Q2 2020 Arcosa Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Arcos. The Inc. second quarter 2020 earnings Conference call. My name is actually and I will be your conference calls ordinator today. As a reminder, today's call is being recorded now I would like to turn the call over to your host Gail Peck Senior Vice President.
Finance and treasurer for our customers mistake. He made a list you may begin.
Good morning, everyone. Thank you for joining our second quarter.
2020 earnings call with me today, our Antonio Korea, President and CEO, It's got be easily CFO. A question answer session will follow their prepared remarks.
A copy of yesterday's press release in the slide presentation for this morning's call our posted at our Investor Relations website, Www Dot IR dot our COSA dotcom.
A replay of today's call will be available for the next two week 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 generally accepted accounting principles reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation.
Let me also remind you that today's conference call contains forward looking statements as defined by the private Securities Litigation Reform Act of 1995.
<unk> looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward looking statement.
Please refer to the company's SEC filings for more information on these risks and uncertainties, including our form 10-K. The earnings press release, we filed yesterday and our form 10-Q for the second quarter expected to be filed later today I would now like to turn the call over to Antonio.
In Q Gail good morning, and thank you for joining todays call. Please go ahead go so second quarter results, although future oak.
Second quarter results demonstrated the resilience of workers in the face of very challenging business conditions.
We have remained fully operations during the pandemic, that's an essential business was broken services, so keep critical infrastructure working.
Turning to slide four here are the key messages, we would like to cover on today's call.
During the pandemic, we continued to prioritize the health and wellbeing of our employees on the communities where we operate.
I want to recognize all of our employees for their incredible commitment and dedication doing just difficult times.
I'm extremely proud of our coastal for continuing to support our customers on communities.
He is what some exceptional quarter for a cultural across all metrics, including revenue net income and adjusted EBITA each of our business segments posted revenue growth for construction business outperformed our expectations showing organic growth on the benefit of the Cherry acquisition that closed earlier this year.
Our shift to more stable than diversified end markets over the last 18 months has been an important factor in enabling this growth.
Another major focus area has been.
Cash flow through in the second quarter, we generated 56 million, a free cash flow versus or use of 5 million a year ago.
Our free cash flow was nearly twice our net income unimpressive result, as we are successfully reducing the working capital requirements of our business and focusing on margin expansion.
During the quarter, we used cash flow to pay down debt I'm at the end of June we had a relatively modest net debt over 108 million or less than half, our trailing 12 months or beat that.
We have kept our leverage low while investing 314 million on acquisitions in the first traveled the year the bulk of which was cherry.
As we move forward. Our goal is to continue to utilize our balance sheet strength and I look at those strong cash flow generation on projects that allow us to growing across the markets reduce our cyclicality and improve our return on invested capital.
We'll spend more time later in the call discussing the demand environment across our businesses as well as our brokers in continuing to execute on our long term vision.
Please turn to slide seven.
I won't spend a few minutes discussing how we have shifted to operate in the current cobiz environment.
Given the essential nature of our business, we have worked hard to keep our plants operating through to support our customers' needs at this difficult time.
The same time, we have also prioritize the safety of our team we have implemented protocols consistent with CDC guidelines at our plants and office as well.
While many of our offices have shifted to work from home that option is not possible for our plans.
There we have implemented number important measures you can see on this slide.
While our employees our top priority our community communities are important to many of them are suffering we have taken a number of steps to support the commuter around our plans and offices and we have donated personal protective equipment to small businesses.
Turning to slide nine let's look at a consolidated results for the second quarter.
Our businesses perform extremely well during the delivering record results revenue grew 15% year over year with growth in all three segments. Adjusted EBITDA grew about 50% faster than revenue evidencing operating leverage and margin expansion coming from initiatives with we have put in place.
Our construction broke segment was the largest driver of revenue and EBITDA growth. The Cherry acquisition will close in January is performing ahead of plan.
On balance we were very pleased with how the second quarter progressed, Scott will take you through the business lines on our financial metrics and then I will give you additional color on our short and long term view of our markets Scott.
Thank you Antonio and good morning, everyone I'll start on Slide 10, and review our segment results from the second quarter.
Construction products revenue grew 28% to $148 million and adjusted EBITDA increased 46% to $38.6 million the quarters almost $39 million of EBITDA was the highest in the segments history.
