ACA - NYSE

Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. Second Quarter 2024 Earnings Conference Call. My name is Britney, and I will be your conference call coordinator today. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Erin Drabek, Director of Investor Relations for Arcosa. Ms. Drabek, you may begin.

Good morning, everyone, and thank you for joining us. Today, we will discuss Arcosa's second quarter 2024 earnings results as well as provide a strategic update. With me today are Antonio Carrillo, President and CEO; Gail Peck, CFO; and Reid Essl, Group President for Construction Materials. Antonio will begin with some brief comments on our second quarter results and strategic update. Gail will provide additional details on our financial results and guidance. Then Antonio will discuss the Stavola acquisition and other portfolio enhancing actions we announced yesterday, before we open the call for questions. 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 two weeks. Instructions for accessing the replay number are included in the press release. 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 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, and good morning, everyone. It's an exciting time for Arcosa. Our second quarter was highlighted by several events, which on a combined basis demonstrate the steady advancement of our long-term strategic vision to grow in attractive markets and to reduce the complexity and cyclicality of our business. Let's start on Slide 4. Yesterday we announced strong financial results, posting record quarterly revenues and adjusted EBITDA, while expanding adjusted EBITDA margins. We also raised the low end of our 2024 full year adjusted EBITDA range. Importantly, we ended the quarter with a healthy balance sheet. We also announced value-enhancing portfolio actions to accelerate our long-term strategy. We have entered into an agreement to acquire Stavola for $1.2 billion, the largest acquisition in Arcosa's history. As a leading aggregate-centric and vertically-integrated construction materials company, Stavola expands our geographic footprint into the nation's largest MSA, with increased exposure to lower-volatility infrastructure-led end markets. We also executed a definitive agreement to divest our steel components business and completed the sale of other non-core assets for a total consideration of $137 million. Pro forma for the transaction as of June 30, Construction Products would represent 65% of Arcosa's adjusted EBITDA on an LTM or last 12-month basis. And consolidated pro forma LTM adjusted EBITDA margin would expand approximately 220 basis points. As we discuss these important announcements, you will hear three major themes today that align with our strategic vision. First, our businesses have strong momentum. Second, with the divestitures we announced, we are taking decisive actions to optimize our portfolio and enhance the quality of our earnings. And third, with a great team, strong market fundamentals, good cash flow visibility and a solid track record, the time is right that Arcosa is ready to take on a transformational acquisition and temporarily increase our leverage. I will discuss the acquisition and divestitures in more detail later, but let me give you some additional color on how our businesses are performing. Turning to Slide 6. Second quarter consolidated revenues increased 14%, and adjusted EBITDA grew 31%, reflecting 230 basis points of margin expansion. On an organic basis, we generated strong double-digit adjusted EBITDA growth, led by the market recoveries underway in our cyclical businesses and operating improvements in our specialty materials and utility structures business. This was augmented by the accretive contribution from recent acquisitions, including Ameron Pole Products, which we acquired in April, and several aggregate the bolt-ons which we completed in Florida, Texas and Arizona last year. The integration of Ameron is progressing well, and we are pleased with the complementary fit within our existing footprint. Also of note, we delivered the first wind towers from our new plant in Belen, New Mexico, which is performing in line with expectations and should become less dilutive to margin as deliveries ramp up. Our aggregates business continues to benefit from strong pricing momentum during the quarter, which together with disciplined cost control, compensated for volume headwinds due to elevated rainfall, particularly in Texas. Our strong performance in the second quarter demonstrates the strength of our infrastructure-led company, which has benefited from increased scale and more resilient platforms. We're very pleased with our year-to-date results and the underlying trends in our businesses remain very positive. As you can see, we had an extremely productive second quarter. I would like to recognize all our employees for delivering a fantastic quarter while, at the same time, executing on the transformative transactions. I see all the work that is behind these accomplishments and want to thank everyone for their incredible commitment to this great company. I would like to turn over the call to Gail to discuss our second quarter results in more detail. Gail?

