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Forterra, Inc. (NASDAQ:FRTA)
Q2 2020 Earnings Call
Jul 28, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to Forterra's Second Quarter 2020 Earnings Conference Call. Today's call is hosted by Karl Watson, Jr., the company's Chief Executive Officer and Charlie Brown, the company's Chief Financial Officer.

With that, I will now turn the call over to Mr. Brown.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thank you and good morning to everyone. Welcome to Forterra's second quarter 2020 earnings conference call.

Similar to last quarter's call, I want to apologize in advance for any technical difficulties or background sound we may encounter during the call, since Karl and I are calling from our home locations. I would like to point out that Forterra intends to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as noted in the earnings release we filed last night.

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. Some of the most important risks are described in detail in the company's SEC filings, including our Annual Report on Form 10-K and our quarterly report on Form 10-Q filed last night. The company does not undertake any duty to update such forward-looking statements.

Additionally, we will refer to certain non-GAAP financial measures during the call, including EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. 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 to investors in our earnings release.

Now, I'll turn the call over to Karl.

Karl H. Watson, Jr. -- Chief Executive Officer

Thanks, Charlie, and good morning, everyone. We appreciate you being on the call with us today.

Before Charlie and I get into the details of the quarter, we want to thank our fellow Forterra teammates. Through this very challenging time, they have continued to improve our safety performance, meet our customers' needs and improve our operational administrative processes.

During the second quarter, we continued to expand gross profit margins in both our operating segments, demonstrated strong working capital discipline, meaningfully increased operating cash flow, strengthened our balance sheet and liquidity position, and reported a record adjusted EBITDA in a quarter since we became a public company.

In addition, this is the seventh consecutive quarter of improvements in our trailing 12 months adjusted EBITDA. We achieved these outcomes despite the pandemic's impact on shipment volumes.

Again, I'd like to thank our teammates for their efforts and the continued focus on our five improvement pillars: health and safety, plant-level operational discipline, enhanced commercial capabilities, working capital efficiency, and G&A effectiveness.

As I briefly mentioned previously, we have implemented a number of COVID-19-related procedures in order to ensure that our team members, customers, and vendors remain safe within our facilities. Those procedures appear to be working well.

During the quarter, we did experience a relatively small number of team members contracting COVID, and had to temporarily close a small number of our facilities to respond to and contain the infections, to ensure it did not transmit within our facilities.

While having COVID infections is certainly a concern, our team member infection rate is relatively low. And through the duration of the pandemic, we have demonstrated our efforts and capability to handle such situations to protect not only our teammates but also our ability to serve our customer's needs and continuously improve our business.

Switching over to the demand side, with COVID-19 disruption to our shipments during the quarter, although not insignificant, was less than what we had anticipated.

The residential housing market paused in April and early May, but recently homebuilders are increasing their activities again. Most states have also started to gradually resume normal economic activities. As a result, we had a temporary delay in certain projects in our Drainage business, contributing to the volume decline of 13% year-over-year. Most of these delayed projects have restarted.

For our Water business, the second-quarter volume remained flat compared to the prior year period. We estimate approximately 60% of our Water business comes from municipal water infrastructure projects. While COVID-19 has negatively impacted the funding revenues of many municipalities, the stable volume highlights the critical nature of water infrastructure to ensure continuous water supply. Funding for municipal projects is long-term in nature, is largely in place and committed for fiscal year 2020 spend.

Additionally, funding for municipal water investments is primarily within the fees charged for water usage and does not depend on general municipal revenue, which goes well for the long-term funding. Operationally, we have improved our safety performance year-to-date by 20% percent over last year, as measured by total recordable injury rate. Yet, we are well away from being world-class and must continue to improve.

As far as costs, we had the benefit of lower steel costs in our Drainage business and lower scrap costs in our Water business. This was partially offset by lower production levels and temporary plant closures, leading to increased conversion cost in both Drainage and Water.

Quarter-to-quarter, our cost per unit will fluctuate, but we are on the right track as we begin our long journey to offset cost inflation with our efforts to continually improve our plant-level operational disciplines.