Segment, EBITDA margins of 26.0% improved more than 300 basis points from last year's second quarter.
Several factors contributed to our increase in EBITDA.
The Cherry acquisition again exceeded our expectations and we remain very positive on the growth prospects of recycled aggregates Houston market fundamentals remain strong in the first half of the year and although Houston construction activity may suffer from coveted related uncertainty in the next few quarters the fundamentals remain strong.
And our legacy natural aggregates business, where our largest geographic presence is a north and central Texas. We had a very strong quarter volumes were up significantly and we were able to improve margins through operating efficiencies lower maintenance costs and benefits from lower fuel costs, we've had price increases.
In line with industry averages across our footprint, although our mix shift made our overall ASP lower than last year's second quarter.
Weakness in oil and gas markets hurt volumes, and our natural aggregates business, but our exposure to oil and gas has declined and represents a smaller portion of our segment revenue.
Finally revenue from our showing product line declined almost 30% as customers reduce their capital expenditures.
We were able to adjust our cost structure accordingly, and minimize the impact on margins, we've seen a small uptick in inquiry levels for sure in products and the last few months as customers have displayed improved confidence in their outlook.
Overall, our construction products team did an exceptional job executing in the quarter to serve our customers in the midst of covered related challenges, while also continuing to integrate the cherry business.
Moving to energy equipment on slide 11 revenue grew 9% to $223 million adjusted EBITDA of $30.4 million was ahead of our expectations on improved operating efficiencies.
The bulk of our revenue growth came from volume improvements in our legacy transmission structures business, where demand due to grid hardening and reliability initiatives remains robust.
Additionally, our new traffic structures product line, which we acquired in March of 2020.
Had a solid performance in the quarter and contributed to revenue growth.
Wind tower units were roughly flat versus last year's second quarter, and we received additional orders to fill our production schedule for the rest of 2020.
Demand in our utility structures product line also continues to be solid.
Order an inquiry activity has remained steady throughout 2020, despite the pandemic, adding to the more than $113 million worth of orders that we booked in Q4 of 2019.
In addition, we have several quarters of visibility with our major alliance customers for projects that are not yet defined enough to qualify as reportable backlog.
Revenues from our storage tank business in the us in Mexico declined year over year on lower shipments of large storage tanks, some of which serve oil and gas markets.
Demand for our higher volume residential and commercial propane tanks remained stable.
Overall margins and energy equipment were 13.6% below last year due to lower pricing in wind towers, but ahead of our expectations. Our operating teams did a fantastic job executing during the quarter to exceed our margin expectations, while also integrating our traffic and concrete structures acquisitions.
Turning to slide 12 transportation products recorded 11% growth in revenues and 26% growth in adjusted EBITDA as our margins improved roughly 200 basis points to 16.5%.
And the barge business, our revenues were up roughly 62% primarily due to increased dry barge production as we began delivering hopper barges. There were ordered in the second half of 2019.
Additionally, we delivered additional tank barges for a variety of commodity markets.
Margins also improved in the barge business as we gained operating leverage from higher production levels and our operating teams executed extremely well in the quarter.
On the negative side, we received only $17 million.
New orders in the quarter for book to Bill of 0.16. These $17 million of orders included a mix of tank barges hopper barges and marine components.
Revenue in rail components declined roughly $28 million against last year's second quarter, although is down only $7 million sequentially.
New railcar orders continue to be weak across the industry, but our leadership team has managed through numerous cycles in the past.
As we discussed on the last call we've taken significant actions at our components facilities to right size for lower demand and we had been EBITDA positive throughout the down cycle.
We've also had success in winning new orders for the more stable maintenance and non rail markets, but these have not yet become large enough to offset the drop in our core business.
I'll now turn to slide 14 to discuss our free cash flow and liquidity highlights.
We generated $56 million of free cash flow in the quarter roughly in line with our six quarter average and approximately 170% of our net income in the quarter.
Our strong free cash flow generation reflects excellent operating performance as well as the cash culture that we are building throughout our COSA.
We've made particular progress in our receivables and payables over the last year.
Working capital as a key component of our incentive compensation program and our operating teams are doing an excellent job generating cash from working capital, while maintaining our ability to meet customer needs.
