Arcosa Inc (ACA) 2019 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. Third Quarter 2019 Earnings Conference Call. My name is Ashley, and I will be your conference call operator today.

As a reminder, today's call is being recorded. Now I would like to turn the call over to your host, Gail Peck. Ms. Peck, you may begin.

Good morning, everyone. Thank you for joining our third quarter 2019 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 website, www.arcosa.com. You can access the presentation by going to the Events tab under the Investors section of the website. A replay of today's call will be available for the next 2 weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for 1 year on our website.

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, 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 discuss Arcosa's third quarter results and business outlook.

Once again, we are pleased to report strong results. Demand trends remain positive across our infrastructure markets and our leadership positions in key products together with internal margin improvement programs are driving significant operating leverage.

Please turn to Slide 4. Broadly, our business has continued to perform well, and we are successfully executing on the long-term strategy. This strong third quarter performance was led by margin improvement in the Energy Equipment business, the revenue contribution from the ACG Materials acquisition and higher revenue and earnings contribution from the barge business. It is important to mention that order activity was strong in the third quarter in utility structures, wind towers and barges. One year-to-date -- our year-to-date results give us confidence that we will achieve the 2019 adjusted EBITDA guidance of $230 million to $240 million, with the likelihood that we will be at the upper end of this range, keeping in mind that we increased our -- this range when we reported first half results in August.

Tomorrow is the 1-year anniversary of Arcosa as an independent public company. We have come a long way since completing the spin-off last November, standing up the organization and implementing our stage 1 priorities. Importantly, as we were establishing the new company, we defined the culture needed to support the long-term strategy. For the last 12 months, we have made significant progress in building this new culture into Arcosa. More on this topic later in the call.

Now let's turn to Slide 5 for an overview of Arcosa's third quarter results. Revenue increased 18% year-over-year, representing a mix of organic and acquisition growth. Operating leverage was evident by the 35% growth in adjusted net income and the 40% growth in adjusted EBITDA, more than twice our revenue growth.

Scott Beasley will now provide financial review of the third quarter. Scott?

Thank you, Antonio, and good morning, everyone. I'll walk through the third quarter results for each segment and then give additional color on capital allocation and liquidity.

Starting on Page 6. Construction Products had an excellent quarter of revenue growth, increasing 60% to $115.9 million. Our legacy aggregates and specialty businesses both had higher revenue driven by strong volume growth. Weather was clear for most of Q3 in our core markets, and healthy customer demand resulted in higher volumes. Additionally, overall pricing was relatively flat sequentially but down a bit versus the stronger third quarter of 2018. Pricing in most of our markets was up versus 2018, but was lower as expected in the DFW market.

Finally, the ACG acquisition contributed the largest portion of our year-over-year revenue growth. Segment EBITDA of $26.2 million was almost $6 million higher than last year. Our adjusted EBITDA margin of 22.6% was very healthy but was 5.6 points lower than last year. Three main factors contributed to the margin decline. As we have discussed over the last several quarters, ACG's historic margins are higher than Arcosa's overall margins but lower than historic segment margins, so there has been some expected dilution to segment margins from the acquisition. Additionally, ACG's aggregates plants serving energy infrastructure in the Permian, Eagle Ford and STACK basins in Texas and Oklahoma experienced volume and pricing declines related to lower drilling activity. We mentioned this slowdown on our last call, and it continued in the third quarter.

Finally, while revenue improved in our legacy aggregates and specialty businesses, our production cost increased with some onetime start-up costs in the legacy business and the production slowdown that I mentioned in our oil and gas markets. Finishing up the segment, our Construction Site Support business posted another solid quarter. Revenue was roughly flat, but the team has done an excellent job improving operating efficiencies to expand our margins in that business. Overall, the Construction Products segment continues to grow. And the 22.6% margin is a sign of the healthy competitive advantages that each business holds.