Thank you, Antonio. Good morning, everyone. I'll begin on Slide 8. Starting with Construction Products, second quarter revenues increased 4% year-over-year. On a freight-adjusted basis, revenues increased 6%, with growth split evenly between organic and acquisition contribution. Second quarter adjusted segment EBITDA increased 22%, primarily due to the accretive impact of recent acquisitions and the operating improvements in our Specialty Materials and trench shoring businesses. Freight-adjusted segment EBITDA margin expanded to 28%, up 360 basis points year-over-year and 160 basis points sequentially from the first quarter. Turning to our aggregates business, which includes both natural and recycled aggregates, pricing momentum remained strong with average organic pricing up low double digits in the second quarter. The contribution from acquisitions was accretive to overall average selling prices. Total volumes were down low single digits and organic volumes were down mid-single digits. Elevated rainfall constrained volume in the quarter. However, demand has been favorable when weather conditions are normal. The accretive impact of recent acquisitions and modest organic growth resulted in low double-digit adjusted EBITDA growth, accompanied by higher margin year-over-year. Within specialty materials, freight-adjusted revenues increased low double digits, driven by strong pricing gains in lightweight aggregates and higher volume and pricing in plaster. Operational improvements in this business resulted in higher adjusted EBITDA and contributed approximately half of the year-over-year margin improvement for the segment. Revenues in our trench shoring business increased on higher volumes. Operating improvements resulted in higher adjusted EBITDA and margin expansion. Moving to Engineered Structures, revenues increased 33% due to higher utility structure in wind tower volumes and the contribution from the recently acquired Ameron business, which drove about one-third of the increase. Adjusted segment EBITDA grew 48%, outpacing the increase in revenues, and margin expanded 160 basis points. Strong organic growth in both wind towers and utility structures was supplemented by the accretive impact of Ameron during the period. Organic margin was up approximately 110 basis points year-over-year and roughly 300 basis points sequentially, due to improved margin within utility and related structures and less dilutive impact from the ramp-up at our two new facilities in New Mexico and Florida. Order activity in utility structures remains healthy with attractive margins. In wind towers, we did not book any new orders during the quarter, but we continue to have active discussions with our customers on future needs. We ended the quarter with a backlog for utility, wind and related structures of $1.3 billion and expect to deliver 37% during the remainder of this year. Finally, we recognized a gain of $7.5 million from the sale of a non-operating facility that supported a previously divested business. This gain has been excluded from adjusted segment EBITDA. Turning to Transportation Products. Segment revenues were roughly flat as higher barge revenue was mostly offset by lower Steel Components revenue. Barge revenues increased 4%, driven by higher hopper barge volumes. Adjusted segment EBITDA increased 7% and margin expanded by 90 basis points. As expected, margin declined sequentially from the first quarter as one of our barge facilities prepared to change over to tank barge production. During the quarter, we received barge orders totaling approximately $33 million, primarily for tank barges, representing a book-to-bill of 0.4. Orders for liquid barges continue to demonstrate momentum for a third consecutive quarter and inquiry activity remains solid. Our total barge backlog at the end of the quarter was $252 million, roughly flat at the start of the year, and we expect to deliver approximately 70% during the remainder of 2024. I'll take a moment to briefly address our cash flow and balance sheet position. Year-to-date, we have generated $119 million of operating cash flow, which is down $36 million year-over-year due to increased working capital requirements primarily related to higher receivables as our cyclical businesses ramp up. Year-to-date capital expenditures were $102 million, up slightly from the prior year. This translated into year-to-date free cash flow of $24 million, down $58 million from the prior period. We are maintaining our full year CapEx guidance of $190 million to $205 million. We ended the quarter with a healthy balance sheet to support the acquisition of Stavola, with net debt to adjusted EBITDA of 1.5 times and available liquidity of $393 million. I'll conclude on Slide 9 with some comments on our increased 2024 guidance. We are very pleased with our year-to-date results. Our businesses are healthy and performing well. Accordingly, we tightened our full year 2024 revenue guidance range and raised the low end of our adjusted EBITDA guidance range. The new adjusted EBITDA midpoint of $430 million represents 24% growth year-over-year, adjusting for the gain on land sale, with 120 basis points of anticipated margin expansion. And this revised guidance is before any adjustment for the newly announced strategic actions. I'll now turn it back to Antonio for further discussions on yesterday's announcement.

