Earnings Call Transcript
Arcosa, Inc. (ACA)
Earnings Call Transcript - ACA Q2 2020
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Arcosa Incorporated Second Quarter 2020 Earnings Conference Call. My name is Ashley and I will be your conference call coordinator today. As a reminder today's call is being recorded. Now, I would like to turn the call over to your host, Gail Peck, Senior Vice President, Finance and Treasurer for Arcosa. Ms. Peck, you may begin.
Gail Peck, Senior Vice President, Finance and Treasurer
Good morning, everyone. Thank you for joining our second quarter 2020 earnings call. With me today are Antonio Carrillo, President and CEO; and Scott Beasley, CFO. A question-and-answer session will follow their prepared remarks today. A copy of yesterday's press release and the slide presentation for this morning's call are posted at our Investor Relations website www.ir.arcosa.com. A replay of today's call will be available for the next two weeks. Instructions for accessing the replay number are included in the press release. A replay of the webcast will be available for one year on our website under the News and Events tab. Today's comments and presentation slides contain financial measures that have not been prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of non-GAAP financial measures to the closest GAAP measure are included in the appendix of the slide presentation. Let me also remind you that today's conference call contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Please refer to the company's SEC filings for more information on these risks and uncertainties including our Form 10-K, the earnings press release we filed yesterday, and our Form 10-Q for the second quarter expected to be filed later today. I would now like to turn the call over to Antonio.
Antonio Carrillo, President and CEO
Thank you, Gail. Good morning and thank you for joining today's call to discuss Arcosa's second quarter results and our future outlook. Second quarter results demonstrated the resilience of Arcosa in the face of very challenging business conditions. We have remained fully operational during the pandemic, an essential business whose products and services help keep critical infrastructure working. Turning to slide four, here are the key messages we would like to cover on today's call. During the pandemic, we continued to prioritize the health and well-being of our employees and the communities where we operate. I want to recognize all of our employees for their incredible commitment and dedication during these difficult times. I'm extremely proud of Arcosa for continuing to support our customers and communities. This was an exceptional quarter for Arcosa across all metrics, including revenue, net income, and adjusted EBITDA. Each of our business segments posted revenue growth. Our construction business outperformed our expectations showing organic growth and the benefit of the Cherry acquisition that closed earlier this year. Our shift to more stable and diversified markets over the last 18 months has been an important factor in enabling this growth. Another major focus area has been our cash culture. In the second quarter, we generated $56 million of free cash flow versus the use of $5 million a year ago. Our free cash flow was nearly twice our net income. An impressive result as we are successfully reducing the working capital requirements of our business and focusing on margin expansion. During the quarter, we used cash flow to pay down debt. 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 in acquisitions in the first half of the year, the bulk of which was Cherry. As we move forward, our goal is to continue to utilize our balance sheet strength and allocate our strong cash flow generation on projects that allow us to grow in attractive markets, reduce our cyclicality, and improve our return on invested capital. We'll spend more time later in the call discussing the demand environment across our businesses, as well as our progress in continuing to execute on our long-term vision. Please turn to slide seven. I want to spend a few minutes discussing how we have shifted to operate in the current COVID environment. Given the essential nature of our business, we have worked hard to keep our plants operating to support our customers’ needs at this difficult time. At the same time, we have also prioritized the safety of our team. We have implemented protocols consistent with CDC guidelines at our plants and offices. While many of our offices have shifted to work from home, that option is not possible for our plants. There we have implemented a number of important measures you can see on this slide. While our employees are our top priority, our communities are important to us. Many of them are suffering. We have taken a number of steps to support the community around our plants and offices. We have donated personal protective equipment to small businesses. Turning to slide nine. Let's look at our consolidated results for the second quarter. Our businesses performed extremely well delivering record results. Revenue grew 15% year over year, with growth in all three segments. Adjusted EBITDA grew about 50% faster than revenue, evidencing operating leverage and margin expansion coming from initiatives which we have put in place. Our Construction Product segment was the largest driver of revenue and EBITDA growth. The Cherry acquisition, which will close in January, is performing ahead of plan. On balance, we were very pleased with how the second quarter progressed. Scott will take you through the business lines and our financial metrics, and then I will give you additional color on our short- and long-term view of our market.