Please turn to Slide 7. Energy Equipment had another strong quarter of performance that combined organic revenue growth and operating margin improvements. Revenue increased 6% to $210.2 million from broad-based strength in the segment. First, our wind towers and utility structures businesses achieved higher volumes than last year as our lean improvement initiatives combined with healthy market demand. Second, we had improved pricing in our utility structures and storage tank businesses that helped offset a portion of the decline in wind tower pricing that we discussed on the last call. We expect similar revenue in the segment for the fourth quarter. Finally, despite a delay in some infrastructure projects in Mexico, our business continues to outperform last year through improved commercial and operational efforts.

Putting this all together, adjusted EBITDA was $33.5 million, which was up both sequentially and versus last year's third quarter. As a reminder, 2018's third quarter included an inventory write-down of $6.1 million, but we still showed very healthy growth this year, even after considering last year's write-down. Looking ahead to the fourth quarter, we expect segment margins to decrease sequentially as we produce more of the lower-priced wind towers taken this year and start production of a new tower type that requires additional changeovers. We expect to finish the year strong with full year segment margins up approximately 500 basis points versus 2018. We are very proud of the work that our energy equipment teams have executed on to improve margins this year, which should help offset a portion of the headwind from lower wind tower margins next year. This is a great example of our team's ability to set a clear priority and then execute against that plan.

Turning to our transportation segment on Slide 8. Revenues increased 11% as the barge business continued to scale up effectively. Our barge revenue was up 57% versus last year, driven primarily by higher tank barge deliveries. As we said at the beginning of the year, barge revenue has increased each quarter, and we expect it to increase again in the fourth quarter as all 3 of our plants reach higher production levels. Revenue in our components business trended the other way, driven by 2 factors. As we have stated throughout the year, pricing on a long-term contract is lower than it was in 2018. The bigger sequential change was lower volume-related to a slowdown in new railcar orders. As the industry backlog has declined, railcar builders have begun reducing their inventories and projecting lower requirements for the upcoming quarters. We expect the slowdown to continue in the fourth quarter. Putting the ramp-up in barge together with the slowdown in railcar components, we generated adjusted EBITDA of $15.9 million. In the fourth quarter, we expect to have offsetting margin forces of higher barge margins but lower components margins likely resulting in a roughly flat sequential margin for Q4. Given our higher projected revenue in Q4 from the continued barge recovery, we expect to have higher sequential EBITDA.

Please turn to Slide 9. We are maintaining our EBITDA guidance and expect it to be at the top end of our $230 million to $240 million range. If we are able to achieve the top end of the range that would constitute more than 28% growth from 2018, including a healthy mix of organic growth, acquisitions and margin improvements. Given the fourth quarter softness in our rail components business, we expect to be at the lower end of our revenue range.

Moving to Slide 10. I'll walk through our year-to-date capital allocation as we continue to follow a balanced approach to allocating capital across organic investments, acquisitions and return of capital to shareholders. We've invested $61 million in capital expenditures and now expect to spend between $80 million and $85 million for the full year. This $5 million increase at the top end is related to several projects we have decided to pursue to expand product lines and capacity in our utility structures and Construction Products businesses.

Next, we've invested approximately $31 million into acquisitions, including 3 aggregate acquisitions in Texas and Louisiana, 2 of which were completed in the third quarter.

Finally, we have repurchased $11 million of shares this year, plus paid $7.4 million of dividends for a total return to shareholders of $18.4 million.

Closing out on Slide 11, we have a very healthy liquidity position and the capacity to fund disciplined growth. We have generated $219 million of operating cash flow year-to-date leaving us with no net debt and approximately $390 million of available liquidity between our cash and unused revolver capacity. As we head into next year, we remain focused on generating additional free cash from our businesses and then investing that cash in high-return investments that will improve our return on invested capital in the long term.

I'll now turn the call back over to Antonio.

