Forterra, Inc.
Q1 2017 Earnings Call Transcript

Published: 16 May 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2017 Forterra, Inc. Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Mr. Matt Brown, Executive Vice President and Chief Financial Officer. You may begin.

[Matt Brown:]

Thank you and good morning to everyone. Welcome to Forterra's Q1 2017 earnings conference call. Joining me on the call today is Jeff Bradley, our Chief Executive Officer. Presentation slides to accompany this call are available in the Investors section of our Web site. Before I turn the call over to Jeff, I would like to point out that Forterra intends to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Please be reminded that our comments today may include forward-looking statements which are subject to risks and uncertainties and actual results may differ materially from those indicated or implied by such statements. These risks are described in detail in the company's SEC filings including our annual report on Form 10-K. The company does not undertake any duty to update such forward-looking statements. Additionally, we will refer to certain non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure and other related information, including a discussion of why we consider these measures useful, in both our earnings release and at the end of our Q1 2017 earnings presentation that is available on our Web site. Now, I'd like to turn the call over to Jeff Bradley, our Chief Executive Officer, to give an update on our business.

[Jeff Bradley:]

Good morning, everybody. While our financial results were very disappointing, my optimism about the business and the long-term future of the company is as strong as ever. Today, I’m going to walk you through some of the challenges we are encountering in the first half of this year that have impacted results but that we believe we can and will overcome. I will also discuss the underlying long-term strength of our end markets and the significant actions underway that we believe will get our business back on track beginning in the second half of this year. And finally, I’m going to update you on our progress with our longer-term plan to improve the market profile of our business over the next several years. Looking at the first quarter. We had a significant number of events that had a major negative impact on our results. We also had some business-related issues that we believe will revert themselves later in the year. Collectively, these unfavorable first quarter events had a severe impact on net loss and adjusted EBITDA as compared to our initial expectations to start the year. In the second quarter of this year, we expect an unfavorable impact of similar magnitude to net loss and adjusted EBITDA which in aggregate we do not expect to recover this year, as Matt will expand upon. Let me now take you through the segments; first, the Water segment. Water is comprised of ductile iron pipe and fittings and concrete and steel pressure pipe. In our concrete and steel pressure pipe business, which is about 20% of our Water segment, we had a much higher degree of project delays and job push-outs than we had originally planned, which contributed to our lower gross profit in the quarter. We anticipate that these delays and push-outs will be realized during the back half of this year. Also, we are actively looking at strategic alternatives for this business. In our ductile iron pipe business, we have seen an increase in scrap prices which make up the large percentage of our input costs. We implemented a significant price increase to the market in March that will currently impact scrap costs, but take the effect on new orders. We do not expect to see the full benefit of this offset until the third quarter. Our top line outlook DIP, fab and fittings remains strong driven in large part by the demand we’re seeing in the residential market. Housing starts in March were up over 9% above the same period last year supporting our expectations for continued strong growth in this market. Moving on to Drainage. During the quarter, we had higher than expected increases in freight, raw materials and labor that have not yet been offset by the multiple price increases we had implemented in all our major end markets. We expect to start realizing the benefit of the increases 8 of our 10 regions as we move into the third quarter. We also experienced market pressure that affected the Drainage business for the quarter. Competition in the first quarter in the Houston market was much more aggressive than we expected. Conversely, in North Texas, our large market, sales were up despite more rainfall than last year, which is a testament to the strong demand we’re seeing in this market. We experienced strength in other key markets, including Florida, where sales were up significantly quarter-over-quarter. And in Canada, one of our most profitable markets, sales were not impacted even though there was more severe weather. We also saw strong demand in Denver, the Mid-South, Mid-Atlantic, Carolinas. We believe that the trends in these regions will continue and lead to better performance in the second half. We saw only a modest decline in net sales for the entire Drainage segment in the first quarter, in spite of the heavy rains and flooding on the West Coast and the very cold weather and snow up North. Moving on to our end markets. I’m really excited that the increased velocity of which we are seeing and winning FAST Act work. In Q4 of last year, we won 13 projects. In Q1 of this year, we more than doubled that rate to 28. And in April, we won 14 at a pace of close to $1 million a week. Also, there’s currently only $80 million of additional work that is out there for us to bid on. In fact, we are starting our capital planning process for 2018 so we are positioned to meet the demand we’re seeing. In addition to the federal highway work, we’re also seeing more and more state infrastructure funding initiatives. California has passed its 10-year, $52 billion transportation bill a little more than a month ago that will provide 3.4 billion per year for roadways and bridges. In late April, Indiana approved $0.10 a gallon gas tax that is expected to raise 1.2 billion per year of infrastructure. Tennessee passed a bill that will provide $350 million a year. And Texas’ Prop 7 goes into effect in September and will provide an additional $2.5 billion per year for highways. We also continue to accelerate our structural segment, our national stormwater products that we call Bio Clean and our initiative to service key very large national engineering and construction firms. All three of these are growing at a rate well above our traditional products. Our structural bridge business is also benefitting from the state and federal infrastructure spending. In certain states, such as Alabama, our plant capacity is at extremely high levels not being in the last decade with demand expected to continue. There are close to 20 states that have enacted legislations that will increase overall state gas taxes and our existing structural plans can reach into these states. We’ve already started work on potential expansion plans. On the heels of our Bio Clean acquisition last year, we continue to expand our breadth and reach of stormwater systems. I’m pleased to report that we now have sales coverage across the entire United States and our national plant network which can also produce all the products. This was Phase 1 in a multi-phase growth plan to substantially grow the business over the next five years. We believe that our initiatives are also working. We have key project wins outside of California where the business was started in states in Tennessee and Texas and a number of other parts of the country. We’ve also been very successful with our regulatory approvals, which allow to sell product in a specific environment. We recently received approval in Austin, Texas for our product to be installed over an environmentally sensitive area known as the Edwards Aquifer. This is one of the most prolific artesian aquifers in the world and is the source of drinking water for 2 million people. We believe these successes are a testament to our products and their use in doing our part to clean pollutants out of our natural bodies of water. Despite the slow start to this year, these positive developments reaffirm our confidence in our ability to grow operating margin by 400 basis points by the end of 2019, as compared to 2016. We have also retained strategic consultants to assist with the implementation of our plan to achieve margin expansion and natural procurement plan, freight optimization and SG&A cost reductions. These initiatives are already starting to show results. On the procurement front, we are wrapping up our analysis of key cost categories to execute on significant cost reduction opportunities across the business. While I remain confident in our top line and margin enhancing initiatives, we need to make critical investments to assure that the cost savings and platform will be able to support the anticipated growth in the coming year. This will impact us getting into the second quarter but beginning to contribute to improved results starting in the second half of the year. Our cross-selling initiative which is focused on driving drainage sales through distribution is gaining traction. In the first quarter, we added more than 10 new distributors to our drainage sales and 20 of our drainage plants shipped products to distributors during the quarter. We expect this initiative to continue improving throughout the year. We’ve also formed a strategic accounts team to focus on key large national engineering project management and construction firms. We estimate that these EPC firms will be a major source of processing for water and drainage infrastructure in the future. We’re already seeing positive results with one project currently that could generate over $15 million in sales over the next two to three years. Finally, we’ll continue to evaluate potential acquisitions and our acquisition strategy remains focused on identifying well-run businesses in strategic growth regions with opportunities to drive immediate centrifuge. We believe there continue to be great strategic and tuck-in acquisition opportunities and we’ll work to secure those that we know will enhance our performance and contribute to sustained growth. Matt?

