Forterra Inc. (NASDAQ: FRTA) is a leading manufacturer of water and drainage pipe & products for a variety of water-related infrastructure applications. Based in Irving, Texas, it employs more than 5,500 people and operates 101 facilities, with products available throughout the U.S. and Eastern Canada.
On November 8th, the company announced results for the quarter ended September 30, 2017. During the quarter, Forterra faced several operational issues (Including hurricanes Harvey and Irma) that adversely impacted its performance. The company also closed the sale of its U.S. concrete and steel pressure-pipe business during the quarter. That divestiture reduced sales by $8.9 million, and the company recorded a $31.6 million loss on that transaction, which is what pulled it into the red.
Notwithstanding the quarterly performance, FRTA shares were up 76% over the last few trading sessions. Trading volume has been brisk.
While these factors created headwinds for the company this year, FRTA’s demand outlook remains favorable against the backdrop of healthy economic fundamentals. Expectations were continued in residential housing growth and improving funding initiatives to support highway infrastructure projects. The backlog in the water and drainage segments remained solid and Supports Company’s outlook for the longer-term growth.
If we factor in all these headwinds, Forterra reported a reasonable set of numbers. Third quarter 2017 net sales increased to $444.3 million, compared to $441.1 million in the prior-year quarter. Net loss for the quarter was $11.5 million, or a loss of $0.18 per share, compared to net income of $8.4 million, or $0.19 per share, in the prior-year quarter.
The results demonstrate the company’s ability to successfully execute on multiple objectives on a sequential quarter basis, including higher selling prices, lower costs, and improved earnings. Additionally, despite the impact of two major hurricanes, Adjusted EBITDA was above the mid-point of its guidance range.
Moving forward, the company continues to expect to see increasing highway infrastructure spending and deployment of FAST act dollars as it heads into 2018. The management believes that the fundamental need for infrastructure investment in the U.S. including both highway and municipal water projects is greater than ever.
Therefore, the company has significant opportunities to enhance earnings in 2018 and beyond, with the divestiture of the U.S. concrete and steel pressure pipe assets, procurement initiatives, SG&A cost savings initiatives and corporate cost reductions all support expectations for a significant improvement in 2018. Driven by abovementioned factors, several equities research analysts recently issued favorable reports on EARS shares. On average, the consensus target is $15.25 over the medium term.
About the company: Forterra is a leading manufacturer of water and drainage pipe and products in the U.S. and Eastern Canada for a variety of water-related infrastructure applications, including water transmission, distribution, drainage, and storm water management.
Based in Irving, Texas, Forterra’s product breadth and significant scale help make it a one-stop shop for water-related pipe and products, and a preferred supplier to a wide variety of customers, including contractors, distributors, and municipalities.
Product Profile: The Company has a national Scale with Diversified Exposure Across Products and End Markets.
The outlook for the near term:
- The guidance range assumes a year over year decline in sales, including a $27 million reduction associated with the divestiture of the U.S. concrete and steel pressure pipe assets. Incorporating the impact of the divestiture, the high end of the guidance range assumes flat sales for the quarter while the low end conservatively implies a more significant decline.
- The guidance range anticipates delivering an improved year over year Adjusted EBITDA margin variance in Q4 2017 as compared to the prior quarter
- Net loss for the fourth quarter of 2017 is expected to range from $16 million to $13 million and Adjusted EBITDA expected to range from $20 million to $25 million
Management’s preliminary Thoughts on 2018
The management expect to see continued improvement in year over year results in 2018 reflecting the anticipated benefit of:
- Higher expected average selling prices
- Input cost inflation mitigated through the procurement initiatives
- Lower operating costs in Drainage resulting from the reorganization
- Lower corporate costs due to lower professional fees and other G&A cost savings initiatives
Industry overview and market opportunity for the company:
- The U.S. market size for drainage and water transmission pipes is estimated to be $20 billion by 2020, representing 7-8% per year growth
- Over 40% of infrastructure spend is on highway and street, water supply and waste water projects
- Expect to see the benefit of accelerating pace of Fixing America’s Surface Transportation Act (“FAST Act”) spending
- Underinvestment in municipal water infrastructure supports longer-term expectations for demand growth
- Outlook for single-family housing starts by state shows high single-digit to double-digit growth in 2017 in large states where Forterra has a significant presence including California, Pennsylvania, Florida, Georgia and Texas
- ~ 30% of commercial construction spending is driven by new construction starts – expect to see continued stable growth during the more mature phase of expansion in the current economic recovery cycle
2nd Quarter 2017 Financial Results:
Revenue and Profitability:
- Third quarter 2017 net sales increased to $444.3 million, compared to $441.1 million in the prior-year quarter.
- Net loss for the quarter was $11.5 million, or a loss of $0.18 per share, compared to net income of $8.4 million, or $0.19 per share, in the prior-year quarter.
- Adjusted EBITDA for the third quarter was $60.9 million, compared to $80.4 million in the prior-year quarter. The estimated Adjusted EBITDA impact of Hurricanes Harvey and Irma was approximately $3.7 million including a $3.0 million impact to Drainage Pipe & Products (“Drainage”) and $0.7 million impact to Water Pipe & Products (“Water”).
- At September 30, 2017, the Company had cash of $41.1 million and outstanding debt on its senior term loan of $1.2 billion. As of September 30, 2017, there was no outstanding balance on the Company’s $300 million Revolver following an $80 million net pay down during the quarter.
- The Company expects to continue to build its cash position through the end of 2017 reflecting the anticipated benefit of positive cash flow from working capital during the fourth quarter.
Key risk factors and potential stock drivers:
- The working capital requirement is relatively large, as is inherent in this industry. Sustained efficient working capital management as the business grows, would be a key sensitivity factor for the company.
- The financial risk profile should improve supported by better working capital management, monetization of non-core assets, and improving cash accruals/profitability.
- Weakening of the financial risk profile due to slower than expected pace of operating performance improvement, or large, debt-funded capital expenditure could adversely affect the sentiments.
- Vulnerability to volatility in raw material prices is likely to persist over the medium term, given the limited flexibility to pass on price increases owing to competition.
- Also, the company is exposed to risk related to environment and adverse weather situations.
- On Monday, November 10th, 2017, FRTA was trading at $8.78 (+2.81%) on volume of 982K shares exchanging hands. Market capitalization is $570.34 million. The current RSI is 87.32
- In the past 52 weeks, shares of FRTA have traded as low as $3.02 and as high as $22.76
- At $8.78, shares of FRTA are trading above its 50-day moving average (MA) at $4.98 and below its 200-day MA at $10.96.
- The present support and resistance levels for the stock are at $8.11 & $9.03 respectively.
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