During the second quarter, we also repaid the precautionary $100 million borrowing on our revolver that we drew in March taken together, we ended the quarter with $522 million of liquidity, including $148 million of cash and $374 million of committed revolver capacity.
Turning to slide 15, our strong cash flow generation in the quarter further reduced our leverage we closed the second quarter at approximately 0.4 times net debt to EBITDA with minimal debt maturities until 2025.
Our low leverage will enable us to manage through uncertain macroeconomic conditions as well as to pursue disciplined organic and acquisition growth.
We continue to manage cash tightly we are reiterating last quarter's capital allocation outlook for the rest of 2020, which you see on slide 16.
First we continue to expect $75 million to $85 million of capital expenditures, which includes approximately $65 million a maintenance capex plus a select set of organic growth projects to expand capacity in utility structures and add reserves and construction products.
We have maintained our dividend of roughly $10 million per year, and we still have $34 million remaining on our share repurchase authorization.
On slide 17, we give additional color on the three complimentary acquisitions that we have made this year to expand into adjacent product lines and utility structures weve invested almost $60 million and acquisitions, plus an additional $10 million to organically expand our capabilities and transmission and distribution structures.
The three acquisitions have combined annualized revenue of approximately $50 million and EBITDA of $9 million prior to expected growth in cost synergies Antonio will discuss the strategic rationale and respective end markets in more detail.
I will now turn the call back over to Antonio.
Thank you Scott.
As Scott be build our business performed well during the quarter and we remain focused on executing our long term strategy.
Slide 19 is a reminder of our vision that we introduced to the investment community. When we became an independent public company in the fall of two indeed dean on their long term vision for our coastal remains the same.
Shifting to slide 20, as we disclosed last quarter, the Golden I didn't impacts on our near term outlook vary across our portfolio.
In markets in construction products on energy equipment, representing almost 75% of second quarter EBITA have remained healthy while transportation pro has experienced significant declining youre their activity.
Construction activity proved to be received in the northeast state during the second quarter, helping to drive great performance in the segment demand in the early part of the third quarter has been very seemed very similar levels.
Construction global doors have shorter lead times than other businesses.
We are watching several key indicators in our geographies to understand future demand strength.
The short term, we're focused on states visco health letting activity and the progress over there are lot shows, including the upcoming exploration of the highway funding bill and the potential stimulus measures.
You know your energy equipment, we are less exposed to go into related uncertainty as our wind towers on utility structure backlogs provide group them good near term visibility on many of our market drivers remain intact.
Throughout this period demand on bidding in the U.S infrastructure business has remained strong.
Wind towers, the current backlog supports our Twentytwenty production plans and we're working with customers on 2021 or others.
Our storage tank business, we saw some slowdown during the early stages of the pandemic. However, as we have continued to navigate dispute we see a more positive dolan emerging from our customers are Mexico business continues to see slow demand.
From.
Our transportation pros business phase the most challenging near term outlook.
In components business that was under pressure before that by mimic continues to navigate the declining build rates for new cars.
In this business, we are staying focused on can cost containment remaining cash flow positive I'm, continuing our efforts to diversify our customer base them end markets.
As Scott mentioned, the barge business reported strong results during the quarter on higher volumes and improved pricing. However, due to increased uncertainty and low utilization rates driven by cold related issues, we have experience a slowing in orders on inquiries since the beginning with the pandemic.
As expected second quarter orders were below our recent below recent quarters totaling 70 million.
On the dry cargo market, we have seen an improvement in inquiries over the last few weeks and the replacement cycle looks very positive, giving the long period of below average build barge build rates.
On the liquid side, given the recent low utilization rate, we're seeing late less interesting barge replacement. However, we continue to see interesting project specific barge building.
Some projects require new barges, including sales significant quantities, we have been working on this project for a while and they could take some time to become a reality.
Therefore, we will be focusing on staying as flexible as possible to run capacity up or down to allow time for these projects to materialize while at the same time looking to maximize profitability.
Given our conviction in the strength of both the dry and liquid by barge markets. We will continue to actively evaluate our footprint and capacity and adjust as necessary to allow time for the fundamentals of the business to overcome the short term weakness in the market.
Our 259 million backlog at the end of the quarter provides visibility into early 2021.
What we don't disclose what the short term view of each of our business.
