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Arcosa Inc
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Good morning, ladies and gentlemen. And welcome to the Arcosa, Inc. Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is David, 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, SVP, Finance and Treasurer for Arcosa. Ms. Peck, you may begin.
Good morning, everyone. Thank you for joining our 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.
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. You can access the presentation by going to the Events & Presentations tab of the website. 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.
Today’s comments and presentation slides contains 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 including its Form 10-K for more information on these risks and uncertainties.
I would now like to turn the call over to Antonio.
Thank you, Gail. Good morning. And thank you for joining today’s call to review Arcosa’s fourth quarter and full year results and also to discuss our 2020 outlook.
Starting on slide six, I’ll cover the key strategic highlights before letting Scott give you more details on the quarter. 2019 was a year of solid financial performance and strong free cash flow for Arcosa, its first full year as an independent company and we expect 2020 to be another year of growth.
We also completed two important strategic initiatives in the past year. With the acquisition of Cherry Companies, a leading natural and recycled aggregates company in Houston, as well as the completion of the first ACG Materials assessment for Arcosa.
Turning to slide seven, the fourth quarter was a solid conclusion to our first full year. Adjusted EBITDA was 17% higher than in 2018 and revenue was up 19%. For the full year, adjusted EBITDA increased 29%, which was driven by organic revenue growth, operating margin improvements and the ACG Materials acquisition we completed at the end of 2018. We also made progress on all the Stage One initiatives, which translated into the impressive year-over-year EBITDA growth.
Moving to slide eight, our 2019 accomplishments have set the stage for another year of projected growth in 2020. We expect organic growth and the recently completed Cherry acquisition to lead to a 19% increase in adjusted EBITDA based on the midpoint of our guidance range. As we indicated in the press release, we anticipate 2020 EBITDA to be slightly second half weighted due to the cadence of our barge and wind tower production schedules.
We’re optimistic about the strength of most of our markets and the backlog we have provides good production visibility. Infrastructure spending remains healthy and volumes has been strong in the construction products business when we have had dry weather. The barge market continues to recover and we have had two healthy quarters of dry barge orders in a row to compliment the recovery that began in 20 -- in late 2018 on the liquid side.
Finally, within the Energy Equipment underline market fundamentals for utility structures remained robust. Driven by grid hardening and reliability initiatives and the demand for storage tanks in the U.S. and Mexico has remained steady.
The backlog for wind towers covers most of 2020 although pricing is lower than 2019. Now that the PTC has been extended, third-party forecasts for near-term wind installations have increased. We’re optimistic that the new orders will follow. The primary market headwinds for 2020 is the new railcar market, which our components business serves. The industry backlog for railcars has declined for four consecutive quarters.
On the other hand, we have been working hard since a spin-off to develop new markets and customers to help us mitigate the impact of the cycle. On the positive side, the continued recovery in our barge business is expected to more than offset the softness in components and we expect transportation EBITDA to grow in 2020.
On slide nine, the acquisition of Cherry Companies was another important strategic milestone. As we discussed in our December call announcing the transaction, Cherry is a leading natural and recycled aggregates company located in Houston and fills a key geographic gap in our Texas network.
We believe recycled aggregate will continue to be a growing market for economic and environmental benefits. And we look forward to working with the Cherry team to replicate Cherry’s natural and recycled average platform in new geographies.
Finally on slide 10, we continue making progress on our ESG initiatives. Our materiality assessments identified 11 material topics across our businesses and we plan to publish our initial sustainability report for 2020 in line with Arcosa [ph] standards. We’re incorporating ESG into our values and culture. We are early in our journey but employees and other key stakeholders have been enthusiastic about the progress we’ve made to-date.
I will now turn over the call to Scott who will provide you additional details from the quarter. Scott?
Thank you, Antonio, and good morning, everyone. I’ll walk through the fourth quarter and full year results for each segment and then give additional color on our free cash flow and outlook for 2020.
Starting on page 12, Construction Products revenue grew 56% versus the fourth quarter of 2018, driven by double-digit revenue growth in the legacy businesses plus the addition of ACG Materials, which we did not own for the for full quarter in 2018.
In our Legacy Aggregates and Specialty businesses, strong end market fundamentals driven by public and private demand, coupled with drier weather than 2018 led to very strong volume growth. Pricing was relatively flat sequentially as improved pricing and a number of markets nationwide roughly offset softness in other markets.
