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Edited Transcript of ACA.N earnings conference call or presentation 3-May-19 12:30pm GMT

Q1 2019 Arcosa Inc Earnings Call

May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Arcosa Inc earnings conference call or presentation Friday, May 3, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Antonio Carrillo

Arcosa, Inc. - President, CEO & Director

* Gail M. Peck

Arcosa, Inc. - Senior VP of Finance & Treasurer

* Scott C. Beasley

Arcosa, Inc. - CFO

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Conference Call Participants

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* Bascome Majors

Susquehanna Financial Group, LLLP, Research Division - Research Analyst

* Blake James

Stephens Inc., Research Division - MD of Producing Sales Manager for Institutional Equity Sales

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Justin Laurence Bergner

G. Research, LLC - VP

* Stefanos Chambous Crist

CJS Securities, Inc. - Equity Research Associate

* Zane Adam Karimi

D.A. Davidson & Co., Research Division - Research Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Arcosa's First Quarter 2019 Earnings Conference Call. My name is Ashley, and I'll 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 of Finance and Treasurer for Arcosa. Ms. Peck, you may begin.

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Gail M. Peck, Arcosa, Inc. - Senior VP of Finance & Treasurer [2]

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Thank you, Ashley. Good morning, everyone. Thank you for joining our first 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.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [3]

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Thank you, Gail. Good morning, everyone. Thank you for participating in today's call to review Arcosa's first quarter results and discuss our business outlook.

We are pleased with the way the quarter evolved and see this as a strong start to a year of strong growth for Arcosa. As you know, our business model has been developed around 3 primary operating segments, each comprised of several product lines, serving different end markets within the infrastructure sector. This gives us multiple platforms for growth as well as significant resilience to other specific events such as weather, shipment timing, maintenance slowdowns, et cetera, that can impact any of our business lines. Our first quarter performance benefit from having this broad exposure to infrastructure end markets as well as some successful organic projects and the addition of ACG Materials, which we acquired in December last year.

Please move to Slide 4 where we list what we consider to be the key strategic highlights for the first quarter. First, our results exceeded our original expectations, specifically on the Energy Equipment segment and provide a strong start to the year. Next, the ACG acquisition is performing to plan, integrating very well into our Construction Products segment and has brought with it potential bolt-on acquisitions that we're currently working on. Also the application of lean manufacturing process in the Utility Structures unit of our Energy Equipment segment that began late last year is starting to pay off. We saw increased throughput and other operating efficiencies that contributed to first quarter EBITDA growth. And in Transportation Products, we continue to see good demand for liquid barges and while we did see some orders for hopper barges, demand remained soft. At the same time, the previously announced production ramp-up at our facilities is going as planned and positions us well to meet customer demand.

To sum up this slide, each of these first quarter strategic highlights is aligned with the near-term priorities that we have outlined and have continued to talk about since our Investor Day, last October. There is still a lot of runway in each of our business units, but we are pleased with the progress so far and are looking forward to continued improvements in the periods ahead. The actions taken so far together with positive momentum in our markets allowed us to deliver a strong financial quarter, which you can see on Slide 5. Our adjusted EBITDA and margin expansion outpaced our revenue growth.

Now I will provide additional operating color on each of the our business segments starting with Construction Products Group on Slide 6 where our priority has been to drive revenue growth at attractive margins. As we look at this segment's results, it's important to remember that the ACG acquisition has margins that are higher than our closest overall margin, but lower than the historical Construction Products segment's margins, contributing to an expected drop in segment margin after the acquisition.

In the first quarter, our legacy aggregates business saw very strong margin performance. On the demand side, activity continues to be healthy and customers remain positive on their outlook. Healthy demand in the Dallas-Fort Worth area is helping absorb the additional supply that came into the market. In addition, despite the increased supply and high number of bad weather days in the DFW market, our margins have remained at attractive levels.

This was also the first full quarter of contribution from our ACG Materials acquisition. We scaled up our construction segment revenues by approximately 50% on an annualized basis. And that is important geographic and end market diversification to the group. ACG Materials also brought additional specialty materials expertise that we believe we'll be able to leverage over time to produce more products with elevated barriers to entry.

