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Edited Transcript of FRTA.OQ earnings conference call or presentation 30-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Forterra Inc Earnings Call

Mar 30, 2017 (Thomson StreetEvents) -- Edited Transcript of Forterra Inc earnings conference call or presentation Thursday, March 30, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Matt Brown

Forterra, Inc. - EVP & CFO

* Jeff Bradley

Forterra, Inc. - CEO

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Conference Call Participants

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* Bob Wetenhall

RBC Capital Markets - Analyst

* Jerry Revich

Goldman Sachs - Analyst

* Rohit Seth

SunTrust Robinson Humphrey - Analyst

* Matt Bouley

Barclays Capital - Analyst

* Ian Zaffino

Oppenheimer & Co. - Analyst

* Rob Hansen

Deutsche Bank - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to Forterra's Q4 and yearend 2016 earnings conference call. Today's call is hosted by Jeff Bradley, the Company's Chief Executive Officer, and Matt Brown, the Company's Executive Vice President and Chief Financial Officer. With that I will now turn the call over to Mr. Matt Brown.

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Matt Brown, Forterra, Inc. - EVP & CFO [2]

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Thank you and good morning, everyone. Welcome to Forterra's Q4 2016 earnings conference call. Joining me on the call today is Jeff Bradley, our Chief Executive Officer. Presentation slides to accompany this call are available on the Investors section of our website.

Turning to slide 2 the presentation, before I turn the call over to Jeff, I would like to point out that that Forterra intends to take advantage of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Please be reminded that comments regarding the Company's results and projections 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 these forward-looking statements.

Additionally, we refer to 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 Q4 and yearend 2016 earnings presentation that is available on our website.

Now I'd like to turn the call over to Jeff to give an update on our business, beginning on page 3 of our presentation, which is available on our website.

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Jeff Bradley, Forterra, Inc. - CEO [3]

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Thank you, Matt. Good morning, everyone, and thank you for joining us on the call this morning. Since many of you may still be new to the Forterra story, I'd like to walk you through slide 3, which highlights the key elements of our investment thesis and the growth opportunities we are targeting.

Our major focus last year was on building out the platform and laying the foundation for top-line growth and margin expansion. Following seven strategic and accretive acquisitions, since Matt and I joined the Company in Q3 of 2015, Forterra today is the leading pure play water infrastructure company that operates 93 facilities strategically located across the US and the eastern part of Canada.

We also believe that we have the broadest production and distribution network in the industry and the largest product line. We are very optimistic about the growth opportunities across all three of our end markets: residential, commercial and infrastructure.

Turning to page 4, we believe that we are the only Company that provides true one-stop shopping across the Drainage and Water Pipe & Products industry. Our scope and scale, combined with our focus on innovative solutions and service, give us a real competitive advantage.

Turning to the strategic actions we took last year on slide 5, 2016 was a transformational year for the Company that included not just strategic acquisitions but also key divestitures of noncore businesses including our brick businesses and our small roof tile business.

The acquisition of U.S. Pipe in April of last year was significant. It added a key business to our platform, [helped] to align water pipe and fittings and also fabrication. We now have a leading market share in the US in this business. The go-to-market strategy of U.S. Pipe is predominantly focused on selling directly to distributors. This new channel has opened up a whole new opportunity to drive additional revenue in the Drainage business. We have developed and are currently executing a cross-selling strategy that is already exceeding our expectations.

The acquisition of Bio Clean added an entirely new product line, stormwater systems. This is a natural extension of our existing Drainage business with growing regulatory pressure across the country to address pollution caused by stormwater runoff, we see an incredible opportunity to use our existing facilities to produce and drive sales of these products across North America. In fact, we expect this to be the fastest-growing part of the Company over the next five years.

During the year, we also completed multiple tuck-in acquisitions in the Drainage segment that added higher-margin businesses and expanded our market share and scale in key growth markets in the US including Tennessee, Denver and North Texas. We are already expanding our precast facility in Denver to meet demand and expect to have additional capacity coming online by the start of the third quarter.

In North Texas, we are investing in our largest plant to increase the free cash capacity and improve our production efficiency. And in the Central Tennessee market, we are seeing strong growth fueled by infrastructure and residential.

Next I want to highlight a few of the key top-line organic growth initiatives that we put in place in 2016 on slide 6. We created a strategic accounts team that is focused on developing and expanding our relationships with large, national engineering, procurement and construction firms. we are already seeing the benefits.

We are tracking a number of multibillion-dollar industrial projects to be built in the petrochemical, power generation and oil and gas industries that could generate tens of millions of dollars in revenue over the next few years. As I mentioned, we also launched a cross-selling initiative that is focused on expanding the sales of our Drainage Pipe & Products to distributors in areas of the country where we did not have a strong presence. We expect that cross-selling will generate meaningful net sales this year.

