Forterra, Inc.
Q3 2017 Earnings Call Transcript

Published: 8 Nov 2017

[Operator:]

Good morning, and welcome to Forterra’s Q3 2017 Earnings Conference Call. Today’s call is being hosted by Jeff Bradley, the Company’s Chief Executive Officer and Charlie Brown, the Company’s Chief Financial Officer. With that, I would now turn the call over to Mr. Charlie Brown.

[Charlie Brown:]

Thank you, and good morning, everyone. Welcome to Forterra's third quarter 2017 earnings conference call. Presentation slides to accompany this call are available on the Investors section of our website. Before turning the call over to Jeff, I will point out that Forterra intends to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as noted on slide two of the presentation. Please remember 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 third quarter 2017 earnings presentation that is available on our website. Now, Jeff Bradley, our Chief Executive Officer will give an update on our business.

[Jeff Bradley:]

Good morning, everybody, and thank you for joining us. Before we get started, I would like to introduce the newest member of our senior team, Charlie Brown, our CFO. Charlie has a strong background in the building material space, prior to joining us in September, he was the CFO of Oldcastle Materials and $8 billion division of CRH, a large building products company based in Europe. And before that he held key financial roles at Vulcan Materials. We’re thrilled to have him on board. Turning to our results. I’m pleased to report that our Q3 results were above the midpoint of the exhausted EBITDA guidance range we communicated on the last call, in spite of two major hurricanes that hit Florida, the Gulf Coast and Houston in the quarter. In our draining segment, our adjusted EBITDA margin was up as compared to Q2 of this year, driven by higher selling prices and savings from the early benefits of our procurement and operational initiatives. We discussed last quarter that we expected our pricing in draining in this quarter to be up as a result of the increases we implemented and that’s exactly what happened both sequentially and year-over-year. In the water segment, our adjusted EBITDA margin was up on a sequential quarter basis, in spite of higher average scrap cost in our ductile iron pipe business. Our average sales price was up on both a sequential quarter basis and a year-over-year basis. We’re seeing the benefit of our recent price increases flowing through our backlog and into our bottom line results and we are optimistic about pricing heading into 2018, as we work to offset the impact of higher input costs. In our corporate segment, costs were down as compared to Q2 of 2017, reflecting the benefit of a decline in professional fees following the significant investments in our cost savings initiatives in the first half of this year. This is consistent with our expectations and I’m pleased to report that consulting work on our procurement cost savings is complete. While we expect some continued use of professionals in Q4 associated with our soft to material weakness remediation, we believe we were on the right track to see a significant reduction in these fees next year. I want to briefly comment on the broader impact that weather had on our results this year. In spite of a number of weather events year-to-date, including heavy flooding in California in Q1, tropical storm Cindy in Q2 and hurricanes Harvey and Irma in Q3, our year-to-date organic shipment volumes are down only slightly as compared to last year. In a different weather, we also faced weaker than expected spending from the FAST act federal highway bill which impacted our drainage segment, and weaker than expected demand from the municipal market in the water segment. While these factors created headwinds for our business this year, our demand outlook remains favorable against the backdrop of healthy economic fundamentals. Expectations were continued residential housing growth and improving funding initiatives to support highway infrastructure projects. The backlog in the water and drainage segments remains solid, and supports our expectations for the longer term growth. We continue to expect to see increasing highway infrastructure spending and deployment of FAST act dollars as we head into 2018. We believe the fundamental need for infrastructure investment in the U.S. including both highway and municipal water projects is greater than ever. The recent hurricane activity had major flooding impact, not just in Houston, in Florida but throughout the Gulf Coast. Longer term, we expect that the tragic flooding that occurred as a result of these storms would help to drive future critical investment in drainage infrastructure. Looking back to Katrina in 2005 were heavily impacted New Orleans. Congress authorized $2 billion to enhance the city’s drainage systems on top of a much larger budget to reach toward the levy system. Following the crisis Forterra’s predecessor saw a boost in sales in that region in the years following the disaster. We are executing on the initiatives that I discussed last quarter, and I believe that we are well positioned to continue – to see continued progress in 2018 and beyond. We are seeing momentum in our drive to realize higher average selling prices next year to offset the impact of higher input costs as evidenced by our Q3 results. We’re beginning to realize the benefit of our procurement initiatives and the reorganization of our drainage segment to the bottom line, and I remain confident in my expectation for a year-over-year benefit to our results in 2018. We’re executing on our SG&A cost cutting initiatives which we also expect to improve our results in 2018 as compared to 2017. We reduced our corporate cost in Q3 versus Q2, reflecting the benefit of lower outside consulting costs and we believe there are more savings as we wrap up our SOX and control weakness remediation work. And we successfully completed the divestiture of the underperforming U.S. concrete and steel pressure pipe business, in short, we are doing what we said we would do, and we’re focused on executing to the bottom line. Finally, I’m excited about the financial leadership that we have in place with Charlie Brown. He brings tremendous industry experience and enthusiasm that the significant opportunities that we have to drive improved results to the bottom line. Charlie, we’re thrilled you’re on the team. Over to you.