Scott Beasley, CFO
Thank you, Antonio, and good morning, everyone. I'll start on slide 10 and review our segment results from the second quarter. Construction Products revenue grew 28% to $148 million and adjusted EBITDA increased 46% to $38.6 million. The 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 remain strong in the first half of the year. And although Houston construction activity may suffer from COVID-related uncertainty in the next few quarters, the fundamentals remain strong. In our legacy natural aggregates business where our largest geographic presence is in North and Central Texas, we had a very strong quarter; volumes were up significantly and we were able to improve margins through operating efficiencies, lower maintenance costs, and benefits from lower fuel costs. We’ve had price increases in line with the industry averages across our footprint. Although our mix shift made our overall ASP lower than last year’s second quarter. Weakness in oil and gas markets hurt volumes and our natural aggregates business. But our exposure to oil and gas has declined and represents a smaller portion of our segment revenue. Finally, revenue from our shoring product line declined almost 30% as customers reduced their capital expenditures. We were able to adjust our cost structure accordingly and minimize the impact on margins. We have seen a small uptick in inquiry levels for shoring products in the last few months as customers have displayed improved confidence in their outlook. Overall, our Construction Products team did an exceptional job executing in the quarter to serve our customers in the midst of COVID-related challenges while also continuing to integrate the Cherry business. Moving to Energy Equipment on slide 11, revenue grew 9% to $223 million. Adjusted EBITDA of $30.4 million was ahead of our expectations on improved operating efficiencies. The bulk of our revenue growth came from volume improvements in our legacy transmission structures business, where demand due to grid hardening and reliability initiatives remains robust. Additionally, our new traffic structures product line, which we acquired in March of 2020, had a solid performance in the quarter and contributed to revenue growth. Wind tower units were roughly flat versus last year’s second quarter. We received additional orders to fill our production schedule for the rest of 2020. Demand in our utility structures product line also continues to be solid. Order and inquiry activity has remained steady throughout 2020 despite the pandemic, adding to the more than $130 million worth of orders that we booked in Q4 of 2019. In addition, we have several quarters of visibility with our major alliance customers for projects that are not yet defined enough to qualify as reportable backlog. Revenues from our Storage Tank business in the US and Mexico declined year-over-year on lower shipments of large storage tanks, some of which serve oil and gas markets. Demand for our higher volume residential and commercial propane tanks remained stable. Overall margins 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 book to bill of 0.16. These $17 million of orders included a mix of tank barges, hopper barges, and marine components. Revenue from rail components declined roughly $28 million against last year’s second quarter, although it was down only $7 million sequentially. New railcar orders continue to be weak across the industry. But our leadership team has managed through numerous cycles in the past. As we discussed on the last call, we've taken significant actions at our components facilities to right size for lower demand, and we have been EBITDA positive throughout the down cycle. We've also had success in winning new orders for the more stable maintenance and non-rail markets. I will now turn to slide 14 to discuss our free cash flow and liquidity highlights. We generated $56 million of free cash flow in the quarter, roughly in line with our six-quarter average, and approximately 170% of our net income in the quarter. Our strong free cash flow generation reflects excellent operating performance, as well as the cash culture that we are building throughout Arcosa. We've made particular progress in our receivables and payables over the last year. Working capital is a key component of our incentive compensation program, and our operating teams are doing an excellent job generating cash from working capital while maintaining our ability to meet customer needs. During the second quarter, we also repaid the precautionary $100 million borrowing on a revolver that we drew in March. Taken together, we ended the quarter with $522 million of liquidity, including $148 million of cash and $374 million of committed revolver capacity. Turning to slide 15, our strong cash flow generation in the quarter further reduced our leverage. We closed the second quarter at approximately 0.4 times net debt to EBITDA with minimal debt maturities until 2025. Our low leverage will enable us to manage through uncertain macroeconomic conditions as well as pursue disciplined organic and acquisition growth. We continue to manage cash tightly. We are reiterating last quarter's capital allocation outlook for the rest of 2020, which you see on slide 16. First, we continue to expect $75 million to $85 million of capital expenditures, which includes approximately $65 million of maintenance CapEx plus a select set of organic growth projects to expand capacity and utility structures and add reserves in Construction Products. We have maintained our dividend of roughly $10 million per year. And we still have $34 million remaining on our share repurchase authorization. On slide 17, we give additional color on the three complimentary acquisitions that we have made this year to expand into adjacent product lines and utility structures. We've invested almost $60 million in acquisitions, plus an additional $10 million to organically expand our capabilities in transmission and distribution structures. The three acquisitions have combined annualized revenue of approximately $50 million and EBITDA of $9 million prior to expected growth and cost synergies. Antonio will discuss the strategic rationale and respective end markets in more detail. I will now turn the call back over to Antonio.