Commercially, we are seeing a return on our investments in our sales teams since the second half of last year. Both Drainage and Water had double-digit pricing improvements this quarter compared to last year. On the Drainage side, the 9% year-over-year increase is a combination of both crude pricing improvements and the effective sales mix, which Charlie will cover in more detail later. On the Water side, the 15% year-over-year increase is primarily the result of our tube price increases last year.

Our commercial excellence initiatives have continued despite the challenges created by the pandemic and our sales teams remain connected with our customers and focused on meeting their needs and exceeding their expectations.

As I discussed on our last call, we have been closely monitoring our working capital investments across all of our facilities, even before the beginning of the pandemic. As a result, we further improved our working capital churns during the quarter and increased cash flow by more than $50 million year-over-year.

We not only repaid the $180 million first quarter precautionary borrowing, but also voluntarily prepaid $10 million of our term loan, while still ending the quarter with more than $50 million in cash and no drawdown on our revolving credit line versus last year. At the same time last year, where we had $17 million of cash and $39 million of ABL drawdown.

Looking ahead, the ongoing pandemic still brings great uncertainties in the economy as a whole. For the markets we are in, there is a lack of clarity regarding the impact of the pandemic on future funding. The things that we are seeing and hearing are probably similar to what you are and there is a lot of speculation around what the future might look like.

We are not going to, speculate but we'll focus on the things we can control, which are the five improvement pillars I outlined earlier: one, the health and safety of our teammates; two, plant level operational discipline; three, enhanced commercial capabilities; four, working capital efficiency; and five, the G&A effectiveness. By focusing on these five pillars, we intend to expand our product unit margins, generate more cash through both earnings and working capital improvement, and continue to pay down debt to reduce our leverage.

Our second quarter results is another example of our execution on these pillars, even during this challenging time.

With that, I'll turn it over to Charlie.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thanks, Karl. I want to echo Karl's comments on our second quarter success and congratulate our teams. Our progress during these challenging times is forging a culture that will carry us forward, in good times and bad, toward delivering upon our five performance pillars.

In addition to the earnings performance, which I will get into shortly, we also have completed two debt refinancing transactions. First, we amended our revolving credit facility by increasing the capacity from $300 million to $350 million and extending the maturity from next year to 2025.

Second, we recently issued $500 million, 5-year senior secured notes and used the net proceeds to repay a portion of our term loan, effectively extending our significant piece of our term loan from 2023 up to 2025.

Earlier in the year, we put out our mid-term leverage goal of 3 to 3.5 times, at which point our net debt-to-adjusted-EBITDA ratio was 6.1. We've decreased that by 1.1 times in just six months. As of the end of June, our net leverage ratio was down to 5.0 times.

Let me now briefly review our second quarter operating performance by segment, starting with Drainage. As Karl mentioned earlier, our Drainage volume decreased by 13% year-over-year, largely due to certain project delays during the early stages of the pandemic. However, our gross profit increased by 6% and gross profit margin improved by more than 200 basis points year-over-year despite the volume decline.

We continue to benefit from higher average selling price, part of which is driven by mix. Similar to last quarter, while the average selling price this quarter was up 9%, approximately 60% of this price impact is a result of product and geographic mix. Most importantly, we were able to expand the margins in this business by controlling costs despite lower volume, which combined with these commercial gains resulted in higher year-over-year gross margin and adjusted EBITDA.

Switching over to our Water segment. That business continues to demonstrate significant growth in revenue, gross margin, adjusted EBITDA as compared to last year. We were able to hold the volume flat year-over-year during the start of the pandemic and our backlog at the end of the quarter was much higher than last year.

On the pricing side, as we had previously predicted, we are seeing the second price increase we announced last October, which combined with the continuing effect of our first price increase in July, contributed to the 15% year-over-year increase in average selling prices. We've experienced higher levels of volume growth with direct customers on multi-year contract, suggesting year-over-year increases in pricing are higher with our distribution partners.

In addition, during the quarter, we continued to benefit from the lower scrap costs year-over-year, which offset inflation and other costs. As a result of these factors, Water's adjusted EBITDA margin improved by more than 700 basis points in the current quarter compared to last year.