[Charlie Brown:]

Thanks, Jeff. I am excited to be a part of the Forterra team, and the opportunity to influence the next phase of the Forterra’s story. My decision to join Forterra was based on my belief that the company is well positioned to grow and expand margins, and the results to date in 2017 do not represent the potential of this company or feasible and our assets. Since joining Forterra in late September, I’ve spent time getting to know the team and digging into the details of the business and has confident that there is a great future ahead for our company. Over the next few minutes I’ll touch three topics, a high level review of our results, fundamentals of the market and our forecast. Our results included the strategic sale of the U.S. concrete and steel pressure pipe business. In addition to non-anticipating near term growth and demand, the product is specialized in the projects and specifications can be complex. This leads to volatile results, high working capital and basically an unacceptable return on assets, in other words a business that does not fit well within the Forterra portfolio. Excluding the loss on the sale of this business, our adjusted EBITDA $60.9 million was just about in the midpoint of our guidance. Now Jeff comments he focused on the sequential quarter results, while my comments will focus on the year-over-year comparison, and I’ll be brief. On slide three of our presentation, we provided third quarter segment sales compared to last year. Acquisition in our drainage segment contributed $28.4 million to the increase in Q3 net sales for that segment on a year-over-year basis. Excluding the benefit of these acquisitions, drainage net sales increased 2% year-over-year, despite the hurricane impact due to solid demand across our regions and higher selling prices. Adjusting for net sales associated with the divestiture of our U.S. concrete and steel pressure pipe business, which was a $9 million impact, our water segment net sales declined about 10%. Net sales in the water segment were negatively impacted by $12 million decline in the Canadian concrete pressure pipe sales related to a large project that we completed in the fourth quarter of 2016. The negative impact of the hurricanes and lower municipal activity on our ductile iron pipe sales was partially offset by the benefit of higher average selling prices. As a result, our combined net sales on a comparative basis were down about 4%. Slide three also summarizes the third quarter adjusted EBITDA and adjusted EBITDA margin for our business. Continuing with our water business, the significant decline in earnings and due to higher scrap costs and the completion of the large Canadian concrete pressure pipe project in 2016, with higher average selling prices for our DIP products partially offsetting lower volume and the impact of the hurricane Irma. Within drainage, excluding the estimated $3 million adjusted EBITDA impact due to the hurricanes, the remainder of earnings decline is attributable to higher labor, freight and raw material costs, which was somewhat offset by higher average selling prices. Finally our corporate costs were up $900,000 primarily driven by our SOX compliance and material weakness remediation work. Margin would miss in both businesses is about 470 basis points. It was better than similar comparisons in Q2, we are not satisfied with this level of performance. Fortunately, we believe the market fundamentals that drive our business are positioned for improvement. Infrastructure spending in 2017 has fallen short of expectations today. Public funding of infrastructure was supposed to see an increase with the passage of the FAST act in 2015. While it contained only a modest growth from MAP-21 legislation, the two year program from 2012. It was believed that the five year term in the FAST act would benefit long-term projects through increased funding certainty. As you know longer term highway projects usually included new or expanded lane capacity, which is demand driver for a drainage business. Unfortunately public construction activity has been new to this year, as legislative uncertainty, DOT, logistics, labor availability and weather events have limited growth. In fact, the August census data shows that highway spending in the U.S. is down about 4% on a year-to-date basis. As the underlying transportation infrastructure funding remains available however, and the need for these projects is undeniable. We believe optimism in our drainage business is well grounded. Housing starts are one of the best indicators for the ductile iron pipe supplied by our water business. As you know, housing starts dropped dramatically during the recession and had been in the slower recovery ever since. While the pre-recession peak was not sustainable, the current level of housing remains well below historic trends, suggesting pending investment. We believe this does well for future demand for our water business and to a lesser extent, our drainage business. Municipal funding is another driver for our water business, but it’s difficult to [inaudible]. Municipalities like all of us balanced our need to invest in water infrastructure against all of our other activities, and that’s deferred non-critical projects. While we believe that the need for investment in this segment is significant and growing, we do not play a significant way on this factor in our future expectations. Regarding our forecast, please note that our fourth quarter expected adjusted EBITDA range is between $20 million and $25 million. This is based on the following positive factors. The continuing traction from initiatives that are lower in cost through a combination of increased operating efficiency, enhance procurement programs, as well as no carryover impact from Harvey as project activity in the Houston area appears to have resumed to previously expected levels. On the negative side, we do see some customer driven delays from hurricane Irma in drainage, still impacting us in the Southeast. In addition, we will have higher SG&A costs which reflects the continued use of professionals in support of our [inaudible] implication. Our adjusted EBITDA range for the fourth quarter assumes a year-over-year decline in sales, driven by a $27 million decline associated with the divestiture for the U.S. concrete and steel pressure pipe business. Adjusted for this divestiture, the high end of our adjusted range assumes flat sales for the quarter, while the low end conservatively assumes a more significant sales decline compared to the fourth quarter of 2016. Finally, we’re still working on our 2018 business plan. So, it is premature to provide a detailed outlook for 2018. However, we expect continued improvement in our year-over-year results and will provide greater clarity on our 2018 outlook on the fourth quarter earnings call. I would like to now turn it back over to the operator to open the line for your questions.

