Q4 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Arcos Inc. fourth quarter and full year 2019 earnings Conference call. My name is David No Beer conference call coordinator today as a reminder, today's call is being recorded.

Now I'd like to turn the call over to your host Gail Peck, SVP finance and treasurer for her Khoza, let's back you may begin.

Good morning, everyone. Thank you for joining our earnings call.

With me today, our Antonio Korea, President and CEO, and Scott easily see us, though a question and answer session will follow their prepared remarks.

Copy of yesterday's press release in the slide presentation for this morning's call I posted at our Investor Relations website, Www Dot I, our dot our co CIO dotcom you can access the presentation by going to the events and presentations tab. The website a replay of today's call will be available for the next to me.

Instructions for accessing the replay number included in the press release.

A replay the webcast will be available for one year on our website.

Today's comments in presentation slides containing financial measures that have not been prepared in accordance with generally accepted accounting principle reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation.

Let me also reminds you that today's conference call contains forward looking statements as defined by the private Securities Litigation Reform Act 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 FCC filings, including its form 10-K for more information on these risks and uncertainties I would now like to turn the call over to Antonio.

Thank you Gale.

Moving on thank you for joining todays call to review our goals this fourth quarter and full year results and also to the schools are 20 Blake the out.

Starting on slide six I'll cover the key strategic highlights before leading Scott give you more details from the quarter.

29, Dean was a euro solid financial performance and strong free cash flow for our goals in its first full year, it's an independent company.

Well, we expect 20 blended to be another year of growth.

We also completed two important strategic initiatives in the past year with yet we still we acquisition of Cherry companies are leading natural I'm, just like what I believe its company in Houston as well as the completion of the first to use GE met the reality assessment for our proposal.

Turning to slide seven the fourth quarter, what the sleeve completions door first full year.

Instead, they beat that was 17% higher than in 2018 and revenue was up 19%.

For the full year, adjusted EBITDA increased 29%, which was driven by organic revenue growth operating margin improvements and the AC de month U.S. acquisition, we completed at the end up wouldn't be Dean.

We also made progress on the oldest stage, one initiatives, which translated into the impressive year over year beat that rolls.

Moving to slide eight or wouldn't be very theme accomplishments have set the stage, where another year of forget the Golden boy. They wouldn't be we expect organic growth and the recently completed Cherry acquisition that will lead to a 19% increasing adjusted it beat them based on the midpoint of our guidance range.

As we indicated in the press release, we anticipate twentytwenty beat that to be slightly second half weighted due to the cadence of our barge and when does the adoption schedule.

We're optimistic about the strength of most of our markets and about do we have provides good production visibility.

The infrastructure spending remains healthy and volumes have been strong and that goes Brooklyn probes business. When we have had dry weather.

The barge market continues to recover and we have had to healthy quarters of dry barge orders in a row to complement the recovery that'd be got endpoint in late wouldn't be 18 on the liquid side.

Finally within the energy equipment on their landmark and fundamentals for your thinking structures remained robust.

And by agreed hardening and reliability initiatives and the demand for storage tanks in the U.S. and Mexico has remained steady.

The battling for wind towers covers most of it wouldn't be blend be although pricing is lower than blunt the 19.

No. The PTC has been extended third party forecast for near term when installations have increased we're optimistic that the new orders will follow.

The primary market headwinds, we're going to blend <unk> is the new railcar market, which are components business serves.

The industry by Bill for rail costs have declined for four consecutive quarters.

On the other than we have been working hard since the spin off to develop new markets and customers to help mitigate the impact over the cycle.

On the positive side the continued recovery in our barge business is expected to more than I've said this alternative softness in components, we expect close workstation they'd be that roll into into 20.

On slide nine it was show Cherry companies was another important strategic milestones.

As we discussed you noted some merkel announcing they've done a sexual cherries, leading natural them that I'm the cycle aggregates company located in Houston and feels like easier graphic gap in our Big says network.