In the first quarter, we continued to invest in organic opportunities to expand the production capacity and geographic reach of several ACG product lines serving the West Coast and Central U.S. markets. This is indicative of the type of support that acquisition candidates can expect from Arcosa for projects that provide high returns for investments.

As we have mentioned before, ACG had developed a robust pipeline of acquisition opportunities prior to the acquisition by Arcosa, complementing the existing pipeline in our legacy businesses. We expect to complete 2 or 3 very small bolt-on acquisitions from our pipeline shortly. Given the size, we believe, we can execute those transactions at reasonable multiples.

Our Construction Site Support operations continued to perform well in the first quarter. Commercial construction activity is a key driver here as well as increasing regulations and the focus on workers' safety.

To sum up construction, we are pleased with our first quarter performance and expect to see volume and margin improvement as we move into a seasonally stronger second and third quarters. I remain very optimistic about the segment's long-term fundamentals and ability to serve as a platform for growth.

There are many encouraging drivers that support our positive outlook. On the public side, state and federal funding for infrastructure products -- projects in our markets, particularly highways, is robust and demographic trends will continue to require both public and private infrastructure investments. Our positive market outlook is why growing construction segment is a priority for Arcosa.

On Slide 7 is a business review of our Energy Equipment group, where our near-term priority has been margin expansion. This group was a very strong performer in the first quarter for a number of reasons, but operationally, we're seeing -- we're starting to see some positive signs related to the rollout of our lean manufacturing process in our utility structure business. Throughput has started to increase as well as our on-time delivery.

As we continue to improve our -- on our operations at the plants, we will have greater confidence and ability to increase our order intake in a market that's showing healthy demand. Overall, we are happy with the signs of improvements seen to date in our utility structure business and are looking forward to future progress.

Our wind towers business continues to maintain attractive margins and our backlog remains solid providing good visibility into 2020. While we did not book any new wind tower order during the first quarter, we're currently quoting orders for 2020. Of course, the planned phased out of the production [tax break] has caused uncertainty in the market. As market leaders, we're preparing to operate within an evolving business environment, but we still believe that the industry's long-term fundamentals are sound given that wind is a competitive energy source on its own.

Lastly, our storage tank backlog continued to increase in the first quarter driven by demand from residential, commercial and agricultural customers. Additionally, we're pleased with the progress on the turnaround of our Mexico business.

Finishing up on our Energy Equipment group, we were pleased to see 2 actions in April supporting fair trade practices. In the U.S., the International Trade Commission upheld the anti-dumping and countervailing duties on imports of utility scale wind towers from China and Vietnam. And separately, in Mexico, a new investigation against the fair trade practices was initiated against China. As a company, we will continue to vigorously support fair trade practices that discourage the illegal dumping of products into the North American markets.

Slide 8 provides additional insights on the development of our Transportation Products group where our near-term priority has been to expand capacity to capture the emerging ongoing recovery in barges and to build our customer base for railcar components.

Scott will touch on some specifics. However, more broadly, we see positive trends in the business, which are creating solid demand factors for tank barges. In the first quarter, our backlog increased substantially by over 65%. This was an exceptionally high quarter for orders with a book-to-bill of 4:1 that reflected solid demand and the finalization of several large orders that have been in the pipeline for months. The majority of these orders were for liquid barges, but this strong performance included some orders for dry barges as well. The orders received in the first quarter come from a wide variety of customers and a diverse set of commodities, which are signs of a healthy market. On the dry side, we still -- we're still seeing demand below replacement volumes and we still see high steel prices as being one of the leading factors in this market. The orders received have filled our production schedule for 2019 and we are starting to build our production schedule for 2020. And in railcar components, we continue to get orders and build a relationship with new customers.

At this point, I would like to turn over to our CFO, Scott Beasley, who will provide first quarter financial review.

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Scott C. Beasley, Arcosa, Inc. - CFO [4]

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Thank you, Antonio, and good morning, everyone. Our first full quarter, as a public company, served as a strong start to 2019. While it is early in the year, we feel good about our first quarter success and our positioning for the rest of the year. I'll give more color on each segment's financial results during the quarter starting with Slide 9.