Antonio Carrillo, President and CEO
Thank you, Scott. As Scott mentioned, our business performed well during the quarter, and we are committed to executing our long-term strategy. Slide 19 highlights our vision, which we first shared with the investment community when we became an independent public company in the fall of 2018. Our long-term vision for Arcosa remains unchanged. Moving to Slide 20, as we noted last quarter, the impacts of COVID-19 on our near-term outlook vary across our portfolio. End markets in Construction Products and Energy Equipment, which account for nearly 75% of second quarter EBITDA, have stayed strong, while Transportation Products has seen a notable drop in new order activity. Construction activity was resilient in our key states during the second quarter, contributing positively to segment performance. Demand in the early part of the third quarter has been consistent with those levels. Construction Product owners tend to have shorter lead times than other sectors. However, we are monitoring several key indicators in our regions to gauge future demand trends. In the short term, we are focused on state fiscal health, learning activity, and the progress of federal elections, especially with the impending expiration of the Highway Funding Bill and potential stimulus measures. In our Energy Equipment segment, we have less exposure to COVID-related uncertainty since our wind towers and utility structure backlogs offer good near-term visibility, and many of our market drivers remain intact. Throughout this time, demand and bidding in our utility structure business has remained robust. For wind towers, the current backlog supports our production plans for 2020, and we are collaborating with customers on orders for 2021. In our Storage Tank business, there was a slowdown during the early stages of the pandemic; however, we have managed that period, and we are now observing a more positive tone from our customers. Demand in our Mexico business continues to be slow. In the Transportation Products segment, we are facing the toughest near-term outlook. Our components business was under pressure before the pandemic and continues to cope with declining build rates for new cars. In this segment, we are concentrating on cost containment, maintaining positive cash flow, and diversifying our customer base in end markets. As Scott highlighted, the barge business reported strong results during the quarter due to higher volumes and improved pricing. Nonetheless, increased uncertainty and low utilization rates attributed to COVID-related issues have led to a decline in orders and inquiries since the pandemic began. As anticipated, second quarter orders were lower than in recent quarters, amounting to $17 million. In the dry cargo market, we have noticed a rise in inquiries recently, and the replacement cycle appears positive, despite a prolonged period of below-average barge build rates. Conversely, on the liquid side, low utilization rates have led to decreased interest in barge replacement. However, we still see demand for project-specific barge construction. Some projects require new barges, which may involve substantial quantities. We have been working on these initiatives for some time, and they may take a while to come to fruition. Therefore, we will focus on maintaining flexibility to adjust capacity as necessary to accommodate these projects while maximizing profitability. Given our strong belief in the resilience of both the dry and liquid barge markets, we will continue to actively assess our footprint and capacity, adjusting as needed to allow time for the fundamentals of the business to overcome short-term market weaknesses. Our $259 million backlog at the end of the quarter offers visibility into early 2021. What we discussed reflects the short-term view of each of our businesses, which is impacted by COVID-related uncertainties. Next, I will address the long-term fundamentals of our business, which remain highly positive. Please refer to slide 21. To begin with Construction Products, we are optimistic about the demand fundamentals in our key markets of Texas and the Gulf Coast, driven by population growth, state fiscal health, and ongoing and planned infrastructure projects. The fundamental dynamics of the market offer additional organic and inorganic growth opportunities. In Energy Equipment, the long-term drivers are also favorable. In utility structures, we receive positive feedback from customers about their future investments, and we anticipate continued strength in market dynamics. The replacement of aging infrastructure, coupled with new programs we have introduced, positions us well for future growth. The telecom market should benefit from the 5G rollout, and our new traffic structure business leverages our engineering and manufacturing capabilities, spurred by infrastructure spending. We view recent acquisitions as product lines that can be expanded into other regions. Regarding wind towers, we expect a transition in the medium term as the PTC phases out. Nonetheless, we remain optimistic about the fundamental strength of renewable energy, particularly wind. We believe the competitive nature of the technology, enduring trends towards sustainability among large corporations, and increasing focus on ESG by investors will create a favorable demand environment for this product line in the long run. In the Transportation segment, the anticipated replacement cycle for barges and railcars is projected to generate long-term demand. In our most cyclical segments, a key competitive advantage is our team's exceptional capability to manage cycles. I am very proud of the work they have accomplished over the past 18 months while navigating a varied rail market while simultaneously increasing production to support the barge market recovery. Barge and rail are expected to continue being key transportation methods in North America, and our strong and flexible assets are significant advantages.