[Matt Brown:]

Thank you, Jeff. Good morning, everyone. Our top line performance exceeded our expectations in the face of a very tough comparable quarter and the impact of heavy rains flooding in California that largely shutdown operations there during the quarter. However, our earnings for Q1 2017 were disappointing with a decline in EBITDA and adjusted EBITDA margin percentages as compared to the same quarter last year. Given our significant acquisitions in 2016 and the difficult year-over-year comparison, I will focus this morning on the key reasons our margins were impacted during the first quarter and we’re expected to continue to be impacted during the second quarter, and improvise some color around our outlook and expectations for the remainder of 2017. Before discussing the segment level results, I will briefly discuss our consolidated results. Net sales increased by 83% due to acquisitions while SG&A as a percentage of sales increased to 19.3% from 18.0% in Q1 2016, due primarily to higher public company costs. In addition to SG&A costs that were added back to the purposes of calculating adjusted EBITDA, we also incurred other professional fees in Q1 2017. These fees which are not added back included costs associated with the integration of acquisitions as well as cost associated with our initiative to realize that 2019 targeted 400 basis points of improvement in income from operations as compared to our 2016 full year results. Specifically, we invested in strategic consultants to assist us with creating implementation plans to realize the targeted savings and margin enhancements. While these initiatives will require significant upfront costs, including professional fees, most of which we believe have and will be incurred in the first half of 2017, we expect to begin to realize savings associated with these initiatives starting the second half of 2017. As disclosed in our 10-Q during the first quarter of 2017, we identified and corrected certain cost accruals that relate to prior periods in 2016. Cumulatively, this correction is recorded in Q1 2017 and increased precast loss in the period by $4.6 million. After evaluating, we determined that the errors were immaterial to operating results in the full year 2016 and expected results for full year 2017, as well as the trends in earnings. But they did impact the results of our business in the first quarter, which I’ll remind you is seasonally our lowest quarter. Turning to the results for the Drainage segment of our business, sales increased approximately 11.2% including the benefit of net sales from acquisitions of $20.1 million. Consistent with our comment from the Q4 2016 call, we had a 2.8% decline in legacy revenues due to a combination of the tough year-over-year comparable and the impact of heavy rain and flooding in California. EBITDA margin was 7.1% and adjusted EBITDA margin was 8.0% for the Drainage segment, down from 19.3% and 20.2%, respectively, in Q1 2016. Key reasons for the decline include the following. First, we had a decline in the average sales price of our products that was driven primarily by competition in the Houston, Texas market that Jeff discussed. Second, heavy rainfall in California combined with colder weather in our Northern and Midwest regions as compared to an unusually warm Q1 2016 was another significant factor in our margin decline. Third, our cost of goods sold increased primarily due to the impact of rising freight costs, increases in raw materials costs and higher overall labor costs. The rise in raw materials and freight costs was driven primarily by aggregate and diesel prices. To offset this pressure, as Jeff mentioned, we implemented price increases in 8 of our 10 regions in the Drainage segment and we have taken additional price increases in other key markets in Q2. We expect to see the benefit of these price increases in the second half of 2017, which we expect to offset the impact of the cost of goods sold increases. The remainder of the increase in cost of goods sold in Q1 was driven primarily by labor costs. The new precast plant had low additional production levels resulting in low cost absorption and thus higher cost of goods sold. Our Rocky Mountain region is among our strongest performing regions with strong demand in backlog and the new precast plant has now wrapped up to normal production levels. Finally, the Q1 of 2016 results also do not include rent expense associated with the sale of leaseback transactions that closed in April 2016. Our quarterly rent expense for the Drainage segment is approximately $3.8 million per quarter. Turning to the results for Water Pipe and Products segment of our business. Net sales of $177.8 million were augmented by the benefit of the DIP, fab and fittings or U.S. Pipe acquisition, which contributed to $142.9 million. As a reminder, excluding the DIP, fab and fittings business leaves only the much smaller legacy concrete steel pressure pipe business which represented approximately 20% of net sales for the Water segment and 10% of consolidated net sales for Q1 2017. The 13.8% decline in the pressure pipe business was due to customer-driven delays, as Jeff described. On a sequential quarter basis, net sales from the acquired U.S. Pipe business increased by approximately 1.5%. We reported an EBITDA margin of 9.6% and an adjusted EBITDA margin of 10.0% at the Water segment, down from 10.3% for both metrics in 2016 first quarter. However, the Q1 2016 results are not easily comparable to Q1 2017 due to transformational acquisition of the U.S. Pipe’s ductile iron pipe business in April 2016. The ductile iron pipe portion of the Water segment accounted for approximately 80% of segment net sales in Q1 2017. While the DIP business did experience a margin decline in Q1 2017 as compared to Q4 2016 as a result of the impact of rising scrap prices, the delay in the realization of DIP price increases, the continued weakness in the concrete and steel pressure pipe portion of the Water segment was the largest reason for the sequential quarter decline and EBITDA and adjusted EBITDA margins. Before I turn to the concrete and steel pressure pipe business though, I want to point out that the EBITDA margin for the DIP portion of our business was below our expectations for the seasonally lower Q4 and Q1 periods as a result of the impact of higher scrap prices in both periods. We expect to realize the benefit of the announced DIP price increase beginning in Q3 2017, which will begin to offset the impact of the scrape cost increases. The decline in the pressure pipe business has been driven by the impact of lower average sales prices in 2017 as compared to 2016, and the impact of weather and customer-driven delays. Consistent with Jeff comments on the Q4 2016 call, we had a large high-margin Canadian project that wrapped up in late 2016, resulting in a decline in EBITDA and adjusted EBITDA margins in Q4 2016 and again in Q1 2017. While we expect to see an increase in concrete and steel net sales starting in the starting half of 2017 compared to the first half, which will result in an increase in EBITDA and adjusted EBITDA margin from operating leverage, we expect that this portion of the Water segment will continue to weigh on our results for the remainder of 2017. Consistent with our comments on the last call, our primary focus for 2017 is on integration and execution of our existing operations, including driving top line growth and margin expansion through our initiatives. While we have a large pipeline of potential acquisitions that we continue to closely evaluate, we expect that any near-term acquisitions will be smaller tuck-in or strategic acquisitions. I want to provide an update on our liquidity capital structure. On May 1, 2017, we completed a $200 million upsize and repricing of our $1.05 billion term loan, which generated approximately $197 million of net proceeds after fees and expenses. We used the proceeds from this upsize primarily to pay down a portion of the outstanding balance in our ABL revolving credit facility. As of March 31, we had $219 million drawn on our ABL facility. As a reminder, we drew $125 million on the ABL facility as issuance in Q4 2016 to fund our refinancing in connection with the IPO, which included the repayment of the balance under our prior ABL facility that was used to fund the acquisition of J&G and Precast Concepts, and we drew an incremental $36 million in February 2017 to fund the acquisition of Royal. The remainder of the ABL draw was used to fund normal seasonal working capital increases. As a reminder, Q4 and Q1 are seasonally slower quarters with lower sales and higher inventory buildup. We expect to generate significant free cash flow from operations in Q2 and Q3, as our working capital declines and sales increase. The intent of the term loan upsize was to increase our liquidity profile through increasing our ABL availability following over $160 million in acquisitions in the last two quarters. In addition to the term loan upsize, we simultaneously completed a repricing of the term loan facility which reviews the interest rate from LIBOR + 350 basis points to LIBOR + 300 basis points. While the company does not anticipate providing annual or quarterly outlooks going forward, given the significant change to our expectations to the first half of 2017, we are providing additional perspective on Q2 of 2017. We expect net income to be in the range of $3 million to $10 million and adjusted EBITDA to be in the range of $50 million to $60 million for Q2. This estimate is based on a careful reevaluation of our outlook for 2017 and our financial expectations for the full year in light of the impact of certain factors discussed on the call today, which will primarily impact our first half results. We expect that second quarter of 2017 will be another challenging quarter as reflected in our guidance range. Given the anticipated delays on several large concrete and steel pressure pipe projects that are expected to push revenue into the second half of 2017 and into early 2018, we expect that margins for this portion of the Water segment will continue to negatively impact our consolidated margins in the second quarter. Our announced price increases for both our Drainage segment products and our ductile iron pipe products are not expected to begin to benefit our financial results until early in the third quarter, as we continue to work through our sales backlog prior to the announced price increases. Additionally, many of the costs including professional fees associated with the initiatives that we have previously discussed to drive long-term and top line growth, margin expansion and cost reduction, will be waived toward the first half of 2017. While we do not expect to recover our first half 2017 adjusted EBITDA shortfalls during 2017, we do expect our business to get back on plan for the second half of 2017. We will accomplish this by realizing the benefit of pricing initiatives, running our business more efficiently and beginning to see the initial benefit of long-term margin enhancement initiatives. The concrete and steel pressure pipe projects continue to be a drag on our bottom line through year end, but as mentioned we are evaluating strategic alternatives for this business. Looking forward, we are confident about the long-term outlook for the business which is supported by the strong in-market fundamentals and demand for our products. As we drive toward the full realization of our initiatives in 2018, without the drag of the implementation costs, we expect to see increases in our gross margin and adjusted EBITDA margins for 2018. As such, the steps we are taking today provides with a clear path to our targets of 400 basis point expansion to our income from operations as a percentage of sales in 2019 as compared to our results for 2016. With that, I would now like to open up the lines for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Bob Wetenhall from RBC Capital Markets. Your line is open.