Segment EBITDA of $17.9 million was 44% higher than last year, but was $2 million to $3 million below our expectations for two primary reasons. First, our aggregates plants serving oil and gas markets in Texas and Oklahoma continued to be weaker than expected and we achieve lower margins on those products.
Secondly, we had an unanticipated plant shutdown at one of our specialty products plants during the quarter. This plant is now fully up and running again.
Turning to our outlook in the segment for 2020, we expect a strong construction market fundamental and our operating improvements to translate into higher overall segment margins in 2020 versus 2019 on higher revenues. Our Cherry integration is proceeding well and we expect it to have a year of EBITDA contribution consistent with what we projected at the time of acquisition.
Please turn to slide 13. Energy Equipment had another strong quarter of performance, coming in at the top end of our expected margin range even with headwinds of lower wind tower pricing. Revenue increased to $213 million and adjusted EBITDA was $27.6 million, up 19% from 2018’s fourth quarter. Margin improvements in our Utility Structures, Tanks and Mexico businesses more than offset lower margins in our wind tower’s business, leading to the EBITDA margin of 13.0%.
Our Energy Equipment group is positioned well for 2020 and our visibility is better than it was one year ago. We received $189 million of utility structures orders in the quarter driven by strong market demand and our increasing participation in the bid market.
Our backlog to be delivered within the next 12 months is up 27% from year end 2018, which includes orders for both wind towers and utility structures. For the segment overall, we expect mid single-digit revenue growth in 2020 and we view our fourth quarter margin of 12% to 13% as an achievable target for 2020.
Turning to our Transportation segment on slide 14. Fourth quarter revenues increased 30% and adjusted EBITDA increased 12% to $19 million, as the strong recovery in our barge business, more than offset softness in rail components.
I’ll start with the barge business. As described in our press release, the barge operating team did an outstanding job ramping up production as the market recovered. 2019 revenue was 73% higher than 2018 and that ramp up included the reopening of our idled facility in Louisiana and significant hiring at our Tennessee and Missouri plants.
This year’s performance was a testament to our team’s ability to scale up and down as market conditions change to create significant value for customers and shareholders. Given the magnitude of a ramp up, our production schedule did slip several weeks at one of our plants. This resulted in the delay of roughly $15 million worth of barges from Q4 into Q1, leading to lower revenue in the quarter than we expected. However, we delivered those barges during January 2020 and are still on track to meet our barge production schedule this year.
Margin should improve significantly in 2020 versus full year 2019. Now that we are through the startup phase at our Louisiana plant and have delivered the lower priced orders that were in our backlog at the beginning of last year.
Barge order activity during the quarter was also solid. We received $84 million of orders in Q4 for book-to-bill 0.8. The majority of our orders were for dry barges marking the second consecutive quarter where dry orders outpaced liquid orders.
Lower steel prices and an improved outlook for grain exports have been catalyst for the dry barge market, and we are cautiously optimistic that we are in the early stages of a dry barge replacement cycle.
Additionally, inquiry level so far in Q1 has been very healthy, both for dry and liquid barges, giving us confidence in the sustainability of the recovery. Our backlog of $347 million will be delivered entirely in 2020. Offering strong production visibility for our plants and enhancing our ability to operate efficiently. We expect to add to our 2020 production with additional orders and we are currently quoting for deliveries in Q4 and into 2021.
Moving to rail components, our business continues to face an industry wide slowdown in new rail car builds, but our team is doing an excellent job responding to this cyclical slowdown and we continue to build out our Components business that serves the maintenance and non-rail related markets.
Overall, we expect the Transportation segments have significant growth in both revenue and EBITDA in 2020. Our barge production schedule has higher deliveries in the second half of the year. So our company wide revenue and EBITDA will be more heavily weighted in the back half.
Please turn to slide 15. One highlight of our 2019 performance was the $273 million of free cash flow that we generated during the year. We are in the early stages of building a cash culture at Arcosa, which includes process improvements to reduce working capital, incentive compensation changes that incorporate working capital improvements in both our short-term and long-term incentive programs and the implementation of a rigorous capital expenditure decision process.
All of these changes are contributing to our free cash flow improvement and we believe there’s still room to improve. The $273 million was helped by approximately $50 million of advanced payments from customers to reserve production capacity and our utility structures and barge businesses.