Construction Products performed roughly in line with our expectations. Revenues increased 51% to $106 million. Adjusted EBITDA of $21.5 million was $4 million higher than last year reflecting a 20.3% margin. Three main factors contributed to the year-over-year margin decline: first, as Antonio discussed, annual ACG margins are closer to 20%, which lowered our segment margins, but were accretive to our overall Arcosa margins; second, volumes and margins in our legacy aggregates business are still at healthy levels, but we faced some expected volume and pricing headwinds in our DFW market as well as a tough comp from last year; third, product mix and planned maintenance shutdowns in our specialty Lightweight Aggregates business impacted margins. Volumes improved, but the mix shifted to lower margin products. Putting it all together, we are pleased with our first quarter Construction segment margins and expect margins to improve in the seasonally stronger second and third quarters of this year. We see solid progress on our stage 1 priority of growing construction products in a disciplined way.

Please turn to Slide 10. Energy Equipment had a terrific first quarter, which was a combination of operational improvements and a few special items that we want to point out. Revenues increased 7% to $209 million. Adjusted EBITDA of $35 million was up 39% from last year. The adjusted EBITDA margin of 16.8% was driven by 4 main factors: continued strong operating performance in our wind towers business; early operating improvements in our utility structures business; the divestment of our cryogenic tank and oil field equipment businesses in the fourth quarter of 2018; and the recovery of $2.9 million in accounts receivable from a canceled utility structures project in Mexico that was previously written off. Looking forward into Q2 and the rest of the year, we're confident in the continued traction of our operating improvements, but the 16.8% margin is unlikely to be repeated as we had the onetime impact from bad debt recovery as well as favorable product mix in our utility structures business. We expect each remaining quarter to be better than last year's full year adjusted EBITDA margin of 10%, but we expect to see more of a small incremental improvement from 10% versus the large step-up we had in Q1.

Please turn to Slide 11. Shifting to Transportation. Revenue increased 9% year-over-year with adjusted EBITDA of $12.1 million. Adjusted EBITDA margins of 12.4% were lower than the first quarter of 2018 primarily due to the ramp-up of our barge business and lower year-over-year pricing in our components business. During the quarter, we had approximately $1.8 million of start-up expenses associated with the reopening of our Madisonville barge facility as well as roughly 2 weeks of lost production due to a flood at our Caruthersville, Missouri, barge facility. Caruthersville is now fully up and running and Madisonville is progressing nicely. We plan to deliver our first barge from Madisonville in early Q3. We expect to continue to have production inefficiencies in all 3 plants as we ramp-up production to meet this year's significantly higher level of demand.

On the last call, I noted that we expected the barge business to grow 70% to 80% from 2018's revenue of $170 million, and we still expect that to be the case. Our Q1 orders solidify our production schedule for 2019 and give us a nice backlog of roughly $120 million in 2020, which is a good start to that year.

Moving to Components. The business continues to operate efficiently and make progress on its lean initiatives. We continue to see higher volume from rail products offset by lower margins from our major long-term sales agreement. We booked a number of smaller orders from new customers and continue to make progress on diversifying our customer base in the components business. Finally, corporate costs were $10.5 million for the quarter as we managed expenses tightly. We continue to expect corporate cost to be in the $12 million to $13 million range per quarter for 2019 given new independent public company costs and additional spending as we move away from Transition Service Agreements over the course of 2019.

Shifting to Slide 12. We had a very strong quarter of cash generation. We generated $125 million of operating cash flow during the first quarter with $72 million from a reduction in working capital. You may recall that we had an elevated level of working capital at year-end 2018 due to a mix of factors and we successfully returned to a more normalized level during Q1. As a result, we repaid $80 million on our revolver and ended March with $118 million in cash and $371 million of liquidity between our revolver and cash on hand. We now have net debt of roughly $0, which positions us well to continue growing organically and through disciplined acquisitions.

Turning to guidance on Slide 13. We are reaffirming our revenue guidance of $1.7 billion to $1.8 billion and our adjusted EBITDA guidance of $215 million to $225 million. We also continue to expect a very healthy level of free cash flow in 2019. We continue to expect $70 million to $80 million of CapEx this year. We also expect working capital to be roughly neutral. We had strong working capital generation in the first quarter, but we'll consume a portion of that in our barge ramp-up. Finally, we continue to project cash taxes of $15 million to $20 million for the year.