Our third organic growth initiative is to significantly grow our Bio Clean business. We have a growth plan in place that we expect will generate significant increases in earnings from these products over the next five years.

I also want to highlight the benefits from our focus on synergy realization and cost-reduction initiatives. We realized over $30 million in cost savings and over $6 million in synergies last year. We believe this is just the initial result of our cost savings efforts. In January of this year, we hired Scott Leonard as our Chief Operating Officer, who is spearheading a new range of cost-reduction initiatives including procurement and lower SG&A.

Before I hand the call back over to Matt, I want to touch on our outlook for 2017 as compared to our top-line results for 2016. Our top-line performance for 2016 was impacted by several temporary factors.

First, while overall US residential home search grew in 2016 as compared to 2015, some of the markets we serve saw a decline last year. Second, while the FAST Act bill was signed in late 2015, we did not see any activity until the latter part of last year. We are now seeing the spending accelerate. Our win rate for projects in Q1 of this year significantly increased over that of Q4 of last year and we expect this pace to continue.

Finally, significant rainfall levels throughout certain areas of the country last year also caused a drag on our results. While our top-line performance was below our expectations for 2016, we believe that the combination of our end market fundamentals, our growth initiatives and our cost savings initiatives support our expectations for much better results in 2017.

And finally, turning to slide 7, we have economic tailwinds across all three of our end markets. In February, we saw the highest number of home starts in the last eight years and the market outlook suggests mid- to high-single-digit growth in home starts this year. Industry analysts predict mid- to high-single-growth in construction spending, on average, over the next three years as well. With that I'll turn the call back over to Matt.

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Matt Brown, Forterra, Inc. - EVP & CFO [4]

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Thanks, Jeff. I wanted to briefly discuss our recently announced acquisition of Royal Enterprises America's drainage products business in the greater Minneapolis market. While this is a relatively small $36 million tuck-in acquisition, it highlights the key elements of our focused and disciplined M&A strategy and is representative of the type of acquisitions we are targeting in the near-term.

The acquisition of Royal provides us with a leading market share in a region with favorable economic indicators and expectations for continued growth. Further, Royal's highly automated and efficient manufacturing plant provides an immediate opportunity to lower production costs, facilitate more efficient scheduling and reduce freight costs in the region. This acquisition was immediately accretive to earnings and to our valuation.

Moving ahead, I also want to provide a bit more color on Jeff's previous comment about the pathway to realizing a 400 basis point improvement in income from operations as a percentage of sales by 2019. Jeff outlined our key top-line growth initiatives. I want to highlight that Forterra today has the available manufacturing capacity to support these growth initiatives. This, in turn, drives margin expansion from operating leverage.

On the cost side of the equation, we put together a comprehensive procurement initiative that is focused on leveraging the significantly increased scale of our business into a best-in-class national procurement program. We have initially focused on driving cost out of key spend categories including cement, aggregates, transportation and maintenance repair and operations costs. We have performed detailed studies and identified meaningful cost savings opportunities.

We also continue to focus on ensuring best execution on procurement of steel and scrap, the largest individual drivers of our raw material costs, where we have focused significant effort in the past.

SG&A cost-reduction initiatives are the third major driver. SG&A as a percentage of sales is above the peer average and an obvious source of incremental savings and margin enhancement. While we have been successful in our early efforts to realize synergies, given the rapid pace of acquisitions in 2016, we believe there are significant incremental opportunities to reduce our cost structure and we have initiatives in place to drive those savings over the next two years.

In summary, we believe that the combination of favorable market fundamentals, combined with our growth, margin and cost-cutting initiatives, provide a well-defined path to realizing a 400 basis point improvement in income from operations as a percentage of sales.

Now I want to provide a summary of our capital allocation programs for 2017. We expect that growth and maintenance capital expenditures for the year will be approximately $55 million, consistent with 2016. We have a large pipeline of potential tuck-in acquisition targets within the Drainage segment of our business and we will continue to evaluate and execute on acquisitions that are consistent with our M&A strategy.

While we could see up to two or three incremental acquisitions in 2017, our primary strategic focus for 2017 is on executing on the many initiatives that Jeff and I have outlined today.

Finally, we are focused on reducing our financial leverage. And, in the near term, we believe that top-line growth and margin expansion provide us the ability to reduce our leverage during 2017.

I also wanted to the mention that in early February 2017, we entered into a $525 million notional interest rate swap, effectively locking in approximately 50% of our floating-rate term loan and interest exposure at a fixed one-month LIBOR rate of 1.52%. We felt that this was prudent in order to protect cash flow given the market expectation for a continued rise in interest rates.