Our corporate adjusted EBITDA loss was relatively consistent with our internal plan and prior year actuals. The slight increase year-over-year primarily reflected our investment in our people, processes and systems; such as, training for our sales force, one of our key improvement pillars.

As an additional update, a hearing on the merits of the $100 million earn out dispute with HeidelbergCement was held from June 23 to 25, and a decision from the Neutral Accounting Arbitrator is currently expected in the latter part of August this year. In the event the arbiter were to order payment of an earn out in amount of $100 million or less and we were required to pay such amount, we currently expect to have sufficient liquidity to make such payment.

We pulled our 2020 earnings guidance last quarter because of the uncertainty created by the pandemic, and we continue to have concerns regarding the progression of this pandemic and its impact on our markets.

Our Q2 rolling 12 months adjusted EBITDA is $243 million, already exceeding our prior guidance of $210 million to $240 million. Although we are pleased with our execution so far this year, and cautiously optimistic about the second half, we also recognize the unprecedented uncertainties and challenges we and our customer face. While our backlog at the end of the second quarter can generally carry us through the majority of the third quarter, we are in uncharted territory. There could be delays or even cancellations of projects due to COVID, and there will be air pockets in certain markets caused by other issues in infrastructure funding or investment uncertainties.

As a result, we've chosen to focus on what we control, the execution of our five improvement pillars instead of providing an overly conservative guidance of a continued abundance of caution.

For cash flow purposes, we have noted in our press release that capital expenditure this year should be between $35 million and $45 million, and we remain committed to delivering working capital improvement in the range of $20 million to $30 million. We remain committed to driving all excess cash flow toward debt reduction and look forward to providing greater clarity about our expectations of future quarters when the macroeconomic uncertainties begin to fade.

This concludes our prepared remarks. Operator, will you please open the line for questions.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Our first question comes from Rohit Seth with SunTrust. Your line is open.

Rohit Seth -- SunTrust -- Analyst

Hi, thanks for taking my question. The first question is on the Water Pipe and the ASPs. Obviously, a great number there, 15% growth. I'm just curious, I mean, with the ASP gains, you'd expect to see that continue flow through for the rest of the year at a similar levels; any reason why that may not be true, that may not be clear to us on this side of the fence?

Karl H. Watson, Jr. -- Chief Executive Officer

No, Rohit, I don't believe that there is. I think we've said in the past, I know we said in the past that we have a very short buy cycle and a long sales cycle. So, it takes a while for increases to actually flow through.

So, the July increase, we saw flow through in the first quarter and October increase we're seeing flow through in the second quarter. That's not complete. It doesn't all happen exactly in the first and second quarter. So, there is no reason for us to think that those prices that we gained to get back to where we're earning a decent return on our assets will change, at least change to the negative. There still maybe potentially some slight upside to it.

Rohit Seth -- SunTrust -- Analyst

Okay. And are they -- what are your plans for future price increases, and the -- what we're seeing in the second quarter results, are actions taken in the back half of 2Q '20; I mean, what are you looking -- what do you expect to announce in the upcoming quarters?

Karl H. Watson, Jr. -- Chief Executive Officer

We've been very clear with our customers that we'll always give them 60 days notice. And so, we'll be communicating with them shortly, but they would be -- it wouldn't be a good thing for me to tell you before I told our customers. So, we're not announcing anything yet but we're going to be communicating to our customers on the 1st of August. That's what we said before.

Rohit Seth -- SunTrust -- Analyst

Understood. And then in the back half of the year, volumes could be impacted by COVID and the macro slowdown. Any sense of where you think your exposure is? I mean, is the Water Pipe, it's more tied to municipal; do you think Water Pipe is subject to volume volatility or is it mostly in the Drainage business?

Charlie Brown -- Executive Vice President and Chief Financial Officer

I think we're not really sort of giving guidance for the back half of the year, but I think directionally what the first half of the year would look like, relative to last year, sort of the last half of the year will look like relative to last year. We don't see the continued softness, but we don't see that accelerating at all as compared to last year.