Which is clouded by cold related on certain however, I will now talk about the long term fundamentals of our business, which we continue to see us extremely positive. Please turn to slide 21.
Let me start with construction products.
We're bullish on the demand fundamentals in our most important geographies of takes us on the Gulf Coast.
Given population growth has stayed frisco help on the ongoing and planned infrastructure projects.
The fragmented nature of the market provides additional organic and inorganic growth opportunities.
Turning to energy equipment. The long term drivers are highly positive as well and utility structures. We continue to received positive feedback from our customers around their future investments and we expect continued strength in the market dynamics.
The replacement of aging infrastructure combined with the new programs that we have just started position as well for future growth that teleco market should benefit with the five the build out on the new traffic structure business, which builds on our engineering and met manufacturing capabilities is driven by infrastructure spending.
We see the recent acquisitions as product lines up can be expanded to other areas over the country.
On wind towers, we expect to transition in the medium term us PTC faced this out however, we remain optimistic about the fundamental strength over renewable energy and when specific.
Our view is that the competitiveness of the technology continued trends towards sustainability by a lot by large corporations and the focus on the as de by investors should create a favorable favorable environment than demand for this bold line over over the long term.
Looking at the transportation segment the required replacement replacement cycle for barges on railcars is predicted to create long term demand.
In our most cyclical segment one of the key competitive advantages is our teams fantastic ability to manages cycle I'm extremely proud of the work they have them over the last 18 months as we navigate Apple navigated compressing railed market them at the same time increased our production to support the recovery of the barge Mark.
Barge and rail are projected to remain key plus per patient modes in North America, and the leading positions on flexible footprints are tremendous assets.
Turning to slide 22, I wouldn't I will discuss how we are transforming our portfolio consistent with our long term plan to reduce complexity and simply complexity and cyclicality.
Our focus on driving a cashcall to allocate got because capital to our long term strategic rebalancing will be one of our priorities.
When we separated from clarity about two years ago the businesses the business lines that generated the bulk of our EBITDA wind towers on rail components were also the businesses with the largest potential hurdles in front of it our wind tower business was faced with a medium term exploration of the production tax credit and resulting pricing pressure our rail.
Components business have one major customer, which created pricing quick which created pricing pressure and it needed to diversify its end markets.
With these headwinds in mind, we defined our current long term strategy anchored around infrastructure markets and decided to reduce cyclicality overtime.
To start repositioning the portfolio, we completed two large construction products acquisitions hcg materials on Cherry. These were donella productive multiples on integrated nicely providing platform for additional growth.
In the energy equipment, we focused first on getting better expanding lean practices throughout the segment that resulted in significant margin improvement once the operational improvements gained traction we started executing the growth plan into adjacent markets with three small acquisitions as a result of the strategy and execution over the last 18 months that to be.
Businesses with the most sustainable growth potential construction materials and utility structures have replaced wind towers on rail components as the two main contributors floor EBITA over the last 18 months, we have completely change the mix and resiliency of our portfolio, which has provided in value proved invaluable during these uncertain times slide.
23 shows the expansion of our utility structure business into adjacent infrastructure related product. Let this has been small acquisitions. However, the goal is to leverage the engineering and manufacturing resources of our closer to enhance and accelerate the growth into other products and geographies.
Turning to slide 20, 425, we highlight our commit continued commitment we as GE in August we plan to publish our mid year is de update which will include more more on our goal goals on plans and we remain on pace to publish our full year sustainability reporting 2021.
As a final thought slide 26 gives our customers value proposition a portfolio of industry, leading infrastructure businesses and experienced management team extremely low leverage with capacity to invest in disciplined growth opportunities focused on capital allocation with a plan to grow on a strong track record of delivering and executing.
Well go with 19 has brought on new challenges, we continued to work everyday towards advancing our long term vision.
Operator, I would like to open the call two questions.
Finally at this time that he would like to ask your question. Please press Star then one on your test cell phone you may recall your question that into our licensing honky once again that is far anyone.
And we'll take our first question from Sina with Oppenheimer. Please go ahead.
Okay, great. Thank you very much.
Hey, guys just talk a little bit more on the part side.
Quarter funds.
Nobody really seen from the end markets normalcy, the barge utilization dig deeper.
In closing what the barges are transporting.
