambition.
I will not that Numerate <unk> efforts, we are undertaking as you can see from this slide we're fully committed to building a cultural roam around DSG on this at the same time, we recognize that we're just getting started on the building of a new culture takes time.
In closer over the last three years I think you can see that our culture has executed successfully in our strategic priorities are made considerable progress in advancing our long term vision I want to take this opportunity to thank our employees for their support I'm effort.
I would also like to thank our shareholders for their confidence in our strategy operator, Please open the gopher questions.
[noise] absolutely at this time, if you would like to ask a question. Please press star one on your Touchtone phone you.
You may remove yourself from the queue by pressing the pound key once again, that's star one to ask a question.
We will take our first question from Sprint seal Midnight D. Eight Davidson your line is open.
Great. Thank you good morning.
Good morning.
Uhm Antonio you, obviously planning for the win portion of the structures business.
To be down in 22 I guess the question is do you think some of these other areas like utility telecom in traffic.
Got that and can you sustain these kind of 11 and 13% EBITDA margins.
We can win business.
What is.
It's a really good question Bryant as you know as I mentioned in my remarks were still in the planning for 2022, we we don't have budgets finished yet we're still working through that.
The facility were idling in Illinois software flexible facility most of our Windpower facility most of our policy still facility to relatively flexible around product lines as.
As you know we bought a few businesses in the in the in the utilities sector in the Tri profit structures et cetera, and we're working to expand those we've been very successfully getting additional work for them that we see very strong demanding all of these businesses.
The bank business is doing very well also so.
As I said, we have a good good backlog for 2022 and Windpower. So I think we have good visibility. It allows us to plan, there's still time to get some additional orders for winter hours. So I will tell you that I I'm I'm encouraged by the demand factors in the other businesses you'll have opportunities in the in the in the wind.
In the winter hours.
So I think if you put it all together we are encouraged that we have a potential to still much that margin and there's still time to do it.
That will be our goal.
In brain. Good morning. This is Gail I might add too we did guide for the segment in my remarks to a 10% EBITDA margin in the fourth quarter and that does reflect some one time costs as we wind down or Clinton, Illinois facility and that we have right past our capacity as we head into 2022.
So just to finish that we do expect profitability started coming back for winter hours in early twenties too.
Got it okay, and I guess, one on barge it seemed like the low hanging fruit here for some sort of inflection but.
Fundamental drivers seem to be pretty good your scrap rates are up I guess, what's the what's the temperature customers. Today is there any indications inquiries are improving that.
Give us some hope return next year.
Sure and I think that's that's the the what you mentioned this I think the key the key.
The key thing to watch here is the fundamentals for the market are really really good.
Coop rates have gone up in terms of the number of barge is being scrapped component to produce the hurricane did a lot of damage in too many barges, there's about 1000 barge as being.
Being.
Repaired and some are heavily damaged.
We've had four or five years of less less production than than build out the grain exports are doing very well the rates have gone up a oil demand is coming back so everything seems to be ready for this business to grow again I think there is a really strong.
Pent up demand that's being generated.
At the same time steel prices continue to be very very high.
And that is not only the problem. The problem is that the expert there's a significant this comic right now between.
It still meals are saying, if you sit down with a steel mill.
2022 is going to be a very strong year in terms of pricing.
On the other hand, you see every steal them at analyst.
Predicting a very sharp drop in steel prices early in 2022 in the first quarter of second quarter. So when you have those if you are a customer that can wait six months, they're waiting no because they think they can buy a barge of half price a year from now.
So I think that is the fundamental thing that needs to get solved and I think we will start seeing something developed broadly early in 2022, depending on who you believe in terms of the steel prices we are.
Acting as a company assuming that steel prices are coming down, we'll keep trying to reduce our inventories as much as possible.
So we don't end up with a lot of high fuel prices, but once they start robbing and think about sorry, I'm extending a little bit on this but if you think about when we are trying to negotiate prices for the second quarter of 22, right now for bargains and things like that so.
To negotiate a price with in this environment is very difficult and that's something that for our customers is difficult to accept that we we don't have clarity around still prices for the second half of next year.
