Arcosa Inc

NYSE:ACA

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Arcosa Incorporated Second Quarter 2020 Earnings Conference Call. My name is Ashley and I will be your conference call coordinator today. As a reminder today's call is being recorded.

Now, I would like to turn the call over to your host, Gail Peck, Senior Vice President, Finance and Treasurer for Arcosa. Ms. Peck, you may begin.

[Gail Peck, SVP, Finance and Treasurer]

Good morning, everyone. Thank you for joining our second quarter 2020 earnings call. With me today are Antonio Carrillo, President and CEO; and Scott Beasley, CFO. A question-and-answer session will follow their prepared remarks today. A copy of yesterday's press release and the slide presentation for this morning's call are posted at our Investor Relations website www.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 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. 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 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.

[Antonio Carrillo, President & CEO]

Thank you, Gail. Good morning and thank you for joining today's call to discuss Arcosa's second quarter results and our future outlook. Second quarter results demonstrated the resilience of Arcosa in the face of very challenging business conditions. We have remained fully operational during the pandemic, an essential business whose products and services help 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 well-being of our employees and the communities where we operate.

I want to recognize all of our employees for their incredible commitment and dedication during these difficult times. I'm extremely proud of Arcosa for continuing to support our customers and communities. This was an exceptional quarter for Arcosa across all metrics, including revenue, net income and adjusted EBITDA.

Each of our business segments posted revenue growth. Our construction business outperformed our expectations showing organic growth and the benefit of the Cherry acquisition that closed earlier this year. Our shift to more stable and diversified in markets over the last 18 months has been an important factor in enabling this growth.

Another major focus area has been our cash culture. In the second quarter, we generated $56 million of free cash flow versus the use of $5 million a year ago. Our free cash flow was nearly twice our net income. An impressive result as we are successfully reducing the working capital requirements of our business and focusing on margin expansion.

During the quarter, we use cash flow to pay down debt. And at the end of June, we had a relatively modest net debt of $108 million or less than half our trailing 12 months EBITDA. We have kept our leverage low while investing $314 million on acquisitions in the first half of the year, the bulk of which was Cherry.

As we move forward, our goal is to continue to utilize our balance sheet strength and allocate our strong cash flow generation on projects that allow us to grow in attractive 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 progress in continuing to execute on our long-term vision.

Please turn to slide seven. I want to spend a few minutes discussing how we have shifted to operate in the current COVID environment. Given the essential nature of our business, we have worked hard to keep our plants operating to support our customers’ needs at this difficult time.

At the same time, we have also prioritized the safety of our team. We have implemented protocols consistent with CDC guidelines at our plants and offices. While many of our offices have shifted to work from home, that option is not possible for our plants.

There we have implemented a number of important measures you can see on this slide. While our employees are our top priority, our community communities are important to us. Many of them are suffering. We have taken a number of steps to support the community around our plants and offices. And we have donated personal protective equipment to small businesses.

Turning to slide nine. Let's look at our consolidated results for the second quarter. Our businesses performed extremely well 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 which we have put in place. Our Construction Product 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 and our financial metrics and then I will give you additional color on our short- and long-term view of our market. Scott?

[Scott Beasley, CFO]

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 segment’s 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 COVID-related uncertainty in the next few quarters, the fundamentals remain strong.

In our legacy natural aggregates business where our largest geographic presence is in 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 the 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 shoring product line declined almost 30% as customers reduced their capital expenditures. We were able to adjust our cost structure accordingly and minimize the impact on margins.

We have seen a small uptick in inquiry levels for shoring products in 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 COVID 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 and inquiry activity has remained steady throughout 2020 despite the pandemic, adding to the more than $130 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 and 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%. In the barge business, our revenues were up roughly 62% primarily due to increased dry barge production, as we began delivering hopper barges that 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 of 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 and rail components declined roughly $28 million against last year’s second quarter, although it was 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 have 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 will 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 Arcosa.

We've made particular progress in our receivables and payables over the last year. Working capital is 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 a 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 of maintenance CapEx, plus a select set of organic growth projects to expand capacity and utility structures and add reserves in 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.

We've invested almost $60 million in acquisitions, plus an additional $10 million to organically expand our capabilities in transmission and distribution structures. The three acquisitions have combined annualized revenue of approximately $50 million and EBITDA of $9 million prior to expected growth and cost synergies.