He may be give us like it sounds like what's going on in those markets or maybe what your your outlook for those markets are and then how that would then translate into higher utilization would that mean higher orders for you guys.
Sure.
Thank you Ian So let me give you and markets are the from let me start with the dry cargo market.
As we've mentioned a we are seeing improved inquiries over the last few weeks from customers.
The biggest thing there as you know Lisa is the agricultural markets on and I think the biggest the biggest.
Seem to be watching is the relationship with China and the the exports to China.
I think.
If you look at the crop for this year on some of the expectations for exports there looking more promising on there's at least some good news coming out of the Chinese market in terms of pricing for corn et cetera that I think for pain say, a relatively better picture in terms of of demand for dry.
Cargo barges.
The other piece that's important in dry cargo is that the replacement cycle.
This is really should be really strong the.
We've had several years, so very very low demand for dry cargo barges. We were just getting started most of the growth. This quarter came from our dry cargo production, which is ramping up very nicely.
So I think between some relatively positive news on the on on the agricultural side and the replacement cycle, we should see.
Covered this going to create some uncertainty in the short term, but we should see a a relatively solid.
Demand for for dry cargo margins over the several years on the liquid side.
Refined products and petrochemicals and the.
Oil derivatives are the ones that have been very slow a over the last few months a yield petrochemical capacity slow refineries have a slowdown significantly as people don't user car, where plants are not flying et cetera, et cetera, and that creates short term.
A low utilization rates on the var disc, which is which is a significant problem because that people don't require as many barges add the river system becomes more efficient et cetera et cetera. So in the short term I think complete until we have more clarity on how these this virus gets controlled on people start doing there are no.
From a life and it's going to be is going to be choppy I think in terms of.
Of utilization rates on deals in hand, we have talked about some specific projects that we are a that we are.
Continuing to work on on these projects could be large on they are very specific this would not be things that are currently being moved on the river system, but this additional things that can be moved and require new barges. So we'll be working with potential customers to attack these projects and Thats, what weve why we've said that.
Our goal in the short term is to stay very flexible tool that we can ramp or production up or down depending on how these projects materialize.
And be able to have flexibility.
Because these products take time to materialize.
Okay.
This doing so well.
Well, maybe give us some specific examples.
What chariots brought to you answer how you've seen in materialize in this quarter.
Maybe example, or two would be helpful. Thanks.
Absolutely. So sold several things went Sherri I think the first thing that Cherry brought the and when you are buying a company sold sometimes hard to predict how thats going to workout, but I think that cherry broader in an incredible culture with demo incredible team.
They are.
Extremely extremely result, driven an extremely resource pool.
And they brought a really solid a list of projects that they were actually executing on.
Before we bought them. So I think the first thing that they brought is that they bought their culturally brought their team which is incredible in terms of of things that they are doing let me give you a couple of examples. So they had a list of additional properties that they wanted to buys what we could expand some of that are a result info.
Feelings around Houston, and we're working on that we've already bought a couple of properties and we have several more in the pipeline.
Another. Good example is if you look at them if you look at.
Houston, the Houston market, there's really very little rock most of the sand and Cherry those mostly sand.
But especially during the rainy season, there's a significant demand for rock.
And.
What was it was not able to get drunk they they get a they get some large.
You can call it drops from the recycle concrete.
But now we're working with our Mexico team and we are starting to import rock from Mexico to Houston area and Thats a few examples over the projects that they had in there in their pipeline that I think with the our cost footprint, we are able to two to enhance.
And then then you have the additional growth that we expect from Cherry No right. Now we are finalizing the integration and getting to learn and the business, but the goal is to replicate their business model in other geographies and Thats what were going to take it in this the in the in the next stage.
And recycled magnitude aggregates for sure. He is something that we did not do before.
We are learning the business, either PVC very appealing business and theres opportunities.
I think in several geography in the country and especially in places where we're all over the operating and it fits very well, we very easy strategy. So I think all in all add the Cherry acquisition has been very very successful.
Alright. Thank you very much appreciate the color.
And we'll take our next question Crownpoint salmon with D.A. Davidson. Please go ahead.
Great. Thank you good morning.
Good morning pointed breadth.
And Tony on our construction products and it looks like sharing your natural aggregates business performed really well can you can you help us understand the headwind.