[Operator:]

Thank you, sir. [Operator Instructions] And our first question will come from the line of Bob Wetenhall with RBC. Please proceed.

[Robert Wetenhall:]

Congratulations, and congratulations on the inflection point operationally. It’s great to see you guys coming in with your initial guidance range in spite of a lot of hurricane activity in the Southeastern Texas. If I’m hearing you correctly, it sounds like private markets are cooperative on residential and commercial side, and you’re seeing a little bit of a draw down on municipal spending in the FAST act hasn’t come through. And that’s a great way to frame it. I was hoping maybe that Jeff, you could really give us a lot more color on what’s happening in both the Houston market, you mentioned some backlog, and also what’s going on with Florida with the fallout Irma. I know those are big markets, maybe if you could size it for us first and just tell kind of what to expect in those two markets into year end?

[Jeff Bradley:]

Sure Bob, I’d be happy to and thanks for the comments. First of all, let’s talk about Houston. Houston is a large important market for the company. Houston came back quicker than we expected. In fact we are now back to shipping at normal expected levels. Florida in the Gulf Coast on the other hand have been slower to recover. Shipping levels continue to improve, and we expect to be back to normal levels by the end of the year.

[Robert Wetenhall:]

Could you talk to me about any of the progress you’ve been making in terms of some of the cost removal initiatives you started earlier in the year, the last two cause you were spending a lot of money on procurement, logistics, freight and distribution. And I just want to understand, are you getting any return on investment for the expenditures and what’s the P&L impact going forward? Maybe if Charlie could jump in too and kind of give us…

[Charlie Brown:]

Sure.

[Robert Wetenhall:]

…what you and the money that’s been spend and the benefit that’s expected and when it’s going to flow through the P&L.

[Jeff Bradley:]

Sure, thanks for the question. So just to remind everybody, we spent on consulting costs on the procurement initiative both in Q1 and Q2. I’m pleased to report that that work is completed. We’re very pleased with the results. We’re starting to execute against those initiatives and put the money to the bottom line, but the biggest impact will come next year. We’re seeing lower costs pretty much across the board. Transportation Bob, has been challenged a little bit with the – especially in the Southeast, with storms. But outside of that, we like the progress we’re seeing and the bigger affect will hit us next year.

[Charlie Brown:]

Bob, and as we mentioned in the release, we’re not prepared to comment on 2018. I think it’s fair to say that, like any of these cost initiatives it does take time to implement. So the 2017 impact we have seen positive impact, we have not quantified that and have just not to, and in 2018 we’ll see the remainder of that come through, and we’ll continue to work on those numbers for the Q4 call.

[Robert Wetenhall:]

I’m not really asking for guidance and so that’s fine, I was just trying to understand if the initiatives have been successful and if you’re seeing tangible benefit from them.

[Jeff Bradley:]

Yeah, so just to reiterate Bob, the answer to both of them is yes.

[Robert Wetenhall:]

You’re starting to realize from savings that sounds like.

[Jeff Bradley:]

Yes we are. We actually track – we track all of the items that we have been able to take cost out of – we started tracking them on a monthly basis. But again, this is really disappointed.