We believe recycled aggregates will continue to be a growing market for economic and environmental benefits. We look forward to working with the Gerry deemed to replicate cherries natural I'm recycled aggregates platform in new geographies.

Finally on slide 10.

We continue making progress on our E as GE initiatives or might there be added to assessments identified 11 material dumped <unk> topics across our businesses.

We plan to publish our initial sustainability report fourtwenty blend in language has to be standards.

We're incorporating it is deemed or values on gord culture.

Early in our journey, but employees another key stakeholders have been enthusiastic about the brokers we've made to date.

I will now turn over the scope the goal to Scott who will provide you a diesel the builds from the quarter Scott.

Thank you Antonio and good morning, everyone.

I'll walk through the fourth quarter and full year results for each segment and then give additional color on our free cash flow and outlook for 2020.

Starting on page 12 construction products revenue grew 56% first the fourth quarter of 2018, driven by double digit revenue growth in the legacy businesses plus. The addition of hcg materials, which we did not own for the full quarter and 2018.

And our legacy aggregates and specialty businesses strong end market fundamentals, driven by public and private demand coupled with drier weather than 28 team led to very strong volume growth.

Pricing was relatively flat sequentially as improved pricing and a number of markets nationwide roughly offset softness in other markets.

Segment EBITDA of $17.9 million was 44% higher than last year, but it was $2 million to $3 million below our expectations for two primary reasons.

First our aggregates plants, serving oil and gas markets in Texas, and Oklahoma continued to be weaker than expected and we achieved lower margins on those products. Secondly, we had an unanticipated plant shutdown at one of our specialty products plants. During the quarter. This plant is now fully up and running again.

Turning to our outlook in the segment for 2020, we expect a strong construction market fundamentals and our operating improvements to translate into higher overall segment margins and 2020 versus 2019 on higher revenues are Cherry integration is proceeding well and we expected to have a year of EBITDA contribution consist.

Can't with what we projected at the time of acquisition.

Please turn to slide 13.

Energy equipment had another strong quarter performance coming in at the top end of our expected margin range, even with headwinds of lower when tire pricing.

Revenue increased to $213 million and adjusted EBITDA was $27.6 million up 19% from 20 eighteens fourth quarter.

Margin improvements in our utility structures tanks, and Mexico businesses more than offset lower margins in our wind towers business, leading to the EBITDA margin of 13.0%.

Our energy equipment group is positioned well for 2020, and our visibility is better than it was one year ago.

We received $189 million of utility structures orders in the quarter driven by strong market demand and are increasing participation and the bid market.

Our backlog to be delivered within the next 12 months is up 27% from year end 2018, which includes orders for both wind towers and utility structures.

For the segment overall, we expect mid single digit revenue growth in 2020, and we view, our fourth quarter margin of 12% to 13% as an achievable target for 2020.

Turning to our transportation segment on Slide 14 fourth quarter revenues increased 30% and adjusted EBITDA increased 12% to $19 million as a strong recovery in our barge business more than offset softness and rail components.

I'll start with a barge business.

As described in our press release, the barge operating team did an outstanding job ramping up production as the market recovered.

2019 revenue was 73% higher than 2018 and that ramp up included the reopening of our idled facility in Louisiana and significant hiring at our Tennessee, and Missouri plants.

This year's performance was a testament to our team's ability to scale up and down as market conditions change to create significant value for customers and shareholders.

Given the magnitude of our ramp up our production schedule did slip several weeks at one of our plants. This resulted in the delay of roughly $15 million worth of barges from Q4 into Q1, leading to lower revenue in the quarter than we expected.

However, we delivered does barges during January 2020, and are still on track to meet our barge production schedule. This year.

Margin should improve significantly in 2020 versus full year 2019, now that we are through the startup phase at our Louisiana plant and have delivered the lower priced orders they were in our backlog at the beginning of last year.

Barge order activity during the quarter was also solid.

We received $84 million of orders in Q4 for book to Bill of 0.8.

The majority of our orders were for dry barges, marking the second consecutive quarter, where dry orders outpace liquid orders.