I'll close by covering our capital allocation strategy on Slide 14 where we have 3 areas of focus: organic investments, disciplined acquisitions and return of capital to our shareholders. On the organic side, we're constantly evaluating growth projects where we can earn an attractive return on investment. As an example, we have proved and started an expansion at one of ACG's western plants to enhance capacity and better serve our customers. This CapEx project is an example of the high-return organic opportunities that we will continue to pursue with ACG and across all of our businesses. While we did not complete any acquisitions during the quarter, we continue to have an active pipeline and are encouraged by our progress.

We repurchased $8 million worth of shares during the first quarter and have $39 million remaining on our authorization. We also used $2.5 million to fund our quarterly dividend in January. We continue to balance capital allocation across these 3 categories to improve our returns on capital. We are working to improve returns by enhancing cash flow, reducing working capital, making disciplined decisions about CapEx and taking a hard look at underutilized assets.

I'll now turn the call back to Antonio, for closing remarks.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [5]

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Thank you, Scott. In closing, I think there are 3 takeaways from our first quarter performance: first, we're executing well on the near-term priorities that we set last year as we prepared to enter the public markets; second, our first quarter results have put us firmly on track to achieve the guidance we provided earlier this year, which represents strong year-over-year growth and substantial operating leverage; and third, we continue to be optimistic about the fundamentals of the general infrastructure markets to which we are broadly exposed.

Given our mix of businesses, you may not see a straight line up across each one of our segments and product lines every quarter, but you should see our positive trends that will lead to long-term sustainable growth.

And as we noted on Slide 15, we have a vision for the future that has not changed. It involves growing our businesses in attractive markets where Arcosa can achieve sustainable competitive advantages reducing the complexity and cyclicality of the business as a whole, improving the long-term returns on invested capital and integrating ESG initiatives into our long-term strategy and our DNA.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Justin Bergner.

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Justin Laurence Bergner, G. Research, LLC - VP [2]

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Congratulations on a nice start to the year.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [3]

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Thank you.

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Justin Laurence Bergner, G. Research, LLC - VP [4]

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I guess where I'd like to start is a lot of the strength in the quarter was driven by utility structures. And while you highlighted the margin improvement on the call, that's very good. In the press release I guess you highlighted the revenue growth and order growth for utility structures. Maybe you can just provide a little bit more detail there. And how sort of -- how much visibility do you have in terms of the sustainability of that strength on the demand side?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [5]

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Yes. And so, this is Antonio, Justin, and let me give you a little sense of the markets. So I think I'm going to be a little broader than just utilities because the quarter was a good quarter, I would say, across-the-board in the Energy group. So on the wind towers side, we mentioned the margins continued to be good. Our business is performing really well. Our lean initiatives have been tremendous and the team is doing a very, very nice job.

On the utilities structures, we saw a significant progress during the quarter in terms of the lean throughput that we were expecting. I also mentioned in my remarks that that's helping our on-time delivery. So we have significant operational issues at -- in the business that we have to fix. And as I mentioned in my script also, as we fix those things, I'm very confident that the market is showing good signs of, let's say, of demand. And as we increase our throughput, we'll be able to capture more of those orders. So we have things to do inside before we can expect those and I think we're on track for that. But when we increase our throughput, what happens is you can kind of wait on your backlog and now we have to go out and sell more. So it's a balancing act as we improve our operations to go into the future and start selling more with more confidence. So I think we're on the right track, and that's why Scott said, look, I think over the next few quarters, our margins will be a little lower than what we did in the first quarter. But we are on the right track and we expect our margins to continue to improve sequentially compared to last year.

And the orders were and bidding activity were up compared to last year. So I think the market is healthy and we have work to do internally to be able to perform well. We also mentioned our storage tank and Mexico business both are turning around well and performing better. And we divested 2 businesses that were not performing last year and were dragging our results down. So all that combination is what drove the margins up.