Our free cash flow was more than 200% of net income for the year. While we are unlikely to repeat such a strong free cash flow conversion rate in 2020, our 2019 performance shows the excellent cash generation potential of our businesses, plus the impact of a renewed focus on cash flow from our operating teams.
This impressive cash flow helped us maintain a low leverage position even after our two large construction materials acquisitions. We funded the $298 million Cherry acquisition with a combination of cash and $150 million of new debt, leaving us at an approximate 0.5 net debt to EBITDA ratio, well below our long-term target.
In conjunction with raising the new debt to fund Cherry, we also upsize our committed credit facility, keeping our available cash and committed liquidity position relatively unchanged after the acquisition. Our low leverage position gives us capacity to invest and attractive growth opportunities, as well as flexibility to manage their different economic conditions.
On page 16, we include several other notes on our 2020 outlook.
I will now turn the call back over to Antonio.
Thank you, Scott. I’d like to close today’s call with a discussion of our long-term vision and the role that capital allocation plays in our progress. On slide 18, you can find the four pillars of our Arcosa’s long-term vision, which will be the foundation for the culture of our Arcosa going forward and will serve as a compass for our capital allocation decisions.
Moving to slide 19 disciplined capital allocation is a key component of making progress on each of the four pillars of our long-term vision. Since our spin-off in November of 2018, we have invested roughly $85 million in capital expenditures, $640 million in acquisitions and returned $25 million to shareholders.
Page 20 highlights are approach to acquisitions. We have allocated more than $600 million into construction plus acquisition [ph] since the time of spin. Aligned with our long-term vision, we view aggregates on specialty materials as attractive markets where we can build sustainable competitive advantages.
Over long periods of time, these markets have experienced steady volume growth, as investment in infrastructure has increased. Also, construction at Arcosa [ph] have achieved consistent pricing growth making them highly attractive markets. With more stable long-term demand drivers the investments we have made in the aggregate and specialty materials business should reduce the cyclicality of our portfolio over time.
In addition, our Aggregates and Specialty Materials business have unique sustainable competitive advantages. Looking at ACG, the business has long-term reserves, processing capacity and strong product innovation capabilities.
Cherry has an extensive network of strategically located facilities and reserves across the Houston market, as well as low cost access to critical raw materials. They also have technical expertise in concrete recycling that has been developed over several decades.
Finally, we have found attractive acquisition opportunities in Aggregate and Specialty Materials because of the fragmented industry structure with the ability to buy small- to medium-sized assets at reasonable multiples.
Through this disciplined acquisition process that began when the business was part Cherry we have grown Construction Aggregates and Specialty Materials significantly since the spin from $280 million in revenues in 2018 to over $500 million including the pro forma results from Cherry.
Turning to slide 21, organic growth projects are also important part of our capital allocation strategy. We’re allocating capital to all of our businesses to continue to develop organic opportunities. However, we see larger growth opportunities in Aggregates, Specialty Materials, and Utility Structures. Therefore, some of the larger growth CapEx will be allocated in these businesses in 2020.
More specifically, in Aggregates, we will be focusing on greenfield investments in geographies where organic investment is more attractive than acquisitions. Also, we will be allocating capital to Cherry to improve the reserve positions around Houston and expand their business model.
On Specialty Materials, we have expanded our capacity in plaster in the last few months, but demand continues to grow and we will be evaluating a new plant to serve that market. On the utility structure business, we will be adding capacity in existing plants and investing in new equipment to expand our product line.
Finally, we will be also allocating capital to ESG initiatives as they get developed. These are just some of the ideas we have at the moment. However, we view organic growth as a dynamic process, and therefore, we’ll be evaluating ideas as they get developed throughout the year. This has been organic growth is the best way to increase return invested capital which is one of our main objectives.
As a reminder, we expect new plants we build to cover payback and no longer than five years and incremental growth projects to have even shorter payback. These levels of return are accretive to the overall Arcosa returns.
To summit a lot, Arcosa is very well-positioned to continue capitalizing on the U.S. infrastructure built. In 2020, we are looking ahead to another year of healthy growth and executing on our priorities.
Our production visibility is good. Most of our markets are very healthy. Our teams are operating well. We have a strong balance sheet and we continue to make strides when our long-term vision. As a result, we’re confident in our position and our ability to achieve strong EBITDA growth again this year.
I will now open the call for questions.
[Operator Instructions] We’ll take our first question from Brent Thielman with D.A. Davidson. Please go ahead. Your line is open.