Thank you, Gail. Let's now move to yesterday's strategic announcements, which optimize our portfolio and enhance the quality of our earnings. First, on Slide 11, we are excited to announce the $1.2 billion acquisition of Stavola, a leading provider of construction materials with a strong position in its core New York, New Jersey markets, the nation's largest MSA. The acquisition enhances our construction products platform with high-margin vertically-integrated aggregates and asphalt operations. With LTM adjusted EBITDA of $100 million, the purchase price represents 12 times gross multiple and 10.7 times net multiple, including expected net tax benefits. Based on Stavola's financial attributes, we expect the acquisition to be immediately accretive to free cash flow per share, neutral to cash EPS in 2025, and accretive to cash EPS in 2026. HSR and regulatory approvals have been obtained, and we anticipate the transaction will close in the fourth quarter. Turning to Slide 12. Stavola is aggregates-led, which is an attribute that we prioritize in an acquisition screening. Aggregates provide 56% of adjusted EBITDA, and the FOB asphalt operations are highly integrated with its hard rock quarries. Stavola's industry-leading adjusted EBITDA margin of roughly 35% on an LTM basis is highly accretive to the Construction Products segment and to Arcosa overall, demonstrating a strong competitive advantage. The company has been in business for close to 80 years and has built a strategic network of five hard rock quarries and three recycled aggregates facilities that produce approximately 5.7 million tons annually. They also have 12 strategically located asphalt plants, which for the most part deliver their products FOB to plant. The company has approximately 350 million tons of estimated hard rock reserves. Stavola brings a talented and experienced management team who will continue to run the company, and we look forward to welcoming them to the Arcosa family. Turning to Slide 14. We're also optimizing our portfolio in other ways. Reducing the complexity and cyclicality of our portfolio has been a pillar of our long-term strategy since inception. Yesterday, we announced the sale of our steel components, one of our cyclical businesses that primarily serves the North American railcar industry, to Stellex Capital Management. With the LTM 2024 revenues of about $150 million, our Steel Components business was small and not core to Arcosa. Following the COVID downturn, the business can -- the business ran roughly at breakeven EBITDA levels in 2021 and returned to profitability as market conditions improve, with LTM 2024 adjusted EBITDA margin dilutive to both Transportation Products segment and to Arcosa overall. The transaction is expected to close in the third quarter. I want to personally thank all the employees of our Steel Components business for the incredible work they have done over many years. I have had the privilege to get to know many of our employees in Pennsylvania, and they will be missed by the Arcosa team. At the same time, we found a new owner with a focus on the rail market, who will be able to support the goals of this business. I look forward to seeing all the great things you will achieve in the future. In addition to selling the Steel Components business, we continued pruning our portfolio in the second quarter. First, we sold a non-operating facility in Engineered Structures. We also sold a subscale asphalt business, which was operating at a loss. Total consideration for the three divestitures was $137 million, and will be used to reduce debt. As we continue focusing on our margin, during the quarter, we also closed a small underperforming aggregate operations in West Texas and redeployed the equipment to other locations. Turning to Slide 15, let me add some additional color on the strategic rationale for the transactions. Stavola is an excellent fit for us and a key to our overall strategy of growing in attractive markets. It's a transformative acquisition, not only in terms of scale but also in terms of our geographic footprint, which upon closing will include a sizable presence in the largest MSA in the country. The company is well positioned in this stable infrastructure-led market with facilities ideally located to service approximately 85% of New Jersey's population. Additionally, we believe this acquisition will provide a platform for future growth opportunities that represent an attractive valuation for a scaled aggregates-led business with premium financial attributes. These transactions demonstrate our commitment to increasing our exposure to higher value-add Construction Products while simplifying and optimizing the portfolio to reduce higher earnings -- to produce higher earnings and profitability. Slide 16 shows Arcosa's