[Robert Wetenhall:]

So it’s in the early stages. And Charlie, congratulations on your role at Forterra. Fair question I wanted to ask you, leverage balance sheet, what’s your strategy for managing the balance sheet when you’re thinking not really in the quarter but 2018, 2019, what are your thoughts on driving free cash flow from network capital? I was just hoping you can give us the higher level perspective on how you’re thinking about balance sheet management.

[Charlie Brown:]

Absolutely. I think the important thing to keep in mind, Forterra is very focused on their portfolio of business. I think we will continue to look for improving our portfolio, which means the acquisitions and divestitures as you can see the movement we made this past quarter in disposal and we will continue to look for opportunities to invest. Those balance sheet is up, obviously we are not comfortable at this level of leverage, but that does not mean that we are going to abandon our growth opportunities and we’ll pursue what we believe are very attractive investments as we go forward, but like I said, we will balance sheet in a portfolio manner.

[Robert Wetenhall:]

Bottom question for me and then I’ll pass it over. Jeff, you noted that you’re seeing positive pricing trends across the portfolio. Do you think this is an inflection point in your markets where stronger demand is leading to recognition that you’re able to take price, is there a change in the markets where you’re operating that is creating a more benign pricing environment relative to prior headwinds you’ve seen?

[Jeff Bradley:]

Well, let me just break the two businesses down the drainage and the water business. The drainage business is a regional business. And we have been successful in getting increases in many of the drainage markets, there are some markets that are weaker that we have not been able to get increase. But the net effect as we’ve come out ahead when you look at the whole business, you have a much greater opportunity to get higher prices in stronger markets. On the ductile iron side, we put through a number of increases, I talked about on the earlier calls, and the benefit that we’re seeing in ductile iron is coming from the increase that we put out in June and we also put a September increase out. So we’re seeing the benefits of that. I mean typically higher prices signal a strong market, vice versa stronger markets typically indicate you can get higher prices.

[Robert Wetenhall:]

So it’s an encouraging setup. And final question, Charlie, can you just speak about how you’re thinking in your new role of CFO is about guidance. Is guidance going to be something you’re comfortable making, is it going to be a stretch goal for the company or is it something you think that you guys deliver with more consistency? Congrats on a great quarter, welcome to Forterra and good luck.

[Charlie Brown:]

Yeah, I mean, thank you very much and I do appreciate your kind words Bob. We’re still considering what’s the best manner for communicating our guidance going forward. Obviously in 2017, we’re in a difficult situation and the company needed to provide better guidance. I think what Jeff had said over and over again in his call is, we’re going to do what we say we’re going to do, so that is – that is the guidance that I want to provide more than anything else going forward is that our message should be taken as serious, it is not – we’re not fluffing things up, we’re trying to give you very clear guidance. And then when we deliver on it, we’ll tell you that we delivered on it, and I think that’s the best way for us to move forward. Thanks a lot Bob.

[Operator:]

[Operator Instructions] Our next question will come from the line of Ian Zaffino with Oppenheimer. Please proceed.

[Ian Zaffino:]

Great, thank you. Just wanted to drill down maybe on some M&A, what are do you thinking there, are you seeing some opportunities, I mean the business seem to have turned around nicely here, I mean there is still more to go but it’s turned around, I mean is that giving you a little bit more optimism as far as going out and buying stuff or and is there anything that you need to buy to kind of round out where you are? Thanks.

[Jeff Bradley:]

Thanks Ian for the question. To piggyback on what Charlie said, we’re analyzing the portfolio of access that we have. We’re looking at opportunities to prove our – and prove our position in stronger regions and really reduce exposure in weaker regions. And I think regions and business lines, I think those are important things to consider. Yes, there are opportunities out there Ian, there is absolutely, and our people are connected to each of the markets. I think what we want to be, and this is going forward, is not opportunistic but very thoughtful about the acquisitions we make, and divestitures. These will be things that fit well without our portfolio for the long-term and will add value for our shareholders going forward.

[Ian Zaffino:]

Okay. And then can you maybe talk about maybe the margin potential or at least kind of your view, particularly on the water side of it. It looks like you have been getting pricing, your competitors kind of following along now. And what maybe just directionally where if your margins go in that business and how do you get there? Thanks.

[Jeff Bradley:]

Thank you. So directionally, we’re going to be able to give a little more color on that on the next call as we look at next year. I can tell you that we’re pleased with what we’re seeing. We have encountered higher scrap costs. So, first thing we need to do is cover those higher costs. But again the higher prices are just a testament to the market and the strength of the market. We’ve got a great team on the ductile iron side and the drainage side, these guys are doing a nice job. And again we’ll be able to discuss a bit more Ian about the future on the next call.