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Justin Laurence Bergner, G. Research, LLC - VP [6]

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Okay. Great. That's good to hear the full view on the segment. In the barge business, I guess in order to get to 70% revenue growth, I guess the next couple of quarters have to average at least $80 million of revenue per quarter. What's going to sort of drive that ramp just the new plant in part? Or are there I guess capacity constraints, internal operating constraints to get to that 70% to 80% growth?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [7]

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Yes. It's -- the new barge plant, as Scott mentioned, we plan to launch our first barge early third quarter. So really that -- and it's not going to be the main driver. It's the smallest in terms of production from the 3 plants. So really, what we're doing and that's one of the reasons why we are focusing a lot on this business is we have significant ramp-ups going on in our other 2 facilities. We are investing -- and you -- and part of the organic CapEx that you see this quarter being spent, we're spending on a new building in one of the plants. We're also building some new launch ways in that same plant.

So what we are trying to do is to increase the throughput in the 2 facilities, the 2 large facilities that we have and at the same time, let's say, invest in our processes so that at the same time, while we ramp-up, we increase our efficiencies. So that's where we're focused. We're confident in our team. They know how to do it. We're not seeing any bottlenecks. The first quarter was kind of special with all this, the flooding of the facility. The river overall had a significant amount of problems in terms of the currents were very hard and we couldn't launch barges for a few days, et cetera. But we're confident that the facilities are performing well and should deliver the production that our customers expect.

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Operator [8]

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And we'll take our next question from Craig Bibb with CJS Securities.

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Stefanos Chambous Crist, CJS Securities, Inc. - Equity Research Associate [9]

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This is Stefanos Crist, calling for Craig. Congrats on the quarter. Could you talk about the improvement in the Energy Equipment margins and just the difference between the efficiency gains versus the sale of the low-margin businesses?

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Scott C. Beasley, Arcosa, Inc. - CFO [10]

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Sure. This is Scott, Stefanos. Good to talk to you. So the margin improvement was really a mix of all the 4 factors that Antonio mentioned: wind towers, utility structures, the divestment of cryogenics and oil field equipment and then the piece we haven't talked about, I talked in my script, was the $2.9 million bad debt recovery from a utility structures project. So the bad debt recovery was the biggest piece and that's a onetime item that we wouldn't anticipate going forward. The other piece is we're kind of relatively in line driving margins up. And then the other piece that I talked about in my script that is not necessarily going to be repeated, was the favorable product mix and utility structures that, as we work through our production schedule, may be less favorable in Qs 2 and 3. But those were the 4 big drivers of the margin improvement.

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Stefanos Chambous Crist, CJS Securities, Inc. - Equity Research Associate [11]

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Got it. And then just one more quick one. You were clear that most of the backlog for barge is liquid, but can you tell us a little bit more about the dry barge demand?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [12]

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Yes. This is Antonio, Stefanos. So as we said, we do have some orders. There's not a large number. We are seeing improved activity in terms of bidding. There's more customer interest. I think on the dry cargo side, I mentioned in my script that there's a high degree of awareness of the steel prices, to put it in a way. Our customers are trying to figure out, that's what we perceive, trying to figure out where steel prices are going because it's such a big portion of the cost of a barge. And I think steel prices are still high, they've come down some, but this is one of the limiting factors in new barge orders. But we are optimistic that we are seeing some more inquiries, some more bidding activity, as I mentioned in the script. The market is not building even at replacement volumes that should be happening. So it's not very robust, but we see some signs of improvement.

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Stefanos Chambous Crist, CJS Securities, Inc. - Equity Research Associate [13]

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And congrats again.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [14]

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Thank you.

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Operator [15]

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And we will take our next question from Ian Zaffino with Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [16]

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Just turning to the balance sheet, obviously net debt is near $0. And you gave a good slide about what you want to do with your capital. What I'm kind of looking at here now is the mention that you're going to do more bolt-ons in the business. How big are those bolt-ons going to be? I mean is there an appetite or is there availability to a do anything larger than that? I know that's been something that you've talked about maybe doing something larger, maybe adding a little debt. So has anything changed as far as that outlook? Or just give us an idea of what's been going on in the M&A side.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [17]

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Yes. Good morning, Ian. This is Antonio. So -- no, I think nothing has changed. The bolt-ons are relatively small at the moment and I mentioned what we're looking for and we think that's how ACG was built with small bolt-ons and a good capacity to integrate them and to buy them at reasonable multiples well below where we bought ACG with the idea that we integrate them and we start generating both synergies, but also new products, et cetera. So we are excited with the list of companies we're looking at. I think it's -- it also provides us additional geographic and broad diversity.