Understood. Thank you Antonio Yeah.
We will take our next question from Ian Casino opened heimer.
Your line is open.
Hi.
<unk>.
Boring.
Question would be on the good side, you know can you talk to us about pricing a little bit.
You know how frequently you know, giving kind of the market how frequently are you able to.
Take price.
Maybe how many times have you taken place you're ready this year, what do you think going forward.
Yeah, I know you can't give me like perfect details, but maybe directionally or we should get some color that's really to that thanks.
Okay. Good morning, and this is Gail I'll take that as we talked about on our two to call. We did have submit ear price increases.
Those are working their way through.
In some other select markets, we might have some opportunity in the fourth quarter, but really it's about sending notices out for 2022 at this point in time.
Looking at our natural aggregates business across the market price was that broadly similar.
Similar to a up to volumes, we haven't talked about volumes, yet I'd say from a weakness perspective, we didn't see a lot of weakness with with pricing trending up and we had some softness in as you might expect in south and West, Texas, just given us those markets continue to recover but those are pretty.
Pretty small small piece of the mix them away from natural aggregates.
Yeah, we we.
We saw roughly flat volumes in our specialty materials business. That's a nice growth gross profit per unit gained on strong pricing. So I'd say all in all as we looked at the quarter. We saw similar pricing in line with with some of our larger theory, the pricing environment continues to be healthy.
Okay. So I guess as far as new pricing that would really more flow through first quarters 2022.
That's right that's right.
Perfect and and then you know as far as the portfolio can you talk to them so that the portfolio, how you're thinking about that now.
The rental businesses is parking back up it's kind of shopping out. So it is on the recovery. So yeah. How are you thinking like totally over there and then also just uses of cash.
At the moment now thanks.
Sure. This Antonio so on the portfolio site I mentioned in my remarks will remain committed to growing our construction segment then engineered structures.
The other business several very good business and we liked them all at the same time.
Our commitment is to try to review the cyclicality of the company and the complexity.
We've talked in the past about timing of these things and timing is never perfect you've been it's difficult to plan.
With our commitment is that we're going to continue to watch us markets have also that we can find the right. The right time to start executing some of these strategies.
During the quarter, we did sell a small a small business in a asphalt.
Not only were after a quarter to so this this quarter.
We sold a a small assets of us national business that came with stone.
We really determined it was not.
Strategic furrows, given the geographic presence et cetera. So we will continue to look at our portfolio and evaluate it and it's something that I said during this during the call.
We focused over the next few orders seeing as we integrate this business in a onshore and users of cash.
My my goal would be to try to generate as much cash as possible during the fourth quarter and if we do any additional sales or businesses reduce debt.
Part of the balance sheet to continue to grow and redeploy capital for growth business.
Okay perfect. Thank you so much.
We'll take our next question from Daniel Lane with bearing burn your line is open.
Hey, good morning.
Morning Glory.
Just can you just remind us how significant that wind towers portion of your business is maybe as a proportion of total is like the bills.
This is yeah I'll take that one.
Is you know in our external reporting we report when utility and related structures on one one line item, we have given color in the past.
Heading out of spin and in our in our you know kind of early part of our life cycle was about half.
Wind have utility and certainly as the as the wind market has come down you've seen utility take a bigger share of that revenue line, that's probably about as specific as I can be at this point, but keep in mind, we do as we said in our in our commentary we did receive $175 million order for wind and that is all for 2022 production.
So that gives you a good a good sense of where we are heading into 2022 right now as it relates to win.
Perfect and.
And just secondly, I guess, how should we think about longer term when's our demand assuming there is no renewal of any federal tax incentives to me.
C. A modest decline next year in a recovery from there on out or do the incoming orders, partially offset that just and you're calling me would be appreciated.
Sure absolutely I'll I'll give you a little sense of the cadence of houses. This business normally work. This is this this this reduction is not new many times when the BTC expires or is getting ready to expire and we see this this reduction in volumes.
When things get renewed and we're confident things will do something will happen.
Normally a wind farm takes about 12 to 18 months to build.
