Forterra Announces Second Quarter 2018 Results

Corporate and Other (“Corporate”) - Second Quarter 2018 Results
Corporate EBITDA and Adjusted EBITDA losses of $14.6 million and $13.0 million, respectively, in the second quarter of 2018 compared to EBITDA and Adjusted EBITDA losses of $27.2 million and $23.6 million, respectively, in the prior year quarter.  The year over year improvement is due primarily to lower external consulting fees and the continued benefit of cost savings initiatives.

Balance Sheet and Liquidity
On June 30, 2018, the Company had cash of $30.2 million, outstanding debt on its senior term loan of $1.2 billion and no outstanding balance on the Company's $300.0 million asset based revolving credit facility.  The decline in cash, compared to the first quarter of 2018, was consistent with expectations relative to the full-year 2018 key cash out-flow items guidance range previously provided by the Company.

Organizational Realignment of Water Pipe & Products
In July 2018, Forterra announced an organizational realignment of its senior leadership team in its Water segment to accelerate the execution of the Company's commercial and operational initiatives focused on driving higher margins.

Amendment and Restatement of Existing Sale-Leaseback Arrangement
As previously announced in June 2018, Forterra amended and restated its existing sale-leaseback arrangement (the "SLB").  The transaction removed 24 U.S. Drainage facilities and U.S. and Canadian concrete pressure pipe facilities from the SLB in exchange for Forterra's contribution of two ductile iron pipe facilities in Bessemer, Alabama to the SLB.

Certain modifications to the SLB, including an increase in the lease term, resulted in a change in accounting treatment for a portion of the SLB from an operating lease to a finance lease effective with the completion of the transaction in early June 2018.  Capital lease obligations increased to $150.2 million at June 30, 2018, compared to $4.7 million as of March 31, 2018, as a result of the change in accounting treatment for a portion of the SLB.

In the June 2018 press release announcing the SLB amendment, Forterra estimated an annual reduction in SLB operating expenses of approximately $19 million, as compared to actual SLB operating expenses incurred in 2017.  After further review, the annual reduction is expected to be approximately $17 million.  SLB operating expenses in the second quarter were $1.4 million lower than the same quarter last year including $1.1 million in the Drainage segment and $0.3 million in the Water segment.

Financial Outlook
For the third quarter of 2018, the Company expects that net income will range from $5 million to $11 million and Adjusted EBITDA will range from $60 million to $68 million.  The third quarter guidance range incorporates the following key assumptions:

• Continued gradual year over year improvement in Drainage, including expected net sales growth on the benefit of higher shipments and higher average selling prices mitigating the impact of continued cost inflation
• Lower expected EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin in Water, as compared to the same quarter last year, due primarily to higher scrap costs, as well as higher labor and freight costs, not yet fully offset by higher average selling prices
• Corporate costs of $15 to $16 million, consistent with previously provided expectations.  As compared to the average quarterly Corporate costs of approximately $14 million in the first half of 2018, the Q3 2018 Corporate cost reflects the timing of certain cost accruals and the completion of a transition service agreement that provided an income offset to Corporate expenses in the first half of 2018. 

Drainage - Key Financial Statistics:

Water - Key Financial Statistics:

Conference Call and Webcast Information
Forterra will host a conference call to review second quarter 2018 results on August 8, 2018 at 8:30 a.m. Eastern Time (7:30 a.m. Central Time). The dial-in number for the call is 574-990-1396 or toll free 844-498-0572. The participant passcode is 5582649. Please dial in at least five minutes prior to the call to register. The call may also be accessed via a webcast which is available on the Investors section of the Company’s website at http://forterrabp.com.  A replay of the conference call and archive of the webcast will be available for 30 days under the Investor section of the Company's website.

About Forterra
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 stormwater systems. 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. For more information on Forterra, visit http://forterrabp.com.

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of words such as "anticipate", "believe", "expect", "estimate", "plan", "outlook", and "project" and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on historical information available at the time the statements are made and are based on management's reasonable belief or expectations with respect to future events, and are subject to risks and uncertainties, many of which are beyond the Company's control, that could cause actual performance or results to differ materially from the belief or expectations expressed in or suggested by the forward-looking statements. Forward-looking statements speak only as of the date on which they are made and the Company undertakes no obligation to update any forward-looking statement to reflect future events, developments or otherwise, except as may be required by applicable law. Investors are referred to the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K, for additional information regarding the risks and uncertainties that may cause actual results to differ materially from those expressed in any forward-looking statement.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

Condensed Consolidated Balance Sheets
(in thousands, except per share data)

Condensed Consolidated Statements of Cash Flows
(in thousands)

Additional Statistics (unaudited)

Reconciliation of Non-GAAP Measures

In addition to our results calculated under generally accepted accounting principles in the United States ("GAAP"), in this earnings release we also present adjusted EBITDA and adjusted EBITDA margin. Adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures and have been presented in this earnings release as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP. We calculate Adjusted EBITDA as net (loss), interest expense, depreciation and amortization, income tax benefit and before (gains)/losses on the sale of property, plant and equipment, impairment and exit charges and certain other non-recurring income and expenses, such as transaction costs, inventory step-up impacting margin and non-cash compensation expense.  Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of net sales.