Antonia will discuss the strategic rationale and respective end markets in more detail.

I will now turn the call back over to Antonio.

[Antonio Carrillo, President & CEO]

Thank you, Scott. As Scott detailed, our business performs 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 2018. And our long-term vision for Arcosa remains the same.

Shifting to Slide 20, as we discussed last quarter, the COVID-19 impacts on our near-term outlook vary across our portfolio, end markets in Construction Products and Energy Equipment, representing almost 75% of second quarter EBITDA have remained healthy, while Transportation Products has experienced significant decline in new order activity.

Construction activity proved to be resilient in our key states during the second quarter, helping to drive rate performance in the segment. Demand in the early part of the third quarter has been very similar -- at very similar levels. Construction Product owners have shorter lead times than other businesses. But we are watching several key indicators in our geographies to understand future demand string.

In the short-term, we're focused on state's fiscal health, learning activity and the progress of federal elections, including the upcoming expiration of the Highway Funding Bill and the potential stimulus measures. In our Energy Equipment, we are less exposed to COVID related uncertainty, as our wind towers and utility structure backlogs provide good near-term visibility and many of our market drivers remain intact.

Throughout this period, demand and bidding in our utility structure business has remained strong. With wind towers the current backlog supports our 2020 production plans. And we're working with customers on 2021 orders.

In our Storage Tank business, we saw some slowdown during the early stages of the pandemic, however we have continued to navigate the spirit, we see a more positive tone emerging from our customers. Our Mexico business continues to see slow demand.

On our Transportation Products business faced the most challenging near-term outlook. In components, our business as was under pressure before the pandemic continues to navigate the declining build rates for new cars. In this business, we are staying focused on cost containment, remaining cash flow positive, and continuing our efforts to diversify our customer base in 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 COVID related issues, we have experienced a slowing in orders and inquiries since the beginning of the pandemic.

As expected, second quarter orders were below recent quarters, totaling $17 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, even the long period of below average barge build rates.

On the liquid side, given the recent low utilization rates, we're seeing less interest in barge replacement. However, we continue to see interest in projects-specific barge building. Some projects require new barges and could entail 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 ramp 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 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 just discussed was the short-term view of each of our businesses, which is clouded by COVID related uncertainty. However, I will now talk about the long-term fundamentals of our business, which we continue to see as 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 Texas and the Gulf Coast. Given population growth, state fiscal health and the ongoing and planned infrastructure projects. The fundamental nature of the market provides additional organic and inorganic growth opportunities.

Turning to Energy Equipment, the long-term drivers are highly positive as well. In utility structures, we continue to receive 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 added position us well for future growth. The telecom market should benefit with the 5G build up. And the new traffic structure business, which builds on our engineering and manufacturing capabilities is driven by infrastructure spending. We see the recent acquisitions as product lines that can be expanded to other areas of the country.

On wind towers, we expect the transition in the medium term as PTC phrases out. However, we remain optimistic about the fundamental strength of renewable energy and wind specifically. Our view is that the competitiveness of the technology continued trends toward sustainability by large corporations and the focus on ESG by investors should create a favorable environment and demand for this product line or over the long term.

Looking at the Transportation segment, the required replacement cycle for barges and railcars is projected to create long term demand. In our most cyclical segments, one of the key competitive advantages is our team's fantastic ability to manage cycle.

I'm extremely proud of the work they have done over the last 18-months as we navigated a contrasting rail market and at the same time increased our production to support the recovery of the barge market. Barge and rail are projected to remain key transportation modes in North America and the leading position some flexible footprints are tremendous assets.

Turning to slide 22, I will discuss how we are transforming our portfolio. Consistent with our long-term plan to reduce complexity and cyclicality. Our focus on driving a cash culture to allocate capital to a long-term strategic rebalancing will be one of our priorities.

When we separated from Trinity about two years ago, the business lines that generate the bulk of our EBITDA, wind towers and rail components were also the businesses with the largest potential hurdles in front of us. 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 pressure, and it needed to diversify its end market. With these headwinds in mind, we defined our current long-term strategy anchored around infrastructure markets, and designed to reduce cyclicality overtime.

To start repositioning the portfolio, we completed two large construction projects acquisitions, ACG Materials and Cherry. These were done at attractive multiples and integrated nicely, providing platforms for additional growth.