Having said that, what we are concentrating on is really our five improvement pillars and doubling down the intensity that we go after those, especially on operating disciplines, our commercial disciplines and working capital.

Rohit Seth -- SunTrust -- Analyst

Understood. And then a final question if I could. Scrap steel prices, it looks like they've been favorable tailwind for several quarters now. Do you still foresee them being a tailwind in the upcoming quarters or have starting to level out?

Karl H. Watson, Jr. -- Chief Executive Officer

They are highly volatile, but for the -- we really buy that ahead maybe a month or two of visibility. And every time we think we have more than that, we get caught on the wrong side of those assumptions, which I think leads into something that's important, that we continue to reiterate. Where -- we have made the strategic decision to decouple our pricing from scrap and that we need to progressively and systematically move our prices up to a point to where we are making value-creating returns that exceed our cost of capital when scrap prices are at their highest quartile level. We'll make very good returns when they are at average levels. And when they are lowest quartile levels, we'll make really eye-popping returns.

So, while we monitor that very closely and I think we buy very well, we have decoupled that from what sort of our strategic intent on returns are. And I think what's shown so far this year, and answering to your first question, we are on the path to getting to those levels. It's going to take us a little while longer. We're not trying to get there in one day, it's a long-term gain. But we are heading in that direction.

But for the foreseeable future, like in the next few months, which is really all the visibility that we have, it looks like scraps are going to be favorable.

Rohit Seth -- SunTrust -- Analyst

Thank you. I'll get back in queue.

Operator

Thank you. And our next question comes from the line of Jerry Revich with Goldman Sachs. Your line is open.

Karl H. Watson, Jr. -- Chief Executive Officer

Good morning, Jerry.

Jatin Khanna -- Goldman Sachs -- Analyst

Good morning, everyone. Good morning, everyone. This is Jatin Khanna on behalf of Jerry Revich. Can you please talk about order trends in both businesses? And in Drainage, specifically, what's the risk of an air pocket over the next six to 12 months, as large projects are completed?

Karl H. Watson, Jr. -- Chief Executive Officer

Yes. We have some visibility into the next three to six months based upon our backlog and order flows and billing patterns. As I said a little earlier, I don't know -- I'm not certain exactly if we're all calibrated on what an air pocket is. So, I don't want to address what an air pocket. But what I can say is that we believe -- while we're not giving guidance -- the second half of the year will look relative to the second half of last year, like the first half of this year looked relative to the first half of this year.

We, sort of, do have that much visibility and, I guess -- for the lack of a better word -- confidence. But the macroeconomic environment is such that there is uncertainty. And because of that uncertainty, we've not given guidance. And how that plays out is still to be seen. But we don't see our volume peak. Our volumes compared to last year, decreasing at an accelerating rate. While they are still soft relative to last year, more on the Drainage business then the Water business, we don't see that accelerating.

And once again, we're going to be concentrating on those -- the five things that we control: the health and safety of our employees, plant-level operational discipline, our commercial discipline and enhanced commercial capabilities, and doing with less working capital and being more efficient every day on our G&A. I think if we focus on those things, the results will take care of themselves.

Jatin Khanna -- Goldman Sachs -- Analyst

Okay. Thank you so much.

Operator

Thank you. And our next question comes from the line of Dan Wang with Berenberg. Your line is open.

Daniel Wang -- Berenberg Capital -- Analyst

Hey, guys, thanks for taking my question. Just piggybacking quickly off the Water average selling price question. Can you just clarify the double-digit pricing gains we saw in the first half, should we expect a similar magnitude in the second half and perhaps even into 2020?

Karl H. Watson, Jr. -- Chief Executive Officer

I'm not so certain I understand the question exactly but let answer it one-way and see. If I don't answer it properly, then reask. I don't think -- well, actually, I know you're not going to see another 15% on top of the 15% in the second half. What you will see is the continuing flow through of our announcement in July -- our announcement in October, and our execution of a price increase on the extras that we sell, not the pipe itself that we had in April.