[Robert Wetenhall:]

Hi. Good morning. Heading in today, I was thinking that 2017 adjusted EBITDA would be 275 million. And just based on your guidance, I’m thinking probably 225 million is the new number. On the quarter, you guys are calling out some things that impacted profitability. You obviously had somewhat immaterial accounting costs that shifted 4Q to 1Q for about 5 million bucks. I was hoping you could maybe give me a dollar step through between the hit in the pressure pipe business, the impact of higher costs for steel and scrap, the hit from the accounting cost that got shifted into 1Q, and maybe the size and magnitude of the dollars spent on consulting initiatives and professional services? Just if you could give me each of those and step through how those played out in the quarter; that would be terrific.

[Jeff Bradley:]

Okay, Bob, thank you. This is Jeff. First of all, I just want to reiterate. We were very disappointed with the quarter but still very, very upbeat about what we’re seeing out there, the long-term outlook for the company. So let’s go through these pieces. Let’s look at the four major buckets I think you talked about. First, the immaterial out-of-period expenses of about $4.6 million. Secondly, higher costs, SG&A and fees; let me break this down a little bit. That number is about 5.4 million which gets those two with a total of 10. On the SG&A, we have identified a tremendous amount of upside for the company with reduced SG&A and also procurement opportunities. We hired two top tier consulting firms to help us and we were actually going to kick this off in April but as I’ve started to see the upsize and the potential, I wanted to get it started sooner. So we incurred these fees in March that we were planning to incur in April. So that’s a bigger piece of the SG&A, 5.4 million. The other two buckets, let’s look at those businesses; ductile iron and drainage. In ductile iron, we’re buying scrap and re-melting it to make this ductile iron pipe. Scrap is priced on a monthly basis. We saw all these – we incurred scrap increases in January and February and March and we took action. We instituted a $100 a ton increase to the market which is going to take a while to see because we had a fair amount of orders that were already on the books. And in this business, price increases take effect on new orders. So that’s climbing. On the drainage side, we had increased cost there related to California and the Northern plants. At the California plant, we had a tremendous amount of rain in the quarter. We could have shut the plant down and started back up in April but we’re seeing very strong demand. We had orders. We chose to leave those plants open and produce those orders so that we’d be able to ship as soon as things started to dry out. We didn’t have the revenue to offset the unabsorbed cost in labor. We also had some freight expenses that were higher than we had anticipated. So what have we done there? Just like in ductile, we’ve implemented price increases across the country and we anticipate we’re going to have additional increases in second quarter and second half to more than offset these additional costs. On the pressure pipe business, first let me say that as Matt and I both said we’re looking at strategic alternatives for the business. Setting that aside for now, we have communicated that we had a very large job that was going to an offset in terms of shipments to the Canadian job that we finished up at the end of December. This very large job, this Texas job, it’s a 150-mile pipeline, largest job in the history of the company was really supposed to start shipping in March. As March went on, there were engineering changes and that has been pushed out. We’re now starting to see much greater shipments of that job in April. That is in addition to other push-outs that were unexpected that we had the pressure pipe business. We haven’t disclosed the impact of those two buckets; the scrap and ductile, the higher cost in drainage both of which will be overcome and the pressure pipe. But I can tell you that those two impact in the first quarter was definitely material.