In the Energy Equipment, we focused first on getting better, expanding lean practices throughout the segments 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, the two businesses with the most sustainable growth potential construction materials and utility structures have replaced wind towers and rail components as the two main contributors to our EBITDA.

Over the last 18 months, we have completely changed the mix and resiliency of our portfolio, which has proved invaluable during these uncertain times. Slide 23 shows expansion of our utility structure business into adjacent infrastructure related product lines.

This has been small acquisitions. However, the goal is to leverage the engineering and manufacturing resources of our concept to enhance and accelerate their growth into other products and geographies.

Turning to slide 24, and 25, we highlight our continued commitment to ESG. In August, we plan to publish our midyear ESG update, which will include more on our goals and plans, and we remain on pace to publish our full year sustainability report in 2021.

As for final thoughts slide 26 gives our courses 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 and a strong track record of delivering and executing. When COVID-19 has brought on new challenges, we continue to work every day towards advancing our long-term vision.

Operator, I would like to open the call to questions.

[Operator]

[Operator Instructions] And we'll take our first question from Ian Zaffino with Oppenheimer. Please go ahead.

[Ian Zaffino, Oppenheimer]

Hi, great. Thank you very much. Can you guys just talk a little bit more on the barge side on the order front? Nobody really seen from the end markets, not necessarily the barge utilization. But if you dig deeper into what the barges are transporting.

Can you maybe give us like a sense of like what's going on in those markets or what your outlook for those markets are? And then how that would then translate into higher utilization, which would then mean higher orders?

[Antonio Carrillo, President & CEO]

Sure. Thank you, Ian. Let me start with the dry cargo market. As we've mentioned, we are seeing improved inquiries over the last few weeks from customers. And the biggest thing there, as always is the agricultural markets. And I think the biggest thing to be watching is the relationship with China and the exports to China.

I think if you look at the crop for this year, and some of the expectations for exports, they're looking more promising. And there's at least some good news coming out of the Chinese market in terms of pricing for corn, et cetera, that I think paints a relatively better picture in terms of demand for dry cargo barges.

The other piece that's important in dry cargo is that the replacement cycle should be really strong. We've had several years of 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 agricultural side and the replacement cycle, we should see -- and COVID is going to create some uncertainty in the short-term, but we should see a relatively solid demand for dry cargo barges over the several years.

On the liquid side some refined products and petrochemicals and on derivatives are the ones that have been very slow over the last few months. Petrochemical capacities low refineries have slowed down significantly as people don't use their car, where planes are not flying, et cetera, et cetera.

And that creates short-term, a low utilization rates on the barges, which is a significant problem because that the people don't require as many barges, the river system becomes more efficient, et cetera, et cetera. So in the short-term, I think, until we have more clarity on how this virus gets controlled and people start doing their normal life, it's going to be choppy I think in terms of utilization rates.

On the other hand, we have talked about some specific projects that we are continuing to work on. And these projects could be large, and they are very specific. These would not be things that are currently being moved on the river system, but this is additional things that can be moved and require new barges.

So, we've been working with potential customers to attack these projects. And that's why we've said that our goal in the short-term is to stay very flexible so that we can ramp our production up or down depending on how these projects materialize and be able to have flexibility because these projects take time to materialize.

[Ian Zaffino, Oppenheimer]

Can you give us some specific examples? What Cherry has brought to you? And how you've seen them materialize in this quarter? Maybe an example or two would be helpful. Thanks.

[Antonio Carrillo, President & CEO]

Absolutely. So several things on Cherry. I think the first thing that Cherry brought up and when you're buying a company is sometimes hard to predict how that's going to work out, but I think that Cherry brought in an incredible culture with them, an incredible team.

They are extremely, extremely result driven and extremely result full. And they bought a really solid list of projects that they were actually executing on before we bought them. So I think the first thing that they brought their cultural and they brought their team, which is incredible.

In terms of things that they're doing, let me give you a couple of examples. So, they have a list of additional properties that they wanted to buy so that we could expand some of their areas of influence 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 the Houston market, there is really very little rock most of it is sand and Cherry bought mostly sand. But especially during the rainy season, there's a significant demand for rock. And Cherry was not able to get rock they get they, they get some large rocks from the recycled concrete.