Adjusted EBITDA and adjusted EBITDA margin are presented in this earnings release because they are important metrics used by management as one of the means by which it assesses our financial performance. Adjusted EBITDA and adjusted EBITDA margin are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA and adjusted EBITDA margin as supplements to GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to allocate resources and to compare our performance relative to our peers.  Adjusted EBITDA and adjusted EBITDA margin are also important measures for assessing our operating results and evaluating each operating segment’s performance on a consistent basis, by excluding the impacts of depreciation, amortization, income tax expense, interest expense and other items not indicative of ongoing operating performance. Additionally, these measures, when used in conjunction with related GAAP financial measures, provide investors with additional financial analytical framework which management uses, in addition to historical operating results, as the basis for financial, operational and planning decisions and present measurements that third parties have indicated are useful in assessing the Company and its results of operations.

Adjusted EBITDA and adjusted EBITDA margin have certain limitations. Adjusted EBITDA should not be considered as an alternative to consolidated net income (loss), and in the case of our segment results, Adjusted EBITDA should not be considered an alternative to EBITDA, which the chief operating decision maker reviews for purposes of evaluating segment profit, or in the case of any of the non-GAAP measures, as a substitute for any other measure of financial performance calculated in accordance with GAAP.  Similarly, adjusted EBITDA margin should not be considered as an alternative to gross margin or any other margin calculated in accordance with GAAP.  These measures also should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items for which these non-GAAP measures make adjustments. Additionally, adjusted EBITDA and adjusted EBITDA margin are not intended to be liquidity measures because of certain limitations such as: (i) they do not reflect our cash outlays for capital expenditures or future contractual commitments; (ii) they do not reflect changes in, or cash requirements for, working capital; (iii) they do not reflect interest expense, or the cash requirements necessary to service interest, or principal payments, on indebtedness; (iv) they do not reflect income tax expense or the cash necessary to pay income taxes; and (v) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and these non-GAAP measures do not reflect cash requirements for such replacements.

Other companies, including other companies in our industry, may not use such measures or may calculate one or more of the measures differently than as presented in this earnings release, limiting their usefulness as a comparative measure. In evaluating adjusted EBITDA and adjusted EBITDA margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments made in the calculations below and the presentation of adjusted EBITDA and adjusted EBITDA margin should not be construed to mean that our future results will be unaffected by such adjustments. Management compensates for these limitations by using adjusted EBITDA and adjusted EBITDA margin as supplemental financial metrics and in conjunction with results prepared in accordance with GAAP.

Reconciliation of net (loss) to Adjusted EBITDA
(in thousands)

¹ For purposes of evaluating segment profit, the Company's chief operating decision maker reviews EBITDA as a basis for making the decisions to allocate resources and assess performance.
² (Gain) loss on sale of property, plant and equipment, primarily related to the disposition of manufacturing equipment.
³ Impairment or abandonment of long-lived assets and other exit charges.
⁴ Legal, valuation, accounting, advisory and other costs related to business combinations and other transactions.
⁵ Effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of business combinations.
⁶ Non-cash equity compensation expense.
⁷ Other (gains) or losses, including the non-cash gain on a divestiture transaction completed in January 2018 and gains on insurance proceeds related to the destruction of property.

Reconciliation of segment EBITDA to segment Adjusted EBITDA
(in thousands)

¹ For purposes of evaluating segment profit, the Company's chief operating decision maker reviews EBITDA as a basis for making the decisions to allocate resources and assess performance.
² (Gain) loss on sale of property, plant and equipment, primarily related to the disposition of manufacturing equipment.
³ Impairment or abandonment of long-lived assets and other exit charges.
⁴ Legal, valuation, accounting, advisory and other costs related to business combinations and other transactions.
⁵ Effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of business combinations.
⁶ Non-cash equity compensation expense.
⁷ Other (gains) or losses, including the non-cash gain on a divestiture transaction completed in January 2018 and gains on insurance proceeds related to the destruction of property.

Reconciliation of Net Income to Adjusted EBITDA Guidance for Q3 2018
(in millions)

Source: Forterra, Inc.

Company Contact Information:
David J. Lawrence
Vice President of Treasury and Investor Relations
469-299-9113
IR@forterrabp.com

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