Lower steel prices and an improved outlook for grain exports have been catalyst for the dry barge market and we're cautiously optimistic that we are in the early stages of a dry barge replacement cycle.

Additionally, inquiry levels. So far in Q1 have been very healthy both for dry and liquid barges, giving us confidence in the sustainability of the recovery.

Our backlog of $347 million will be delivered entirely in 2020 offerings strong production visibility for our plants and enhancing our ability to operate efficiently.

We expect to add to our 2020 production with additional orders and we are currently quoting for deliveries in Q4 and into 2021.

Moving to rail components, our business continues to face an industry wide slowdown and new railcar builds but our team is doing an excellent job responding to the cyclical slowdown and we continue to build out our components business that serves the maintenance and non rail related markets.

Overall, we expect the transportation segment to have significant growth in both revenue and EBITDA in 2020.

Our barge production schedule has higher deliveries in the second half of the year. So our companywide revenue and EBITDA will be more heavily weighted in the back half.

Please turn to slide 15.

One highlight of our 29 team performance was a $273 million a free cash flow that we generated during the year.

We are in early stages of building a cash culture at our COSA, which includes process improvements to reduce working capital incentive compensation changes that incorporate working capital improvements in both our short term and long term incentive programs and the implementation of a rigorous capital expenditure decision process.

All of these changes are contributing to our free cash flow improvement and we believe there's still room to improve.

The $273 million was helped by approximately $50 million of advance payments from customers to reserve production capacity in our utility structures and barge businesses.

Our free cash flow was more than 200% of net income for the year.

While we are unlikely to repeat such a strong free cash flow conversion rate in 2020, or 2019 performance shows the excellent cash generation potential of our businesses plus the impact of a renewed focus on cash flow from our operating teams.

This impressive cash flow has helped us maintain a low leverage position even after our two large construction materials acquisitions, we funded the $298 million Cherry acquisition with a combination of cash and $150 million of new debt, leaving us at an approximate 0.5 net debt that you.

EBITDA ratio well below our long term target.

In conjunction with raising the new debt to fund Sherri, We also upsized, our committed credit facility, keeping our available cash and committed liquidity position relatively unchanged after the acquisition.

Our low leverage position gives us capacity to invest and attractive growth opportunities as well as flexibility to manage through different economic conditions.

On page 16, we include several other notes on our 2020 outlook.

Ill now turn the call back over to Antonio.

Thank you Scott.

Let me close today today's call. It a discussion of our long term vision on the rolled up capital allocation, placing our brokers on slide 18, you can find the four pillars of our goals as long term vision, which will be the foundation for the culture of our goals are going forward I will serve us a complex for capital allocation decisions.

Moving to slide 19 disciplined capital allocation is a key component or making progress on each of the four pillars of our long term vision.

Since our spin off in November of blunt, the Dean we have invested roughly 85 million in capital expenditures.

And then $40 million acquisitions, and returned 25 million to shareholders.

Based on the highlights our approach to acquisitions.

We have I look at or more than 600 million into construction. Both acquisitions is it seems that diamonds been aligned with our long term vision, we view aggregates and specialty materials as attractive markets, where we can build sustainable competitive advantages.

Over long periods of time these markets have experienced steady volume growth as investment in infrastructure has increased.

Also construction, both have achieved consistent pricing growth, making been highly attractive markets.

With more stable long term demand drivers the investments we have made in the aggregate some specialty materials business should review the cyclicality OSV our portfolio over time.

In addition, our aggregate those specialty materials business have unique sustainable competitive advantages.

Looking at hcg, the business as long term reserves processing capacity on stroke strong broken novation capabilities.

Jerry has an extensive network of strategically located facilities and reserves that grows the Houston market as well as low goes to access the critical raw materials.

We also have technical expertise in public reduced recycling that has been developed over several decades.

Finally, we have found attractive acquisition opportunities in aggregate some specialty materials because of the fragmented industry structure with the ability to buy small to medium size size assets have reasonable multiples.