But now we're working with our Mexico team. And we are starting to import rock from Mexico to Houston area and that's a few examples of the projects that they had in their pipeline that I think would be Arcosa footprint, we are able to enhance. And then you have the additional growth that we expect from Cherry.

Right now we are finalizing the integration and getting to learn the business. But the goal is to replicate the business model in other geographies and that's what we're going to take it in the next stage. And recycled aggregate for sure is something that we did not do before.

We are learning the business. It is a very appealing business and there's opportunities, I think in several geographies in the country, and especially in places where we are already operating. And it fits very well with our ESG strategy. So I think all in all the Cherry acquisition has been very, very successful.

[Ian Zaffino, Oppenheimer]

Alright, thank you very much. Appreciate the color.

[Operator]

And will take our next question from Brent Thielman with D.A. Davidson. Please go ahead.

[Brent Thielman, D.A. Davidson]

Great, thank you. Good morning.

[Antonio Carrillo, President & CEO]

Good morning.

[Scott Beasley, CFO]

Good morning, Brent.

[Brent Thielman, D.A. Davidson]

Antonio, on Construction Products, and it looks like Cherry in your natural aggregates business performed really well. Can you help us understand the headwinds phased from the specialty business? Is that tied to specific markets? Or was it because it wasn't considered essential? And do you see those headwinds potentially fading there in the second half?

[Antonio Carrillo, President & CEO]

Sure. So, Construction, and then we’ve aggregates, we have specialty and we have Shoring. And within aggregates we have Cherry with recycled. But on the specialty side, there were a couple of headwinds. First, it's a more national footprint that we have.

And there's regions where we have a specific a shutdown. So we had to shut down a small facility in the northwest, in Washington State. And then we have a facility in California where we have to also slow down significantly, and not only us, but especially our customers, if you think about it.

The facility we shut down was not because we were forced to shut down, but because our customers were shut down. So, demand locally was not working well and we have to slowdown and several projects got delayed. So, that's one specific issue.

On the Shoring, Scott mentioned in his comments. It's also a national footprint even though we were only producing in one state. And we are starting now to produce in Mexico. We're shifting some production to Mexico as we have significant demand and couldn't keep up with demand in the first quarter.

But our main production is in Michigan, and we ship nationally. And something happened to us in terms of CapEx, as Scott mentioned. So some of our customers see this as CapEx. And like everyone's slowed down CapEx in the in the second quarter as they're trying to predict what's going to happen.

But as Scott mentioned, also as the months have gone by, we're starting to see more positive tone from our customers and things are starting to improve. So the view that we have from both specialty materials and Shoring in May was very big. And as the quarter progressed, light started turning on and it started looking better. I think every time we talk to our team, it sounds better. So, we are we're optimistic about the future of both businesses.

[Brent Thielman, D.A. Davidson]

Yes. So, it sounds like on specialty it's more demand disruption versus demand distraction. Is that…

[Antonio Carrillo, President & CEO]

That's correct.

[Brent Thielman, D.A. Davidson]

Okay. And then on barge, I mean, this year looks pretty solid with the book of business that you have on hand. Antonio, what point do you begin to get concerned about next year for the barge business and have to kind of consider taking those cost actions if you need to see another quarter or two orders like this before we can really say next year is going to be a tough year?

[Antonio Carrillo, President & CEO]

Yes. I'm 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 industry, the dynamics and our position, our competitive position are great.

So, I think more than a concern, I will 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 COVID related disruptions.

And that's why we've said we're going to be watching our footprint and our manufacturing capacity. And if needed, we're going to slowdown 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 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.

But I want to keep the flexibility to be able to ramp-up production fast up and down. And that means, of course watching our cost structure and flexing our cost structure down as we've done in the past, as we know this business, we're very good at it. We never lose money when things go down. And our idea is to continue to focus on profitability and maintaining our margins while staying flexible.

[Brent Thielman, D.A. Davidson]

Okay, thank you for taking my questions. I appreciate it.

[Operator]

And we'll take our next question from Julio Romero with the Sidoti and Company. Please go ahead.

[Julio Romero, Sidoti & Company]

Hey, good morning. Hope you all are well. Just wanted to ask about that trench shoring business, what are you hearing from your equipment rental company, customers regarding, their willingness to deploy capital for CapEx, has some of the uncertainty that maybe felt earlier in the year subsided or are they kind of waiting for maybe the other shoe to drop there?