Based from the specialty businesses that tied to specific market or was it because it wasn't considered essential and do you see those headwinds potentially fading here in the second half.
Sure. So construction as you know we have the aggregates, we have specialty and we have shoring.
And.
Within aggregates, we have cherry with recycled look.
Life.
On the specialty side, there were a couple of headwinds firstly I'd say, it's it's a more a national footprint that we have and theres regions, where we had.
Specific a shutdown so we had to shut down a small facility in the northwest.
In Washington State and then we have facility in California, where we had to also slowed down significantly and not only us, but especially our customers. If you think about it at the facility. We should that was not because we were forced to show down it was because our customers were shut down.
So the miles locally was not the will not working well and we have to slowdown on several projects got delayed. So that's that's one specific issue on the on the shoring Scott mentioned in his comments. It's also a national footprint, even though we only producing in one state and we are starting now to to produce in metro.
Well, we're shifting some production to Mexico, as we had significant amount and couldn't keep up with demand in the in the first quarter.
But our main production is in Michigan.
And and we shipped nationally.
Something happened towards us.
Terms of Capex as Scott mentioned, so some of our customers.
Our customer Cvss, capex and like costs, everyone slowdown capex in the in the second quarter us there.
Trying to predict what's going to happen, but as Scott mentioned also.
As the US demands have gone by we're starting to see more positive tone from our core customers and things are starting to improve so the view that we had from both specialty materials and showing at the be may was very weak.
That is as the quarter progress.
I started coming turning on and on it started looking better and I think every time, we talk to our team. It sounds better. So we are we're optimistic about the future of both businesses.
So it sounds like on specialty it's more demand disruption versus demand destruction that that's correct Thats correct Thats a good that's a good way yes.
Okay.
And then our bar I mean, this year looks pretty solid with that book of business do you have on hand in turn here with the what point do you began to get concerned about next year for the barge business and after kind of consider taking those cost action you need to see another quarter two orders like this before we can really say next year.
He is going to be a tough year.
Yes, I think I think so yes.
Absolutely convinced that the fundamentals of the business are really strong and that the replacement cycle and the drivers of the business and our position in the in the in the industry dynamics and our position our competitive position our great.
So.
I think more than a concern I would tell you my focus right now is going to be on making sure that we can stay very flexible to be able to allow those fundamentals of the industry to overcome the short term Colgate related disruptions.
And we're good that's why we've said, we're we're going to be watching our footprint than our manufacturing capacity.
And if needed we are going to slow down to be able to match. The short term demand, but we want to keep our flexibility. So we can ramp up as soon as it picks back up so.
What happened to us if you remember a year and a half ago as as demand picked up we didn't have the capacity to reopen as fast as we should have opened.
And that's why we decided to open a third plant.
And this time, what I want to do is keep the flexibility I don't want to sell barges that the market doesn't need.
What I want to keep the flexibility to be able to ramp our production fast up and down and that means of cores watching our cost structure and on that and flexing our cost structure down as we've done in the past as you know this business. We are very good at it we never lose money when things go down and and our ideas to continue to focus on profitability.
And maintaining our margins while staying flexible.
Okay. Thank you for taking my questions I appreciate it.
And we'll take our next question really on the Merrill Lynch.
Okay and company. Please go ahead.
Hey, good morning, I Hope you all are well.
Hello.
Okay.
Just wanted to ask about that trench shoring business.
What are you hearing from for equipment rental company customers regarding their willingness to deploy capital for Capex as some of the uncertainty that JV felt earlier in the year subsided or are they kind of waiting for.
Another shoe to drop there.
Hello, Thank you for questions yes.
A replay of the human March April is basically all capex froze.
On a say as Scott mentioned in his remarks on them. We are we are seeing more positive tone from our customers.
In terms of capital deployment that we have started to receive more orders in the last few months.
And we see a more positive tone from them and from our team in terms of market conditions. So I think we're we're optimistic about that business and the fundamentals and and hopefully. This this is just a short term blip in terms of of orders slowed down no, but we are seeing improved trends over the last few months.
Yes.
Okay, that's helpful and so.
What does your Crystal ball tell you about maybe tactic lower cash receipts on state infrastructure budget.
In terms of life experience that went ahead and if that doesn't do.
When could that began to affect you.