[Charlie Brown:]

The only thing I would add to that Ian is that, we talk a lot about price which is important, but it’s also cost. And our business as you know, we have opportunities, we’ve identified, we’ve mentioned this on the calls in the past, we’ve just talked about the reorganization of the drainage business as far as the management structure, operationally we have improvements that we are making and will continue to make. And so the margin, I don’t think we want to set any rules to go by, but we believe as we’ve said a few times now, that we believe that they can be better.

[Ian Zaffino:]

Okay, thank you very much.

[Operator:]

Thank you. Our next question will come from the line of Nishu Sood with Deutsche Bank. Please proceed.

[Nishu Sood:]

Thank you. Wanted to ask about the $31.6 million EBITDA adjustment in the water pipe business. It seems like there is three components to that, there is the period operating loss from the pressure pipe business, there is the period operating loss from the roof tile business and then any loss on sale. I was hoping if you could give us a breakdown of those three different items please.

[Charlie Brown:]

Sure, Nishu I appreciate the question. Really this is – it’s really just the loss on sale and it really is that U.S. pressure pipe business that we’re talking about, so it is not bifurcated as you’ve indicated.

[Nishu Sood:]

Got it. I mean, obviously where I’m going with those, I’m trying to think about the margin trend year-over-year as if, you know, because the 3Q 2017 obviously separates out of the profit or the loss and I think it was the loss on the concrete, on the pressure pipe business, but the 3Q 2016 compared to a period does not. So I was just trying to come up with some like-for-likes to see what the margin trend of that the remaining business has been.

[Charlie Brown:]

Yeah, so I think in the release we do have the table that shows, for the quarter, the impact on sales and EBITDA, and the adjusted EBITDA associated with the this divestiture. And remember, this is a loss, I mean I’m sorry, a sale of assets which necessitated, you have full write-down of the assets we had on the books. To my comments earlier, we indicated it was a not returning – the return on assets was not sufficient, so obviously we had overly, we had too much value associated with that business that we needed to dispose of.

[Nishu Sood:]

Okay. And then also I wanted to ask about the drainage business, the Houston area had been significant kind of drag on unprofitability in recent quarters. What is the competitive environment there like currently, how much of a – has pricing recovered or volumes, any color you could give there would be helpful.

[Jeff Bradley:]

Sure, I’ll take that one. Let’s talk about volume first and just demand. We’ve seen increase demand in Houston, meet little stake that one of our sales guys gave me was, in Houston we have seen more bidding through the third quarter than we saw in all of 2015, which really was the best year since the crisis. We’re seeing residential volume there, we’re seeing infrastructure, so Houston continues to be a really promising market for us. It’s a large market. To your other point, on pricing, pricing – there was a price increase put through in the market place this summer. It was a pretty aggressive increase. We’re seeing the benefits of that but just to remind everybody, in drainage we typically have a four month backlog, so it just takes time for that to flow through. We’re looking for better results at a Houston next year versus this year for sure.

[Nishu Sood:]

Okay, thank you.

[Operator:]

Thank you. Our next question will come from the line of Scott Schrier with Citi. Please proceed.

[Scott Schrier:]

Hi, good morning, and welcome Charlie. I wanted to ask you about public infrastructure spending and I appreciate your comments Charlie on some of the constraints that you’re seeing. I’m curious if you could talk about bidding activity what you’re seeing and how you think the cadence of a potential increase of infrastructure spending from both federal and a state and local measures might look?

[Charlie Brown:]

Okay. All right, so thanks for the welcome. I don’t know exactly how I would answer that per se, but the FAST act, we are disappointed I think I made that clear. There is a – the larger projects take time. How do I see it rolling out, how do we see it rolling out, I think it’s much more comes to this coming. It takes time for the local DOTs who is staffed accordingly, because this is – these big projects require significant engineering. And this year has been, we have more of a year of change the expectations, the initial kick off of the FAST act was somewhat I would say stymied by confusion due to the election and the trillion dollar number that was thrown out there. And that caused little bit of a I guess delay as the States trying to figure out when that funding might show up and how they would have to match that. So I think there is a lot more clarity, but I want to say there is a lot more clarity, there is more clarity, there is more time people feel that there is other legislative initiatives which are still distracting the federal government, and that will just take time to work through. But Scott, I mean from my perspective, I mean Jeff you may have thoughts on this as well. I think that this is – we’re setting up well for the next coming years.