So what happens when when did this tax incentives are on <unk>, there's sort of certainty around them to create kind of this.
Air pocket in in the in the demand and.
And it takes a while for it to come back and was there was some clarity you get you started working on orders and it takes maybe we will be negotiating orders for 12 months ahead or for 18 months ahead.
Probably.
Sometimes a late 2022, a moot point to go into depending on what happens. So my guess is that winter hours will be relatively slow in 2022, we still have time to get more orders.
Throwing it away, there's still time to get more orders and we expect to get more order seafood.
If things work out us we are looking at it.
But at the same time.
We need some clarity around both steel and.
Some of the tax incentives.
In the longer term, we're very encouraged by bye bye when.
You know the shift towards renewable energy is a fact, it's coming this is a business where the disconnect between.
You know what you're reading the news that everything's moving towards renewable and the reality that we're seeing in the market is very different.
But but it eventually we're going to get there and it's longer term, we're very optimistic about this business.
Okay. Thank you.
And we'll take our next question from Gary Shameless with Blue Capital. Your line is now open.
Alright, Thanks for taking my question wanted to follow up on construction products pricing, you're recognizing you put through a major price increases in several markets, which should help kick.
Price and grow for for next year, but several do construction product Pierce, we've been talking all the aggregates pricing both conceptually.
In in their preliminary guidance for for 2022, So I just want to get your view.
On pricing your outlook more broadly.
The next year and maybe the Orange we expect.
Pricing to to accelerate for you as well.
Yeah. This this is a antonio Connecticut so.
I think what you see in her construction peers when when you.
We read all the comments and everything.
And in many in many markets, we see them and we we are competitors and I think we see similar market conditions than the C. E. In many of our markets here in Texas, where we have a large share.
I think we see the same credits when we have the same goals. We have there's a lot of inflation happening and we have to pass through price increases and that's going to be our goals for early for whereas we've talked me into 2022.
But I think conceptually the way you should think about our aggregates portion of their business is very similar to what you hear from our competitors. That's our goal to continue to raise prices.
Themselves.
[noise] advantage occur in the environment. So.
There is nothing different from our business than what you hear from our competitors.
Great I appreciate that and then this is my follow up question also stinker construction products I was wondering if you could probably a little more color on the organic sales growth.
The quarter.
<unk> yoga feels.
We're derived from required us.
Yeah, Good morning, Garrick I'll take that scale.
Parsing through the segment for the quarter and maybe start with what maybe.
It may be easier for you to see is our trend shoring business, which is reported as other and we saw very nice revenue growth in that business all organic year over year close to 40% revenue growth you know recognizing at the smaller piece of the segment looking at our aggregates in our specialty materials the <unk>.
Primary driver.
Given the fact that we did our largest acquisition in the company's history in April followed by southwest draw from a revenue perspective was was the addition of those two to the portfolio. We did have a little left from Ah late too early queue for acquisition.
Last year, so, but but stripping those away we saw very solid organic revenue growth in our legacy.
<unk> business.
Both on a specialty side as well as on the on the natural aggregates side.
Anecdotally.
When you talk to our team.
In our meetings to follow up on how they're seeing the market.
Several of them you are seeing very strong.
Projects for Ya glaring in many areas. It takes us he has one it wasn't one for example, but also Arizona, Tennessee, where they are seeing very very strong letting some very new projects being awarded so I think.
What's important to me those.
Sentiment of our team is very optimistic very very strong market at the moment it.
Maybe just cut to add on to that got to help them out a little bit and we will disclose you'll see standpoint revenues in the queue therapy back off stone point and make an assumption on southwest rock based on what we we've provided externally you're somewhere around $150 million ish area X those too and that compares to.
About $129 million last year, so nice growth on the on the organic site.
Okay. Thanks for that email pet's name.
We'll take our next question from Stephano.
Chris with C. J S Securities. Your line is now open.
Hey, good morning.
Good morning speaking of you know the the acquisitions of Stone point, then you know more recently southwest could you just give us some more color on the integration of those anything unexpected in terms of senator user costs that we should be thinking about.
No Stefan.