Thank you, Scott. Now I will provide you with further insight into market dynamics and developments at each one of the business segments. Please turn to Slide 12. Construction Products had an active third quarter with several points worth noting. We saw healthy demand in the aggregates and Specialty Materials product lines. As we approach the end of 2019 and for 2020, we remain very optimistic about the fundamentals of our market positions, our business model and regional infrastructure spending trends. While we're expecting continued softness in the ACG business that has exposure to the oil fields in Texas and Oklahoma, we see a robust infrastructure environment that should create opportunities for organic volume growth and pricing improvements.

On the M&A side, we completed 2 bolt-on acquisitions during the third quarter. What's important is that we continue to see opportunities to expand the current platforms at relatively low multiples. It's a slow process, but strong market positions take time to get built. Continuing with M&A, as we approach the 1-year mark of owning ACG, we are pleased to report that the business integration has gone extremely well. The team has done a great job of integrating and mining this business for organic and acquisition expansion opportunities. Part of the M&A pipeline we're working on came from the ACG acquisition as well as a healthy list of organic growth opportunities that we will be working on in 2020. So overall, I'm very happy with the integration and opportunity that ACG has brought. And also with the learning curve that the whole organization has gone through in bringing in this type of platform acquisition.

At the moment, we are quite active on the M&A front, working through a large pipeline of potential targets in both aggregates and Specialty Materials, which includes small bolt-ons and some that are more significant in size.

Finally, on the Construction segment, we have realigned responsibilities in the business to better serve the market, all natural aggregate operations now report under a single organization. And the ACG management team has taken responsibility for the Specialty Materials business, with both continuing to report to Reid Essl. With a very focused organization, in a market with favorable demand factors and significant growth opportunities, I am very optimistic about this segment's long-term potential.

Turning to Slide 13. The Energy Equipment segment reported strong performance as well as robust order activity. Our backlog provides good visibility, setting us up for continued progress in 2020. In utility structures, we have seen an increase in quoting activity coming from grid hardening and resiliency initiatives. Also, improved throughput and lean manufacturing initiatives has -- have positioned us to compete more effectively in the bid market. While this market can be less predictable, it has been extremely active of late, and we have -- we are successfully competing with healthy margins. Between our traditional alliance work and the bid market, we expect strong demand to continue. The strength in demand and the improvement in operational performance give me confidence that we will continue to see progress in this business. With this in mind, we are working on capacity expansions within our existing footprint to be able to take advantage of long-term market dynamics and increase our participation in the bid market.

Turning to wind towers. We continue to see new order activity in advance of the phase out of the PTC. These orders have good margins, but they are lower than the ones we have traditionally had in this business and similar to those we took in the last quarter. In the fourth quarter, we expect a more notable impact from the lower margin pricing. However, when we look beyond the short-term headwinds, our wind tower business has a very positive story. It serves an industry that has become very competitive. Renewable energy is a trend that's here to stay. Our plants are located in wind-rich areas. And our team is the best in the industry.

Now let me talk about the tank business. Storage tanker activity continues to build, with inquiry and order activity steady across the board. Our teams in the U.S. and Mexico have done an excellent job of improving efficiencies and increasing market shares in this last year, achieving a very successful turnaround of the business. As we look forward, our 2020 view of Energy Equipment hasn't changed overall. The wind tower business has some headwinds related to pricing and foreign competition, but the utility structure business has excelled and should be able to offset a portion of those headwinds. On the balance, we continue to expect healthy margins in line with our public competitors.

Please turn to Slide 14. The Transportation Products segment has an overall positive story to tell. In a nutshell, the barge segment continues to perform in line with our expectation, but softening demand for new railcars has led to a slowdown in activity for the rail components business. To start with the negative. The outlook for new railcars has weakened over the past 3 months, with industry estimates suggesting railcar builds will be down 25% to 30% in 2020, which is in line with a normal replacement year. That said, we have already taken actions to rightsize the business in the face of a more normalized demand. At the same time, we will be adjusting our working capital needs over the next few quarters to reflect market demand. On the other hand, we have been working hard to diversify our customer base and expand our portfolio of products, and those efforts should also help us partially mitigate some of those reductions in rail components.