Through this disciplined acquisition process that began when we when the business was part of liquidity, we have grown construction aggregates and specialty materials significantly since it's been.

From 280 million in revenues in blended deemed to over 500 million, including the pro forma results for charity.

Turning to light blunt the one organic growth projects are also important part of our capital allocation strategy.

We're allocating capital to all of our businesses to continue to develop organic growth opportunities.

However, we see larger growth opportunities in aggregates specialty materials and use the structures. Therefore similar to the some of the larger growth Capex will be located in these businesses in twentytwenty.

More specifically.

Because we will be focusing on greenfield investments in geographies, where organic investment is more attractive than acquisitions.

Also we will be allocating capital to Jerry we improved the reserve positions around Houston on expand their business model.

On specialty materials, we have expanded our composite the blaster into last few months will demand continues to grow and we will be evaluating a new plant to serve that market.

The utility structure business, we will be adding capacity in existing plans and investing in new equipment to expand our broke legs.

Finally, we will be also allocating capital to his deep initiatives as they get developed.

These are so just some of the ideas we have at the moment. However, we view organic growth of dynamic browsers, and therefore, we'll be evaluating idea as they get developed throughout the year.

Visibly in the organic growth is the best way to increase return on invested capital, which is one of our main objectives. As a reminder, we expect new plant a new plant, we build to have a payback of no longer than five years, I think equipment growth projects to have even shorter paybacks. These levels of return are accretive to the overall ARPU also reserves.

To sum it up are of course is very well positioned to continue capitalizing on the U.S. infrastructure built.

In Brltwenty, we are looking ahead to another year of healthy growth I'm executing on our priorities.

Our production Visibilities. Good most of our markets are very healthy our teams are operating well we have a strong balance sheet than we continue to make strides on our long term vision as a result, we're confident in our position and our ability to achieve strongly to meet the growth again this year.

I will now open the call for questions.

Okay.

At this time, if you'd like to ask your question. Please press the star and one keys on your telephone keypad.

Keep in mind, you marry move yourself from the question Q at any time by pressing the pound cake.

So now the interest of time, we ask that you limit yourself to one question and one follow up question.

Again, it is star and want to ask a question today.

We'll take our first question from Brett Feldman with da Davidson. Please go ahead. Your line is open.

Thanks, Good morning strong finished the year.

Thank you.

Yes, maybe starting on construction products and just given the legacy business volumes were up can you help us understand.

How big the oil and gas pieces now as a percentage of the total pie for Acos.

And does that particular area contribute margins are pricing kind of in excess of the segments average.

Sure. This is Scott we said.

At the time of acquisition it was roughly 20% of hcg, so much smaller percent of construction products and then.

Our COSA is also not not huge percentage of our kostas overall exposure, but.

It has if you follow drilling activity. It certainly has been hit in the last year and we've had to to make a lot of changes to rightsize that footprint to correspond to lower demand level.

Revenues in that.

Market held up decently, well, but the margins have been really compressed. So it's really had an outsized impact on construction margins.

Particularly in the third and fourth quarter.

Okay, and then I guess my follow up would be the book of business and utility structures looks solid I guess can you talk about the bidding environment pricing conditions are you.

Are you going to continue to focus more on these sort of shorter lead time spot market versus larger programs.

Yes, Brian. This is this has said about new yes.

We see a very healthy market out there I think we're.

We received our management team about a year ago Theyre doing an excellent job. When we are changing all of our processes last year was a big year for change our manufacturing processes. We're also working on their sales process on.

All the management process inside the company and it's really paying off.

We're seeing our bidding activity in Greece, we're seeing our customer base expand.

We're being more aggressive in penetrating the bid market, which we really didnt lay it all on with that that's why I mentioned that we are increasing capacity in some of the existing plans we have on expanding our brother Black. So overall very positive all about our theme very positive about the market. Our lead times continues to be shorter than some of our company.

So I think we're in a really good position.