expanded geographic footprint, including Stavola. We will now operate in 13 of the top 50 MSAs, up from only 5 in 2018. Moving to Slide 17. You can see the breakdown of Stavola demand drivers. The company is over-indexed in -- or to infrastructure demand, both in aggregates and asphalt, providing stable demand. Slide 18 shows how the acquisition enhances our Construction Products portfolio. The pro forma portfolio mix has aggregates and aggregates-based products accounting for 76% of the segment's LTM revenues. On a pro forma basis, our Construction Products adjusted EBITDA -- adjusted segment EBITDA margin expands by nearly 260 basis points to 26.1%. We're taking strategic actions that are expected to drive strong sustainable growth. This acquisition and the divestiture of Steel Components underscores this as shown on Slide 19. At the time of our separation in 2018, Construction Products accounted for about one-third of total Arcosa EBITDA. Pro forma for the Stavola acquisition and the sale of Steel Components, Construction Products will account for roughly two-thirds of our total adjusted EBITDA. This marks an important inflection point in our business as these strategic actions accelerate the execution of our long-term vision shown on Slide 20. Today, we have added a fifth pillar to our strategy, our commitment to a healthy balance sheet through prudent deleveraging. This will be our priority in the near term. As shown on Slide 21, over the past six years, we have strategically invested to expand our Construction Products business, both in terms of product lines and geographic regions, because we are attracted to the long-term market fundamentals, sustainable competitive advantages and the fragmented industry structure. To-date, we have invested approximately $1.5 billion focused on aggregates-led opportunities. We have purchase price of $1.2 billion, Stavola nearly doubles that investment in Construction Products. This transformational acquisition will increase our leverage beyond our targeted range in the near term. So I would like to take a few minutes to discuss why this is the right time for Arcosa to take on this acquisition and temporarily increase our leverage. First, as our recent results demonstrate, each one of our businesses are performing well. The outlook for our growth businesses is bright with healthy market fundamentals and increased infrastructure spending. Furthermore, our cyclical businesses are seeing positive market indicators, and we anticipate a multiyear up cycle for both wind towers and barges, supported by our current backlog visibility. Taken together, we have good line of sight to increase cash flow generation, which gives us confidence to take on additional financing. Second, for the past two years, we have made sizable investments in growth capital expenditures. Most of these projects are complete or on track to be completed by the end of the year. As these plants ramp up, they will start contributing to our organic growth and provide incremental cash flow. At the same time, we plan to reduce growth CapEx in the near term and focus on reducing debt. We also have opportunities to generate cash by focusing on working capital reductions. Third, we have successfully completed many acquisitions over the past six years. We have an experienced team and improved systems that allow for effective integration. An opportunity of this size does not come around often and Arcosa is in a healthy financial position to take advantage and grow our platform. The purchase price for Stavola will be paid in cash, and we have committed financing in place. For permanent financing, we plan to tap the long-term straight debt market. On a pro forma basis, our leverage ratio is 3.7 times, and we are focused on delevering the balance sheet. We have a proven track record of paying down debt quickly following execution of acquisitions, as you can see on Slide 22. With debt reduction as a near-term capital allocation priority, our goal is to return to our targeted ratio of 2 to 2.5 times net leverage within 18 months of the acquisition closing date. We're financially disciplined and firmly committed to maintaining a healthy balance sheet. Before opening the call for Q&A, let me return to my primary message, which is that our strategy is working, and we continue to focus on profitable and sustainable growth. In almost six years, Arcosa has made significant progress. We are pleased with our results for the first half of 2024, and we are well positioned to create additional long-term value for all our stakeholders. As I reflect on how far we've come and the initiatives we have underway for 2024 and beyond, I am the most excited - I have ever been about the future potential of Arcosa. We're now ready to take your questions. Operator?