Scott Beasley, CFO
Turning to slide 22, I will discuss how we are transforming our portfolio. Consistent with our long-term plan to reduce complexity and cyclicality, our focus on driving a cash culture to allocate capital to a long-term strategic rebalancing will be one of our priorities. When we separated from Trinity about two years ago, the business lines that generate the bulk of our EBITDA, wind towers and rail components, were also the businesses with the largest potential hurdles in front of us. Our wind tower business was faced with a medium-term exploration of the production tax credit and resulting pricing pressure. Our rail components business had one major customer, which created pricing pressure and needed to diversify its end market. With these headwinds in mind, we defined our current long-term strategy anchored around infrastructure markets and designed to reduce cyclicality over time. To start repositioning the portfolio, we completed two large construction projects acquisitions: ACG Materials and Cherry. These were done at attractive multiples and integrated nicely, providing platforms for additional growth. In the Energy Equipment, we focused first on getting better, expanding lean practices throughout the segments that resulted in significant margin improvement. Once the operational improvements gained traction, we started executing the growth plan into adjacent markets with three small acquisitions. As a result of the strategy and execution over the last 18 months, the two businesses with the most sustainable growth potential, construction materials and utility structures, have replaced wind towers and rail components as the two main contributors to our EBITDA. Over the last 18 months, we have completely changed the mix and resiliency of our portfolio, which has proved invaluable during these uncertain times.
Antonio Carrillo, President and CEO
Slide 23 shows the expansion of our utility structure business into adjacent infrastructure-related product lines. This has been through small acquisitions. However, the goal is to leverage the engineering and manufacturing resources of our concept to enhance and accelerate their growth into other products and geographies. Turning to slides 24 and 25, we highlight our continued commitment to ESG. In August, we plan to publish our midyear ESG update, which will include more on our goals and plans, and we remain on pace to publish our full-year sustainability report in 2021. As for final thoughts, slide 26 gives our core value proposition: a portfolio of industry-leading infrastructure businesses and an 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, Operator
And we'll take our first question from Ian Zaffino with Oppenheimer. Please go ahead.
Ian Zaffino, Analyst
Hi, great. Thank you very much. Can you guys just talk a little bit more on the barge side on the order front? Nobody really seen from the end markets, not necessarily the barge utilization. But if you dig deeper into what the barges are transporting. Can you maybe give us like a sense of like what's going on in those markets or what your outlook for those markets are? And then how that would then translate into higher utilization, which would then mean higher orders?