Now moving to the financial results for the fourth quarter of 2016. Net sales for the quarter grew to $354.1 million as compared to $196.3 million in 2015. A significant net sales growth for Q4 2016 reflects the impact of $172.1 million in net sales from acquisitions during the year.

The 450 basis point improvement in the gross margin percentage reflects the combined benefit of higher margins from acquisitions and the realization of synergies and other cost efficiencies. The reduction in SG&A as a percentage of sales of 17.8% reflects operating leverage and the realization of synergies.

Net loss for the quarter of $48.7 million compared to a net loss of $33.1 million in 2015. The increase in the net loss for the quarter was due to charges incurred in the fourth quarter related to our refinancing. Adjusted EBITDA margin of 12.0% for 2016 compared to 3.2% in Q4 of 2015, reflects the combined improvement in gross margin SG&A as a percentage of sales.

Turning to slide 15, the growth in Q4 sales in Drainage Pipe & Products to $176.8 million was driven by acquisitions. Excluding the benefit of $31.4 million in acquisitions, organic sales from the legacy Drainage business declined by about 1%. The slight decline in the legacy Drainage business was driven by the impact of weather in Q4 2016, most notably extreme cold in our northern region in December, as well as softness in pricing in South Texas and the Midwest.

EBITDA margin (technical difficulty) the quarter declined to 6.6% compared to 11.0% in 2015 on a combined basis, due to a loss on the sale of property. Adjusted EBITDA margin for the Drainage business increased significantly in 2016 to 16.7% compared to 12.3% in 2015, reflecting the benefit of higher margin acquisitions and efforts made to lower cost and realize synergies.

On the Water Pipe & Products side of the business, net sales for the quarter increased significantly to $177.3 million due to acquisitions. Excluding the benefit of the $140.7 million in net sales from the U.S. Pipe acquisition, net sales for the quarter declined by approximately 24%.

Excluding U.S. Pipe, leaves the legacy concrete and steel pressure pipe business. The decline in sales for the quarter reflects the impact of the roll off of a large project and delays in several large projects in the pipeline.

EBITDA margin for the Water business increased significantly to 10.4% compared to a loss in 2015, driven largely by the acquisition of the higher margin U.S. Pipe (inaudible) pipe business. Adjusted EBITDA margin for the Water business also increased significantly to 14.0% compared to 4.6% in 2015.

With that I'll turn the call over to the operator to open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Bob Wetenhall, RBC Capital Markets.

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Bob Wetenhall, RBC Capital Markets - Analyst [2]

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Hey, thanks very much and good morning. I was thinking about kind of baseline numbers, like $1.675 billion top line and $275 million for 2017 EBITDA, and I know there are a couple moving pieces. I was hoping, Jeff, maybe you could talk through, on the organic basis, what kind of self-help cross-selling initiatives you are trying to do to drive organic volume growth, the cadence of revenue and what kind of upside you could get from M&A and what's in the pipeline.

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Jeff Bradley, Forterra, Inc. - CEO [3]

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Okay, I touched on the initiatives during the comments, but really excited about what we are seeing on the cross-selling initiative. We've gotten off to a very strong start in the first quarter. We really kicked things off the end of last year, but really things started kicking into gear first quarter.

Results are actually exceeding our expectations. Results in terms of volume and also results in terms of the number of distributors that we are working with. So, that's going very well.

On the M&A side, Bob, you mentioned M&A. We have a number of deals, I would say, in the pipeline. The pipeline as large, but we've got, let's call it, two to three that we are really focused on.

So really, just pretty much across-the-board we've got a lot of good things going on internally. In addition to the cross-selling, I mentioned Scott coming onboard. We see a lot of opportunity continuing on cost reductions. We see opportunity to take our SG&A down. We see opportunities on the procurement side, so we are all over it.

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Bob Wetenhall, RBC Capital Markets - Analyst [4]

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Would you say that the M&A opportunities are comparable in size to Bio Clean, or what kind of revenue size transaction would you be talking in acquired sales?

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Jeff Bradley, Forterra, Inc. - CEO [5]

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They would be along the Bio Clean size. There is nothing large like the U.S. Pipe acquisition. More on the smaller side, yes.

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Bob Wetenhall, RBC Capital Markets - Analyst [6]

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Got it. And can you talk about -- it sounds like you had a really -- like some tough comparisons in the Water business. And I was just trying to understand, is there -- is what we are seeing like the normal ebb and flow, the lumpier pieces to the business, which is kind of transitory, as opposed to any fundamental change in what's going on in the marketplace? And could you also just touch briefly on maybe Matt's comments about softer pricing environment in the Midwest and the Midsouth?