[Antonio Carrillo, President & CEO]

Julio, thank you for the question. Yes, the end of the March, April, is basically all CapEx close. And I say as Scott mentioned in his remarks, and we are seeing more positive tone from our customers in terms of capital deployment. And 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 are optimistic about that business and the fundamentals. And hopefully this is just a short-term blip in terms of order slowdown. But we are seeing improved trends over the last few months.

[Julio Romero, Sidoti & Company]

That’s helpful. And what does your crystal ball tell you about maybe lower Texas feels from the infrastructure budget, in terms of like the cadence of when that is? I mean, does that impact you, when could that begin to affect you?

[Scott Beasley, CFO]

Yeah, sure Julio, this is Scott. I think, most of our biggest data is Texas and that’s the one we watch most closely. Texas feels pretty solid for the third quarter and then probably into the fourth quarter. We’ve had several positive quarters of laying data. The DoT has come out and said that they reiterated their $77 billion 10-year plan. So, overall we’re optimistic that the fundamentals are still strong in Texas.

There have been some headwinds in the recent months with sales tax revenue being down, April and May were the worst months but then it bounced back up in June. So, overall, we’re positive in Texas and our other core states although, we will watch those tax receipts closely and look at the impact that they have on state budget.

[Julio Romero, Sidoti & Company]

Got it, appreciate the color there. And then just a last one is on the Energy Equipment side. You are investing in transportation and distribution. You seem pretty optimistic about the outlook there. I was just hoping if you can talk about the communications infrastructure opportunities both in the near term and long term? Thank you.

[Antonio Carrillo, President & CEO]

Sure. So, if you think about the structures utility, traffic structures, telecom structures, at the end of the day, similar engineering, similar manufacturing footprint. And they fit very well into that part of the process which is the manufacturing that we have in the expertise and engineering. So, it’s a similar product. The end markets are very different and driven by different dynamics. But all these markets we like their dynamics.

The telecom market that you referenced, the company we bought does not do this micro sales or very small sales that are attached to buildings or traffic lights or things like that. This company makes larger structures both rails and poles, many rails [ph]. And this sales structure support the micro structures around in the city.

So, you need these big towers to support the smaller ones. And with the 5G rollout, we think there’s going to be significant opportunity to grow this company, not only where it is right now. But we have manufacturing capabilities across the country and the idea is to be able to use our manufacturing capabilities to replicate this business across the U.S.

Same thing with the traffic structures, with the size in project structures that we bought in Florida. And this is the business that’s driven by infrastructure spending. And right now we have a great position in Florida.

But we want to replicate the business across the U.S. and that’s one of our biggest projects also. And finally, we bought a small concrete pole manufacturing. This is cast concrete small poles. And the idea is that, we want to be able to approach our customers and offer them not only steel structures but concrete structures also.

So, the idea is to widen our portfolio approach for our customers and also widen our markets. So that as we said, try to reduce the cyclicality of the business and don’t depend on the single market even though we are extremely bullish on the utility market.

[Operator]

And we’ll go next to Stefanos Crist with CJS Securities. Please go ahead.

[Stefanos Crist, CJS Securities]

Good morning. Thanks for taking our questions.

[Antonio Carrillo, President & CEO]

Good morning.

[Stefanos Crist, CJS Securities]

I’d like to start discussing M&A, your strong liquidity and net debt as well. 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?

[Antonio Carrillo, President & CEO]

So, I think Stefanos, let’s say both are open opportunities for us. On the small side, we continue to see small opportunities on the aggregate side and specialty materials that I think could be tuck-ins and things that we can easily do and opportunities that we have our pipeline of. And so those are relatively seeing there and there they complement those very, very well.

On the larger side, if you think, if you look our numbers, I think what you're seeing from the companies we would like to buy, they're probably doing well, if they're doing -- if they're serving similar markets. So, we are not looking right now, we don't see that as an area of or as a time to buy a very, very cheap things that are out there. I don't think there are any cheap things out there, or things that we would be interested in.

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 there's some uncertainty in the future. So we are going to be very disciplined.

We're going to be watching our fundamentals. We're going to be watching our markets to make sure that we are on solid ground before we commit to anything. We're always evaluating opportunities, we have a pipeline of opportunities.