And Brent this is Scott to follow up on that one of the big advance billing payments. We received was from a utility structures customer there was a large order. So we're active both on the small bid market, but also the the large order side and the teams do an excellent job pursuing both.

And you've been able to negotiate some upfront payments there Scott.

That's correct, so with which capacity tight in the industry.

People have been willing to put down some advance payments in order to reserve capacity.

Okay, great. Thank you appreciate it.

Yes.

We'll take our next question from Stefano Crist with CJS Securities. Please go ahead. Your line is open.

Good morning, and congrats on the strong corridor.

Thank you. Thank you.

Can you talk a little bit more about organic growth and aggregates and then what you're seeing in 2020 as well.

Yes, I mentioned the at our best as well as I mentioned in our in our prepared remarks.

As you know some of the aggregates companies the multiples to buy some of them are are expensive.

And we've been able to find bolt on acquisitions have reasonable price and we expect twentytwenty to be the same too fine.

Some of those small bolt on acquisitions, if we can do they are very healthy they're very good for our growth.

On the other hand, there are some markets, where we think there's opportunities to go with a greenfield.

Approach, meaning buying the reserves.

And then developing the market expanding the market we've seen we've done some of those and they're really a.

Really good for a return on invested capital.

Both Cherry and hcg brought ideas on where to do that on how to do that then and I think this rate up we're doing is to continue to expand doing some of those so I think blunted plenty to do we do a response you will see some bolt on acquisitions some greenfields in in our aggregates business.

Thank you so much.

And.

Now that Cherry acquisition is complete.

Any estimates for synergies.

There.

Yes.

Let me give you a sense.

And to give you a number because it do we have to be completely on as we really didn't buy cherry for synergies, we really bought.

Gary because we believe cherry it brings a significant amount of opportunities to grow and.

I include bills in the Seanergy bucket, meaning.

Jerry has a unique.

Business modeling Houston with cheese.

Generating the some of the recycled products recycling the concrete and in doing the stabilize and Sun.

Hey to serve the customers with a full portfolio.

We believe there are opportunities to expand cherry around Houston market. They will we had a business plan to do that them part of our carpet that locationing twentytwenty will be to expand reserves around Houston to continue growing cherry, but there's also opportunities to bring that business relative to other geographies and we're going to be testing that doing twentytwenty.

And we'll give you a dates where that because we're still working with them on that but that's one of our goals.

Got it thank you so much.

We'll take our next question from Ian Zaffino with Oppenheimer. Please go ahead. Your line is open.

Hi, great. Thank you.

Yes, just keying in on the utility structures business.

Where are you seeing the strength there is you ask Canada.

Maybe what region, but could you give us any color there that would be helpful. Thanks.

Yes, we're seeing.

The strength really in the U.S., we do exports from forgot about that but it's mainly are you is driven market.

We are seeing I think we see in all of our plans we have seen throughout the old yoga fees of course, you'll see some into with specifically in California has been really strong, but but I think we are seeing if the demand growth in all of the geography. So it's not a single area or a single project.

Im a let's say event, if you compare it to all the times in this industry, where you'll see this big lines being built the in Texas and other places to serve the wind market very long lines et cetera, we're not seeing that we're seeing.

The large projects some of the larger projects, but we're also seeing a lot over the small projects that come to you to get built so it's a healthy mix of large projects some small projects across the us.

Okay. Thanks, and then just on the barge side of the equation here.

Liquid obviously started out pretty strong now dry shore.

Coming through.

He is in a matter of.

Dry, which just so far below.

Where it should have been and Thats why its accelerating now.

Are you seeing and maybe deceleration in liquid or are they both kind of accelerating interest. The dri is exciting for a much lower base and that's why we're seeing a kind are starting to show here now.

We so we saw in a in blunt. The late 2018 early 19, we started seeing basically all equally the acceleration.

The third and fourth quarter, we started seeing some some dry.

Barges coming in on that Scott mentioned in the prepared remarks, we continued to see healthy inquiries for both linked with them barge in the first quarter. So.