In barge, revenue and order activity continues to be healthy, supporting our decision to reopen a third barge plant earlier this year. In the third quarter, we booked $92 million of orders for a 1.2 book-to-bill ratio on higher revenue base. The margins on our $258 million backlog for 2020 are improving. Remember that orders delivered this year were taken at a weaker point in the cycle. We expect to exit 2019 at a more normalized production run rate with margin upside as we deliver additional orders. Worthy of note, our plants have done an incredible job increasing throughput in 2019. We have gone through learning curves and investments in all the plants, but our teams are the best in the industry at flexing up and down. Beginning with the fourth quarter, the focus will shift from ramping up to increasing margin and operating leverage, supported by our backlog visibility. We are particularly pleased to note that over half the orders we received in the third quarter were for dry barges. They were also from a healthy mix of customers. This is the first time we have seen significant orders for dry barges in a long time. We are optimistic, but it's still too early to tell if the pickup is sustainable. Of course, agricultural tariffs continue to create headwinds. But on the other hand, lower steel prices could make some of our customers begin the much-needed replacement on -- in their barge fleets.

So when we put the whole transportation segment together, we're still very positive about the growth outlook for 2020. On the one hand, our components business is facing industry-wide headwinds. But on the other hand, our barge outlook has improved from lower steel pricing, signs of improved barge demand and our healthy 2020 backlog. We expect the segment as a whole to have significant organic growth potential in the quarters ahead.

Please turn to Slide 15. When we reflect on this past year, we are proud of the considerable progress we have made, but we are still more excited about the bright and promising future. Becoming an independent company gave us the opportunity to develop a new corporate culture that supports our long-term strategy and resonates with employees. Let me give you some color on this. To support the 4 pillars of our long-term strategy, we wanted to create a culture that is focused on growth, embodies an entrepreneurial spirit, and which is supported by a strong ESG foundation. As a new company, we also wanted to emphasize that creating a collaborative environment should be a key component of our new culture. We started with a great foundation. We brought an incredible team of people to the new company, including existing board members with great experience in our business combined with new talent on the board. With this foundation, we have made significant process -- progress developing our new culture.

On ESG, we are taking a very deliberate approach. We went through a comprehensive materiality story and determined which ESG topics are of long-term strategic importance for Arcosa and other stakeholders. At the moment, we are in the process of setting the baseline to be able to determine goals and measure progress. I am very encouraged by the progress we are making on building a new culture, and I'm also convinced that this progress has helped us achieve great result on our stage 1 priorities communicated during Investor Day last year.

We have successfully grown Construction Products business via the ACG acquisition as well as several bolt-on acquisitions this year. We have improved returns on the Energy Equipment segment. Our margin improvement tells the story. Our Transportation Products business has successfully ramped up production to meet increasing demand for barges. And finally, a lean corporate structure has allowed us to grow the overall profitability in spite of the additional cost of being an independent public company.

Please turn to Slide 16. Finally, let me close with a reminder of our long-term plan. To grow in businesses -- to grow our business in attractive markets where we can achieve sustainable competitive advantages, to reduce over time the complexity and cyclicality of the overall business, to improve long-term returns on invested capital and to integrate ESG initiatives into our long-term strategy. Our vision has not changed, and our third quarter results are another step in the right direction.

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

(Operator Instructions). We'll take our first question from Brent Thielman with D.A. Davidson.

Great. Antonio, on barge, you made the comments about healthy mix of dry and liquid in the orders. I know you've been waiting for the dry side to come around for a long time. I understand it's early to call kind of a sustained rebound. But any comments on the inquiry activity out there on the dry side? Is it still at elevated levels? Or any trends you can point to into the fourth quarter?