Before we bought ACG, we were very, very concentrated in the DFW area. We needed some diversification. So nothing has changed. We continue to believe that Construction segment will be the main focus of our M&A. On the larger side, we are open to larger opportunities if we find them. We should not forget that ACG was a large acquisition for us. It was -- it grew our revenues by almost 50% on a yearly basis. It has over 20 mines. So it's a significant buy for us. It's integrating very well. It's performing very well. I just need to give our teams some time to digest, time to do the right thing, but we are open. If we find the right opportunities, we'll -- I think we have the bandwidth and the team to be able to do it.

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Operator [18]

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And we'll take our next question from Bascome Majors with Susquehanna.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [19]

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I want to follow up on an earlier question about the cadence of the ramp in your barge business. Directionally speaking, can you give us any sense of the magnitude between 1 to 2Q, 3Q and 4Q from a revenue perspective?

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Scott C. Beasley, Arcosa, Inc. - CFO [20]

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Sure, Bascome. This is Scott. Good to talk to you. We -- the ramp-up is relatively stable kind of Q -- well, throughout the rest of the year, it ramps up each sequential quarter. Q2 will be above Q1. Q3 will probably have a bit bigger bump from Q2 because that's when Madisonville will be producing. And then Q4, probably not as big of a step-change from -- as the previous quarter because all 3 will be running, but they'll be running at a higher capacity. So that's a rough magnitude of the way to think of it, but it should increase sequentially each quarter.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [21]

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And where you land in Q4, should we consider that a run rate? Or is there still more capacity in that existing footprint, continue to push that higher into 2020 if demand warrants?

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Scott C. Beasley, Arcosa, Inc. - CFO [22]

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Sure. There definitely will be existing capacity in the manufacturing footprint. So if you think back to peak barge levels that were $650 million of revenue, that was 4 operating plants, but our goal is to be able to operate potentially the 3 plants as efficiently as we did 4 originally. So we definitely have the bandwidth within 3 plants to ramp up beyond where we'll be Q4 and then if we need to, we can open up our fourth plant. I'll say, one of the -- it's still a significant ramp-up this year. We're talking 70% to 80%. So our team is doing a great job at the local level hiring with partnerships, with technical colleges and relationships in the community, but the 70% to 80% ramp-up this year is pretty significant. And then when you look into 2020, we already have $120 million of backlog, which is a very good spot to be in sitting in May right now.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [23]

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And last one on barge and clearly, the margins typically follow the revenue ramp in this type of business as you're adding capacity. Will we start to see a peak of what a more normalized margin should look like in 4Q? Is that really a 2025 event?

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Scott C. Beasley, Arcosa, Inc. - CFO [24]

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Yes. If you're talking about peak margins, the peak margins in the marine business were kind of in the 20% range, but that was when the dry and liquid barges were both very strong and all 4 plants were running at almost near capacity. So we're not going to be there given where we are now and the dry markets still being soft. So we're not going to be at a peak margin even by Q4 or early in 2020 unless the dry market picks up significantly.

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Bascome Majors, Susquehanna Financial Group, LLLP, Research Division - Research Analyst [25]

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And realizing -- last one for me. Realizing it's May 3, 2019, I figured it's a great time to ask about 2020, but any visibility you have and that any certain items that you'd be willing to talk about for next year as we kind of think about the trajectory of the business midterm, whether it -- and clearly, barge backlog is one thing that we've already discussed, be it corporate expenses or anything on those lines. Just any high-level thoughts we can think about your business that you're willing to share going out a year?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [26]

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Bascome, this is Antonio. Let me give you a little sense of what we are seeing and our expectations. But more importantly, if you look at our exposure to the infrastructure market, we are very optimistic about the fundamentals of the markets where we are and the general view of where things are. Starting with construction materials, I think there's, I mentioned, significant public and private spending in our regions. So I think the markets are healthy. So overall, we're optimistic about where that's going.