I would say Thats a.

We said it last year, the dry carnival markets have been dead for a loan level time, I'd say very it's a market thats I would say more sensitive to steel prices steel prices came down very significantly in Plenti 19, and I think thats one of the things at the same time some of the uncertainties around dray deal with them.

With that I, we cultural both with China also help.

But I think the age of the barges is just catching up so it's also a very healthy market in terms of the number of customers. We have is not a single customers. It's a wide variety of customers. So overall, we're seeing some healthy signs indeed.

In the in the market.

Just to reflect on that as Scott mentioned with some of the barges moved to 2020 from 20 may deem.

And if you see in our office a year ago, you would notice that we were glad oil for liquid barges have been.

Like our largest started arriving and we have to wish fell below our plans to accommodate the dry illiquid barges on the positive news of the more those barges moving into 22 entities that we have been able now to set up the our promotional lines almost perfectly to serve the market meaning the.

Barge and the plan Thats the best plant that we have before making tank barges, we'll be making opening of our does this year.

Blends that are very good at making.

A dry cargo barges, we'll be focusing on that so I think we're really really well set up for margin improvement then on continuing serve the market.

Okay. Thank you very much.

We'll take our next question from Moscow managers with Susquehanna. Please go ahead. Your line is open.

Yes, thanks, Thanks for taking my questions.

In your 16 ish March was a public company you guys who.

Really found the sweet spot on the M&A front by by being able to acquire businesses that.

Or big enough to move the needle for you geographically synergistic business line synergistic only aggregate side and but also maybe small enough to not attractive double digit multiples that could that could destroy some value if you chase them.

Hi, I'm curious if you look out over the good opportunity set.

Are there more deals kind of in the sweet spot for you guys that you're looking at over the next year too.

Just trying to see what the M&A front could look like if things go well over the next 12 to 18 much.

Thank you Bascome. It was you know and I've said this before the old M&A has a level of its own because a big things open up on closed down at a relatively unexpected unexpectedly but the reality is that every one of these businesses that we bought.

Brings a whole new set of ideas to the table.

That's why I spend so much so low in my prepared remarks talking about capital allocation because I think the main message you need to here for me and Scott is that we are going to stay disciplined door about that that allocation model.

And I think theres great opportunities at the moment. The we are we have a pipeline that's healthy nothing on the of the size of Cherry at the moment, but we have quite a bit of ideas and opportunities coming into our way and sitting down with cherry and would they be deemed there's still a a whole list of things that we have to research and work on.

And to to develop opportunities for M&A. So it's a long answer we have.

We are enthusiastic about what we're seeing in the pipeline nothing of the size of Cherry at the moment, but that doesn't mean nothing will show up in the next few months.

Okay, and thank you for that and with the with the show up in the broader market Thats definitely it back to you guys stock is.

The opportunity to be more opportunistic on the buyback playing into the kind of capital dollars.

Occasion decision.

Thanks Bascome. This is Scott, we do have a $50 million share repurchase authorization. We've used about 14 of the 50 so.

We have quite a bit of headroom and that authorization and where it makes sense to buy back shares versus invest organically and invest in acquisitions will continue to do that in the first year, we sell a lot of opportunities inorganic growth acquisitions, but if the returns better buy back shares we'll certainly do that.

Okay last one from me.

As we think about simplifying the portfolio.

Can you re address the opportunities to may be.

Look for some of your businesses that are less core to find the new home over time in it and in any interest in that process.

Thank you.

Yes.

Well as you've said in the second pillar of our long term vision. This that we're going to try to.

Simplify the for the portfolio and also reduce the cyclicality and some some businesses fit that the better than others.

As you know, we don't comment, though M&A I think we are we are at the moment operating our business is like we do everyday and we are likely to pull them and grow them and make them better even an opportunity comes we have a an obligation to dual dual.

To evaluate it at the moment, we are functioning and operating all the businesses.

Just like we do everyday.

Thank you.