[Jeff Bradley:]

Right, and I would just – I would just eco what Charlie said, there is still a tremendous amount of money out there to be spent. One of the things that has been tough is, in the larger states, many times there federal funds go into larger state funds, and we can’t always identify if the projects is resolved of FAST act federal dollars or state dollars. Good news, we are seeing a healthy infrastructure environment. As we sit here today, we’re tracking close to a $100 million of FAST act work. So obviously with that in mind, the outlook for longer term demand is very good.

[Scott Schrier:]

Thanks, I appreciate that color. My follow-up, [inaudible] about BioClean, I know that was a technology that you’re looking at rolling out and expanding across your portfolio, just looking to see what kind of benefits you’ve seen and what kind of potential benefits you might see.

[Jeff Bradley:]

Yeah, we still are very excited about the BioClean business. The BioClean business is growing. It’s growing more than our other businesses but it’s a very small business today. We have invested in people, we have put people across the United States, we have regionalized the business, we have new leadership in place, we have new products that have come out, we have some really great R&D going on, there were new products in the pipeline. This is a business that’s not going away. We transformed it from a California in a West Coast business where it’s still very strong into places like Texas and the Mid West and the East Coast and Florida. We’re still in the infancy stages but have very high hopes for the business.

[Scott Schrier:]

Great, thanks for that. And congrats on the progress.

[Jeff Bradley:]

Thank you.

[Operator:]

Thank you. Our next question will come from the line of Mike Dahl with Barclays. Please proceed.

[Michael Dahl:]

Hi, thanks for taking my questions. Jeff, the first question, interested by the comments about Houston relative to Florida as it relates to some of the recovery since the storms, we’ve heard kind of the opposite from a lot of housing related players. So, I just wanted to get a little more color on, when you make those comments, is that relating to actually – actual revenue performance having rebounded back already in Houston or is that more related to your – the comments you just made around the bidding activities come back very strong and some of that maybe is future rebuild potential, just any color you can give on a little more on what you’re seeing there if there is any skew residential versus public etcetera?

[Jeff Bradley:]

Sure. So, it relates to shipments which transform into revenue. We had a business plan for Houston this year for the third quarter and the fourth quarter, and we are now back to levels that we thought we would be at before the storm. We are – we do a fair amount of work on the north side of Houston, with south side where it hit pretty hard, but we’re pretty much back to shipping at normal levels in the Houston market. I was down there a couple of weeks ago, and you mentioned residential, and this is just a data point. I was talking to a customer and he was sharing some information on a home builder that they do work with that’s a pretty large one down there, and he said, they’ve already told us that their forecast for next year is 50% higher than this year. So, I think that’s the testament to Houston is back.

[Charlie Brown:]

And I think there is different segments of the infrastructure support businesses like us have different dynamics. So in Houston, it is feasible for us to do, the contractors who we supply to do work, the water has receded from certain projects and that’s working fine. Whereas in Florida, we still have situations where job sites are flooded, that may require more aggregates from some of our peers but the drainage portion would be harder to dig and install because that is still a factor.

[Jeff Bradley:]

Yeah, and then just to close this out, in Florida, it’s really been getting the heavy equipment to the job sites. And don’t forget we just remind everybody, all the products we produce go underground. So, it might look dry on top, but as you start digging, if you got saturated soil, heavily saturated soil like we had more in Florida than Houston, it’s going to impact our business more than let’s say in aggregates business.

[Michael Dahl:]

Right. Yeah, that’s helpful, and that’s actually why I was surprised to hear that it was bouncing back so quickly for you guys in Houston. But shifting gears, Charlie, I just wanted to get your perspective another way of asking kind of how you’re approaching the role, more from kind of an internal perspective, what is your plan or what have you implemented as far as from team standpoint, from forecasting standpoint kind of how you’re structuring the finance ops and what your – how you’ve potentially changed your interactions with the field and anything related to forecasting?

[Charlie Brown:]

Yeah, no I appreciate the question because that’s – obviously the people are what really make the difference here, and I am fortunate to stepped into – we’ve got a great team, very young, very new to the business but we’ve implemented some very impressive changes in before I had arrived here. The forecasting, I think we’ve got new processes which linked very closely with the finance team with the operation. So we have more visibility and more comfort going forward as we put numbers together. I think going forward that will continue to be the case, certainly. And you’ll see, we are obviously as we’ve mentioned several times, we’re addressing our internal controls as well where we have material weaknesses. And those are, we’re making great progress, I’ve got a number of very hardworking individuals trying to make sure that we have good linkage between our business and our financial reporting. And I think that’s the crucial part. So at this point, Mike, I think that six and a half weeks into the job, I’m fortunate to have this opportunity and to be surrounded by people who have really done a great job. I would love to take credit for the performance in Q3, but reality is I joined on September 25 and all of this hard work was already done by the people here.