Thank you. [Operator Instructions] We'll take our first question from Ian

Hi, great. Thank you very much. Congratulations on everything all around here.

Thank you, Ian.

Wanted to ask you, on the acquisition, as far as the market location, I know it is getting into a little more of a market, but is there a further opportunity to maybe consolidate around that market? Is this going to be a platform to do so? I know you have some deleveraging to do in the medium term. But how do we think about this longer term and how it fits into the portfolio? Thanks.

Yes, I'll give you some color, Ian. It's a very, very stable market. When you look at the financials over a long period of time, are very stable, with high margins, a very good market. This company has done a great job expanding over the last several years. And there are opportunities to consolidate not only in the main market of the New York, New Jersey area, but they also have other quarries around it. So there are opportunities. One thing that's very interesting when you look at the competitors in the region, you have many of the big guys around it, which is something we like. We like to compete against some of the larger peers. But there are also some smaller bolt-on opportunities for the future. As I said before, our priority right now is deleveraging, and that's going to be our focus. And there are opportunities to grow organically, and implement some other actions to improve efficiency, et cetera. But also to learn from this company. This company has done a fantastic job and there are things we can bring to them, but there are also things we can learn from them. So very excited about it.

Okay. Thank you. And then just as far as order inquiries and the backlog in the order book on both sides. On the wind side, are we expecting a pretty large order to be coming your way? And if so, how do we get there -- or how do you guys get there to seal that deal? And then on the barge side, in discussions with customers, how are they now talking about steel prices? Are we at a level now where we can maybe reach mid-cycle EBITDA in that barge business? And I think before you've thrown out something north of $50 million as far as of a mid-cycle EBITDA number for that business, maybe $60 million or $70 million. Maybe help us understand where we are in that process as well? Thanks.

Sure. Let me start with wind. I've said this a few times, but wind is a business that we don't expect to get $10 million here and $10 million there. It's a very consolidated market. So there's really two big players in the U.S. and some smaller players in terms of customers. And I think, if you think about the Inflation Reduction Act that was passed just a couple of years ago. The time to develop projects, and we're spending time with developers and other people talking, that it takes time for these projects to get developed. And normally, when we get orders - large orders for towers, it's not for - New Mexico is specific, because we have a specific order for a specific project. But in general, we get a blank order for a region, for a certain part of the country. And there's many wind farms being built there. So, I think as our customers build their book and they get more clarity on the amount of projects and the size of projects, et cetera. We're in discussions with them, as Gail said in her script. And it is - it might not be this quarter or next quarter, but it's going to - we expect - our plan is to continue ramping up our production. As I've said before, we operate a relatively low capacity still. So I think over the next year or so, you should see us get additional backlog. And that's our expectation to get additional backlog over the next year. Right now, we have very good visibility into 2025. So, we are in a really good spot to be able to - we don't want to give away the capacity. I think we have a very nice position to negotiate good agreements with our customers over the next year. On barges, Gail mentioned specifically, on liquid barges, we continue to see very, very robust demand. When you look at the latest report, liquid barge - the fleet for liquid barge is about the same age as the dry cargo. And normally, liquid barge customers are a lot more demanding on the quality and how they keep up their barges. So we're seeing really good things. We launched in the last couple of weeks, our first 30K in our plant in Ashland City, that, as Gail mentioned, we have transitioned from dry cargo to liquid cargo. So both of our plants are in their sweet spot of the products they need to be making. I think the mid-cycle, the previous high bar for the business about $120 million in terms of EBITDA, so mid-cycle with something around $60 million or so. Right now, what we're focused on, again, seeing the demand that's going to come, because of the age of the fleet and the replacement that's needed. And when you see the utilization of the fleet, it's very high. What we want to conserve is our capacity and be able to focus on margins and sell it at a nice place. Steel prices are helping. Steel prices have come down a lot. So we are - I think those things are converging for us to continue to focus on gaining market - gaining pricing and margin on the backlog. So I'm not worried that we had a low book-to-bill this quarter. I think we're in a good spot. I think we have really good visibility into 2025. And what we're focused is on making sure that when we get orders, we get the right margin for them.

Okay. Great. Thank you very much.

Thank you. We'll take our next question from Julio Romero with Sidoti & Company. Your line is now open.

This is Alex on for Julio. Congrats on the quarter and thanks for taking questions.

Thank you, Alex.

Absolutely. On the acquisition, how would you have us think about further portfolio simplification?

Well, Alex, I think it's, as part of our strategy, as I mentioned, is always to simplify and reduce the cyclicality of the company. I think there's always opportunities for simplification. As I've mentioned before, M&A both on the buying and the selling side, sometimes it takes a life of its own, I said it several times. Sometimes you buy things that you want to appear out of nowhere, or sometimes when you want something - it's not available. Same thing when you want to sell. We need to - every business we've sold, the conditions have to be right. The buyers have to be in the right place. So I think we will continue to simplify the company. But it's going to take some time. And as far as show - to show you that we are committed, we just sold Steel Components. Two years ago we sold our tank business. So, we'll continue to move that way. And also, it also depends on the capital allocation. If we simplify the company, we have to have, as we did this quarter when we sold the business, but at the same time, we have places to put it and continue to move our portfolio in the right direction. So it's fine-tuning, I would say, but it's - I think the strategy is working. I think we have some clear path towards continuing to move that way. But it's going to take some time.

Okay. Thanks. So I guess to summarize, post-closing capital allocation, you're not ruling out further simplification or M&A, but you are going to be focused on the deleveraging?

Yes. I think you should see us focus on deleveraging. We're reducing our CapEx - growth CapEx, as I mentioned. We're finishing all these plants that we've been building. We're going to reduce our fees. We're not going to reduce maintenance CapEx. And the goal will be to reduce our leverage. And once we do that, we'll be able to continue with our M&A strategy.