We'll take our next question from Justin Bergner with J. Research. Please go ahead. Your line is open.

Good morning, Antonio Good morning, Scott and Gale.

Good morning warning.

I wanted to start construction products I guess adjusted EBITDA for that segment grew about 20 million in 2019 that you acquired.

A little bit more than $30 million EBITDA with a C.G. was that entire headwind concentrated around.

The pricing of aggregates being sold into the oil and gas industries that sort of 10 million or.

Headwind when you adjust for the hcg contribution or were there other headwinds as well, but the EBITDA 2019 from construction products.

Sure. This is Scott Justin.

The two primary headwinds we had in 2019 versus 2018 were on the hcg side, the aggregates plants, serving the oil and gas markets and that's what you talked about and then in the legacy business. We did have some headwinds primarily related to pricing and DFW in the first half of the year that comp and 2019.

Versus the previous year in 2018 was challenging and we talked about that on a number of call so bit of a bit of headwind in the legacy aggregates business.

And then and then the rest in the oil and gas related aggregates businesses nation G. I think that the good news is the volume growth, particularly in the second half of the year in our legacy businesses was very strong the end markets remain robust DFW has great private demand public demand. So we think the legacy business in particular.

Very healthy based energy business.

The specialty.

Business is running very well with or building products.

Plan essentially running at capacity, we're having to turn away customers. So.

Overall healthy mix, but those two headwinds in 19 versus the previous year.

Okay. Thank you.

My second question relates to free cash from working capital.

50 million benefit sort of.

We're seeing or will reverse in 2020, how should I think about the advance billings in the context of that flat working capital combat.

Sure I think you're you're thinking about the right way and that the 50 million of advance billings creates a bit of a headwind and even with that we expect to be working capital neutral adjusting for acquisition. So back to building the cash culture at our COSA and making incremental improvements in a our inventory and IP, we would expect to be able.

To offset that $50 million with kind of core working capital management improvements to end up roughly neutral for the year.

Okay, great interest on that point are you expecting more sort of advanced billings I realize the one from last year wont repeat but are you expecting more as a normal course of business related to strong demand and utility structures and barges.

Yeah, I think it's it's they're opportunistic we wouldn't build them into our forecast, but certainly in an environment, particularly in utility structures and barge where capacity is tighter.

We try to work with customers in a lifetime customers want to reserve that space and are willing to too.

Put some money down in advance so it's not part of the working capital neutral guidance, we gave for the year, but it's something that we'll try to.

Make more regular as part of our business.

Great. Thank you for taking my questions.

We'll take our next question from Romero with Sidoti. Please go ahead. Your line is open.

Hey, good morning, everyone.

Good morning.

On the utility structure side, one of the payback on that earlier question about your penetration into the bid market on can you elaborate on that ability to toggle that on and off and how much of the incremental capex year over year that you're forecasting is being put towards some additional capacity there.

Yes. So so the bid market is a very large market and we still have a.

Very very small share of it so.

As I mentioned before we'd something we as a company we were not focused on in the last.

A few years.

And.

I think it provides a good baseline for production and I think.

It requires a different modalities in terms of how to approach. It our team is doing a really good job in starting to penetrated so.

I'm enthusiastic about it I think it's also provides a great.

Stability to the business.

On the Capex side, I would say of the growth Capex I would say about half of it will go a towards the improvement of our a utility structure, both expanding capacity and as I mentioned also expanding or both.

Thank you that's helpful and I guess.

On the corporate cost side.

The 7 million came well below your guidance. So kudos to you on the cost control side, there, but I think your 2020 outlook implies about a 5 million or so step up.

Is there may be something incremental this that's driving a step up or is it more kind of based on the Fourq you run rate.

Thanks to a this is Scott it's.

Most of the step up is just consistent with operating a bigger company. If you look at our corporate cost as a percent of.

Of revenue as we have grown as we have a new costs related to the Cherry acquisition. That's all built into the $13 million per quarter run rate, which again is is pretty consistent as a percent of revenue with where we were in 2018, I mean 2019.