Antonio Carrillo, President and CEO
Thank you, Ian. Let me start with the dry cargo market. We are seeing improved inquiries from customers over the last few weeks. The agricultural markets are the biggest factor, and the key aspect to watch is the relationship with China and exports to China. This year's crop looks promising, with positive expectations for exports. There's encouraging news from the Chinese market regarding pricing for corn, which improves the outlook for dry cargo barge demand. Additionally, the replacement cycle for barges is expected to be strong. After several years of very low demand, we are just beginning to see growth. Most of the growth this quarter is coming from our increasing dry cargo production. Between the positive agricultural news and the replacement cycle, we anticipate solid demand for dry cargo barges in the coming years, despite short-term uncertainties due to COVID. On the liquid side, utilization rates for some refined products and petrochemicals have been low recently. Petrochemical capacities and refineries have seen significant reductions due to decreased vehicle usage and less air travel. This results in low utilization rates for barges, which presents a challenge because efficiency within the river system increases when fewer barges are required. Until we gain more clarity on virus control and a return to normal life, utilization rates are likely to remain unpredictable. However, we are working on specific projects that have the potential to be large-scale; these are not currently tied to items being transported on the river but represent additional needs that could require new barges. We are collaborating with potential customers on these projects. In the short term, our goal is to remain flexible so we can adjust our production based on how these projects develop.
Ian Zaffino, Analyst
Can you give us some specific examples? What Cherry has brought to you? And how you've seen them materialize in this quarter? Maybe an example or two would be helpful. Thanks.
Antonio Carrillo, President and CEO
Absolutely. So several things on Cherry. I think the first thing Cherry brought is an incredible culture and an incredible team. They are extremely results-oriented. They brought a solid list of projects that they were executing on even before we acquired them. So that’s the first key contribution they've made. Regarding specific activities, let me give you a couple of examples. They have additional properties they wanted to acquire so we could expand their areas of influence around Houston. We’re currently working on that; we've already made a couple of purchases and have several more in the pipeline. Another good example is in the Houston market, where there is little rock; most of it is sand, and Cherry primarily bought sand. However, especially during the rainy season, there's a substantial demand for rock. Cherry was not able to get enough rock, only some large pieces from recycled concrete. Now we are collaborating with our Mexico team, and we are starting to import rock from Mexico to the Houston area. These are a few examples of the projects they had in their pipeline, which I believe will enhance Arcosa's footprint. We also expect growth from Cherry; we are currently finalizing the integration and learning the business. The goal is to replicate their business model in other geographies, and recycled aggregates are certainly something we did not pursue before. We're learning that business, and I see opportunities in various geographies in the country, which fit well with our ESG strategy. Overall, the Cherry acquisition has been a very successful endeavor.
Ian Zaffino, Analyst
Alright, thank you very much. Appreciate the color.
Brent Thielman, Analyst
Great, thank you. Good morning.
Antonio Carrillo, President and CEO
Good morning.
Scott Beasley, CFO
Good morning, Brent.
Brent Thielman, Analyst
Antonio, on Construction Products, it looks like Cherry in 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 there in the second half?
Antonio Carrillo, President and CEO
Sure. In Construction, we have aggregates, specialty, and shoring. Within aggregates, we have Cherry with recycled products. However, specialty faced a few headwinds. First, it’s a more national footprint, and there are regions where we faced specific shutdowns. For instance, we had to shut down a small facility in the northwest, in Washington State, and in California, we also had to significantly slow down operations, not only for us but for our customers as well. The shutdown wasn't because we were mandated, but because our customers were forced to shut down. Local demand wasn’t sufficient, causing several projects to get delayed. As for shoring, while we were only producing in one state, we are starting to shift some production to Mexico where demand is significant. In the first quarter, we couldn't keep up with demand. However, our main production is in Michigan, and we ship nationally. We've noted that some of our customers perceive this as CapEx. Like everyone else, they slowed down their CapEx during the second quarter as they tried to predict what would happen. However, as Scott also mentioned, over the months, we’re starting to see a more positive tone from our customers, and things are beginning to improve. Overall, we’re optimistic about the future of both businesses.
Brent Thielman, Analyst
Yes. So, it sounds like on specialty it's more demand disruption versus demand distraction. Is that…
Antonio Carrillo, President and CEO
That's correct.
Brent Thielman, Analyst
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 do you foresee needing to consider taking those cost actions if the order flow continues like this for another quarter or two before assessing next year's outlook?