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Jeff Bradley, Forterra, Inc. - CEO [7]

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Right. Well, on the Pressure Pipe side, the biggest falloff we saw -- we had a very significant job that we had booked in Canada in early 2015. Margins on that job were very high and we saw that job falloff or tail off in the first half of 2016 and really falloff in the second half of 2016. That really had a major impact on the business.

We replaced that -- or we picked up another very large job in Texas. The margins on that job are not nearly as large as the margins on the job that we picked up in Canada in early 2015. So that was the major impact on the Pressure Pipe business. What else did you ask, Bob?

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Bob Wetenhall, RBC Capital Markets - Analyst [8]

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And on pricing? And on pricing as well, just to Matt's comments in Midwest and Midsouth, kind of Kentucky/Tennessee area, I guess?

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Jeff Bradley, Forterra, Inc. - CEO [9]

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Let me just talk about pricing overall and really what we are seeing this year. We put through a price increase in ductile iron in March. We put through a $100 a ton increase in March, and that was to compensate for the increase in scrap that we are seeing. Scrap is a major input on the ductile side.

On the Drainage side, we put through multiple increases in the first quarter across the country, so we are really getting increases in both sides of the business. Actually, in the Drainage side, we actually had increases in every one of our regions.

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Bob Wetenhall, RBC Capital Markets - Analyst [10]

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What about on the weather side? It sounds like there was tough weather conditions in the back half of December, which might have impacted results. There's been a lot of rainfall in the West Coast in California since the start of the year. Can you maybe talk about how that can impact revenue performance?

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Jeff Bradley, Forterra, Inc. - CEO [11]

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Sure. When we look at the fourth quarter, when we looked at our ductile iron pipe business, we had two events there. We had Hurricane Matthew, which hit in October. Two of the largest states that we ship into in ductile are the Carolinas and Georgia, and they were both hit very hard, and then we had a lot of very cold weather in the central region.

In fact, we had -- in our central region we probably had the shortest or the lowest amount of shipments in five years in the month of December for ductile iron pipe. So that had an impact on us.

On the Drainage side, again, fourth quarter, a lot of cold up north. Comps were tough because a year ago the winter was milder. Up north it was very cold, pretty much had an abrupt end in December. In first quarter, the big impact first quarter is the rains on the West Coast. We've got a new plant in Southern California. We've got a plant in the northern part of the state, so we were impacted by the rains there.

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Bob Wetenhall, RBC Capital Markets - Analyst [12]

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Got it. And then any update on what you are seeing through the first quarter that you can comment on? And then I was hoping Matt could just touch on some of his comments; 400 basis points is a big step up in margin expansion. Is that going to be mostly gross margin or SG&A leverage? Thanks.

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Matt Brown, Forterra, Inc. - EVP & CFO [13]

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Yes, Bob, I would say when you look at the various initiatives we laid out to get to 400 basis points by the end of 2019, we laid out some top-line growth initiatives. We also had procurement and SG&A in there. I would say that top-line growth, when you compare these -- if you break into three buckets like this, top-line growth would be less than the cost-cutting initiative.

And depending on which year you look at, procurement and SG&A cost rationalization could be fairly similar, so procurement hitting the gross margin -- it's pretty similar between those two cost-cutting initiatives, I would say, depending on which year you look at.

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Bob Wetenhall, RBC Capital Markets - Analyst [14]

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So would you say it is 200 and 200 gross margin and SG&A? How would you allocate that?

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Matt Brown, Forterra, Inc. - EVP & CFO [15]

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At this point, we don't want to allocate out numbers for those. We want to -- we are still in the early stages of these initiatives, so we are keeping it a general total of 500 basis points of improvement by the end of 2019.

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Bob Wetenhall, RBC Capital Markets - Analyst [16]

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Got it. And last question, anything on the first quarter you can tell us, just what you are seeing since the start of the year? Thanks. Good luck.

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Jeff Bradley, Forterra, Inc. - CEO [17]

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Overall, the first quarter and the year are looking good, Bob, we are seeing good demand on the Drainage side, seeing good demand on the ductile side. On the Pressure Pipe Water side, we are always challenged with push-outs, but the business never goes away, it is just pushed out.

I talked about infrastructure, I talked about resi, I talked about commercial. We are starting to see -- really starting to see the FAST Act dollars flow. We are seeing much more in the first quarter from the FAST Act dollars than we saw in the fourth quarter. Right now, in FAST Act, we are tracking about $60 million in active bids, so overall, we are optimistic.

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Bob Wetenhall, RBC Capital Markets - Analyst [18]

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Sounds good. Thanks for all the clarity.

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Operator [19]

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Jerry Revich, Goldman Sachs.