Understood. Thanks for taking the questions and best of luck in 2020.

Thank you.

We'll take our next question from Blake Hirschman with Stephens. Please go ahead, Sir your line is open.

Hi, Good morning, guys congrats on a great here.

Thank you places like.

First on the barge side.

The revenue grew I.

70% last year.

Paul Jesus, if I missed that but do you have any rough.

Guide post as far as what we can see this year.

Your topline growth there and then just the second part not being its ground sequentially for like the last year do you think we can see sequential.

Revenue increases throughout 2020 as well.

This is Scott I'll take that if if you look at the exit rate of barges about a 100 million.

Revenue in the fourth quarter, and we expect that to grow into 2020, so there should be absolute growth in the year. The way that production schedule lays out Q3 will be the highest.

Quarter, it's particularly back half so you'll see a ramp up from Q1 into Q2 into Q3, and then kind of flat in the second half of the year. So a bit of a shift in mix as Antonio mentioned, so perhaps a tiny step down from Q4 into Q1, but then growing pretty.

Pretty strongly throughout the years, we hit our stride with those are the different plants operating the best barge type for for that plant.

Got it alright, and then on a.

When towers, how how much was lower pricing drag.

In the quarter and just to clarify the headwinds there. It really is just on the pricing side and not volume correct.

I didn't see.

The wind towers piece within the positive demand.

Pieces on the business from the slide so I just wanted to double check.

Correct Blake the headwinds from the pricing our volumes have remained strong and productions and really good shape.

Most of the if you look at the sequential margin that went down from 15 to 13, almost all of that was was related to wind tower. So again, the team's doing it done a great job production strong, but the prices of for what we're delivering are lower and that creates that margin headwind.

Got it makes sense, thanks, a lot guys.

Thank you thanks.

Next we'll take a follow up question from Justin Bergner with J. Research. Please go ahead. Your line is open.

Thanks, guys for the follow up and.

Also my congratulations on strong year.

First follow up would be related to.

Utility structures and the bid market and pricing it seems like I'm inferring from the prior question that.

There's been no sort of weakening the bid market such that.

Your energy equipment margins are.

Coming down from higher levels due to some softening of the that the tightness and utility structural market is that sort of accurate in the fourth quarter and if you look into 2020.

Justin This is something you know I think that you think the stroke or as I mentioned this is really strong both on the on the traditional customers on the bid market the margin coming down really has been more related to wind towers in the energy side also in our banks it both in Mexico. When you as the margins have been a really good.

Then and improving and I think we still have a room for improvement there I think there's room for improvement than you do need to strokes and I think there's room for improvement in thanks.

And the the area, where we have a the weakest the fundamentals right now is even though the markets its strong than that Twentytwenty mtwenty two the what would probably be strong the margins will be lower than in the past. These can wind towers.

Okay. Thanks for clarification, then just secondly.

I guess, the lower range of your EBITDA guide.

Implies sort of flat organic EBITDA growth, what sort of conditions are markets would be pressured that would lead you to the lower end that EBITDA guidance sort of flat organic EBITDA growth.

Sure. Justin This is Scott I think if you if you look at the the slide that Antonio mentioned of what are the challenge is heading into 2020, there are some scenarios, where there could be weakness in those three areas a wind tower prices pretty much locked in for the year, but.

If rail components is worse than expected and potentially weather in construction weather has has been a challenge in Q1 across the country and so yeah I think the lower end of the range would imply a worse than expected outcomes, there, which again, even if it's flat year over year I think.

If you add cherry there will be absolute growth, but those would be some of the scenarios that would cause kind of flattish year over year performance in the legacy portfolio.

Thanks for the fall.

And there no further questions on the line at this time I'll turn the program back to Gail Peck for any closing comments.

Thank you David and thank you everyone for joining us today, and we look forward to speaking with you again next quarter.

This does conclude today's program. Thank you for your participation and you may now disconnect.

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