I think it is going very well, we're very happy with both acquisitions.
As I mentioned.
When you buy bigger companies like stone point, specifically become sometimes with 99% or 95% of what they have you like them, 5% is not strategic and that's why we sold this asphalt that there was nothing wrong with it it was just that it didn't fit.
But for the rest is going very well I think.
Company. These two acquisitions and that's why we're taking the time to integrate them well as a company you know I mentioned, it's almost 60% of already beat them now in this quarter came from construction products, we're becoming a more construction both centric company.
So the integrations. These two integrations are very important we are implementing a new ERP system very specifically for a construction segment that will allow us to manage the business differently from a.
Manufacturing company.
We were three years ago basically.
Is going to take us a while is going to take was probably 2022 complete to finish that.
That implementation, but that will allow us to get more data to be able to analyze our business better to report better for you to become more a construction centric reporting company.
Is more similar to our beers, we are clear that's what we need to go and that's where we're going it's going to take some time, but.
We were using these two integrations are so as a model to continue moving forward and we're very excited I'll tell you not only the all excited about the business, but excited about the talent, we brought with the businesses.
We have we we brought incredible talent, that's allowing us to reshape our internal structure doors for different regions now in our aggregates business and be able to be very diligent I'm very disciplined are on the pricing our volume. So overall very excited about not only the the business in themselves.
But also what these business are allowing us to to the local signed to soap very excited about bold.
That's a great color. Thank you and then Leverages two three times within your longterm range.
How comfortable are you going above that and you know in terms of M&A. If there's just the right opportunity presents itself.
So yeah as we've said two to three there's nothing magic around that it's just a a.
Or 2.5 is this is where we feel comfortable given the cyclicality of some of our businesses.
The way, we are conservative around our leverage ratio.
We've always say that it's 2.5 with some sort of a mid cycle cyclical businesses. So.
In that sense, we are at the bottom of the cycle. So we have some leverage if something great would happen.
We might think about it but at the moment as I've said the focus is not there we continue to analyze her markets and we have very specific aim, let's say fiddler's.
Failure is looking for opportunities in the markets, we like but at the moment.
Folks who is going to be first we need to generate cash in the fourth quarter. That's been I will tell you some of the focus of organ probably in the fourth quarter is generating cash second.
We're going to be focusing on the integration of the business and I'm third there's some really great organic opportunities that we have internally that we need to finalize I'm going to start investing in there in the beginning of 2022 and then finally as I've said and I responded to the previous question some of the simplification of the <unk>.
Portfolio, so that we can deploy.
Review some of our data and continue to redeploy that.
Capital Indoor construction segment, so I think you're going to <unk>, probably six to nine months working on these projects.
But at the same time, we're going to continue to feel the the market and see if there's any interesting things that we can start working on this deal steak time. So it's it. So I think we have good time in front of us.
That's great. Thank you for taking my questions.
We'll take our next question from Leo.
Vermont Romero with Siddhartha income many your line is open.
Hey, good morning, Antonio Yale Thanks for taking the questions.
Good morning.
Hey, so I wanted to ask more on the construction product segment and.
You touched on the E R P that you're implementing.
Are you moving to recent acquisition to to an existing ERP or is this a completely new York's system, you're implementing and then secondly, Antonio you mentioned I believe that it should be completed the integration by end of year 22 that that that seems.
Pretty fast.
So is that correct and day, you should see for your benefits and twenty-three from European.
Yeah. So the the ERP will not implementing a completely new one.
That's as some said you know we we are.
Unique company in terms of the way we approach acquisitions I think that.
We.
I think there's great things that are of course brings to the table. When we acquire companies book. We also looking always to see what the acquisitions bring to work also.
Not only terms of talent that I already mentioned, but if you think about.
Most of the acquisitions, we both came from another acquisition. So we bought ACG Cherry came from an idea from ACG recently cells was broken what's already in the works for stone point so.
When we approach acquisitions, we approached them not only as a.
Part of the business, but also we approached I'm looking for things. They have that are very valuable and tried to execute on them and add value to the ideas that they already have.
In that sense.
D already had a good ERP system.
And.
