Arcosa Inc (ACA) 2020 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Arcosa, Inc. 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.

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.

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 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 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.

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 as an essential business whose products and services help keep critical infrastructure working.

Turning to Slide 4. 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, but 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 end 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 a 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 used 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 7. 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 communities are important, too. Many of them are suffering. We have taken a number of steps to support the communities around our plants and offices, and we have donated personal protective equipment to small businesses.

Turning to Slide 9. Let's look at our consolidated results for the second quarter. Our businesses performed extremely well during the -- delivering record results. Revenue grew 15% year-over-year, with growth in all 3 segments. Adjusted EBITDA grew about 50% faster than revenue, evidencing operating leverage and margin expansion coming from initiatives we have put in place.

Our Construction Products segment was the largest driver of revenue and EBITDA growth. The Cherry acquisition we closed 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 markets.

Scott?

Thank you, Antonio, and good morning, everyone. I'll start on Slide 10 and review our segment results from the second quarter.

Construction Products revenue grew 28% to $148 million, and adjusted EBITDA increased 46% to $38.6 million. The quarter's 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 remained 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 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 in 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 U.S. 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 remain stable.

Overall margins in 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 a book-to-bill of 0.16. These $17 million of orders included a mix of tank barges, hopper barges and marine components.

Revenue in rail components declined roughly $28 million against last year's second quarter, although 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 have taken significant actions at our components facilities to rightsize for lower demand, and we have been EBITDA positive throughout the down cycle. We have 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 6 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 our revolver that we drew in March. Taken together, we ended the quarter with $522 million of liquidity, including $148 million of cash and $374 million of committed revolver capacity.

Turning to Slide 15. Our strong cash flow generation in the quarter further reduced our leverage. We closed the second quarter at approximately 0.4x 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 in 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 3 complementary acquisitions that we have made this year to expand into adjacent product lines and utility structures. We have invested almost $60 million in acquisitions, plus an additional $10 million to organically expand our capabilities in transmission and distribution structures.

The 3 acquisitions have combined annualized revenue of approximately $50 million, and EBITDA of $9 million prior to expected growth and cost synergies. Antonio will discuss the strategic rationale in respective end markets in more detail.

I will now turn the call back over to Antonio.

Thank you, Scott. As Scott detailed, our business performed well during the quarter, and we remain focused on executing our long-term strategy. Slide 19 is a reminder of our vision that we introduced to the investment community when we became an independent public company in the fall of 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 great performance in the segment. Demand in the early part of the third quarter has been at very similar levels. Construction Product orders have shorter lead times than other businesses, but we are watching several key indicators in our geographies to understand future demand strength. In the short term, we're focused on states' fiscal health, lending activity and the progress on federal actions, including the upcoming expiration of the highway funding bill and the potential stimulus measures.

In Energy Equipment, we are less exposed to COVID-related uncertainty as our wind towers and utility structure backlogs provide good term -- 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. In 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, as we have continued to navigate this period, we see a more positive tone emerging from our customers. Our Mexico business continues to see slow demand.

Our Transportation Products business faced the most challenging near-term outlook. In components, a business that 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 and 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 our recent -- 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 given 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 project-specific barge building. Some projects require new barges and could entail significant quantities. We have been working on these projects 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 product lines that we have just added, position us well for future growth.

The telecom market should benefit with the 5G buildout, 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 a transition in the medium term as PTC phases 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 towards sustainability by large corporations, and the focus on ESG by investors should create a favorable environment and demand for this product line 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 segment, one of the key competitive advantages is our team's fantastic ability to manage the cycle. I'm extremely proud of the work they have done over the last 18 months, as we navigated a contracting 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 our leading positions and 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 our long-term strategic rebalancing will be one of our priorities.

When we separated from Trinity about 2 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 them. Our wind tower business was faced with the medium-term expiration of the production tax credit and resulting pricing pressure. Our rail components business had one major customer, which created pricing pressure, and it needed to diversify its end markets.