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Jerry Revich, Goldman Sachs - Analyst [20]

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Hi, good morning, everyone. I'm wondering if you folks can talk about the cadence of organic growth that you expect over the course of 2017. Obviously, weather was really favorable in the first quarter of 2016, so first quarter should be down year-over-year.

But maybe you can help us with order of magnitude considering we are a good way through the quarter. And then just help us understand how you expect the organic growth to play out as we head through the year just from the cadence standpoint.

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Matt Brown, Forterra, Inc. - EVP & CFO [21]

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Yes so, Jerry, this is Matt. Just to recap what you are saying. So, yes, we did have a tough comp in Q4 of 2016. We would expect 2017 Q1 to be a tough comp as well, meaning that weather was very favorable in those quarters in the previous period, which we didn't see this year. So basically we think that's going to -- that phenomenon is going to reverse, though, as you move into Q2 and Q3 because Q2 and Q3 of 2016 were impacted significantly by heavy rain in both quarters.

So just to lay out the seasonality of the business so everyone is aware of that, the volumes for the business do vary from quarter to quarter, it's not split evenly throughout the year. So I'm not going to give you exact percentages, but rather than say 25% sales each quarter, typically Q3 would be the highest volume and therefore the highest sales quarter and you could have well over 25% of your sales in that quarter.

Q1 would be the lowest volume, the lowest revenue quarter with Q4 being a little bit higher than Q1 and Q2 being second only to Q3. So, that's the sales seasonality, how that flows through to adjusted EBITDA is that due to operating leverage you actually have greater seasonality by quarter for adjusted EBITDA. So you could have over 30% of our EBITDA easily in one quarter and say less than 20% in some of the other quarters.

So -- and the pattern is the same as I laid out for revenue such that Q3 is the highest, Q1 is the lowest. So hopefully that helps answer your question on the cadence.

And then in terms of growth, at this point, conservatively, we are expecting mid-single-digit percentage increases; I would say mid- to high-single-digit percentage increases for the business year-over-year. And that's actually before the implementation of these initiatives we talked at, particularly the top-line growth initiatives. So that could add call it a percentage point plus to that number I just gave you.

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Jerry Revich, Goldman Sachs - Analyst [22]

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And so, Matt, just to make sure I'm putting the pieces together correctly, so if the first quarter is down similar to what the fourth quarter is to get to mid-single-digit for the year, it effectively implies organic growth accelerates by the construction season to the mid- to high-single-digit range. And I just want to make sure I understand that right and that the backlog is supportive of that level of cadence.

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Matt Brown, Forterra, Inc. - EVP & CFO [23]

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Yes, Jerry. That's exactly correct.

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Jerry Revich, Goldman Sachs - Analyst [24]

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Okay, and then you had --.

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Jeff Bradley, Forterra, Inc. - CEO [25]

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Jerry, I was just going to touch on the organic initiatives maybe a little deeper; you had mentioned that. I highlighted three in the comments, the strategic accounts. What we've done there, we made a change. We put -- actually we see so much upside here, we actually put a stronger guy over top of that team.

As I said, we are tracking an awful lot of work out there. Cross-selling is exceeding expectations. The Bio Clean business just continues to ramp. We will see that ramp as we go through the year quarter by (technical difficulty).

And then in addition to all that, I mentioned the new hire, Scott, who is our COO. He has really gotten on top of procurement. We think there is a fair amount of money there. We've talked about our SG&A being high; we are getting all over that. So we have a number of organic growth initiatives that are really going to drive the earnings as we go through the year.

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Jerry Revich, Goldman Sachs - Analyst [26]

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Okay. And, Jeff, maybe on that note, as you point out, the SG&A did stick out this quarter. How would you counsel us to think about the run rate as we think about 2017?

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Jeff Bradley, Forterra, Inc. - CEO [27]

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Well, I mean as we look at SG&A overall, SG&A today is approximately -- Matt, correct me if I'm wrong -- about 10% of sales?

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Matt Brown, Forterra, Inc. - EVP & CFO [28]

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Yes, and that's a good run rate for 2017.

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Jeff Bradley, Forterra, Inc. - CEO [29]

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Right. So our goal is to get that closer to 8%, 8%-plus, Jerry.

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Matt Brown, Forterra, Inc. - EVP & CFO [30]

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That's a good baseline for starting and then the initiatives we talked about would be an improvement to that.

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Jerry Revich, Goldman Sachs - Analyst [31]

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And sorry, Matt, what were the lumpy items in the fourth quarter that drove you folks higher than that 10% number that you were at for the full year?

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Matt Brown, Forterra, Inc. - EVP & CFO [32]

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We had a number of transactions in the fourth quarter. Remember, we had the IPO October 25, we had refinancing. We had two acquisitions in Q4, so just a lot of transactions that drove costs there.