Thanks. Good morning. Strong finish to the year.
Thank you.
Maybe starting on construction products just given a legacy business volumes were up, can you help us understand how big the oil and gas piece is now as a percentage of the total pie for Arcosa and does that particular area contribute margins or pricing kind of an excess of the segments average?
Sure. This is Scott. We said at the time of acquisition it was roughly 20% of ACG, so much smaller percentage of construction products and then of Arcosa as a whole, so not a huge percentage of our Arcosa’s overall exposure.
But it has -- if you follow drilling activity certainly it has been hit in the last year and we’ve had to make a lot of changes to right size that footprint to correspond to lower demand level. Revenues in that market held up decently well, but the margins have been really compressed so it’s really had an outsized impact on construction margins particularly in the third quarter and fourth quarter.
Okay. And then, I guess, my follow up would be the book of business in utility structures looks solid. I guess, can you talk about the bidding environment pricing conditions are you you’re going to continue to focus more on the sort of shorter lead time spot market versus the larger programmers?
Yes. Brent, this is Antonio. Yes. We see a very healthy market out there. I think we are -- we reshaped our management team about a year ago. They were doing an excellent job and we are changing all of our processes.
Last year was a big year for changing our manufacturing processes. We’re also working on our sales process and all the management process inside the company and it’s really paying off. We’re seeing our bidding activity in Greece. We’re seeing our customer base expand. And we’ve been more aggressive in penetrating the big market, which we really didn’t play at all.
And with that, that’s why I mentioned that we are increasing capacity in some of the existing plants we have and expanding our product line. So, overall, very positive about our team, very positive about the market, our lead times continues to be shorter than some of our competitors. So I think we’re in a really good position.
And Brent, this is Scott to follow up on that. One of the big advanced billing payments we received was from a utility structures customer that was a large order. So we’re active both on the small bid market, but also the large order side and the teams do an excellent job pursuing both.
And you’ve been able to negotiate some upfront payments there, Scott?
That’s correct. So with capacity tied in the industry, people have been willing to put down some advanced payments in order to reserve capacity.
Okay. Great. Thank you. Appreciate it.
We’ll take our next question from Stefanos Crist with CGS Securities. Please go ahead. Your line is open.
Good morning and congrats on the strong quarter.
Thank you.
Thank you.
Can you talk a little bit more about organic growth in Aggregates and what you’re seeing in 2020 as well?
Yes. I mentioned in -- Stefanos, I mentioned in our prepared remarks. As you know, some of the aggregates companies and multiples to buy some of them are expensive. And we’ve been able to find bolt-on acquisitions at reasonable price and we expect 2020 to be the same to find some of those small bolt-on acquisitions that we can do. They are very healthy. They are very good for our growth.
On the other hand, there are some markets where we think there’s opportunities to go through the greenfield approach, meaning buying the reserves and then developing the market or expanding the market. We’ve seen, we have done some of those and they are really good for a return invested capital.
Both Cherry and ACG brought ideas on where to do that and how to do that and I think there’s great opportunities to continue to expand doing some of those. So I think 2022 we will give you a respond, you will see some bolt-on acquisitions, some greenfield in our aggregates business.
Thank you so much. And just to follow-up now that the Cherry acquisition is complete, have there been any estimates for synergies there?
Yes. Let me give you a sense. I’m not going to give you a number because to be completely honest, we really didn’t buy Cherry for synergies. We really bought a Cherry because we believe Cherry brings a significant amount of opportunities to grow.
And I include those in the synergy bucket meaning Cherry has a unique business model in Houston, which is generating the some of the recycled products, recycling the concrete and then doing the stabilized sand and sand to serve the customers with a full portfolio.
We believe there are opportunities to expand Cherry around the Houston market, they already had a business plan to do that and part of our capital allocation in 2020 will be to expand research around Houston to continue growing Cherry.
But there’s also opportunities to bring that business model to other geographies and we’re going to be testing that during 2020. I cannot give you dates for that because we are still working with them on that, but that’s one of our goals.
Got it. Thank you so much.
We’ll take our next question from Ian Zaffino with Oppenheimer. Please go ahead. Your line is open.
Hi. Great. Thank you. Yeah. Just keying in on the Utility Structures business, where you seeing the strength there, is that U.S., Canada, maybe what regions, if you give us any color there, that’d be helpful. Thanks.