When we saw it it's much better than what we have for a construction segment too. So we are bolting all all bolting on the businesses to the ACG ERP system, and that's why it's going to be probably faster than normal hundred percent implementation also much cheaper no and at the same time, we already have it we know what we've tested it so.
<unk>.
So so we are very happy with being able to to to bring on a system that's working into our culture.
Understood and then secondly, the press release and I believe in your commentary you mentioned you touched on the reorganization of your <unk>.
I agree it's into four regions can you talk about what that reorganization does for our kosta neither from a synergy perspective aware from a communication perspective.
Sure. It's I think it's very important that you know we've grown a lot.
I'm convinced.
Convinced that the structure fallow strategy.
And the structure that we are we are creating a.
Functionally that we'll be able to support our growth strategy.
Think about it we have about 25 minds of three years ago, we have over 100 today.
You need you need a lot of a more.
You need more supervision you need more.
Am I.
I would say.
Thinking around strategic opportunities in each one of the regions you would need to think about the organic growth you need to think about pricing you need to think about synergies in each one of the regions. So we now have four regions. We have the west region, we have techs us we have the Gulf Coast, and we have the Ohio River Valley region.
With Great management, all very experienced management each will have their controller will be able to we're working towards developing.
Developing the financial structure internally to be able to manage it that way.
But I think it's going to be very important for us as we grow to have to have this structure and continue to grow to to support the growth strategy that we have so.
I think as we stare step the growth of our call. So this was very important to create so that we take the next step and for the integration. It's also important.
Understood if I could sneak one more in here the receivables balanced picked up a bit in the quarter and I think you mentioned part of that was the higher sales volumes and utility structures does that business have a have a structurally longer cash conversion cycle and and how does dsos trend over the next couple of quarters.
Good morning, Julio This is Gail yeah. They're good question, we didn't talk about a couple of things as it relates to an hour and a quarter.
Some collections that were a little bit delayed does came through at the early part of the fourth quarter and then the higher and mix really as the utility structures receivables.
And they do carry a slightly.
Longer DSO relative to some of our other businesses.
You're seeing that all very strong high quality customer as utility customers, but they they do have a little bit of a.
Industry norm longer DSL than than some of our other businesses. So rolling that through their cash conversion cycle is a is a little bit longer.
About a little bit you know throughout the the last year and a half I will tracings. The pandemic started that was something that we.
Putting a lot of attention on our collections, especially when there is.
Economic slowdown like we have last year.
That's always something we watch I'll tell ya.
Qualitatively, we have an incredibly <unk>.
Good.
R M. A process and we have a very solid we don't have a problem with collections. This was just a deal of some some delays, but qualitatively we have a very very healthy.
Our aim collections right now.
I guess I just as it specifically relates to utility Hulio I think if you were to look at some peer comparisons are DSO isn't isn't anything different from what you would see it in other other peers in the industry.
Got it thanks again for taking my questions.
[noise], we'll take our next question from Noah Macaskill with Steven Your line is now open.
Good morning, and thanks for taking my question.
Good morning.
He'd been asked and answered.
But I was hoping to talk a little bit longer term outlook for the construction products EBITDA margins you know for entering a period of strong demand and we started improving price and volumes and you get these accusations fully integrated what sort of EBITDA margins could we see on that.
Good morning, Noah This is Gail I think.
That's a good question, where we're very focused as I said in some of my commentary earlier, you may have nest on expanding our gross profit per unit and certainly that's helpful to margins at the same time.
We are in an inflationary environment and we are trying to mitigate the impacts of that so we had a very healthy margin and a quarter, 24% for the segment.
I'll see some normal seasonality is with as we head into Q4, but our outlook overall is generally positive as it relates as it relates to our construction margins, we're doing everything we can to enhance.
Enhance expansion enhanced pricing and expand that gross profit per unit. So.
I don't think I can give you a specific target, but I think we had a.
The first half of the year, if if you recall it was difficult from a weather perspective with the winter storm Uri and then the excessive rainfall we had in queue too. So as we as we look to 2022.
We would hope to see a slightly better first half from our weather perspective, but we'll see.