So -- Brent, thank you for the question. So yes, as I said, we were encouraged to see not only orders but also a healthy mix of orders in terms of customers and which was a very -- a very, very good news for us. We continue to see good inquiries. As I mentioned in my remarks, steel prices are, I think, good news for the barge business. I think there's still some uncertainty around the -- all the China tariffs and the export for grains. The rates in the river for the dry cargo have not been really good over the last few months. So I think there is a kind of a -- some positives on the steel side, some negatives or uncertainties around it. But overall, I -- we see more and more inquiries. And just to give you a little more color, we talk a lot about the steel prices being a catalyst for dry cargo barges. There's a need for replacement for sure. But it's also a catalyst for liquid barges. The impact on steel prices on a liquid barge is much larger than on a dry cargo barge. So overall, steel prices are good news for both. We continue to see healthy inquiries also on the liquid side.

So let's see -- of course, the comparables are going to be much tougher because as we ramp up our revenue, the book-to-bill, we need to be very active to be able to have a larger book-to-bill ratio. But overall, we're positive on what we've done. The plants have been -- done very well. We expect our plant that we opened this year to become profitable in the fourth quarter. So overall, I think it's a very positive story on our barge business.

Okay. And then on Construction Products. Just curious kind of how large, if you can couch it, the -- kind of the oil and gas or energy pieces for the segment and kind of what you see ahead for that? And whether the, kind of, the remainder of the business can, kind of, overcome some of those challenges?

Sure, Brent. This is Scott. Overall, on the Construction Products segment, the oil and gas exposure is not a large portion of it. If you look at the time of the ACG acquisition, we said that oil and gas probably constituted about 20% of ACG's end market exposure. So as a total segment, it's less than 5% to 7%. But again, in a single quarter, when you have a big, kind of, demand shift, you tend to have to slow down production, manage your inventories down, so it tends to have an outsized impact on the first quarter or 2. I think the good news is, like you said, we see a lot of health in the infrastructure markets. So I think we do have the opportunity to potentially offset most of that slowdown with healthy growth in both volumes and pricing in our infrastructure markets. But it is a bit of a drag right now.

Okay. And just finally, on Energy Equipment. I appreciate you've got 2 sort of different trends that are going on in structure -- utility structures and wind towers from a margin perspective. But it does sound like the utility structure, bid environment and pricing has been quite a bit better. I guess, 2 parts to that. One, is that -- can that be big enough to offset wind in any given quarter with the trends you see in wind? And I guess, as you're looking into the fourth quarter, are you -- Scott, are you still kind of thinking about that 12% to 13% EBITDA margin for this segment?

Sure. Let me answer first and then Antonio can give more color on the overall piece. I think that sounds in the right ballpark. We talked about the second half being a few hundred basis points below the first half, and more of that kind of downdraft will be in the fourth quarter. So it sounds like the right ballpark because we're -- in the fourth quarter, we will be building more of the lower-priced towers, and we had the changeover that we talked about. In terms of the ability of utility structures to offset softness in wind towers, looking forward, I think that's -- that would be a big offset. I think our goal is to offset as much of it as possible, but given the size of the wind towers and then the magnitude of pricing declines that we're starting to see in the fourth quarter and then into next year, I think, offsetting the full amount would be a pretty tough task.

And let me just add a little more color on that. The so if you look at wind towers, we've had incredibly good margins over the last few years, coming from very large backlogs that were sold several years ago in a very different environment. That's, let's say, the tough comparison. On the other hand, if you look forward, and if you look forward beyond just this quarter, let's say, the [whole] forecasts [are low,] let's say, whole forecast for the wind industry have become more optimistic. As we look forward, I think the market demand should start reflecting some of that and as you know, we're also working towards an anti-dumping case against several countries. I think in terms of wind towers, the margins we're going to see are lower than what we have, but there is a good perspective in the future that those margins can improve. On the whole, the segment, I think we're going to have very healthy margins. Yes, wind is going to be lower than what it was. But on the whole, the segment should be very positive.

And we'll go next to Bascome Majors with Susquehanna.

Just wanted to see if you could give an update on free cash? It looks like you've done about $160 million year-to-date. Any stance of where that's going to end up for full 2019?