[Robert Wetenhall:]

If you cut it this way then, kind of like the accounting shift is 4.6 million, the consulting fees are 5.4 million, so there’s 10 million of somewhat non-operational or non-recurring costs impacting the P&L this quarter. Would it be fair to say that pressure pipe was off 10 and drainage was off 5 and that kind of accounts for the balance of the hit?

[Jeff Bradley:]

Bob, we can’t disclose those numbers other than to say they were a material impact on the quarter.

[Robert Wetenhall:]

Okay.

[Jeff Bradley:]

For everybody on this call, I still remain very upbeat about everything we’re seeing across the company whether it’s in our initiatives on the procurement side, whether it’s cross selling which we’re gaining velocity on, FAST Act which we’re seeing huge rise there. Had it not been for these one-offs in the quarter, it would have been a much different story. The good news is we get all this behind us. The company’s back on track the second half. By the way, our revenue number was very close to consensus. So the business itself is rock solid.

[Robert Wetenhall:]

So you’re pleased kind of with the core underlying business to the extent that you’re hitting or exceeding your revenue estimate. You had bad fix cost absorption it sounds like, as well due to weather, rainfall in California and kind of colder weather that limited pipe installation in the Northern and Western regions. It sounds like you’ve got a lot of inventory lying on the ground right now. Are you going to ship in second quarter? So do some of the headwinds that you have from the first quarter unwind in the second quarter, or am I thinking about that incorrectly?

[Jeff Bradley:]

First of all, let me answer the first one. I am very, very optimistic about the strength of the business. And as hard as you might think that is to say on a quarter like this, it’s not but I’m very, very optimistic about everything. And think about this. When we look at the range of [ph] the first quarter in California, we look at all the cold weather up North. We had plans to have her shutdown. It’s really a testament – when you look at the revenue of the company, it’s the testament to what we’ve been talking about and that’s a platform. That’s the national footprint. We saw better than expected demand in a number of markets I think I mentioned; North Texas, the Mid-Atlantic, the Southeast, Florida. So we were able to offset that falloff in California and the North. Unfortunately, we have some of these other things, but base business is great. In terms of inventory, we always build a lot of inventory in the first quarter. The first quarter is always our slowest quarter. We build for the summer months. The highest shipment quarter of the year is the third quarter. We have to build inventory in this quarter to be able to satisfy the demand that we’re going to see in the third quarter. I was up at the Minnesota plant about a month ago and I commented on all the inventory that they have on the ground. I was talking to the former owner, Brian. I said, boy, Brian, you got a lot of inventory on the ground. He suggests this is probably 2.5 times what we sold. We have got to prepare for this summer because it’s going to be strong.

[Robert Wetenhall:]

I just meant that it sounds like your shipment levels got constrained because of the weather and you would produce to meet demand, and we are now in the second quarter. You produced any way through the quarter in spite of the inability to ship. So does that mean that some of the unfavorable operating leverage on lower shipment levels reverses in 2Q at some point?

[Jeff Bradley:]

Yes, of course. Yes.

[Robert Wetenhall:]

Got it. And can you talk about Houston for a second and price competition in the market? It’s your second biggest market. It’s kind of core to the thesis. What’s going on there and do you see this fixing at some point? And also to with higher costs, are you getting price now in that market?

[Jeff Bradley:]

You can’t really fix the market. So here’s the good news. We talked a year ago about Houston being off – the oil and gas off and Houston being off. Houston’s back. We saw very good demand out of Houston in the first quarter. We faced competitive pressures that we weren’t expecting. The good news is, as we look forward we see demand continuing to be strong. As I mentioned, I’m not going to disclose the reasons but we had price increases in Q1 and we expect additional increases in Q2 at the balance of the year.

[Robert Wetenhall:]

Got it. And final question, then I’ll pass it over. Obviously based on Matt’s outlook for the second quarter, full year EBITDA goes lower, net leverage is going to rise as a result of lower EBITDA. Are you putting acquisitions on hold for the moment and just focusing on getting the consultants in to work on cost out and the elimination of duplicate plants, or do you feel you have enough strength on the balance sheet and enough financial strength right now where you’re in a position to pursue M&A targets?

[Jeff Bradley:]

Yes, so we still – I’m going to take a piece at this and handoff to Matt. Yes, there’s still some work to do within the company but the pipelines or acquisitions is still pretty large. I would guide you to smaller – we’re looking at a couple smaller acquisitions in the second half and probably in the latter part of the second half. We’ve done a really good job I think with acquisitions. In many cases, we’ve exceeded our synergies. The integrations have gone very well when we think back on Minnesota and Denver, Bio Clean, all great, great acquisitions that we’ll continue to do great things with. The outlook in all those business is higher than we expected. So acquisitions are going to continue to be a part of the strategy to grow the company.

[Matt Brown:]

Yes, and I would add that we did seven acquisitions in the last few years, five of which were in 2016 and one so far this year. You’ll not see anywhere near that pace of acquisitions for the rest of 2017. As Jeff mentioned, we got an active pipeline and you might see a couple of small ones maybe. But to your point and to your question, Bob, yes, this will be a year more of delevering, internal focus, improving processes, integrating acquisitions and pursuing initiatives for both top line growth and cost containments and cost reductions. So I think that’s how we see it at this point.

[Robert Wetenhall:]

And you’re good with your bank covenants, right?

[Matt Brown:]

Absolutely. There are no maintenance covenants in our credit facility. There’s a springing fixed charge coverage ratio which is only sprung at a good level of liquidity which will weigh above at this point. So we’re well in compliance with our covenants.

[Robert Wetenhall:]

Got it. Thanks and good luck next quarter.

[Jeff Bradley:]

Thank you.

[Matt Brown:]

Thanks, Bob.

[Operator:]

Thank you. Our next question comes from Ian Zaffino from Oppenheimer. Your line is open.

[Ian Zaffino:]

Hi. Great. Thank you very much. Matt, maybe you could touch on free cash flow a little bit. I know there’s a big drain of cash from working capital. Is that going to release as we get through the year? What does free cash flow look like going forward?

[Matt Brown:]

Yes. So, Ian, we look at Q1, Q1 is the most negative cash flow quarter of the year because it just flows through seasonality of volumes. Q3 is the strongest volume of the year. Q1 is the lowest volume quarter of the year. So during Q1, you don’t have a lot of volumes and you’re building inventory and AOR [ph]. So you can have a decrease in cash from an increase in working capital, let’s say $80 million to $90 million. So that impact cash flow from operations in Q1 and I would say that hasn’t continued up through May or so during the year typically. And then in June you’d see that flip to where you actually start generating cash and you have a decrease in working capital. And that continues through the rest of the year. So as you look to rest of the year and I don’t want to provide guidance, but you won’t see us returning to positive cash flow. We did have some one-time items this year. For example, we had a one-time cash payment related to the Brick’s sale, gain on sale there of about $25 million and then an acquisition sort of $6 million. So after those things, we’re not going to be generating net of those or a lot of cash flow in 2017. But for the remaining course of the year, operating cash flow should bump it [ph].