Those continue to flow through, and you will see some improvement in the second half of the year versus where we are today. But there won't be an additional 15% on top of the 15%.

Daniel Wang -- Berenberg Capital -- Analyst

Okay, perfect. And just so I can -- digging a little bit into the Drainage mix. I guess, one, can you remind us which regions or products you typically experience higher or lower average selling prices? And then two, how sustainable do you see this mix tailwind being?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure. So, I'll take that Dan. The mix, let's focus on the simple, which is good for me. We sell the pipe and precast products in our Drainage business. Precast is typically, it's a custom product and those prices are higher. However, the margins in that business are not dissimilar from the Pipe business. So, we get a higher price, but we do have a higher cost.

I think that's the easiest way to think about this. And probably, if you look at volumes, you'd see a little bit less Pipe volume this year than last year, plus a little -- both businesses, both pieces of the business were down. Probably more decline in the Pipe side. So, again, that influences a higher price on average. That's why we've been really clear, pricing, which is a simple calculation is up. But like I said, 60% is tied to the product mix issue.

Daniel Wang -- Berenberg Capital -- Analyst

Perfect. I'll get back in queue.

Operator

Thank you. And our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open.

Mike Dahl -- RBC Capital Markets -- Analyst

Hi, thanks for taking my questions. So, Karl, I certainly understand -- not wanting to get into too much detail around guidance specifics. But I wanted to ask slightly different way around the back half volume outlook. You've got 50% of your total business muni, infrastructure, and the balance a mix of resi and non-resi. By end market -- could you give a little more color on those volume declines, would you expect to be better or worse across those by end market?

Charlie Brown -- Executive Vice President and Chief Financial Officer

You're on mute. I think Karl's on mute right now.

Karl H. Watson, Jr. -- Chief Executive Officer

Sorry. We see each other on Zoom, but we can't do the setting. Let me answer that, realizing we're not giving guidance, but just sort of broad themes.

In the shorter term, residential construction is coming back fairly strongly. Municipal budgets, as I said in the opening comments, are largely in place and the spending is there. In the commercial construction, our pipe goes to -- really sort of follows the residential construction.

So, if I think the second half, like I said before, with the trends are -- the volume trends are not accelerating to the downside. What slowed us down in the second quarter in Drainage, which is coming back in the third quarter. Most of the residential stuff that went on hold is being released. So, the second half of the year, say again that we believe the second half of the year compared to the second half of last year, looks very similar on a percentage basis compared to the first half of this year compared to the first half of last year.

Longer term, if you think of the infrastructure spending, which is half of our business and we go back to other sort of recessionary environments, we really didn't go down. Even the great recession, people found a way to pay for infrastructure. States are -- 30 states have enacted measures. 33 states have put up over 160 legislative proposals in this 2020 legislative session for increased infrastructure spending.

So, there is an absolute knowledge that infrastructure spending is necessary. That we are ready to be both in transit and Water Infrastructure by the American Society of Civil Engineers. And that -- especially the Water side, there is 240,000 water main breaks a year, trillions of gallons of already treated water wasted. And in the Mayors -- in a Boston study of cities, a study last year, the Mayors of all of this -- of all the municipalities around the country said, "If you had a federal grant, either larger or small, what would you spend it on? What's the first thing you would spend it on?" And the number one answered by not small margin was "Water and Water Infrastructure."

So, we think that the municipal spending, federal spending, state spending; if the funding sources come from a multitude places, that there is an absolute need, there's an absolute knowledge that there is that need. And historically, that has not gone down.

Residentially, we believe that the growing trends are more toward us, the homebuilding you're talking about, meaning suburban versus urban. There has been a lack of housing investment overall and we're not even back to our historical levels for new household formation based upon the population trends that remain intact. So, we believe, residentially, we're still in a very good spot.

And commercially, what -- our sweet spot is what follows housing, especially suburban housing. So, what-- we believe in the Last Mile Amazon concept or there'll be more Targets and Wal-Mart's to follow those houses. Both of those use a large amount of our products, especially on the Drainage side. So, even if commercial spending were to be flat for the next five years, which I don't believe that it will be. But even if it was, the proportion of commercial spending that would be in products -- be in segments, that would be supportive of our products would actually be greater.