Antonio Carrillo, President and CEO
Yes. I'm absolutely convinced that the business fundamentals are really strong and that the replacement cycle and the drivers are fundamentally sound. While I don't have concerns, my focus right now is on ensuring that we remain flexible to allow industry fundamentals to overcome short-term COVID-related disruptions. That's why we're watching our footprint and manufacturing capacity closely. If necessary, we'll consider scaling back temporarily in order to match short-term demand, but we want to maintain the flexibility to ramp up as soon as demand picks back up. Just to recap, last year, when demand increased, we struggled to keep up due to capacity issues. That's why we opened a third plant. This time, we want to remain flexible and not sell barges that the market doesn’t need, yet we want to retain the ability to ramp production quickly. This means monitoring our cost structure and adjusting it as needed, as we have successfully done in the past. We’re very good at maintaining profitability even in downturns.
Brent Thielman, Analyst
Okay, thank you for taking my questions. I appreciate it.
Operator, Operator
And we’ll take our next question from Julio Romero with Sidoti and Company. Please go ahead.
Julio Romero, Analyst
Hey, good morning. Hope you all are well. Just wanted to ask about that trench shoring business, what are you hearing from your equipment rental company customers regarding their willingness to deploy capital for CapEx? Has some of the uncertainty that was felt earlier in the year subsided, or are they kind of waiting for the other shoe to drop?
Antonio Carrillo, President and CEO
Julio, thank you for the question. Yes, at the end of March and in April, there was basically a freeze on all CapEx. However, as Scott mentioned in his remarks, we are now seeing a more positive tone from our customers regarding capital deployment. We've started to receive more orders in the last few months and have noticed a more upbeat outlook from our team regarding market conditions. I remain optimistic about that business based on the fundamentals. I hope this is just a temporary blip in terms of order slowdown.
Julio Romero, Analyst
That’s helpful. And what does your crystal ball tell you about potential lower Texas feels from the infrastructure budget, in terms of the cadence of when that is? I mean, does that impact you, and when could that begin to affect you?
Scott Beasley, CFO
Yeah, sure, Julio, this is Scott. I think, most of our focus is on Texas, and we watch that one most closely. The outlook for Texas looks pretty solid for the third quarter and likely into the fourth quarter. We've had several positive quarters of laying data. The Department of Transportation has reiterated their $77 billion 10-year plan. Overall, we’re optimistic about the fundamentals in Texas and our other core states, although we will be closely monitoring those tax receipts and evaluating the impacts they may have on state budgets.
Julio Romero, Analyst
Got it, appreciate the color there. And then just a last one is on the Energy Equipment side. You are investing in transportation and distribution. You seem pretty optimistic about the outlook there. I was just hoping if you can talk about the communications infrastructure opportunities in the near term and long term? Thank you.
Antonio Carrillo, President and CEO
Sure. If you think about the utility structures, traffic structures, and telecom structures at the end of the day, they have similar engineering and manufacturing footprints. They align well with our expertise and capabilities. The end markets are indeed different and driven by different dynamics, but we find all these markets promising. Regarding the telecom market, the company we bought does not produce the microsales or very small products associated with buildings or traffic lights; they produce larger structures, both rails and poles. These larger sales structures support the smaller ones. With the rollout of 5G, we expect significant growth opportunities for this company, not just where it is currently located but across the country. The same applies to the traffic structures business and the project structures we acquired in Florida. We currently have a robust position in Florida, but we want to replicate this model nationwide. Lastly, we acquired a minor concrete pole manufacturing entity. These are cast concrete poles. The goal is to approach our customers and offer not just steel structures but also concrete structures. This broadens our portfolio and market diversity, which helps reduce the cyclicality of our business while remaining extremely bullish on the utility market.
Stefanos Crist, Analyst
Good morning. Thanks for taking our questions.
Antonio Carrillo, President and CEO
Good morning.
Stefanos Crist, Analyst
I’d like to start discussing M&A, your strong liquidity and net debt as well. Is the strategy to focus on smaller tuck-ins due to just the market uncertainty, or are you still willing to make a bigger acquisition if you find the right opportunity?
Antonio Carrillo, President and CEO
I would say both are open opportunities for us. On the small side, we're identifying small opportunities on the aggregate side and specialty materials that could serve as tuck-ins and complement our business very well. On the larger side, if you examine our numbers, the companies we would consider acquiring are likely performing well, given they are serving similar markets. Currently, we don't see it as the right time to acquire poorly performing assets, as there isn't much available that we would be interested in. We will continue to pursue our long-term strategy and look for valuable opportunities we like and are willing to invest in. Simultaneously, we're being very disciplined, monitoring our fundamentals and markets to ensure we are on solid ground before committing to anything significant. We're always assessing opportunities and have a healthy pipeline. We are open to both small and larger acquisitions but remain disciplined in our approach, keeping in mind our goal to reduce cyclicality and complexity while boosting our return on invested capital. Those factors will guide our decision-making.