[Ian Zaffino:]

Okay. So you said you’re not expecting a significant amount of cash flow in 2017? Is that what you said? I just didn’t hear that.

[Matt Brown:]

The run rate operating cash flow will be, call it, north of $50 million. But after the one-time items that I mentioned, you’re going to be close to breakeven.

[Ian Zaffino:]

Okay. So basically free cash flow is going to be slightly negative for 2017?

[Matt Brown:]

I wouldn’t say slightly negative. It’s going to be close to neutral.

[Ian Zaffino:]

Neutral, okay. And on the price increases, have the price increases that you announced that will go through, is that going to get you back to where you were before raws started to increase, or did you increase them more or did you increase them less? I’m just trying to get a sense.

[Jeff Bradley:]

No, we did not increase them less. Let me just say that we don’t wait for raw materials to increase to implement price increases. You wouldn’t see it more on the ductile side than the drainage side. In the drainage side, I mentioned the eight increases. These eight increases that we’ve implemented are just the testament to the strength in the markets where we put these increases. And it’s a testament to the strength of the whole drainage business. And as I said, Ian, we’re going to be putting additional increases through. So we anticipate that these increases will more than offset the additional costs we’re seeing in the drainage business. In the ductile iron pipe business, we put through a large increase, $100 a ton, probably not going to get to $100 – the whole $100 a ton but the plan there is to definitely recover the added costs we saw in scrap. And DIP is more project-by-project too. So at the end of the day, to sum it all up, yes, we anticipate the increases overall to the corporation will more than cover the raw material increases that we’ve seen.

[Ian Zaffino:]

Okay. And then give us an idea of what the competitive landscape is in Houston? Is this something temporary going on? Is it more of just a market structure? Help us understand what’s going on there and your outlook.

[Jeff Bradley:]

Yes, the outlook is very good. We see demand increasing. You never really know what a competitor is doing. It could be a situation maybe where a competitor has lost share. I don’t know. You never really know. It’s a big market. We’ve got some pretty big competitors there. The pricing is still good. It’s definitely less than we thought it was going to be not only as we enter the quarter but as we were going through the quarter; hence, the miss. I think at the end of the day, the good news is the volume increases and we believe price will follow. Typically in strong volume markets, you’re going to have strong price at the end of the day in any business. And the volume is strong. So we’re hoping, we’re thinking it takes care of itself.

[Ian Zaffino:]

Okay, good. And then lastly, as you look at kind of the portfolio and if you were to rank your businesses and I know you’re positively favorable to – the concrete drainage pipe you like, you like the ductile business, but then there’s other businesses that maybe you don’t like as much. And what’s your thoughts there as do you keep them, do you fix them, do you punt them? What happens to some of those businesses?

[Jeff Bradley:]

So we like our businesses. The one I spelled out was the pressure pipe business. We’re definitely looking at strategic alternatives. There are a number of alternatives we’re looking at. Not in a position now to disclose that. But that’s really the only business. And think about pressure pipe as about 20% of our water business or about 10% of the overall business. It’s a very, very lumpy business, very difficult to forecast and that’s the concrete and steel by the way. And it’s a very project-driven business. So we’ll keep everybody in the loop as to what we’re doing with that.

[Ian Zaffino:]

All right, great. Thank you very much.

[Jeff Bradley:]

Sure. Thanks, Ian.

[Operator:]

Thank you. In the interest of time, we do ask that you please limit yourself to one question and one follow-up. Our next question comes from Scott Schrier from Citi. Your line is open.

[Scott Schrier:]

Hi. Good morning. Thanks for taking my question. I wanted to follow up a little bit on the pricing realization that you were talking about and how it relates to third quarter. So as some of these price increases go through, is that also enough to overcome some of the other costs that you called out whether it was the freight costs and things of that nature? So by the time we get to 3 and 4Q, we should see more of a normalized operating leverage in the business?

[Jeff Bradley:]

Hi, Scott. Thanks for the question. Yes, as I said, we’re definitely back on track in the second half of this year. The increase you were referring to were in the drainage business. And the eight increases that we’ve announced and the additional upcoming increases that we expect we’ll push through in the drainage business, yes, would more than overcome some of these higher costs that we weren’t able to absorb in the first quarter. But again, it’s all part of our conviction that second half is back on track. Thank you.

[Scott Schrier:]

Got it. And then you had called out the California transportation bill in your prepared remarks, which I would think was, I don’t want to say unexpected, but given how long the bill has been out there, we could look at it as a pleasant surprise. How much of an impact or upside do we think that that could have in the business as some of that funding comes into place?

[Jeff Bradley:]

Scott, it’s really hard to put a number on it. When you think about our business, we’re going to see business as they put in new roads, new highways, they add additional lanes, that’s really where we pick up the business, because when you add more surface, you got to take the rain off the surface. So can’t really give you a number other than to say a small percentage of a very big number ends up being a very big number for us. And that’s the other thing. When you look at this business and this industry and the markets we serve, it really gives us a lot of optimism when we look at all the spending coming out. I gave some facts on the FAST Act and the momentum we’re seeing there. And then you couple all of this additional money coming out from the states. This Texas number is huge. California’s number is huge. That’s a big part of why I believe so strongly in the upside for the company and the outlook for the company and the outlook for this industry.

[Scott Schrier:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Mike Dahl from Barclays. Your line is open.

[Michael Dahl:]

Hi. Thanks for taking my questions. Just wanted to dig in a little bit more on kind of the bridge for 2Q. I know you walked through the 1Q details to the extent you could. But it sounds like in 1Q you had – maybe pressure pipe was relatively the greatest delta between the results and consensus followed by some of the professional and out-of-period expenses. If you look at that 2Q guidance, I guess probably those out-of-period expenses go away, but can you help us understand some of the other moving pieces? What’s happening with the professional fees? Is pressure pipe a similar or greater or a smaller headwind in 2Q relative to 1Q?

[Jeff Bradley:]

Okay, Mike. So Matt and I will both take this. Let me first talk about the professional fees. We’re going to have a fantastic return on investment these fees. As we look at the upside to reduce SG&A expense, as we look at the upside on the procurement initiatives, the one big bucket of costs that we really haven’t had time to really drive is freight. We spent roughly $100 million on freights. And we think there’s an awful lot of upside that take freight costs out of the company. And what I’m meaning with this is, these professional fees – and let me say again we hired top tier consultants who by the way gave us their top teams to help us with those fees. And we’re actually going to see – as I’ve said, we saw the upside and we saw the opportunity and I wanted to get moving faster. So we pulled some of that into first quarter. We’re actually going to see a larger piece of that professional fee investment in the second quarter. But again, just to reiterate, everyone on the line knows professional fees is going to be large. Matt, maybe you can take them through some of the other pieces of the second quarter?