With these headwinds in mind, we defined our current long-term strategy anchored around infrastructure markets and designed to reduce cyclicality over time. To start repositioning the portfolio, we completed 2 large construction products 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 segment that resulted in significant margin improvement. Once the operational improvements gained traction, we started executing the growth plan into adjacent markets with 3 small acquisitions.

As a result of the strategy and execution over the last 18 months, the 2 businesses with the most sustainable growth potential, construction materials and utility structures, have replaced wind towers and rail components as the 2 main contributors to our EBITDA. Over the last 18 months, we have completely changed the mix and resiliency of our portfolio, which has provided -- proved invaluable during these uncertain times.

Slide 23 shows the 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 Arcosa 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 a final thought, Slide 26 gives Arcosa's 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. While 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 Instructions) And we'll take our first question from Ian Zaffino with Oppenheimer.

Can you guys just talk a little bit more on the barge side on the order front? What are you really seeing 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 maybe what your outlook for those markets are? And then how that would then translate into higher utilizations, which would that mean higher orders for you guys?

Sure. Thank you, Ian. So let me give you -- and markets are different. Let me start with the dry cargo market. As we've mentioned, we are seeing improved inquiries over the last few weeks from customers. The biggest thing there, as you know, 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 coal, 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 is really -- should be really strong. The -- 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 -- 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, refined products and petrochemicals and all derivatives are the ones that have been very slow over the last few months. Petrochemical capacity is low. Refineries have slowed down significantly, as people don't use their car, airplanes are not flying, et cetera, et cetera. And that creates short-term 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 these are 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 what we -- 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.

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Just doing so well. Can you maybe give us some specific examples, what Cherry has brought to you and sort of how you've seen it materialize in this quarter? Maybe an example or 2 would be helpful.

Absolutely. So several things on Cherry. I think the first thing that Cherry brought -- and when you're buying a company, sometimes hard to predict how that's going to work out. But I think that Cherry brought an incredible culture with them and an incredible team. They are extremely result-driven and extremely resourceful, and they brought 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 is that. They brought their culture 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 had 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 are 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 Houston -- the Houston market, there is really very little rock. Most of it is sand and Cherry does 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 some large, you could call it rocks from their recycled concrete. But now we're working with our Mexico team, and we are starting to import rock from Mexico to the Houston area. And that's a few examples of the projects that they had in their pipeline that I think with the 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 their business model in other geographies, and that's what we're going to take it in the next stage.

Recycled aggregates, 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.

And we'll take our next question from Brent Thielman with D.A. Davidson.

Antonio, on Construction Products, I mean, it looks like Cherry and your natural aggregates business performed really well. Can you help us understand the headwinds faced 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 here in the second half?

Sure. So in construction, as you know, we have 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 had specific 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 had 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, it was because our customers were shut down. So demand locally was not working well, and we had to slow down and several projects got delayed. So that's one specific issue.

On the shoring -- Scott mentioned it in his comments, it's also a national footprint, even though we only produce in one state, and we are starting now to produce in Mexico. We're shifting some production to Mexico as we had 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 same thing happened to us in terms of CapEx. As Scott mentioned, some of our customers -- our customers see these as CapEx. And like us, everyone slowed down CapEx in the second quarter as they are trying to predict what's going to happen.

But as Scott mentioned also, as demands 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 bleak. And as the quarter progressed, light started coming -- turning on, and it started looking better. And I think every time we talk to our team, it sounds better. So we're optimistic about the future of both businesses.

So it sounds like on specialty, it's more demand disruption versus demand destruction. Is that a fair way to characterize it?

That's correct. That's a good way to put it, yes.

Okay. And then, on barge, I mean, this year looks pretty solid with the book of business that you have on hand. Antonio, at 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?

Do you need to see another quarter or 2 of orders like this before we can really say next year is going to be a tough year?

Yes. I think -- so 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 would tell you, my focus right now is going to be on making sure that we can stay very flexible to be able to allow those fundamentals of the industry to overcome the short-term 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 slow down to be able to match the short-term demand, but we want to keep our flexibility so that we can ramp up as soon as it picks back up.