Stefanos Crist, Analyst
That makes sense. Thank you. And regarding the barge business, with lower utilization rates, are you observing any market shifts? Perhaps your typical customers are deciding to rent versus buy just to save on CapEx as well?
Antonio Carrillo, President and CEO
There are certainly market shifts occurring with respect to how some customers approach the market. Certain customers are adopting different strategies to navigate these market conditions, which may prove beneficial for some and could increase barge demand from clients that were previously not our customers. Customer balance sheets play a significant role in determining their course of action. Some are of considerable financial strength while others are not. We're mindful of these dynamics. We see this as a short-term adjustment that we need to navigate. The market fundamentals for barges remain strong, and I believe it will recover. The sentiment from our industry peers suggests that the faster adjustments occur in the oil market, the quicker recovery will ensue. Presently, we are facing a demand issue; it's not a supply issue in terms of barges, and we need demand to recover to resolve this situation. We remain optimistic that it will happen soon while observing varying approaches from customers in the market.
Stefanos Crist, Analyst
Got it. Okay. Thank you very much.
Operator, Operator
We'll take our next question from Bascome Majors with Susquehanna. Please go ahead.
Bascome Majors, Analyst
Yes, Scott. Clearly, there's some uncertainty regarding revenue and EBITDA outlook for the second half. However, several cyclical companies appear to be more willing to frame their free cash flow expectations due to the inherent buffers of working capital and discretionary CapEx. Do you have any thoughts on the range or even just the floor for your expected free cash flow for this year, despite the challenges? It would be helpful as we consider the business’s trajectory.
Scott Beasley, CFO
Sure, Bascome. This is Scott. Let me provide some context around free cash flow. We generated $76 million of free cash flow in the first half, which was a commendable first-half performance. In the third quarter, we anticipate another strong free cash flow outcome. The core business fundamentals remain strong, and we expect to continue making improvements to working capital. The fourth quarter is when we anticipate a bit of drag on free cash flow because some projects yield advanced billings collected in Q4 of the previous year. Thus, some contracts won’t be paid until Q1, which is likely to affect our cash flow in Q4. However, when you consider the entire picture, we expect free cash flow to be approximately at or above 100% of our net income for the year. This follows last year's performance, where we had over 200% free cash flow conversion. Taken together, we expect two strong back-to-back years of free cash flow performance.
Bascome Majors, Analyst
I appreciate that detail. Lastly, we’ve discussed M&A and positioning from different angles. Antonio, I appreciate the long-term slide that highlights how far you’ve come in the last two years. Looking ahead two to three years for Arcosa, where do you see opportunities for focusing the portfolio, potentially monetizing businesses that may become less core over time?
Antonio Carrillo, President and CEO
Certainly. As highlighted, for the first time, construction materials were our largest EBITDA contributor this quarter and even during the first half of the year, which underscores our repositioning efforts. We expect this trend of growth in construction and utility structures to persist while we continue to identify further opportunities. Should the need arise for divestitures in our portfolio over the next couple of years, that process is entirely feasible. However, market conditions could complicate such actions, as finding buyers for non-core assets may prove difficult. We will keep emphasizing the importance of our portfolio and our commitments to simplifying our operations as we strive to encapsulate a clearer narrative for our investors. This remains a major focus for us.
Bascome Majors, Analyst
Thank you both. I really appreciate it.
Operator, Operator
And it does appear that there are no further questions at this time. And I'll turn the call back over to you Ms. Peck for any closing remarks.
Gail Peck, Senior Vice President, Finance and Treasurer
Thank you, Ashley. Thank you, everyone for joining us today. We look forward to speaking with you again next quarter.
Operator, Operator
Thank you. And this does conclude your program. Thank you for your participation. You may disconnect at any time.