[Matt Brown:]

Yes, so the other big bucket we look at trying to bridge from guidance is $50 million to $60 million through the consensus. There are basically three big buckets and those are all operationally driven and there are essentially extensions of what you saw in Q1. So the way I would characterize those is first, this is in the drainage segment. You still see pricing competition in Houston which will impact us in Q2. You also see some of the lower volumes, particularly in our Northern region which is Montana, North Dakota and South Dakota and also California trickling into Q2. So that should impact us negatively in Q2 versus where we thought we were going to be let’s say a quarter ago. Secondly, the scrap cost increase within ductile iron pipe, we put price increases for ourselves into effect. Those had about a three-month lag, so we don’t really expect those to impact us positively on our revenue until the end of Q3. So that will continue to impact us in Q2. And then the third piece is the pressure pipe and additional project delays and I would expect that to be similar in the past with Q2 than it’s been in Q1. So those are the major buckets and a rough idea of the size for those. The other of course is the professional fees which Jeff mentioned.

[Michael Dahl:]

Right, got it. And if we think about some of the consulting fees, can you help us size up the opportunity as far as over the next one to two years what that opportunity is? What else could potentially be associated with this, i.e., any sort of restructuring actions that we should be aware of?

[Jeff Bradley:]

On the professional fees, the SG&A, we think there is ultimately probably 200 basis points of SG&A takeout. If you run the numbers on that, you’re looking at a number at $30 million or so. On the procurement side, there are some very big numbers out there. Let me just say estimates in the tens of millions. Again, these are only estimates but we’re looking at tens of millions on procurement – actually tens of millions on the SG&A side. So when you look at our investment, as I said, our return on that investment with the professional fees is going to be great.

[Michael Dahl:]

Got it. And then lastly --

[Jeff Bradley:]

Was there another beat to the question?

[Michael Dahl:]

I’m sorry. What was that, Jeff?

[Jeff Bradley:]

Was there another beat to the question?

[Michael Dahl:]

No. I think that’s helpful as far as trying to understand those --

[Jeff Bradley:]

And these aren’t going to happen overnight. We’re kicking everything into gear. Not to repeat but it’s big enough that we want to move it into March. We’ll start to see impact in the second half and we’ll see a much greater impact next year.

[Michael Dahl:]

Okay. And then the last one for me, just on the – you’ve now mentioned it a handful of times as far as the strategic alternatives for pressure pipe. Usually when management teams start speaking about a segment that way, it means they’re leaning in one direction. And so if we think about the progression for this business, what can you tell us about a timeline that we should be thinking about as far as a resolution to this process? And then also what are the metrics that it would take at this point for this business to move back into the keep-and-fix bucket?

[Jeff Bradley:]

Right. We’re looking at all the alternatives on the table. As I said earlier in my comments, it has a material impact to the quarter. So needless to say with that material impact to the quarter, it behooves us to move this as quickly as we can. I can’t speak to a timeline other than to share the fact that we’re looking at everything that was material in the quarter and it makes sense for us to move as quickly as we can.

[Michael Dahl:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Trey Grooms from Stephens. Your line is open.

[Trey Grooms:]

Hi. Good morning.

[Jeff Bradley:]

Hi, Trey.

[Trey Grooms:]

First is on the DIP business. You guys have been facing the scrap increases here it sounds like; you said January, February, March. Just trying to get a feel for the reasoning on the decision to wait until what sounds like maybe later in the quarter to start to push a price increase out in that business. Understanding there’s a lag between when you implement it and when you actually start to benefit from it. Just some of the mechanics behind timing around pricing in that business would be helpful, especially in light of the raw material inflation.

[Jeff Bradley:]

Sure, understanding the DIP business. So as we entered the quarter, we saw the price of scrap start to increase. We actually thought it would reverse itself. We were getting some indications from the market that it was going to reverse itself, settle out and level off and we were wrong. It went up in January, it went up again in February, it went up again in March. In February, we made the decision to put the increase through. We put it out there in March. And really that was the reason.

[Trey Grooms:]

And what is the – you mentioned you won’t get all of the $100, but I’m sure your competitors are facing similar cost inflation. So what’s been the competitive response to the increase that you put out in March? Have you seen other folks also follow or come out with their own increases in the market?

[Jeff Bradley:]

Yes, we have.

[Trey Grooms:]

And have they been similar in size?

[Jeff Bradley:]

Yes.

[Trey Grooms:]

Okay, that’s helpful. And then --

[Jeff Bradley:]

Everybody knows. Our customers know the price of scrap is going up. It’s published every month. It’s just a known fact that scrap has been increasing.

[Trey Grooms:]

Right. And generally speaking or I guess historically when you guys see scrap move around, is it generally the – the three-month lag that you were talking about, is that the best way to kind of think about it, because your customers see it. Like you mentioned, everybody sees the scrap, they see your raw materials moving around. Is it generally – in this case, it’s going to be a little longer but generally speaking, if we’re going to model kind of the raw material risk and the timing there when we start to see things move around, is it more generally a three-month thing or is this six-month deal kind of --?

[Jeff Bradley:]

I think three-month is a safe number. Let’s be honest, we have backlogs in both the businesses. On the ductile side, the increase takes us back to new orders. So you’ve got orders on the books that you have to shift before you can realize the price increase on the new business. We actually thought – we also have business in ductile. We get an order within a month and ship it the same month. But it’s on new business and taking into account new orders that we have on the books, probably a safe number is three months.

[Trey Grooms:]

Okay, got it. And last one from me is with the professional fees and you guys bringing in top tier consultants and those guys kind of identifying some things that are going to obviously help you guys and you’re pretty excited about that it sounds like, as we go into '18. You’re talking about a couple hundred basis points of SG&A takeout. You’re talking about procurement improvements. Are those things as we look at them longer term, so your long-term plan that you guys have laid out, is that do you think additive to the potential for 400 basis points of improvement as we get to '19? Is that all part of the plan? Just kind of help us frame that up, because it seems like this is something that’s fairly new versus the plan. So I’m trying to see if we’re playing catch-up or if this is additive.

[Jeff Bradley:]

So this is all part of the plan. We haven’t commented and given every piece of the plan. Today, we’ve given more color on the 400 basis points plan than we’ve given in the past. So we’ve given some of the pieces. Let’s now hold with these are in the plans to get to 400 basis points. And as time goes on, if we think there’s additional offside, then we will share it. I’ll just reiterate that we’re really optimistic about what we’re seeing.