On the Energy side, we saw -- we see good demand on transmission. I think all this electrification that's coming around is -- should have positive fundamentals for the transmission business. The wind towers business, we are starting to quote some additional things in -- for 2020 and we have a very strong backlog in wind and in barge to start 2020. On the liquid side of the barges, there's a significant amount of petrochemical activity still happening in the Gulf, and a lot of those plants are coming online as we speak. So the fundamentals are there for the liquid barges to continue to move. The oil prices continue to be relatively healthy.

And -- so overall, I would say signs are good for our businesses to -- maybe we don't have the backlog for, as you say, the second part of 2020 and we don't have enough visibility. But that's the case, I would say, with most of our businesses. We don't live with the exception of the wind tower for a very long period. We also have the infrastructure build, which we don't know what's going to happen, but we're optimistic that the infrastructure is going to be a priority for this company. So overall, we're optimistic.

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Operator [27]

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And we'll take our next question from Zane Karimi with D. A. Davidson.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [28]

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This is Zane in, on for Brent. First one, I was kind of hoping for more color on the wind tower market, particularly in 2019 and what kind of momentum and activity you're seeing there? And then with regard to the Energy Equipment, kind of just understanding the investments going into improved productivity. And are these areas you will need to invest in to improve the competitiveness of that business or more so to expand your current market share?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [29]

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Yes. Zane, this is Antonio. Starting with the wind tower question, in the last call, and this is something that is evolving, and I mentioned it today, again. This market without the PTC as it ramps down, I think as a company, we were very, very -- we're very good at making wind towers. That's, first of all, one of the things I believe that this company is really good at making these wind towers, which are very complex piece of equipment. People believe it's only a piece of pipe, but it's a very complex piece of equipment with high tolerances and difficult to make. But overall, I would say because we will not have a PTC, we got -- the industry got used to very long-term orders. All we would get is orders for 4 or 5 years of $1 billion or $600 million. And I think that the industry is changing. It's going to be a much more project-oriented industry similar to most of the industries around.

So I think if there's a big project in the Midwest, we'll have to bid for that big project in the West, and if it's in Texas, we'll bid for that. And our plans are very well positioned to take advantage of the high wind areas in the U.S. So what I'm trying to say, I think I'm not scared that we've don't have the backlog for 2021. I'm very optimistic about the long-term fundamental of the industry. I think that with the change in the way business is going to work without a PTC, we will probably see some slowdown. But overall, I believe in the fundamentals of wind and the fundamentals of clean energy. I think this world is not going back from that -- those trends. So I'm optimistic about the future of wind. Will we get more orders? I'm convinced we will get orders for 2020 and 2021 and we'll continue to be a strong player here.

On the transmission side, the first thing we have to do to improve our, let's say, numbers is work on our processes rather than investing a lot of money. It's basically working on our lean process, which is more process than any new equipment. As we extract more and more, let's say, efficiencies from our current equipment and processes, probably we'll have to invest, but we don't foresee anything that's a major investment that we need to do in the near future to improve our margins and our throughput. Once we get to a certain capacity then, of course, we'll think about bigger investments. For the moment, we don't see that happen.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [30]

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And then transitioning over to Construction Products there. Can you talk about your strongest markets or regions for Construction Products where you see the most demand pull from today? And then also your thoughts on a potential diversification from Construction Products out of Texas?

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [31]

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Yes. So this is Antonio again. Our biggest market continues to be Texas, and we are very strong in the DFW area. We have a good presence in Central Texas and in the Gulf Coast area. Those are the 3 main regions. With ACG, we also got a significant exposure to the construction infrastructure around the Permian Basin. So we also have a presence in West Texas in the Permian Basin. With ACG, we got significant exposure to Oklahoma. We have a small exposure to Louisiana, and then we have Nevada, something in the Midwest and the Northwest of the U.S. that came with ACG. That's on the, let's say, on the pure aggregates side.