And I think we are 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 pay. And remembering our goal, our goal is that we're going to try to reduce the cyclicality and complexity and increase our return on invested capital. So we will keep those things as major focus for our decision making.

[Stefanos Crist, CJS Securities]

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 buy just to save on CapEx as well?

[Antonio Carrillo, President & CEO]

I think there's shifts in what we're seeing from some of our customers, I think how they approach the market. Some of our customers are finding different approach to market conditions that for some people work better for others and could generate the additional barge demand for some customers that traditionally have not bought from us.

So, I think this market of course, what's important for our customers is their balance sheet. Some are very well capitalized, some are less well capitalized. So we're going to be watching for that. I think, again, this -- I think this is a very short-term thing that we have to navigate through.

But the fundamental of the barge market is just incredible, it's a really, really great market for us. And I think it's going to recover. When we talk to the other people that are in the business. The faster the adjustments happen in the oil market, the faster it comes back.

So, right now it is a demand issue. So the demand is the problem, it is not a supply issue in terms of barges. And demand needs to come back for this to get solves. So hopefully that happens soon and we are seeing different approach to the market. To your question, we are seeing different approaches to these conditions from different customers.

[Stefanos Crist, CJS Securities]

Got it. Okay. Thank you very much.

[Operator]

We'll take our next question from Bascome Majors with Susquehanna. Please go ahead.

[Bascome Majors, Susquehanna]

Yes, Scott. Clearly, there's some uncertainty to say the least 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 of working capital and discretionary CapEx there.

Any thoughts from you guys on either the range of or even just the floor to what you think you can deliver on free cash flow this year despite the challenges would be helpful as we think about where the business itself is headed? Thanks.

[Scott Beasley, CFO]

Sure Bascome. This is Scott. Let me give you some color 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 remain strong. We expect to continue to 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, so advanced billings that we received in the fourth quarter of last year, it will have some contracts where we won't collect them until Q1, so we would expect to drag in Q4.

But when you put it all together, we expect free cash flow to be right around if not higher than 100% of our net income for the year. That follows a year last year, when we had more than 200% free cash flow conversion. So put last year with this year, two really strong years of free cash flow and this year individually, we expect great free cash flow.

[Bascome Majors, Susquehanna]

I appreciate that detail there. The last one for me. I mean, we've talked about M&A in the positioning a couple different ways. And, Antonio, I appreciate the long-term slide you frame kind of how far you've come in the last two years.

We look at the next two or three years for Arcos, where do you seek to opportunistically focus the portfolio by maybe monetizing some businesses that are becoming less core overtime?

[Antonio Carrillo, President & CEO]

Absolutely. Thank you Bascome. So a couple of things there. First, as you saw in that slide, for the first time this was our largest EBITDA contributor is construction materials this quarter and even in the first half of the year. So I think that tells you a lot about what we were trying to say about a couple of years ago how we were going to reposition the business.

And I would say that this trend of growing the construction and utility structure business products around it will continue to be the trend that you should see. And at the same time as we see opportunities there.

If you ask me a couple of years from now, should we see some changes in the portfolio divestitures? I think you should expect us to be working on them. At the same time, with conditions as they are, it's not easy to find buyers of things that we can find a better place where they fit better.

So, I think you should see us and expect us to be working on them. I hope conditions are such that we can execute well, I think it's just as important to buy these things for our investor community just as important to tell them we're buying these things as to give you the sign that we are really simplifying the portfolio and taking the steps to become a simpler story.

So, it's our priority. We have it. We are clear on it. And just 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 ask me in the first quarter and the second quarter look to be a drag. And, with this COVID uncertainty, things are clouded in the short-term because we don't know how things are happening.

So, at least we're in the beginning of the third quarter, we have time to adjust. And we'll be adjusting with our businesses to try to make the fourth quarter not blind. But right now it looks like that, but we're going to be working, we still have time.

[Bascome Majors, Susquehanna]

Thank you both. I really appreciate it.

[Operator]

And it does appear that there are no further questions at this time. And I'll turn the call back over to you Ms. Peck for any closing remarks.

[Gail Peck, SVP, Finance and Treasurer]

Thank you, Ashley. Thank you, everyone for joining us today. We look forward to speaking with you again next quarter.

[Operator]

Thank you. And this does conclude your program. Thank you for your participation. You may disconnect at any time.