[Trey Grooms:]

All right. Thanks, Jeff and Matt. And good luck as you kind of get through this tough 2Q and progress into the rest of the year.

[Jeff Bradley:]

Thank you, Trey.

[Operator:]

Thank you. Our next question comes from Jerry Revich from Goldman Sachs. Your line is open.

[Benjamin Burud:]

Hi, everyone. This is Ben Burud on for Jerry Revich. Thanks for taking my questions.

[Jeff Bradley:]

Hi, Ben.

[Benjamin Burud:]

Just wanted to touch on DIP. I was just wondering how that environment’s shaping up. Are you guys – is DIP maintaining share when compared against competing products?

[Jeff Bradley:]

Well, to answer the question it’s shaping up very well. I shared the residential number we’re seeing. We’re seeing big increases in resi. Resi’s a big part of this business. We’re seeing solid demand across the country. Remain very optimistic about everything we’re seeing.

[Benjamin Burud:]

So plastic pipe and those competing products are just kind of staying stable in terms of taking share from DIP?

[Jeff Bradley:]

That is correct. Yes.

[Benjamin Burud:]

All right. And then just turning to drainage, I know you guys have --

[Jeff Bradley:]

Let me just add one other thing on drainage. We had a capital project at the end of the year that adds zinc coating to our Virginia plant. Zinc coating is value-added for DIP. The project went very well. We’re shipping more higher value-added zinc coated products in the Northeast United States. Longer term, we view that helping us as well.

[Benjamin Burud:]

Got it. And then within drainage, you guys have done a pretty good job about breaking out all the components. I guess looking at the precast plant, can you give us an idea the magnitude of the impact of that ramp and how long a ramp at a plant like that normally takes?

[Jeff Bradley:]

So the precast plant, we’re really talking about the Denver plant. Let’s just take a step back. We acquired this business fourth quarter of last year, saw tremendous amount of upside in Denver. In fact, the day I was there as I was leaving I asked the owner, I said are there any issues I need to know about? He said, Jeff, there’s so much business out here, I don’t know how we’re going to do it all. So we actually started thinking about the expansion almost immediately on the precast side. Precast was a small part of that plant. It was really a major pipe plant. So we started that expansion, expect an awful lot of upside out there. When you think about drainage, you’ve got the precast products and the pipe products. The precast products are high margin products. So we had that impact in the first quarter. Again, this is another one of those things. We’re going to have a fantastic return on investment on this. Really starting in the second half this year and moving into next year. And I would not be surprised. And if Mark was on the call, I think it would agree with me. I would not be surprised if you saw even additional expansion in Denver, because the business – not just the current business but the optimal is very strong.

[Benjamin Burud:]

Got it. Thank you.

[Jeff Bradley:]

Thanks.

[Operator:]

Thank you. Our next question comes from Nishu Sood from Deutsche Bank. Your line is open.

[Nishu Sood:]

Thank you. So looking against the consensus, sales as you mentioned were pretty much in line. The SG&A was also pretty much in line. So the shortfall was about 900 basis points in your gross margin and most of that seemed to fall in the drainage business versus the water pipe business. So based on – appreciate all the details. It sounds like in that business the factors that might have affected gross margins would include the materials, the Houston market. It would really help – the order of magnitude of shortfall was so large, it would really help if you could give us some sort of waterfall or breakdown because it’s roughly kind of $40 million miss on the gross profit line. A lot of businesses in this sector are facing materials and labor and some competitive issues, skirmishes here and there. And in the aggregates business as well, our understanding of the business was that those pricing increases, since you’re selling from inventory, get passed on pretty quickly. And rising prices, if anything, should be a benefit on that side of that business. So it would be really helpful, given the magnitude of the miss, if you could give us some breakdown on the gross profit line as to what the drivers of the miss were?

[Jeff Bradley:]

Nishu, let me just take a shot at the small piece of your question and then I’m going to handoff to Matt. You mentioned the aggregates business, maybe the cement business being able to cover raw material costs quickly. I wouldn’t disagree with you there. Our business is a very different business. We’re making products especially in the first quarter, let’s not lose sight, first quarter is an inventory building quarter. We have to build inventory in every market to satisfy demand that we’re going to see in the third quarter. So we’re going to have inventory on the ground that’s got to ship. We’re going to have inventory that’s going to have some of those higher costs and it’s going to just take time to liquidate that inventory. Matt, do you want to jump in?

[Matt Brown:]

Yes. Does that make sense, Nishu?

[Nishu Sood:]

Well, what I meant was that in the drainage business, the precast product, a lot of it is being sold from inventory and so the pricing would reflect the kind of prevailing conditions. So the magnitude – and maybe the pricing is part of – but that was actually part of the same situation. So I’m not sure I’m seeing the connection between the magnitude of the miss and those factors on the gross margin line, especially on the drainage side of the business.

[Matt Brown:]

Yes. Nishu, let me add to what Jeff said. So let me give you the big bucket. I’m not going to put dollar amount in these, but one is that we mentioned Q2’s competitive tensions there, competitive pricing. That is a big market for us. Texas is in about 35% of the drainage business and not quite happy that is Houston. So that is an impact for us, which – and obviously we’re talking about pricing that’s impacting gross margin. In addition, in California, we’ve had the weather-related issues. Similarly, we had weather-related issues in the Northern region, Dakota and Montana due to cold weather. So between volumes being pushed back and building inventory and having labor costs and non-revenues to offset those, that’s impacting the gross margin. And then also the other thing is that similar to what’s happening in the ductile iron pipe, you have some raw material and other cost increases that have been in front of some of our own price increases and we haven’t quite caught up to those yet. And that would include aggregate steel, labor and freight primarily. Those are the big buckets driving that performance.

[Nishu Sood:]

Okay, got it. That’s helpful. Just taking a step back question here as well. You folks have been a public company now for seven months. From the initial kind of vision that you laid out had – we all interpreted that, consensus interpreted that as EBITDA in 2017 around close to 300 million. Now just taking into account what you have told us through the end of 2Q puts us closer to 200. And that doesn’t even take into account any potential impact on what might happen in the second half of the year, because I appreciate that you’re not giving guidance about that. You’re projecting a lot of confidence about the second half of the year and in the long term the 400 basis point margin improvement by '19. Can you help investors understand, because it just seems like something is breaking down and can you give us – can you give investors some sense of where the confidence is coming from and just kind of help put things in context, if you could?