Sure, Bascome, this is Scott. I think it will be -- it should be better than that. And the pieces of it that we've talked about, so EBITDA, we said we expect to be at the top end of our guidance range. CapEx of $80 million to $85 million. We've said cash taxes in the $20 million range and then change in working capital, we've generated $40 million of cash from working capital this year. Year-to-date, we expect to be able to hang on to most of that because the teams have done a really good job offsetting the increase in barge inventory with improvements in payables and receivables. So you put all of those together, I think you're still probably in the $160 million to $170-plus million range for the year, which we feel like is a really good first year free cash flow as a public company.

And longer term, I mean, you're in a quite a few businesses or few different businesses and end markets for a company of your size. Can you comment a little bit on when and why you consider selling legacy businesses as well as buying new ones? And maybe just looking out 2, 3, 4 years, what's really the optimal portfolio to drive real shareholder value longer term?

Bascome, this is Antonio. The -- let me start with the M&A side, the buying of businesses. As I said in my remarks, we have a pretty active pipeline. And we've been very clear on what we're looking for. We are growing our aggregates. We're growing our specialty materials. And we've also said we are expanding our footprint in the utility structure, not only in terms of capacity, but also product lines. If you look at our competitors, they have a much broader product line than we have. So we are looking for ways to expand our product line. Those are the areas where we're focusing, let's say, deployment of cash. We have other smaller opportunities, but that's the major areas where we're focusing. On the divestitures, I would tell you that we don't have a clear time line for doing that. As we said, when we spun off, each of the businesses, we went through a strategic analysis and making sure that we knew the growth opportunities. We have built a great pipeline of organic opportunities in many of our businesses. Scott talked about some additional investments we're doing on the organic side, improving capacity, opening new plants, et cetera. But at the same time, we realize that, we understand and we are clear that the story is very complex. And that's why in the long-term strategy, we say we're going to simplify and we're going to reduce the cyclicality of the company. So it will depend on market conditions and other things. But at the moment, we are focused on growing the businesses, and we'll know when -- M&A has a lag of its own. So we'll know when it comes.

If I could just slip 1 more in. I mean you gave a pretty detailed rundown of the run rate of -- at least directionally, of a lot of your businesses into 2020. Tying that all together, I mean, the Street is looking for something like low- to mid-teens EBITDA growth next year. Does that feel unreasonable based on where you sit today?

Sure. This is Scott. I'll take that one. I think we're going to reserve specific revenue and EBITDA guidance for probably our February call. I think directionally, Antonio gave some good color that we should see growth in Construction Products organically and through acquisition. Transportation, we should see growth as barge probably will certainly -- we hope it to overcome a slowdown in rail components. And then energy, we'll see how much of the wind tower pricing we can offset. So we expect healthy growth next year. And I think you're right about that.

We'll take our next question from Stefanos Crist with CJ Securities (sic) [CJS Securities].

Congrats on the quarter. Can you talk a little bit more about what's driving the increase in dry barge demand? Is it just steel prices? Or are there other factors into that?

Well, this is Antonio. Let me -- if you look at the fleet age, the reality is that there is a need for dry barges, also for liquid barges, but the need for dry barges is much larger. People -- the perception that because coal has been coming down so much, there's excess dry barges. It's not completely accurate. Coal has -- most of the coal barges have been converted over the last years. And also, the drive -- what really drives the business is grain. It's much more than coal today. If you look at the ton miles that the grain moves compared to coal is much larger. So I think that's one of the things that we need to realize is that the grain market is what's going to drive the volume in the future. That's why I'm saying that the tariffs are still a big uncertainty but replacement needs to happen. If you look at some of the conditions of some of the barges we've seen in the last few months as we toured some of the yards, et cetera, they're not in good shape. So I think replacement is going to be the big driver. And that's why steel prices are so important. No?

Yes. And then one more question. Can you talk about the 2 construction acquisitions during the quarter? Were those specialty or legacy? And is the pipeline leaning towards one of those as well?

Yes, they were both traditional aggregates in our current platform. So that's -- when you talk about bolt-ons, I would say, they're more on the aggregate side, when you talk a little -- about a little larger pieces, it will be probably on the specialty materials. But on the bolt-ons, we have a healthy pipeline of bolt-ons in the aggregate side especially.