On the Specialty Materials, we've mentioned that this material is a little different. It's a material that travels much further than the aggregates. So we have plants around the country and we serve a national market. So it's more product-oriented than geographic-oriented market. And with ACG, we also got some Specialty Materials. So I'm not sure I answered your question, but those are the 2 main areas where we are very strong. Going forward, where we want to grow, I think we see ACG's acquisition as a platform and we'll be able to evaluate potential acquisitions based on their own merits once we see them.

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Zane Adam Karimi, D.A. Davidson & Co., Research Division - Research Associate [32]

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Perfect. And then one quick follow-up there. I know you guys don't report average selling prices, but can you speak qualitatively at least about your own pricing initiatives and plans for 2019 for these products?

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Scott C. Beasley, Arcosa, Inc. - CFO [33]

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Sure. This is Scott. So it obviously varies market by market and we've talked about in DFW, there had been some pricing headwinds as additional suppliers come into the market. But in other geographies, we've been able to -- ASP has increased and across ACG's footprint, in general, which is not DFW-centric, ASPs have increased kind of roughly in line with industry numbers. So it's market by market, but healthy across-the-board.

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Operator [34]

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And we'll take our next question from Blake with Stephens Inc.

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Blake James, Stephens Inc., Research Division - MD of Producing Sales Manager for Institutional Equity Sales [35]

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Congrats on a good quarter.

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Scott C. Beasley, Arcosa, Inc. - CFO [36]

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Thanks, Blake.

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Antonio Carrillo, Arcosa, Inc. - President, CEO & Director [37]

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Thank you.

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Blake James, Stephens Inc., Research Division - MD of Producing Sales Manager for Institutional Equity Sales [38]

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First off, I could have missed it, but could you unpack what ACG versus organic growth was in the Construction Products piece of business this quarter?

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Scott C. Beasley, Arcosa, Inc. - CFO [39]

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Sure. This is Scott. We don't break it out separately, but what we said was ACG was roughly in line with our expectations at the time of acquisition. So that did well and then organically, driven by the pricing and volume headwinds that we talked about in DFW. The legacy businesses shrunk a little bit, but, again, that was expected and part of the trend that we had talked about was very healthy margins compared to the industry, but some additional supply coming into the market that hurt pricing.

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Blake James, Stephens Inc., Research Division - MD of Producing Sales Manager for Institutional Equity Sales [40]

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And on components, is there any update there? Or anything kind of notable to call out in your first few months of operating as a standalone and kind of with the Trinity agreements in place? Just curious if there's any color to add there.

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Scott C. Beasley, Arcosa, Inc. - CFO [41]

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Sure. I think it's a -- we've talked about the diversification strategy that -- our former parent is obviously a big customer and over time we want to grow and diversify the customer base. We're making early progress on that strategy. We've received some nice new orders from customers both on the railcar builder side, but also maintenance services, railroads. It's a broader market than just railcar builders. So I'd say it's early, but the signs are positive commercially. And then operationally, we're very focused on being as competitive as possible reducing waste in the system and the team's done a really good job with their own set of lean initiatives.

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Blake James, Stephens Inc., Research Division - MD of Producing Sales Manager for Institutional Equity Sales [42]

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Got it. And then just lastly, cash flow generation was nice in the quarter. Can you kind of remind us how you guys think about it from a conversion standpoint? I mean I got the guidance for this year, but kind of longer term, whether you guys comp into net income or EBITDA and kind of what the conversion rates that you're typically looking for are?

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Scott C. Beasley, Arcosa, Inc. - CFO [43]

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Sure. So we talked about the goal at Investor Day was have working capital as a lower percentage of sales as we go forward. We know that it was elevated going into this year for a few different reasons. We had some customer terms on a few large contracts that extended into Q1 and then we had some spin-related items and ACG-related increases. The team did a really good job resolving a lot of those, generating $75 million of working capital in the quarter. And we would expect to consume a portion of that in the barge business this year, but still end up the year with working capital as a smaller percentage of sales than we did at the end of last year.

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Operator [44]

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And at this time, we have no further questions. I'll turn the call back over to Gail Peck, for any closing remarks.

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Gail M. Peck, Arcosa, Inc. - Senior VP of Finance & Treasurer [45]

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

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Operator [46]

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And this does conclude today's program. You may disconnect at any time.