Great. Yes. Thank you for the context. And just switching gears a little bit. Could you give us an update on IIJA, and any impact or whether you're starting to feel that at this point?

Well, it's, anecdotally, as I've said, you - we don't get specific projects that we know exactly where the money is coming from. But anecdotally, we're seeing more and more bidding and letting in many of our states. So I would say it's been slower than expected. But I think little-by-little, we see more and more larger projects being awarded. So I think we're seeing portions of it. I cannot tell you exactly how much of it is coming. But what I can tell you is when you look at the volume reduction this quarter, a lot had to do with weather. As Gail mentioned in her script, when weather is good, the demand is strong. And we continue to see strong demand, across the board in our business and pricing momentum continues to be good. So overall, happy with what we're seeing.

Appreciate the context. Thank you very much.

Thank you. We'll take our next question from Trey Grooms with Stephens, Inc. Your line is now open.

Hi, good morning, everyone. It's Trey Grooms. First off, congrats on the Stavola acquisition. It looks like a great fit for you guys. And so we kind of look - so as we look at kind of layering in Stavola, I'm guessing that could change the seasonality of your business somewhat. Any color you could give us there as we kind of think about our models?

Good morning, Trey. I'll take that. It's Gail. Yes, so operating in the Northeast certainly brings a little bit more seasonality to our construction business. We're accustomed to seasonality as it is today with us on being - our seasonal low point. But as we think about the impact, and we've looked over the last few years, looked at maybe the relative impact on our segment. I'd say it's probably in Q1 about 175 basis points on average, maybe dilutive to our Q1 segment margin. But as you see the full year margin of 35%, it is absolutely accretive on a full year basis. But you will see that seasonal step-down a little bit more pronounced. Maybe not as pronounced as some of our larger peers that have exposure to colder weather, but it will have an impact.

Yes. Okay. Thanks Gail. That's super helpful. Also, I guess maybe another one for Gail, on the updated guidance. Any color you could give us on the on the cadence for the back half for the legacy business? Clearly, you guys have a lot going on with the portfolio. But outside of the portfolio announcements last night, anything we should be aware of there as we think about kind of the back half and the cadence as it relates to the updated guide?

Yes. I think as we've always said at the start of the year, our second half was going to be stronger than our first half. We are very pleased with our first half results. But if you look at the implied, you see a slight tick-up at the midpoint in EBITDA for the back half. I would say from a cadence perspective, what may be a little bit more visible than the run rate during the year is just, as we've said. We've been ramping and within Engineered Structures. So you're seeing the ramp-up in our Belen, New Mexico, and you're seeing the ramp-up in our Florida concrete pole plant. So, I would see more of the second half improvement relative to Engineered Structures. Otherwise, I think it's fairly consistent patterns in our quarterly cadence.

Okay. Perfect. And last one from me. Kind of circling back to Stavola, just kind of looking at the New York and New Jersey markets that they operate in. What is the pricing dynamics of that market look like historically? We've heard over the last few years that that pricing has really improved, well, maybe over the last several years with some of these assets kind of changing hands in that market. But anything to add there, maybe how pricing in these markets might compare to the legacy business, or any color? Thank you.

Yes, Trey, I'll take that one. This is Reid. Good morning. You're right, pricing has improved over the last couple of years in that market. As a reminder, the majority of these volumes are hard rock volumes up in that market. So, we would see elevated pricing in line with what would be expected from hard rock, as opposed to some attributes or locations in our legacy portfolio. But I'd say, overall, the market has performed well and in line as our other markets have, experiencing a couple of price increases a year. We expect that, and we'll continue to support that going forward as well. So definitely, over the last couple of years, have seen those pricing increases. And with the mix, adding these hard rock locations to our portfolio, we would expect that going forward. Disciplined competition up there as well. We like the competitive landscape. Antonio mentioned it in some of his remarks, with some of our larger peers in that market, not only this acquisition, but you've seen some other consolidation in that market recently as well, which we think will bode well for that market going forward.

Got it. All right. Thanks, everyone. Thanks, Reid. Good luck.

Thanks, Trey. Thank you.

Thank you. We'll take our next question from Garik Shmois with Loop Capital. Your line is open.