So what happened to us, if you remember 1.5 years 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 our 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 you know, this business, we are 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.

And we'll take our next question from Julio Romero with Sidoti & Company.

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 alluding for maybe another shoe to drop there?

Julio, thank you for the question. Yes, at the beginning of the March, April, basically, all CapEx froze. And 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.

Great. That's helpful. And what does your crystal ball tell you about maybe the impact of lower tax receipts on state infrastructure budget in terms of like the cadence of when that hits? I mean if that does impact you, when could that begin to affect you?

Yes, sure. Julio, this is Scott. Yes, I think most of -- our biggest state 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 letting data. The DOT has come out and said that they have reiterated their $77 billion 10-year plan. So overall, we're optimistic that the fundamentals are still strong in Texas. Yes, 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 budgets.

Got it. Appreciate the color there. And then just my last one is on the Energy Equipment side. You are investing in transmission and distribution. You seem pretty optimistic about the outlook there. I was just hoping you could talk about the communications infrastructure opportunity, both in the near term and long term.

Sure. So if you think about the -- these structures, utility, traffic structures, telecom structures, at the end of the day, similar engineering, similar manufacturing footprint. And they fit very well into, let's say, the back part of the process, which is the manufacturing that we have and the expertise in engineering. So it's a similar product.

The end markets are very different and driven by different dynamics. But all of these markets, we like their dynamics. The telecom market that you referenced, the company we bought does not do this -- the micro sales or the very small cells that they'll attach to buildings or traffic lights or things like that.

This company makes larger structures, both lattice and poles, mainly lattice. And these cell structures support the microstructures around 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 a 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 sign and traffic structures that we bought in Florida. This is a business that's driven by infrastructure spending. 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 manufacturer. 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 of products for our customers and also widen our markets so that we, as we've said, try to reduce the cyclicality of the business and don't depend on a single market, even though we are extremely bullish on the utility market.

And we'll go next to Stefanos Crist with CJS Securities.

I'd like to start discussing M&A. You have strong liquidity, net debt's low. Is the strategy to focus on smaller tuck-ins due to just the market uncertainty? Or are you still willing to make a bigger acquisition if you find the right opportunity?

So I think, Stefanos, the -- we -- both are on the, 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 a pipeline of. And so those are relatively easy there, and they complement us very, very well.

On the larger side, if you think -- if you look at our numbers, I think what you're seeing from our -- 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 it as an area of -- or as a time to buy 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 is 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.

That makes sense. 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.

I think there are 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 who work better than for others and could generate 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 oil people that are in the business, the faster the adjustments happen in the oil market, the faster it comes back.

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

And we'll take our next question from Bascome Majors with 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 near-end 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 is held -- is headed?

Sure, Bascome. This is Scott. Let me give you some color on free cash flow. So we generated $76 million of free cash flow in the first half, which was a really strong first half performance.

In the third quarter, we expect another strong free cash flow performance. The fundamentals of the business 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, and then we'll have some contracts where we won't collect them until Q1. So we would expect a drag in Q4. But when you put it all together, 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, 2 really strong years of free cash flow. And this year, individually, we expect great free cash flow.

I appreciate that detail there. Last one for me. I mean, we've talked about M&A and the positioning a couple different ways. And Antonio, I appreciate the long-term slide. You framed kind of how far you've come in the last 2 years. When we look out the next 2 or 3 years for Arcosa, and -- where do you seek to opportunistically focus the portfolio by maybe monetizing some businesses that are becoming less core over time?

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 that's -- 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 or products around it will continue to be the trend that you should see. And at the same time, as we see opportunities there, we should -- 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 -- that we can find a better -- a 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. I think it's just as important to buy new things for our investor community, just as important to tell them we're buying these things 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, the second quarter looked 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 we are 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 nondrag. But right now, it looks like that. But we're going to be working. We still have time.

And it does appear that there are 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.

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