So, we think we're actually in a pretty good space, both municipal -- infrastructure, commercially and residentially, over the short term and the long-term.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, thanks. That's helpful. My second question, just specifically on Water and the pricing dynamics. Recognizing that the severe intentional multi-year shift for you to establish your value-based pricing and earn a proper return, is still a little atypical to see this type of pricing power and in a market that is kind of flat to potentially down on volume and costs, also potentially flat to down.

So, from a competitive standpoint, could you talk at all about whether you're seeing anything differently from your -- A, from competitors or any additional color around that and what gives you the confidence that this can be sustained?

Karl H. Watson, Jr. -- Chief Executive Officer

I really can't talk about our competitors in any way, shape or form. But what I can say is this. If would you look back 2018, this business had an EBITDA margin of 10%, EBITDA margin. That's not even margin, that's not profit after tax margin. That's an EBITDA margin. It is a low asset term business. It's a high barriers to entry, at very stable demand. It's a national business with three players. So, there is a decent industry structure. And so, when you have a 10% EBITDA margin, there is something doesn't make any sense because those are really poor, poor returns on our investment.

So, it really can only be a couple of reasons for that. We either have a cost problem or a pricing problem. And the cost problem, it wasn't hard to diagnose. In diagnosing a cost problem, we buy -- what we buy scrap for, what our conversion costs for, what our plant technology is? We didn't really have a cost problem.

So, it had to be a price problem. And I think we had to look internally before we looked externally. We had to look at our processes and methodologies, our philosophy, strategy and tactics, and we have. And we've dramatically changed those in conjunction with our customers. I mean, we consider price increase to be successful if three things happen. One, we do not disrupt our customer's business model. Two, it's -- we don't lose our industrial positions. And three, it's successful, I mean, it actually works and it flows through, and that is success.

So, we don't want to disrupt our customer's business model. We do not want to give up share for price. I mean, it's really -- it doesn't take a whole lot of skill to raise prices and reduce market share. And it doesn't take a whole lot of skill to cut prices and gain market share. I mean, it doesn't take any skill at all. But it also has to be successful. And these are not -- these price increases have not been successful because we threw it up on a wall and hope it stuck. I mean, there is a very comprehensive proven methodology for how to do this. That's worked across multiple industries and multiple geographies and we're executing on that.

So, now, having said that, this can't happen at a vacuum. I mean, we think that we are, of course, we go for the best ductile iron pipe producer. But we also realize that we're not going to be 15% higher than our -- I mean, if our customers had an option to buy something that's 15% less, they probably would. We don't talk about our competitors with our customers, we just talk about ourselves. But we are not losing share. So, we have to assume that we are a competitive price.

Mike Dahl -- RBC Capital Markets -- Analyst

Thanks, Karl. Nicely done. Appreciate it.

Operator

Thank you. [Operator Instructions] Our next question comes from Matt Bouley with Barclays. Your line is open.

Matthew Bouley -- Barclays -- Analyst

Hey, good morning. Thank you for taking the questions. I wanted to ask on the cost side, earlier this or in the second quarter, obviously you guys took a lot of precautionary cost actions in a very uncertain time. Was there just any kind of short term or are sort of one-time benefits there to the margin in Q2, just given the volumes obviously held up a little better while you took those actions? And I guess how would those expenses coming back into the system, now that you sort of reengaged on them kind of flow into the second half? Thank you.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure, Matt. No, that's a great question. I would focus on some of the actions that we've publicly stated where we limited hiring, so that was a benefit, but that would be a small piece. It more matched up with volume than anything else and just prudence in general. We also, from the executive team, took a pay cut for a period of time, that was reinstated and those costs are included in the second quarter. And our employees, hard-working employees, we deferred their annual increase and that was also put back in place before the end of the second quarter and we reinstated that back to, so they didn't miss anything. It was just a timing issue out of an abundance of caution.