We'll take our next question from Blake Hirschman with Stephens Inc.

On wind towers, as we look into 2020, you talked about the pricing and some of the challenges there. Can you help frame this up a little bit more? I mean, how much downside are we talking about on the margin front? Is it 50 bps, 100 bps? Or is it much more than that? Just trying to get a little bit more clear sense.

Sure, sure. Blake, this is Scott. What we've said about wind towers next year, we expect very healthy volumes next year. So volume is roughly flat. We're running a very lean operation now and expect that to continue and the orders to fill up our plants. Pricing will be the delta. And what we've kind of talked about is the overall downside in the segment is probably a few hundred basis points versus this year's full year average. And then looking forward to what a more normalized, kind of, industry-wide EBITDA margin would be. So our goal is to make up as much of that as possible with other businesses, but you're still talking probably in that neighborhood of degradation in the segment margin.

Okay, got it. And then also on the wind towers. Is there any momentum kind of building behind any kind of extension to the PTC? Or is a lot of that going to depend on -- in 2020, the administration that ends up being in office?

This is Antonio. No, there's always this -- the possibility of a PTC being renewed. That's always on the table. On the other hand, I think what's very, very, very important is that the wind energy is competitive on its own feet. And that's why I think the -- all the forecast look at the next 5 to 10 years with a very strong or stronger outlook than it was a year ago, let's say. The other thing that's changing, which is very important, it's a trend that we tend never to talk about. But as companies look more into ESG and as more investors also look more into ESG, companies are very focused on improving their carbon footprint, et cetera. If you look at the demand for wind energy, it shifted dramatically over the last few years. Initially, it used to be all these large utilities building or developers developing large wind farms. Now a lot of the demand for wind power is coming from large corporate Fortune 500s and large companies especially public companies. And that's what's driving a lot of the demand for renewable energy. So that's a very positive trend for the market.

Got it. And then last one on Construction, kind of looking into next year, it seems like others are kind of talking about low single digit, mid single-digit growth for volume and price specifically on the aggregate side. But let's just say that this is what you end up seeing, what kind of incrementals should we be thinking about on the margin front in that kind of growth environment?

So as Scott mentioned, I think on our traditional aggregates business and legacy businesses, I think that the volumes and the pricing trends that the other people are talking about, we see the same thing. So I -- we're confident on that side. It should be a very good year. The trends are good. The spending is good. All the projects in the regions where we are really good. So we are positive on it. We do have a smaller headwind on the oil side -- oil and gas side in Texas and Oklahoma. But as Scott mentioned, that's a smaller piece. I think the overall story is similar to what you're seeing from other people, and we are very optimistic about our business going forward. And we also see good opportunities, as I mentioned, on the M&A side to continue building these bolt-ons and some larger opportunities.

We'll take our next question from Justin Bergner with G. Research.

Starting with Energy Equipment. As I look at sort of the sequential revenue over the course of '19, it's been pretty flat. But would you be able to sort of break down what -- how the underlying mix has changed between wind towers and utility towers year-to-date?

Sure. I'll give you some directional color on that, Justin. The revenue split between the two has not changed as much. Our wind towers have been pretty consistent in terms of revenues, same with utility structures. The delta has been on the margin side, where we've been able to improve our utility structures margin as wind tower margins have declined in the second half a bit to offset that and keep it at a relatively flat segment margin.

Okay, great. And then on the utility structures margin side. I mean, I guess, you were able to hold up margins in the third quarter versus the second quarter despite -- it seems like some more pressure on the wind pricing side. Anything that's positively surprising you in the third quarter versus the second quarter on the utility structures margins? And can we think of sort of the exit margin for the fourth quarter as being indicative for 2020?