[Michael Dahl:]

Okay, thank you.

[Operator:]

Thank you. Our next question will come from the line of Jerry Revich with Goldman Sachs. Please proceed.

[Unidentified Participant:]

Good morning, everyone. This is Ben [inaudible] on for Jerry. Just wanted to talk cost for a second. If you guys could please maybe bridge the year-over-year decline in EBITDA for 4Q and specifically would like to discuss your reorgan drainage as well as the completion of the procurement work in Sarbanes-Oxley compliance work.

[Charlie Brown:]

Sure. I guess I’ll make this simple on the Q4 bridge, we’re not going to provide that right now Ben, I think that that would be stepping a little beyond what we’ve already provided, and we’d not be comfortable with that. On the Sarbanes-Oxley work, we’ve made great progress with the team, there is a lot they’ve done, obviously a lot of starting off with an IPO and a situation like they were without pure SOX controls in place that I just put them behind [inaudible]. The team has been worked very hard, they’ve got a lot of – we are using a number of consultants and that is a big cost for us, but it’s also a learning opportunity. And the teams, we’re trying to enhance all of our teams to make sure that we capture the knowledge transfer and are able to deliver on that going forward, so we get value out of the investment we’re making right now. I’ll let Jeff talk about the reorganization in drainage.

[Jeff Bradley:]

Yes, thanks Charlie. So the reorganization in drainage, let me first say that you reorganize a business to make it better, that’s what we believe we’ve done. We have gone to a federal manager structure in drainage. Remember we have a lot more plans in the drainage business than we have in the ductile business. We operate at any given time north of 65 plans. We’ve gone to seven regions, seven general managers. I’ve met with all of them, in fact I’m meeting with them again next month. These guys are really hyper focused, not just on driving volume but driving profitable volume. They’re focused on costs, Charlie’s team has done a lot of really good work giving them better cost out they’ve had in the past, and we continue to refine that so they can run the business better. We weeded out some of the lower performers. So, we not only reorganized, we’ve strengthen the team, we’re giving these guys better tools to manage the business. And this was done in the summer. We’re seeing results, but this is also going to plan to better results next year.

[Unidentified Participant:]

Got it. And I was hoping you guys could provide some additional color on your price cost during the quarter. It seems like it was – still negative across most of the business, but has that – has the balance evolved at all? And specifically in ductile iron, has competitive rationality changed at all, given how consolidated that industry is?

[Jeff Bradley:]

Let me take it at a high level then I’ll just hand it over to Charlie. We’re encouraged with the fact to reiterate that we’ve had higher prices in drainage and we’ve had higher prices in water. We’ve successfully implemented price increases in both the businesses. We’ve made a major investment in cost savings initiatives the first half of this year. And as I’ve stated earlier to one of the – one of the guys on the call, we’re just starting to see the benefits of that, we’re going to have a great return on investment on that spend. Again it’s one of these things where we’re going to see more of that next year than this year, but we’re not just sitting here. We’ve done good work on raising prices and we’ve done good work on lowering costs and there is more to come.

[Charlie Brown:]

Yeah, I mean, I think if you look at slide three of the presentation, yes, this is not a pretty picture where you see a decline in our EBITDA margin, our adjusted EBITDA margin until down 450 basis points. As I said that is, we’re not happy about that, but that’s an improvement of where we were in Q2, and certainly an improvement even beyond Q1 as well. And our guidance has suggested that in Q4 that will be even smaller that 450 will be – mess will be smaller. Beyond that I think it’d be a intrude for us to make any additional comments, because as you know, we’re trying to create value for our shareholders and anything that we have made is more difficult for our operations and then the sales people is not something that I think we want to share here on this call.

[Unidentified Participant:]

All right, thank you.

[Operator:]

Thank you. Our next question will come from the line of Rohit Seth with SunTrust. Please proceed.

[Rohit Seth:]

All right, thanks for taking my question. My first question is on underlying demand trends. I know water infrastructure sales can be lumpy, I was just curious is there any large projects that helped in the quarter that where you’re sensing this more of a pickup in the underlying markets, and so which end markets and geographies?