Hi. Thanks. Congratulations on everything Just on Stavola, wondering if there are any synergies we should anticipate either on the cost side or on the commercial side.

Yes, Garik, Reid again. Good morning. So again, as we've all been saying, really excited about this acquisition. It really is truly an extension of our current footprint geography-wise, obviously, into the largest MSA. And we're excited about adding the management team, the plant locations. We do expect some operational efficiencies, to come from these businesses, but there is currently no overlap with our current portfolio up there. So really incremental volume and incremental benefit to our business. There are some growth opportunities, again, as we touched on earlier in the call that we expect to experience and are looking forward to. The recycling business is a business that we've been very active in, over the last five to six years since becoming Arcosa, and there are some additional expansion opportunities up there in that space. Some of the aggregate facilities as well, there's five aggregate locations in the market, I'd say are in the early stages of their ramp-up and newer facilities. So looking forward to the future growth in those areas. And then Greenfield locations potentially in the future, and then some potential consolidation opportunities again as Antonio hit on. So overall, we do expect some benefit operational efficiencies and some potential, I'd say, overall synergies as we bring the businesses together. But really leveraging this extension to our footprint up in the Northeast market.

Okay. No, that's helpful. Just one more follow-up on Stavola. As far as the end-markets that that business service, is it any different than the legacy operations, is it a little bit more infrastructure focused, or is it fairly comparable to legacy Arcosa?

Same end-markets, but more heavy emphasis on infrastructure, as noted in the slide deck, 80%, 85% when you look at the aggregates and asphalt markets. There's additional replacement demand as well on the asphalt side of the business. So again similar, but different with more infrastructure-led projects up in that market.

One thing - this is Antonio. One thing that's interesting about the market, when you look at all the analysis we did, and we hired consultants to go review the market, it's - the roads are in not a great shape in many of the places. So a lot of it has to do with maintenance, which is something that attracted us. There is also in the region very large infrastructure projects that are happening. That is also very attractive. And then as - Reid mentioned the recycling piece, recycling the raw material for recycling is demolition and replacement. So as that region requires a lot of replacement, we believe there's a good opportunity for us, to grow in the recycling piece also. So I think overall, it fits very, very well.

Okay. No, thanks. I can certainly attest to the maintenance needs in the region? And then just last question, just on Construction Products. Very strong margin expansion in the quarter. Just wondering if you can speak to the sustainability and maybe some of the drivers that benefited 2Q, and how to think about that in the back half of the year?

Sure. I'll take that, Garik. Good morning. Really very pleased with the margin performance in the segment, both on a year-over-year and sequential basis. As I said in my comments, about half of the year-over-year improvement came from really the good work we've been doing in Specialty Materials, in turning that business around from some operating challenges that we experienced last year. It's never been a demand aspect. We had some labor challenges and some production inefficiencies. We're very pleased with the stride that we have within our Specialty Materials business. Likely some additional opportunity there as we - as these improvements fully take hold. We also saw, a similar vein, we saw good improvement in our shoring products business as well. If you recall, we acquired a Houston manufacturer a little over a year ago. So not inorganic at this point. But really, the integration between the operations and the efficiencies we're seeing there. And then the aggregates business, obviously, the biggest piece of that segment, performed very well. I think the opportunity there would be having it be consistently dry weather. So, we're very optimistic and very pleased with what was a very strong quarter.

Okay. Thanks for all that. Appreciate it. Best of luck.

Thank you. We'll take our next question from Jean Ramirez with D.A. Davidson. Your line is open.

Hello everyone. Congrats on the quarter and the acquisition

Thank you.

Reid or anyone, regarding Stavola, could you provide some color around the sustainability of the 35% EBITDA margin versus the last couple of years? And also, could you just give some color on what you expect going forward?

Sure. I'll take that. The 35% - when you look back over the last couple of years, that margin has been in the low to mid-30s for the business as a whole. And so looking forward, not only what we're seeing in that market today and the LTM performance, but also go forward with what's expected for the balance of this year and into the future, we would expect those margins to remain relatively consistent. So yes, it's been a business that has experienced lower volatility in the past. And again, that's what drives us and what attracts us to that market as well as the replacement, and repair side of it. We have a little bit additional visibility because of that, and then would expect those fundamentals to continue.