Yes sure earlier this is Scott, yes, I think most of.
Our biggest status, Texas and Thats. The one we watch most closely Texas feels pretty solid.
For the third quarter, and then probably ended the fourth quarter and we've had several.
Positive quarters of letting data the DFT has come out and said today.
Every reiterated their 77 billion dollar 10 year plan. So overall, we're optimistic that the fundamentals are still strong in Texas is there have been some headwinds in the recent months with sales tax revenue being down April and May where the worst months, but then it bounce back up in June. So overall, we are.
Positive.
In Texas, and our other corestates, although we will watch those tax receipts closely and look at the impacted they have on state budgets.
Got it appreciate the color there and then just.
My last one is on on the equipment side.
You are investing in transmission distribution, if you seem pretty optimistic about the outlook. There. It's just hoping you could talk about the communications infrastructure opportunity at both in the near term and Walter Thank you.
Sure. So so if you think about the.
This structures utility.
You know traffic structures telecom structures at the end of the they similar engineering similar manufacturing footprint and they fit very well into.
Let's say the back part of the of the process, which is the manufacturing that we have Andy expertise in engineering. So it's a similar product the end markets are very different than driven by different dynamics.
But all of these markets, we like the dynamics the telecom market that you that your reference at the company. We bought does not do this the micro sales for the very small cells of global attached to buildings or profit lights or things like that this this company makes a larger structures both lotteries.
And polls mainly lattice.
And this this.
Sell structures support the micro structure is around the city. So you need this big towers to support the smaller ones and then on that with the Fiveg rollout, we think theres going to be a significant.
Opportunity to grow this company, though not only where it is right now, but we have manufacturing capabilities across the country and gay da's to be able to use our manufacturing capabilities to replicate this business across the U.S same thing with the traffic structures with the with the sign and private structures that we bought in Florida.
A DC said that business, that's driven by a infrastructure spending.
Right now we have a great positioning, Florida, but we want to replicate the business across the us and that's one of our biggest projects are also and finally, we bought US more concrete poll manufacturer. This is cast concretes multiples.
And at the idea is that we want to be able to approach our customers and offer them not only steel structures, but congrats structural full so the idea is to widen our.
Portfolio approach for our customers and also widen our markets. So that we as we've said quite to reduce the cyclicality of the business and don't depend on a single market. Even though we are extremely bullish on the on the on the utility market.
Well go next is performing credit Suisse CJ Securities. Please go ahead.
Good morning, Thanks for taking your questions.
Good morning.
Okay.
I'd like to start.
Discussing M&A.
Strong liquidity net debt slow is the strategy to focus on smaller tuck ins due to just the market uncertainty or are you still willing to make a bigger acquisition. If you find the right opportunity.
So I think.
Stephen laws the.
We both are on only on the let's say.
Both our open opportunities for us on the small side.
We continue to see smaller opportunities from the aggregate side.
And specialty materials that I think could be talking sell on things that we can.
Finally, do and opportunities that we have a pipeline our fund so those are relatively easy there and there they complement those very very well on the larger side. A if you think or if you look at our numbers I think what you're seeing from our a from the company's we would like to buy they're probably doing well.
If they are doing is there.
Serving similar market so.
We're not looking right now we don't see that center Plaza as an area of or the time to buy.
Very very cheap things that are out there I don't think that are there any cheap things out there or things that we would be interested in a we will continue to look at our long term strategy and find opportunities of things that we like that are extremely valuable.
And that we will be willing to pay.
At the same time as we've talked about Theres some uncertainty in the future. So we're going to be very disciplined we're going to be watching our fundamentals were going to be watching.
Our markets to make sure that we are on solid ground before we commit to anything.
We were always evaluating opportunities we have a pipeline of opportunities and I think we're willing to do both small and larger things, but at the same time very disciplined around what we're looking for the price we would be on that and remembering our goal our goal is.
That we're going to try to to reduce the cyclicality in complexity and increase our return on invested capital. So we will keep those things as major focus for our decision making.
That makes sense. Thank you.
And in terms of barge with utilization rates lower are you seeing any market shifts maybe your typical customers are deciding to rent versus buying them just to save on capex as well.
I think the shift in what we're seeing from some of our customers and I think how they approach the market. Some of our customers are finding different approach to two to market conditions that.