[Jeff Bradley:]

So let me take a higher level stab at that. The question’s great, Nishu. When we look at this quarter and break it down into what I’ll call the four major buckets. We have the immaterial out-of-period expense that hit us, which was approximately $4.6 million; higher SG&A let’s call it slash including professional fees, about $5.4 million. That’s a total of 10. We have the additional costs in scrap that we haven’t been able to recover yet. We had additional costs in drainage that we haven’t been able to recover yet that we’ll recover. And then finally pressure pipe. The one that wasn’t in the formula in the beginning really was the pressure pipe. As we kicked things off a little less than a year ago, the pressure pipe business has gotten tougher. And as I’ve said, those additional costs in ductile and drainage that we’re going to be able to offset, if you take all that out of this quarter, we wouldn’t be having the conversation we’re having now. All four of these have had a major impact and we have said, we’re doing something about pressure pipe, we’re looking at strategic alternatives for the business. So that’s one that’s got to be handled. But I still have a tremendous amount of confidence, conviction in the forward look. Our story hasn’t changed. In fact, I think and probably you might think I’m crazy saying this in light of this quarter, but I’ve gotten more conviction now than we had back then at the pressure pipe business which is about 10% of the company. As I look at FAST Act and the velocity we’re seeing there, we were on the road in October we didn’t have the facts that we have today. When you look at cross selling, at that time it was just a concept. It’s exceeded expectations. We didn’t have a strategic accounts team that we have today. Bio Clean, we have just acquired. I’ve put a number out there of $50 million in five years for that business and we’re getting traction there as well. As I’ve said, we’ve now taken this across the country. So my conviction has only improved as far as it might be to believe for this quarter, if you take these one-offs out, I think we still – not think, I know we still have a great, solid, longer term story. We’ll get through this half. Second half will be better. All this stuff will start hitting in '19 and '19 will be better than '18 I believe and '20 will be better than '19. And again, that doesn’t even account all the funding we’re seeing as well.

[Matt Brown:]

Yes. In addition to that, you have our price increases catching up to the raw materials increases and you have the phasing of the initiatives such that the cost of the initiatives really hit to some extent in Q1 and to a greater extent actually in Q2, then they trail off in Q3 and Q4 whereas the benefits of those initiatives really start to come to play in Q3 and Q4. So that’s another reason that we think Q3 and Q4 will be stronger than Q1 and Q2.

[Nishu Sood:]

So the adjustment path of this getting back on track with your longer-term vision because you still have faith in the 2019, the longer-term vision. It doesn’t sound like we get there in the second half, but maybe by the end of the year, we will be back on track again as we look into next year?

[Jeff Bradley:]

Well, as we said, we’re back on track the second half of this year. Our long-term vision for this company, for this industry, for all the markets we’re in is more solid today than it’s ever been. I think I kicked off the comments with that. So we’ll get this behind us. We’ll get through the second half. And as we go through the next call and the following call, I think we’ll see more traction on these initiatives and will have more and more to share to I’ll call it maybe regain and further instill the confidence of our investors.

[Nishu Sood:]

The second half is just six weeks off. So you’re saying that this business will be back on track within six, seven weeks or so?

[Jeff Bradley:]

Yes. As I said, we believe we’ll be back on track the second half.

[Nishu Sood:]

Okay, great. Thank you very much.

[Jeff Bradley:]

Thank you.

[Operator:]

Our next question comes from Ryan Cassil from Seaport Global. Your line is open.

[Ryan Cassil:]

Good morning. Thanks for squeezing me in.

[Jeff Bradley:]

Hi, Ryan.

[Ryan Cassil:]

I don’t want to kick a dead horse here, but I want to go back to the pricing realizations and your confidence there. Are you already seeing orders where you’re getting these price realizations for the second half coming in, or I’m just trying to get a sense of where the confidence is coming in the face of competition?

[Jeff Bradley:]

The answer is yes.

[Ryan Cassil:]

Okay, great. And just from a general sense, modeling sense, should we be turning to positive organic growth here in the second quarter and through the rest of the year? You’re hitting easier comps and this project in Texas is pushed. Can you give me a framework of how you’re thinking about organic growth in the second quarter between the segments?

[Jeff Bradley:]

I don’t know if we can get that granular with the segments. I hate to keep repeating that we’re going to get back on track the second half. We’ve talked a lot this morning. But really like to really our comments at coming back on track the second half of this year.

[Ryan Cassil:]

Okay. And then last one from me. You filed an 8-K. Looks like you’re making a change at the COO level. Can you talk about where we are in that process?

[Jeff Bradley:]

Yes. So the COO left for personal reasons and honestly I’m really looking at the whole organization to see what makes sense.

[Ryan Cassil:]

Okay.

[Jeff Bradley:]

Not going to say we’re not going to rehire a COO, we are going to rehire a COO. I’m just taking a step back. We’ve got a lot of growth in front of us. We’ve got a lot of great things happening. So I’m looking at the overall structure of the company and I’ll make a decision on what the best move is.

[Operator:]

Thank you. Our next question comes from Rohit Seth from SunTrust. Your line is open.

[Rohit Seth:]

Hi. Thanks for taking my question. Just on the scrap steel prices, the spike in scrap steel last quarter you had said that it was relatively immaterial or under control with the price increases. Now I went back in the PPI data and it looks like ductile iron prices have never been up more than 2% on an annual basis pretty much ever. So if scrap steel prices continue to hover where they are today, do you think your price increases are enough or relative – but do you think a 2% price increase rather is enough to offset where scrap steel prices are today?

[Jeff Bradley:]

Yes, we don’t look at it as a percentage. We look at the absolute numbers. We look at the absolute increase in the cost of scrap versus the absolute increase to the marketplace. And I will just leave it at that. We believe that the $100 a ton increase that we have out there will cover our additional costs in scrap.

[Rohit Seth:]

So are you suggesting we should model in the second half a restoration of your margins in that business?

[Jeff Bradley:]

Yes.

[Rohit Seth:]

Relative to where we were in the IPO process?

[Jeff Bradley:]

I don’t have the IPO numbers. I’m not prepared to answer that here sitting here. I don’t have those numbers in front of me.

[Rohit Seth:]

All right. I’ll stop --

[Jeff Bradley:]

We can get back to you on that. I don’t have the numbers in front of me.

[Rohit Seth:]

All right. That’s all I had. Thank you.

[Jeff Bradley:]

Thank you.

[Operator:]

Thank you. I’m showing no further questions from our phone lines. I would now like to turn the conference back over to Jeff Bradley for any closing remarks.

[Jeff Bradley:]

Okay. Thank you very much. I think the questions have been very good. I just to reiterate. Yes, we had a tough quarter. Yes, we’re going to have a tough first half. We’re really optimistic about everything we’re seeing, talked about a lot of what we’re seeing in the business, in the market. We’re back on track, back on plan second half of this year. And as we close out this year, which by the way isn’t that far off and we get into next year seeing much greater things next year versus this year. So thank you very much. I appreciate your time.

[Matt Brown:]

By the way – Matt here. If anybody has any additional questions, please feel free to call us. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone, have a wonderful day.