So let me start with the -- I would say, the soft side of the question, which is the -- what sort of -- what are the surprises. And I don't think it's a surprise. I think it's more, we are a company that has traditionally focused on long-term relationship with very large customers. And we had a very small participation in a very large portion of the market that's called the bid market. And traditionally, that's a more -- less predictable market and it's normally very competitive. As we focused over the last year in our improvements, internal improvements, operational improvements, our lean manufacturing processes, the team has done an incredible job increasing throughput, improving our on-time delivery, et cetera. And we've been able to participate with very good economics on this bid market. And the bid market is huge. And we really have a very small percentage of the market. So that's why we said we're increasing our capacity to be able to compete more effectively there. And like every other manufacturing, the more volume you put through your plant, the operational leverage you get is incredible. So I think it's a combination of a good market that we're participating that we have traditionally not participated, and that's increasing our operational leverage. On the margin side, I'll let Scott give you color, but I think he was clear before.

Yes, I think that's a decent -- if you look at the exit margin in the fourth quarter, that's a decent starting point for where we think we'll be in 2020.

Okay, great. Just quickly on the barge side of things, I'm not sure I caught the fourth quarter versus third quarter progression. I guess you expect better barge margins to offset rail components margins, but you still expect EBITDA to be up sequentially? Just maybe...

Correct. Correct, Justin. So we talked about from a margin percentage perspective, the increase in barge margins should offset the weakness in components margin and be able to keep that segment margin relatively flat sequentially. But we've also got the big step-up in barge revenue coming in the fourth quarter. So higher barge -- higher total segment revenue, flat EBITDA margin should lead to higher EBITDA dollars in the fourth quarter. We're finally past. We feel like the fourth quarter will be really past the inflection point of the start-up costs that we've now shed and we've talked about the third plant being profitable. We're finally starting to get into some of the better priced orders that were taken in a better pricing environment, and that should continue into Q1 of next year.

Okay, great. So I'm inferring that you don't expect a meaningful sequential step-down in steel components either for the barge revenue uptick?

No. So we are saying that we expect a step-down in components revenue for Q4 versus Q3. The volumes that we expect are lower due to the kind of slowdown in the industry and the whole supply chain, and railcar components just trying to work out the excess inventory and expectation of 25% to 30% lower builds next year. So we would expect lower revenue in components, but as a whole, transportation should be up in the fourth quarter.

We'll go next to Julio Romero with Sidoti.

So wanted to ask -- wanted to follow up on the 2 bolt-ons in Construction Products. Can you talk about maybe the oil and gas end market exposure for those bolt-ons? And maybe that end market exposure for the pipeline of acquisitions you're looking at? Is it notably different than what you have in either legacy aggregates or ACG?

No. Yes -- thank you for the question. We really don't have any oil exposure in the acquisitions we did. And from the pipeline we have, no oil exposure at all. It doesn't mean we are scared of the oil exposure. There's some really good -- the plans we have are really good. It's just a little more volatile, but there's going to be opportunities eventually in those areas. And -- but at the moment, we're not working on any aggregates that have oil exposure.

Understood. And on the working capital guidance, you're seeing a strong free cash flow conversion. DSO has ticked down sequentially. Can you give us some color there on anything notable to call out maybe that's driving that down?

Sure, Julio. As I've said, we've made some really good progress on receivables and payables. And if you look, we've been able to put a lot of focus on those. And the real victory so far through the year is that we've had a big ramp-up in inventories related to the barge business. So the barge business has ramped up almost 80% year-over-year. That requires a lot of extra inventory, but the achievements we've been able to make on the other 2 fronts, have more than offset that, and we generated about $40 million of working capital year-to-date. So we're pleased with that. We do feel like there's additional improvement in terms of working capital as a percent of sales, but we feel like we're definitely in the right trend.

And let me expand on that because I think it's important. We meet every month to look at this, and the one thing that -- it's the softer side of the DSOs. But it's not only that it's dropped, the quality and the strength of our receivables has become really, really good. So we have good visibility and high-quality receivables.

It does appear that we have no further questions at this time. I'll turn the call back over to you, Ms. Peck for any closing remarks.

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

This will conclude today's program. Thank you for your participation. You may now disconnect.