So, there really aren't any major issues that we failed to -- that we were -- be carried forward into Q3 as a pain. We tried very hard to make sure that we captured all those costs in Q2, so that we had a clean second half as we started off. So, no, I don't think there's any surprises lurking in our cost basis at this point.

Matthew Bouley -- Barclays -- Analyst

Okay, perfect. That's exactly what I was looking for. And then secondly, just curious about -- the EBITDA came in obviously a little better versus when you guys gave the preliminary results at the end of June. And apologies if I missed it, but could you just explain what happened there?

Charlie Brown -- Executive Vice President and Chief Financial Officer

So, I think, and I tend to be fairly conservative and there are certain adjustments at the end of every quarter that we have to look at, whether it be lower cost of market, various other adjustments, IBNR etc., etc. And we looked at all that and made our best estimate. We put out our pre-release.

Obviously, we are surprised but pleased that our cost came in as well as they did and put us above our earlier guidance. But no, nothing unusual in that. It was actually a very good quarter.

As far as closing, I would just brag on our team. Our team members did an awesome job being able to get everything done in a very short order. This would be the earliest that Forterra has ever released earnings. And you know the team itself was just spectacular in getting things done from home in this environment and getting us great information.

Karl H. Watson, Jr. -- Chief Executive Officer

And I want to brag on Charlie and his team. That is an example of our G&A effectiveness. We've been -- closed our closing cycle by six days and we're getting better, deeper information delivered at a lower cost. And so, Charlie and his team has done a fantastic job around that.

Charlie Brown -- Executive Vice President and Chief Financial Officer

Thanks, Karl.

Matthew Bouley -- Barclays -- Analyst

Got it, OK. Thanks for the details, everybody. Congrats on the quarter and hope everyone stays well.

Karl H. Watson, Jr. -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Joshua Gonzalez with GSO Capital. Your line is open.

Joshua Gonzalez -- GSO Capital -- Analyst

Hi. I was wondering if you guys could maybe walk us through, I guess, how do you balance the potential to maybe tap the bond market again, against maintain pre-payable debt, given your debt has traded so well?

Charlie Brown -- Executive Vice President and Chief Financial Officer

Sure, Josh. You're right. And it certainly, it is painful to pay more for the new bonds that we've issued than for the term loan that we had, that we continue to have. But the view was, out of an abundance of caution, having a huge tower sitting out there in October of 2023 has just -- not knowing what the future may bring, they felt it would be prudent to tap the bond market and move a bit of that debt out. It also gives us a little bit more exposure, a little bit more flexibility as we continue to demonstrate our ability to reduce our leverage ratio. We can take that money and give ourselves a little bit of time. We will still have the term loan. We still have $600 plus million on the term loan. And then we'll continue to work that down as well and as we generate cash.

But again, giving ourselves a little bit more flexibility, the term loan has been excellent and very low cost. And I would point out that, yes, our interest expense will go up this year by about $6 million in the second half related to higher interest rates on the term loan that we're paying -- on the new bonds that we're paying on the term loan.

Joshua Gonzalez -- GSO Capital -- Analyst

Got it. It sounds like you guys would prefer to have as much pre-payable debt as possible at this point?

Charlie Brown -- Executive Vice President and Chief Financial Officer

We still have a significant portion of pre-payable debt and we will continue to take that down as our cash generation allows.

Joshua Gonzalez -- GSO Capital -- Analyst

Great. Thank you.

Operator

Thank you. And at this time, I'm not showing any further questions.

Karl H. Watson, Jr. -- Chief Executive Officer

Well, thank you, everyone. We appreciate your participation on the call and we look forward to talking to you next quarter about our results. Stay Safe and all the best.

Operator

[Operator Closing Remarks]

Duration: 40 minutes

Call participants:

Charlie Brown -- Executive Vice President and Chief Financial Officer

Karl H. Watson, Jr. -- Chief Executive Officer

Rohit Seth -- SunTrust -- Analyst

Jatin Khanna -- Goldman Sachs -- Analyst

Daniel Wang -- Berenberg Capital -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Matthew Bouley -- Barclays -- Analyst

Joshua Gonzalez -- GSO Capital -- Analyst

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