[Jeff Bradley:]

Okay. Again we’ll take it down to both the businesses. We have stronger markets and weaker markets in both businesses. I talked about our stronger markets. We continue to see strength in Texas, in California, in Denver, in Florida for the drainage business. Ductile, we’re seeing pretty good results across the country, and let me step back remind everybody that about 80% of our drainage business is sold directly to contracts and about 90% - 80%, 90% of our water business, our ductile iron pipe business is sold through distribution. Where we’re seeing weaker markets, we’re seeing weaker markets up north in the Dakotas and Montana, which are not large markets to begin with. We still haven’t seen the strength that we’d like to see on the Gulf Coast, specifically areas like Alabama. Georgia is – Georgia has been a strong for drainage but it’s been strong for water.

[Charlie Brown:]

But I don’t think there is any callout special projects that we would – we’d be referencing at this point. Our business is very broad and national footprint, and, so I don’t have any special items to mention for you.

[Rohit Seth:]

Okay. And on a price cost dynamics, ductile iron, sorry the scrap steel and iron prices, meaning to accelerate early in the year. They pulled back about mid-year and now they started to re-accelerate again. Just curious if the quarter sort of benefited from that deceleration in the scrap prices. And if you have any comments on that that’d be great.

[Charlie Brown:]

No, I don’t think we really have any comments on that, I don’t – that isn’t necessarily what happens in this industry as to vary, as you know, prices are up as we indicated in our call and that continues to be the situation.

[Rohit Seth:]

Okay. And then on concrete pipe prices, can you just confirm that prices sort of decelerated over the last quarter or so? We’re seeing that in the industry data.

[Charlie Brown:]

I would say, I mean obviously we’ve reported that our average selling price is up for our drainage business. So I don’t see a deceleration. Deceleration would be hard for us to see the velocity of change being less, all I can say is that the prices are up.

[Jeff Bradley:]

Right. And you’re talking concrete drainage and not the concrete pressure pipe business that we sold.

[Rohit Seth:]

Yeah, right, the concrete – yeah, the concrete drainage, concrete pipe on the drainage side, yeah.

[Jeff Bradley:]

Yeah, just to eco what Charlie said, we’re not seeing that.

[Rohit Seth:]

Okay. All right, that’s fair. And then on the material weakness Charlie, for some investors that could be a non-starter. Do you feel the remediation work is on track the next report?

[Charlie Brown:]

I do. A lot work to be done, but we have – again in my six and a half weeks, I’ve seen great progress, we have good contact with our auditors. And then I think that that is something we will continue to spend a great deal of time on [inaudible].

[Jeff Bradley:]

Yeah.

[Rohit Seth:]

Okay. And then the final question on that earnings, the earn out payment with [inaudible]. Is there any updates on that? I think it was like a $100 million [inaudible].

[Charlie Brown:]

No, at this point we have no additional information to share. And we will keep you informed as things change.

[Rohit Seth:]

All right, great. Thank you so much.

[Charlie Brown:]

Thank you.

[Operator:]

Thank you. Our next question will come from the line of Sam McGovern with Credit Suisse. Please proceed.

[Sam McGovern:]

Hey guys, thanks for taking my questions. I was hoping you guys could talk a little bit more about working capital and revolver draw. What are our expectation should be for the fourth quarter and then how we should think about working capital in 2018 both seasonally and then also compared to 2017?

[Charlie Brown:]

Sure, Sam. I’m happy to talk about that. I mean obviously we’re very – the team it should be are and very proud of the pay down of the revolver to where we are right now. Obviously in the fourth quarter like many seasonal businesses, this will be a period for us seeing cash collections and we will have some inventory but at the same time, it’s really a cash collection period, so we should see continued improvement. Seasonally as we go into 2018 and well I won’t provide guidance, but I will just talk about seasonal issues within working capital. We would see Q2 as being the highest demand for working capital in our business. And my view is, there is opportunities for us to enhance our working capital metrics, so as to continue to pull cash out of that, so the impact of that seasonal high Q2 should be better. But we are – we’re at this point I think we’re in good shape and doing the right things to make that cash as effective as is possible. Does that help you out though?

[Sam McGovern:]

Yeah, that’s very helpful, thank you. And just a cleanup question, the fourth quarter guidance you gave was very helpful. How do we think about the fourth quarter of 2016 EBITDA that’s comparable to, and then how do you guys think about what pro forma LTM EBITDA is currently?

[Charlie Brown:]

I think it’d be intrude for us to talk about pro forma data. So I don’t think I have good answers for that one Sam.

[Sam McGovern:]

Okay, great. I’ll pass along then.

[Charlie Brown:]

All right.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. It’s now my pleasure to hand the conference back over to Jeff Bradley, Chief Executive Officer for some closing comments and remarks.

[Jeff Bradley:]

Thank you all again for joining us on the call this morning. We really appreciate your interest in the company and we look forward to speaking to you again on the next call. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day.