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Jerry Revich, Goldman Sachs - Analyst [33]

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Okay, got it. Thank you.

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Operator [34]

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Rohit Seth, SunTrust.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [35]

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Hey, thanks for taking my question. Can you guys provide any color on some of the end market dynamics by geography? Where are some of your strengths and weaknesses?

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Jeff Bradley, Forterra, Inc. - CEO [36]

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Sure. I mean we are seeing -- we continue to see a lot of strength in the North Texas market. In fact, I had mentioned that we're going to increase the free cash capacity in our largest drainage plant there. Continue to see upside in Florida. We had some meetings earlier this week, Florida just continues to grow.

Denver market, very strong. We are reconfiguring that plant to some extent because we need more capacity there. The California businesses strong. When you look at resi numbers, resi numbers continue to be strong on the West Coast. Even the Nashville area is very strong. We don't talk much about the joint venture we have in the mid-Atlantic region, Mid-Atlantic being Maryland, Virginia, Washington, again, very strong.

So all of that, you couple the strength we are seeing, you couple that with the organic growth initiatives we have in place and we are optimistic about the year. And I think you'll see us continue to get stronger as we go throughout the year.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [37]

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If you could rank like your top maybe three states and bottom three states, could you help us with that?

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Jeff Bradley, Forterra, Inc. - CEO [38]

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Top three states in total volume? It's a little different. It's different for drainage and ductile. If you look at ductile, what's strong -- the larger states would be the Carolinas, New York and Georgia. In drainage, it would be Texas, it would be Canada -- we don't talk much about Canada -- Toronto is a fantastic market. Toronto is strong. The Minnesota market is very good.

I was up in -- Minnesota is our fourth or fifth largest. In fact, I visited our new facility up there last week and was really impressed. Had an awful lot of inventory in the yard and I commented on the inventory and he said, this is probably 2.5 times oversold, so very optimistic about what we are seeing up there.

The California business is coming on strong -- even though we've had a setback with the weather and all the rain, a lot of optimism there as well. So --.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [39]

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In light of the infrastructure package that was announced yesterday, I'm trying to get a sense of what percentage of your sales is coming from California now and if you have a sense of where that could go if demand levels were somewhat higher.

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Jeff Bradley, Forterra, Inc. - CEO [40]

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The California business right now for us is small on the drainage side. We've got the northern plant; we've got a new southern plant. We talked about ramping up our brand-new plant in Riverside to 50,000-plus tons this year, but see an awful lot of upside there. That's a plant that has the capacity to do north of 100,000 tons, so we definitely see upside there.

On the ductile side, we've got -- we've also got a facility out there. So we've got a fair amount of ductile business on the West Coast and the Northwest. Our backlogs are strong. Our backlogs are strong across the country.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [41]

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Got you. Those deals that you mentioned that are in the pipeline, are any of those in the California market?

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Jeff Bradley, Forterra, Inc. - CEO [42]

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No.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [43]

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No? Okay. Would you guys be interested in integrating downstream to maybe distribution?

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Jeff Bradley, Forterra, Inc. - CEO [44]

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Not now. The relationship we have with distributors is working very, very well. We sell to all the big guys, and you know the names -- [J. T. Supply] and [Fortaline]. Relationships there are very strong. Things are working very well. I mentioned the cross-selling initiative is really exceeding expectations, so no.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [45]

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Okay. And then you mentioned -- you talked a little bit about the input cost inflation you are facing in ductile iron pipe. And you put out some price increases. What was the level of price increase and do you see that being able to offset the spike we are seeing in ductile -- scrap and iron (multiple speakers)?

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Jeff Bradley, Forterra, Inc. - CEO [46]

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Sure. So ductile iron, our main input is steel scrap, just like the steel scrap that would go to a mini mill. From the end of December through the end of March, we saw about a $50 increase in the price of scrap. We put through an increase, a ductile iron price increase March 6; that was $100 a ton, and -- but that takes time to go through. That's just on the new orders placed.

But typically, it takes about 60 to 90 days for that to flow -- for that to flow through into our numbers. So we are going to see a hit in the first quarter because of the increasing scrap, but then we pick it back up in the second quarter. We also had a successful price increase in October that was less than $100 a ton, that has gone through.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [47]

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And on a percentage basis, what is that $100 equal to?

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Jeff Bradley, Forterra, Inc. - CEO [48]

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We don't actually give out the selling price of our ductile, do we, Matt? We just --?

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Matt Brown, Forterra, Inc. - EVP & CFO [49]

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No, that's competitively sensitive, so we (multiple speakers) disclose that.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [50]

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All right, all right. And then my final question, on the earn-out payment dispute with Heidelberg, has that been resolved?