No. This is Antonio just to add to to build on gail's comment.
You think about the construction products the two areas that we saw the most weakness in 2020 given COVID-19.
Shoring.
Some of them are lightweight business.
And also some on our specialty materials.
Business.
As we continue to grow the aggregates portion of our business that BCC, let's say easier to to to to forecast because as I said, we're similar to the rest of our competitors, we should see similar margins, we should see similar diner.
Dynamics when the specialty materials.
Gail mentioned assuring piece has recovered two prepandemic levels and were encouraged and we're very happy with the growth. We're seeing lightweight aggregate has recovered and is having a great year and we're seeing very very good demand and very very strong fundamental for margins there.
Specialty materials, even though we're growing it's still it's still slower than than we expected them, it's affecting a little bit of our our our margin.
And finally, we've mentioned in the past and some of our goals. We did have some oil export oil and gas exposure and some of the oil fields, which was a headwind for us in the last few eh.
For the last couple of years.
And now we're seeing so much from drilling come back in West, Texas, where we have operations, we're seeing some drilling come back in Pennsylvania, where we have operations. So that should also help us accelerated margin expansion, which is our our goals. So that's probably a little too much color, but the the goal is to accelerate our margin growth behave various.
Similar to our competitors in our aggregates them on.
And work on our specialty materials and lightweight ensuring too to be accretive dorm overall construction markets.
Okay.
That's really helpful color and then just switching gears here for my follow up.
If the engineered structures.
News or seeing higher prices because of steel inflation, we start to see pricing decline.
The steel prices crash, where can you hold on to those higher prices you know I guess, what's happened historically and if you do if it is the case that you get back from price what does that mean.
The margin.
Yeah.
Yep.
We have three types of businesses.
And that are very different than the way. They used you I'll start with the engineered structures, which is where you started.
That business has we have contracts with with customers significant portion of our business is a longer term.
Contracts or agreements literally contracts or agreements for volume for the year, where we have a pass through.
Under certain terms, so if the price goes up or down more than mix. We can pass it through I'll put it on a over a certain period of time.
So sometimes couldn't prices are going up this business may suffer for a for a quarter or so if they are.
Not being able to pass it through we've been a very successful at doing it our margins.
Overall and utility structures are higher.
Within the mix them they were years ago, a year ago or two years ago, they were going up and they're doing looking very good.
As they come down.
You will see prices coming down a not immediately but maybe in the next quarter just like it when it goes up it's a quarter by quarter or more of my mom's, depending on the customer. So you will see prices come down.
That's why I've been saying that we're focusing on inventories because it's important that you carry a lot of inventories are still comes down that's one type of business. We had a second type of business, where there's complete possible and that is barges in winter hours, where we basically have agreements with the customer and the steel milsom we need.
You'll shape longer term contracts with both of them we pass it through completely so you will see prices coming down there and there's kind of a a a there's kind of a built in a margin into our contracts, where you will see margins going up us as we are still prices come down.
And the third one is the bill to build the bill to Stockholm.
<unk> talked about for example in our tank business those are businesses, where it a little more.
Politically speculatively cause you by the steel you make the tanks and wait for someone to order that there's really no backlog there.
Those are the ones that you run a little risk when it's coming up because you might you might be a where you might.
If you're not fast enough and raising prices you might be caught up but we've been very successful our margins have gone up quite a bit in doing last year and I think this is the business we're in.
When prices come down you can hold onto the margin more because prices will come down and you will not bring down the prices as fast or you might not bring them down.
At all depending on the the market demand. So I think within the three of them <unk> margins us as prices come down to my expectations will be margins to continue to hold or even expand a little bit.
But we have to be very agile and doing it though I hope I give you gave you an off color I'm still.
Yeah, Yeah that was really helpful. I appreciate and I'll leave it there.
[noise]. It appears we have no further questions at this time I will now turn the program back over to Erin draping additional comments or closing remarks.
Thank you and thank you everyone for joining US today, we look forward to speaking to you again next quicker.
[noise]. This does conclude today's program. Thank you for your participation you may disconnect at any time.
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