A for some people work better for them for others and could generate the additional barge demand for for some customers are traditionally have not bought from us So I think.
This does market of course, what's important for our customers is their balance sheets. Some are very well capitalized on our list well capitalized. So we're going to be watching for that I think again. This is I think this is a very short term thing and that we have two we have to navigate through.
But the fundamental of the barge market is just incredible is a really really great market for ourselves and I think is going to recover.
When we talk to the oil people a that are in the in the business the faster they adjustments happened in the oil market the faster it comes back.
So right now its has demand issue. So the demand is the problem is not a supply issue in terms of barges.
And demand is to come back for this get too to get sold so hopefully that does happen soon and and we.
We are seeing different approach to the market to your question. What we are seeing different approaches to these conditions from different customers.
Got it okay. Thank you very much.
Your next question can Bascome majors with Susquehanna. Please go ahead.
Sure Scott clearly, there's some uncertainty to say that leaves around where revenues and EBITDA will fall in the second half, but we have seen a number of cyclical companies maybe be a little more willing to frame their free cash flow expectations, just given the inherent buffers are working capital in discretionary Capex sphere.
Any thoughts from you guys on on either of a range of or even just a floor to to what you think you can deliver on free cash flow this year or despite the challenges would be helpful. As we think about where the business itself. It's got it. Thanks.
Sure Bascome this is Scott.
Let me give you some color on free cash flow. So we generated $76 million of free cash flow in the first half, which was a really strong first half performance in the third quarter. We expect another strong free cash flow performance. The fundamentals of the business remains strong we expect to continuing make working capital improvements.
The fourth quarter is when we expect a bit of a drag on free cash flow because we have some projects that we've already gotten paid for us of advance billings that we received in the fourth quarter last year and then we'll have some contracts where we won't collect them until Q1. So we would expect a drag in Q4, but when you put it all together.
Expect free cash flow to be right around if not higher than a 100% of our net income for the year.
You know that follows a year last year, when we had more than 200% free cash flow conversion. So put last year with this year to really strong years of free cash flow and this year individually.
We expect great free cash flow.
I appreciate the detail there.
Your last one for me I mean, we've talked about M&A in the positioning a couple of different ways and.
There are Antonio I appreciate the long term slide you for in kind of how far you have come in the last two years, we look out the next two or three years for our coach.
And your where do you seek to Opportunistically focus the portfolio Bart maybe monetizing some businesses that are becoming less core overtime.
Absolutely. Thank you bet Bascome, so a couple of things there first.
As you saw in that slide for the first time. This with this was our largest the EBITDA contributor is construction materials. This this quarter.
And then even the first half of the year so.
So I think that tells you a lot about what we were trying to say about couple of years ago, How we were going to reposition the business.
And I would see that this trend of growing the construction and utility structural business or products around it will continue to be the trend that you should see.
And at the same time as we see opportunities there.
Yes, we should if you asked me a couple of years from now should we see some.
Changes in the portfolio divestitures, I think I think you should expect us to be working on them.
At the same time.
With conditions as they are it's not it's not easy to two to find buyers of things that we we that we can find a better a place where they fit better. So I think you should see also unexpected to be working on them I hope conditions are such that we can that we can.
Execute no I think it's just as important to buy new things.
For our Investor community, just as important to tell them, we're buying these things.
Yes, the to give you the sign that we are really simplifying the portfolio on and and taking the steps to to become a a simpler story now so it's our priority. We haven't we are clear on it.
Just to too.
To give you a little more color on Scott's.
Thoughts on working capital and cash flow for the second half just.
I want to complement his thoughts.
The fourth quarter looks.
To be a drag and if you asked me in the first quarter. The second quarter look to be a drive and with this calling uncertainty thinks our cloud in the short term because we don't know how things are.
Happening. So we are in the we're in the beginning of the third quarter, we have time to adjust and will be adjusting with our businesses to try to make this fourth quarter non drug but right now it looks like that but we're going to be working we still have time.
Thank you both I really appreciate it.
It does appear that there are no further questions at this time I'll turn the call back over to Hewlett Packard closing remark.
Thank you Ashley. Thank you everyone for joining us today, we look forward to speaking with you again next quarter.
Thank you and this does conclude your program. Thank you for your participation you may disconnect at any.
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