Yeah. We are seeing the strength really in the U.S. We do export some to Canada. But it’s mainly a U.S. driven market. We are seeing -- I think we see it in all of our plans we’ve seen throughout the old geographies. Of course, you see some in the west specifically and California has been really strong, but I think we are seeing the demand growth in all of the geography.
So it’s not a single area or a single project, let’s say, event. If you compare it to all the times in this industry, where you see this big lines being built in Texas and other places to serve the wind market, very low lights, et cetera, we’re not seeing that. We’re seeing large projects, some of the larger projects, but we are also seeing a lot of the small projects that continue to get built. So it’s a healthy mix of large projects and small projects across the U.S.
Okay. Thanks. And then just on the barge side of the equation here, liquid obviously started out pretty strong, now dry sort of coming through. Is it a matter of dry was just so far below where should have been and that’s why it’s accelerating now is -- are you seeing and maybe the deceleration in liquid or are they both kind of accelerating, it’s just the dry is flowing from much lower base and that’s why we’re seeing a kind of be the start of the show here now?
We saw we saw in 20 -- late 2018 early 2019, we started seeing basically all liquid acceleration. The third quarter and fourth quarter we started seeing some dry barges coming in. And as Scott mentioned in the prepared remarks, we continue to see healthy inquiries for both liquid and barge in the first quarter.
So I would say that, we said it last year, the dry cargo market had been dead for a long, long time and it’s a very -- it’s a market that I would say more sensitive to steel prices. Steel prices came down very significantly in 2019 and I think that’s one of the things. At the same time some of the uncertainties around a trade deal with the agricultural products with China also helped.
But I think the age of the barges is just catching up. So it’s also a very healthy market in terms of the number of customers we have, it is not a single customers. It’s a wide variety of customers. So, overall, we’re seeing some healthy signs in the market.
And the just to reflect on that, Scott mentioned, some of the barges moved to 2020 from 2019. And if you sit down in our office a year ago, you would notice that we were planning also liquid barges and then dry cargo barges started arriving and we have to reshuffle all our plans to accommodate the dry and liquid barges.
And the positive news of that -- those barges moving into 2020 is that we have been able now to set up our production lines almost perfectly to serve the market, meaning the barge the plan that’s -- the best plans that we have for making tank barges we’ll be making all tank barges this year, plans that are very good at making a dry cargo barges, we’ll be focusing on that. So, I think, we’re really well setup for margin improvement and continuing to serve the market.
Okay. Thank you very much.
We’ll take our next question from Bascome Majors with Susquehanna. Please go ahead. Your line is open.
Yes. Thanks for taking my questions. In your 16-ish months as a public company, you guys have really found a sweet spot on the M&A front by being able to acquire businesses that are big enough to move the needle for you geographically synergistic business lines, synergistic on the aggregate side, but also may be small enough to not attract the double-digit multiples that could destroy some value if you’ve chased them. I’m curious, as you look out over the opportunity set, are there more deals kind of in this sweet spot for you guys that you’re looking at over the next year or two year. Just trying to see what the M&A front could look like if things go well over the next 12 to 18 months?
Yeah. Thank you, Bascome. Well, as you know, and I have said this before, M&A has a life of its own because things open up and closed down relatively unexpectedly. But the reality is that every one of these businesses that we bought brings a whole new set of ideas to the table.
And that’s why I spend so much -- so long in my prepared remarks talking about capital allocation, because I think, the main message you need to hear from me and Scott is that we are going to stay disciplined to our capital allocation model.
I think there’s great opportunities, at the moment we are -- we have a pipeline that’s healthy, nothing of the size of Cherry at the moment. But we have quite a bit of ideas and opportunities coming in our way.
And sitting down with Cherry and with the ACG team there’s still a whole list of things that we have to research and work on to develop opportunities for M&A. So it’s a long answer. We have -- we are enthusiastic about what we’re seeing in the pipeline, nothing of the size of Cherry at the moment, but that doesn’t mean nothing will show up in the next few months.
Okay. And -- thank you for that. And with the sell-off in the broader market that’s definitely impact if you guys stock, is the opportunity to be more opportunistic on the buyback playing into the kind of capital allocation decision?
Thanks Bascome. This is Scott. We do have a $50 million share repurchase authorization. We’ve used about $14 million of the $50 million. So, we have quite a bit of headroom in that authorization. And where it makes sense to buy back shares versus invest organically and invest in acquisitions we will continue to do that. In the first year we saw a lot of opportunities in organic growth and acquisitions, but if the returns better buy back shares will certainly do that.