I'll give you also a little more color. We saw some - when you see the financials of the company in 2023, the year was a little slower than they expected. And we've been in talks with this company for a while. So, we hired consultants to make sure that we understood the reason for 2023 was a little slower than normal. And it had to do with COVID, the DOT, the local DOT, was very slow in issuing the lettings for, and the projects, for the region. So they had a huge backlog of things that were held up, and that held the demand down a little bit. So the margins stayed okay. But the volumes came down quite a bit because of that. So, we proved that with a consultant and checked on all those things. It proved out that they have been telling us exactly what's happening. And as soon as that bottleneck in DOT cleared, I think the volumes came back up. And when you see the last 12 months of this - of the $100 million that they produced until June, you can see the business came back very strongly towards 2022 levels. So I think when you see the business over the long period of time, it's very consistent.

Thank you so much for that. And staying within Construction Products, what are your expectations for the second half? It seems like there should be some significant pent-up demand in Texas given the adverse weather we had through the first half. And then just a follow-up to that. What are you - are you seeing volumes up materially? And how does that impact any potential price increases through the second half of 2024?

Well, what we said in the past many times, projects, it's not like they can build the road faster. So sometimes you see some additional demand that gets held up by weather in the first half, especially here in Dallas, it was very, very wet. So, we're seeing very good volumes as we move along the year. I'm not sure how much is pent-up demand versus normal demand. But it's - projects are needed and the demand is there and the projects are underway. So it's hard to tell you how much really pent-up demand versus just normal demand. And it's not easy to ramp up a project and do it faster, just because we were held up with rain. So I would say - and remember, the rain has two impacts. One is on the projects, of course. But also when you shutdown plants, you have increased costs. You have to carry the cost of the plant while you have it shut it down because of rain. So I think the combination of both things are - should help us.

I guess I'd say, as we think about our full year volume outlook, we said at the start of the year we saw kind of flat volumes. And as we had volumes down organically low single in the first quarter and mid-single in the second quarter. And I'd say both those quarters, we had some weather. So, I think on balance, for us, what that would likely mean is we see probably the full year down low single-digits now as compared to flat where we really started the year. And to echo Antonio's comments and really kind of put that volume constraining weather related. Of course, on a total volume basis, with the contributions from the acquisitions we did in the back half of the year, announced Stavola here for one quarter, we see total volumes up for the year.

And just to add a little more context, how does that impact your pricing? Are you having any conversations with clients that - regarding that for the second half?

We're definitely still having conversations with customers on pricing. We've had many year price increases that have gone out and are still receiving feedback on those to understand the stickiness of them, like everybody is, as of July 1. But pricing conversations are always ongoing, and we'll look to continue those into the expected January 1 increases of next year.

Yes. And as I said in my comments, to echo Reid's remarks, on a year-over-year basis, organically, we saw low double-digit price increases. Q1 was strong, so that will translate into very healthy pricing gains for '24, and momentum as we set ourselves up for 2025.

Perfect. And if I could just move one more into barges - barge orders. It would seem that with steel prices are down, that should motivate some activity for customers. Yes, how are you thinking about the outlook for barges going forward given that environment?

I think you have two things that are converging, as I mentioned before. I think one is the age of the fleet and the really low replacement that has happened over the last several years. And also, that's complemented by high level of barge scrapping. There is some barges that are being refurbished. But overall, I think the environment is very positive for the barge business. It's lumpy. The backlog is going to be lumpy. We're not going to be getting book-to-bills of one or two every quarter. But I think when you think about the capacity, when you think about the market, when the market is low, our market share goes down because there's other smaller players that are getting orders, and everyone gets a piece of the pie. As the market becomes a little more robust, we are - the company that has the most capacity. So I believe as the market is getting more, let's say, the conditions are good for a good replacement market - our biggest goal is to maintain our capacity, and be able to sell it at a really good margins and be disciplined around our order taking. So with steel prices coming down and good demand drivers. I think we're - if we are patient, we're going to get really good orders. But we have to be patient. And we have good visibility. We're not in a hurry. We have really good visibility. So, we're in a really good position for 2025, to be able to continue to grow the business.

Antonio and team, thank you so much for the commentary. I'll hop back in the queue.

Thank you.

Thank you. We have no further questions in the queue at this time. I'll turn the program back over to Erin Drabek for any additional or closing remarks.

Thank you for your time and attention today. It is an exciting time for Arcosa and we have a lot of work ahead of us. We thank you for your continued support, and look forward to our next update.