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Matt Brown, Forterra, Inc. - EVP & CFO [51]

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No, that has not been resolved. That is still being negotiated at this point. I can just give you a quick update on that. Really no changes since last quarter, but to bring everyone up to speed, so at this point, the purchase agreement actually stipulated its matters to be negotiated through arbitration.

The other side has filed a motion to have this put into the Delaware court system. We filed a motion to have that aspect of this dismissed. So we would expect that particular part of the process to be resolved essentially in Q2. So that will have to be put out there; that will be the next phase of this. Most likely this will continue on into late Q2 or Q3, so it is not resolved. But again, there is nothing reserved in our financial statement for this.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [52]

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Okay, good. So no accruals? All right.

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Matt Brown, Forterra, Inc. - EVP & CFO [53]

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No accruals, correct.

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Rohit Seth, SunTrust Robinson Humphrey - Analyst [54]

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All right. All right, I'll pass it on. Thank you.

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Operator [55]

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Mike Dahl, Barclays.

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Matt Bouley, Barclays Capital - Analyst [56]

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Hey. Good morning. This is actually Matt Bouley on for Mike today. Thanks for taking our questions. I wanted to follow-up a little bit about the project mix since you spoke a little bit about the Canada project and I think in the slides you also highlighted a project win with an EPC firm.

I was just wondering if you could outline some of the timing of any other large projects that we should be thinking about this year that would either be rolling in or completed. And then how we should think about any mix impacts of those projects on margins this year. Thanks.

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Jeff Bradley, Forterra, Inc. - CEO [57]

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Sure, so the largest ones -- as I mentioned, we had a large one last year in Canada in the Pressure Pipe side that rolled off where margins were very high. And then we picked up an even larger job in Texas in the Pressure Pipe business, but the margins there are lower. That has started up this year in the first quarter, although we have had some push out there. That is actually a job that is going to go into probably as late as second half of next year.

On the EPC jobs, yes, we picked up a very large industrial job, I will call it on the East Coast. It is a multiyear job. We will see that -- we are actually starting -- we have actually shipped on that job, and we'll continue to ship on that job into next year. On the EPC job -- I'm sorry, on the EPC business, we are also tracking, as I think I mentioned my comments, a number of very large projects that have been identified and planned to be built and we are keeping an eye on them. But we really wouldn't see anything flowing to those until 2018 or 2019.

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Matt Bouley, Barclays Capital - Analyst [58]

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Okay, got you. Thank you for that. The second question I wanted to ask a little bit about the organic growth initiatives. You mentioned 1% or so of incremental sales this year from those initiatives. So what kind of longer-term sales growth would you expect from these initiatives? And I guess specifically, how big is the opportunity on the storm water management rollout that you spoke about? Thank you.

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Jeff Bradley, Forterra, Inc. - CEO [59]

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Sure, so the storm water management rollout, as I said, that's going to be the fastest-growing part of the business. We really see a tremendous amount of growth there as we scale this business across the country. What we are going to do with that business, we basically plugged this into the platform we have in place in our Drainage business. This was predominately a West Coast business.

The guy that we bought it from, he said to me, this is really as far as I can take this thing. We are now scaling that across the country. We are getting business now in places as far away as Maine. We've had a lot of success in the Nashville area late last year and early this year. But, we'll continue to scale that up and we'll use our existing drainage plants to not only produce the products but also using that existing sales force to market the products. So see an awful lot of upside there.

On the cross-selling, don't know how big that can be. It's actually trending larger than we thought it would be in the first quarter. Really excited about that. I mean you are talking about taking our drainage business and working with distributors across the country, big names like HD Supply, that have many more facilities than we have, [borderline] some of the big guys, but also some of the smaller local guys, too.

I think that's going to end up being larger than we had anticipated. I really don't want to put in any numbers out now, but we are excited about that. Strategic accounts I talked about. And again, we'll continue to scale both these businesses across the country.

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Matt Bouley, Barclays Capital - Analyst [60]

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Okay, got it. Thanks very much.

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Operator [61]

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Ian Zaffino, Oppenheimer.

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Ian Zaffino, Oppenheimer & Co. - Analyst [62]

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Great, thank you very much. Jeff, I know when you're talking about the margin expansion, I really didn't hear you talk maybe about some type of portfolio optimization. I know you have some businesses that are arguably lower margin, a little bit more volatile. I mean have you considered maybe shedding those or doing something else to change the profile of the business? Or maybe just give us an idea of what you are thinking. Thanks.

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Jeff Bradley, Forterra, Inc. - CEO [63]

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Sure. One of the things that we have actually been working on, especially on the drainage side, is looking at opportunities to rationalize some of our plants. A great example is the Minnesota acquisition. We bought Royal the first part of this year. We've got a plant about [50] miles south of there. It was a plant that was not as efficient.