Okay. And last one from me, as we think about simplifying the portfolio, are -- can you readdress the opportunities to maybe look for some of your businesses that are less core to find a new home over time and any interest in that process? Thank you.
Yes. Well, as you said in the second pillar of our long-term vision is that we’re going to try to simplify for the portfolio and also reduce the cyclicality and some businesses fit that better than others.
As we don’t comment M&A, I think, we are at the moment operating our businesses like we do every day and we are trying to improve them and grow them and make them better. Even opportunity comes we have an obligation to evaluate it. At the moment, we are functioning and operating all the businesses just like we do every day.
Thank you.
We’ll take our next question from Justin Bergner with G. Research. Please go ahead. Your line is open.
Good morning, Antonio. Good morning, Scott and Gail.
Good morning.
Good morning.
I wanted to start with construction products, I guess, adjusted EBITDA for that segment grew about $20 million in 2019 that you acquired a little bit more than $30 million of EBITDA was ACG. Was that entire headwind concentrated around the pricing of the aggregates been sold into the oil and gas industries that sort of 10 million r headwind when you adjust for the ACG contribution or were there other headwinds as well for the EBITDA of 2019 from construction products?
Sure. This is Scott, Justin. The two primary headwinds we had in 2019 versus 2018 were on the ACG side the aggregates plant serving the oil and gas markets, and that’s what you talked about. And then in the Legacy business, we did have some headwinds primarily related to pricing and DFW, in the first half of the year, that comp in 2019 versus the previous year in 2018 was challenging and we talked about that on a number of calls.
So bit of headwind in the Legacy Aggregates business and then the rest in the Oil and Gas related aggregates businesses and ACG. I think the good news is, the volume growth, particularly in the second half of the year in our Legacy businesses was very strong. The end markets remain robust. DFW has great private demand, public demand.
So, we think the Legacy business in particular is very healthy. ACG business, the Specialty business is running very well with our building products plan essentially running at capacity, we’re having to turn away customers. So, overall, healthy mix, but those two headwinds in ‘19 versus the previous year.
Okay. Thank you. My second question relates to free cash flow and working capital. When you guide working capital flat for 2020, is that inclusive of sort of the advanced billings $50 million benefits sort of reversing or will it reverse in 2020. How should I think by the advanced billings in the context of that flat working capital comment?
Sure. I think, you’re thinking about the right way and the $50 million of advanced billings creates a bit of a headwind and even with that we expect to be working capital neutral adjusting for acquisition.
So, back to building the cash culture at Arcosa and making incremental improvements in AR, inventory and AP, we would expect to be able to offset that $50 million with kind of core working capital management improvements to end up roughly neutral for the year.
Okay. Great. And just on that point, are you expecting more sort of advanced billings, I realized the one from last year, won’t repeat, but are you expecting more as a normal course of business related to strong demand and utility structures and barges?
Yeah. I think it’s, they’re opportunistic. We wouldn’t build them into our forecast. But certainly in an environment particularly in utility structures and barge where capacity is tighter. We tried to work with customers and a lot of time customers want to reserve that space and are willing to put some money down in advance. So it’s not part of the working capital neutral guidance we gave for the year, but it’s something that we will try to make more regular as part of our business.
Great. Thank you for taking my questions.
We’ll take our next question from Julio Romero with Sidoti. Please go ahead. Your line is open.
Hey. Good morning, everyone.
Good morning
On the utility structure side, one of the feedback on that earlier question about your penetration into the bid market, can you elaborate on that ability to toggle that on and off, and how much of the incremental CapEx year-over-year that you’re forecasting is being put towards some additional capacity there?
Yes. So the big market is a very large market and we still have a very, very small share of it. So, as I mentioned before, with something we as a company we will not focused on in the last few years.
And I think it provides a good baseline for production and I think it requires a different mentality in terms of how to approach it. Our team is doing a really good job in starting to penetrate it. So I’m enthusiastic about it, I think, it also provides a great stability to the business.
On the CapEX side, I would say, of the growth CapEx, I would say, about half of it will go towards the improvement of our utility structure both expanding capacity, and as I mentioned, also expanding our project.
Thank you. That’s helpful. And I guess on the corporate cost side, $47 million came well below your guidance, so kudos to you on the cost control side there. But I think your 2020 outlook implies about a $5 million or so step up. Is there may be something incremental that’s driving that step up or is it more kind of based on the 4Q run rate?