So we are going to be moving a lot of that business into the new Stacy plant. It's going to drive our cost down there. We've done that also in Southern Texas. We had a number of plants there. We are rationalizing some of that business internally. Have an opportunity to idle some of those plants and just pack more business in less plants. And we are always considering options to optimize.

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Ian Zaffino, Oppenheimer & Co. - Analyst [64]

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Okay, okay, and then any maybe -- other than just some of the operations, maybe just some entire businesses that you are seeing, just businesses that you own now with lower profiles on the margin side or maybe higher volatility. Or is that not something you're ready to discuss right now?

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Jeff Bradley, Forterra, Inc. - CEO [65]

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I mean, we are -- you know, Ian, we are always looking at things. Really nothing I can share now, but I can tell you we are always looking to optimize the business.

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Ian Zaffino, Oppenheimer & Co. - Analyst [66]

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All right, great. That's really helpful. Thank you very much.

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Operator [67]

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Nishu Sood, Deutsche Bank.

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Rob Hansen, Deutsche Bank - Analyst [68]

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Thanks. This is Rob Hansen on for Nishu. I just wanted to touch on the selling through distribution and drainage again. And like what markets are regions are you -- have you started this program in? How widespread is it? Are there any specific products that are being pushed through distribution more easily on the drainage side?

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Jeff Bradley, Forterra, Inc. - CEO [69]

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So, we were actually selling a very small amount of our drainage product through distribution, specifically in the southeast United States, and, as I mentioned, really where we are seeing upside is in geographies that we're not that strong. When you take all the distributors collectively, the footprint is much larger than ours. So really what we are doing is focusing on those areas that are underserved and it's all products. It's pipe, it's precast.

But the other thing where we have a lot of upside is the Bio Clean business. The distributors are really interested in a lot of the Bio Clean product that we produce. And that would also give us an opportunity to really further turbocharge that business by plugging Bio Clean products into distribution. So yes, and a lot of opportunities there.

Are we going to continue selling to contractors? Of course we are. That's the majority of the business. But this is all upside for us. We are not -- and let me just be very clear. we are not taking any of the contractor business away. All of this cross-selling, we are selling drainage pipe and drainage precast and Bio Clean products through distribution is all upside.

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Rob Hansen, Deutsche Bank - Analyst [70]

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Got it.

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Jeff Bradley, Forterra, Inc. - CEO [71]

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We are just now, literally, scratching the surface.

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Rob Hansen, Deutsche Bank - Analyst [72]

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That's helpful. You also mentioned tracking some larger projects. I think you said oil and gas and other infrastructure areas. How large is your backlog, so to speak, right now? And I imagine you have like some sort of gauge over how much this is increasing on a year-over-year basis or maybe quarter-over-quarter. Just maybe give us some sense of how the pipeline looks for larger projects.

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Jeff Bradley, Forterra, Inc. - CEO [73]

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So, we've really just kicked this initiative off not that long ago, and really focusing on the very large companies out there. I'm told I really can't use the names, but the very, very large guys. We put a team together. We brought in a couple people from the outside, but we are really focused on the top 10 EPC firms in the country.

The backlog is not huge right now, but the pipeline of work that we are seeing out there is unbelievable. There is just a tremendous amount of work that is being planned out there.

And along these lines a little bit, I was out with a contractor -- Mark and I were out with a contractor last week and he threw out a fascinating fact to me. That two, three years ago -- he is large, he is very large. He does work across the country in multiple states.

And he said that at any given time through three years ago, he was probably looking at where there were two or three jobs north of $100 million out there. And this guy is -- he is pipe, he is tunneling, he is pretty much everything. He said today it is north of 30, it's literally a tenfold increase. He just said there is a tremendous amount of work out there, just large projects.

So that's why -- I mean that's really just a testament to us putting a team together to really focus on this side of the market that we never really specifically focused on. We might have sales in a particular area where they might be building something, but really never have the strong focus that we have now because we just see so much upside. Is it today? A little bit, but really it's just the next couple of years as we move out in 2017 into 2018 and 2019.

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Rob Hansen, Deutsche Bank - Analyst [74]

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Great, so nice kind of tailwind for growth. Appreciate it, guys. Thanks.

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Operator [75]

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This now concludes our Q&A session. I now would like to turn the call back to Mr. Jeff Bradley, Chief Executive Officer, for any further remarks.

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Jeff Bradley, Forterra, Inc. - CEO [76]

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Yes, thank you very much, everybody. We really appreciate your interest, really appreciate your time and look forward to talking to you again. Thank you.

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Operator [77]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect. Everyone have a great day.