Thanks, Julio. This is Scott. It’s -- most of the step up is just consistent with operating a bigger company. If you look at our corporate costs as a percent of revenue, as we have grown, as we have new costs related to the Cherry acquisition, that’s all built into the $13 million per quarter run rate, which again is pretty consistent as a percent of revenue with where we were in 2018, I mean, 2019.
Understood. Thanks for taking the questions and best of luck in 2020.
Thanks Julio.
Thank you.
We’ll take our next question from Blake Hirschman with Stephens. Please go ahead. Your line is open.
Yeah. Good morning, guys. Congrats on a great year.
Thank you, Blake.
Thanks Blake.
First on the barge side, the revenue like 70% last year,, apologies if I missed it, but do you have any rough guideposts as far as what we can see this year for topline growth there? And then just the second part of that being, it’s growing sequentially for like the last year. Do you think we can see sequential revenue increases throughout 2020 as well?
This is Scott. I’ll take that. If you look at the exit rate of barges about $100 million revenue in the fourth quarter and we expect that to grow into 2020. So there should be absolute growth in the year.
The way that production schedule lays out, Q3 will be the highest quarter in particularly back half. So you’ll see a ramp up from Q1 into Q2 into Q3 and then kind of flattened the second half of the year.
So a bit of a shift in mix, as Antonio mentioned, so perhaps a tiny step down from Q4 into Q1, but then growing pretty strongly throughout the year as we hit our stride with those different plants operating the best barge type for that plan.
Got it. All right. And then on a wind towers, how much was lower pricing a drag in the quarter? And just to clarify the headwinds there, it really is just on the pricing side and not volume, correct? Because I didn’t see the wind towers piece within the positive demand, pieces of the business from the slide, so I just wanted to double check there.
Correct Blake. The headwinds from the pricing, our volumes have remained strong and productions in really good shape. Most of the -- if you look at the sequential margin that went down from 15 to 13, almost all of that was related to wind tower. So, again, the team’s doing a great job, production strong, but the prices for what we’re delivering are lower and that creates that margin headwind.
Got it. Makes sense. Thanks a lot, guys.
Thank you.
Thanks.
Next we’ll take a follow up question from Justin Bergner with G. Research. Please go ahead. Your line is open.
Thanks guys for the follow-up and also my congratulations on a strong year. First follow-up would be related to utility structures in the bid market and pricing. It seems like I’m referring from the prior question that there’s been no sort of weakening that the bid market such that your Energy Equipment margins are sort of coming down from higher levels due to some softening of the tightness in Utility Structural market. Is that sort of accurate in the fourth quarter honestly looking at 2020?
Justin, this is Antonio. No. I think the Utility Structures, as I mentioned, is really strong both on the traditional customers and the bid market. The margin coming down really has been more related to wind towers in the Energy side.
Also on our Tanks both in Mexico on U.S. the margins have been really good and improving. And I think we still have a room for improvement there. I think there’s room for improvement in Utility Structure and I think there is room for improvement in Tanks.
And the area where we have the weakest fundamentals right now is even though the markets its strong and 2020 and 2021 will probably be strong, the margins will be lower than in the past is in wind towers.
Okay. Thanks for the clarification. Then just secondly, I guess, the lower range of your EBITDA guide implies sort of flat organic EBITDA growth. So what set of conditions or markets would be pressured, that would lead you to the lower end of that EBITDA guidance sort of flat organic EBITDA growth.
Sure, Justin. This is Scott. I think, if you look at the slides that Antonio mentioned of, where the challenge is heading into 2020. There are some scenarios where there could be weakness in those three areas. Wind tower pricing is pretty much locked in for the year. But if rail components is worse than expected and potentially weather in construction, weather has been a challenge in Q1 across the country.
And so, I think, the lower end of the range would imply kind of worse than expected outcomes there, which, again, even if it’s flat year-over-year, I think, if you add Cherry, they’ll be absolute growth. But those would be some of the scenarios that would cause kind of flattish year-over-year performance in the Legacy portfolio.
Thanks for the follow.
And there no further questions on the line at this time. I’ll turn the program back to Gail Peck for any closing comments.
Thank you, David. And thank you everyone for joining us today and we look forward to speaking with you again next quarter.
This does conclude today’s program. Thank you for your participation and you may now disconnect.