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Forterra, Inc. (NASDAQ:FRTA)
Q3 2020 Earnings Call
Oct 29, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Forterra's Third Quarter 2020 Earnings Conference Call. Today's call is hosted by Karl Watson, Jr., the company's Chief Executive Officer; Charlie Brown, the company's Chief Financial Officer; and Simon Chen, Vice President of the Treasury and Investor Relations. With that, I will now turn the call over to Mr. Chen.

Simon Chen -- Vice President, Treasury, Investor Relations and FP&A

Thank you, Angela, and good morning to everyone. Welcome to Forterra's Third Quarter 2020 Earnings Conference Call. I'd 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 the detail in the company's SEC filings, including our annual report on Form 10-K and in our quarterly report on Form 10-Q that was filed last night. The company does not undertake any duty to update such forward-looking statements. Additionally, we'll refer to certain non-GAAP financial measures during the call, including EBITDA, EBITDA margin, adjusted EBITDA, adjusted EBITDA margin and net debt. You can find a reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures and other related information, including a discussion of why we consider these measures useful to investors in our earnings release. Now I will turn the call over to Karl.

Karl H. Watson Jr -- Chief Executive Officer

Thanks, Simon. Good morning, everyone. We appreciate you being on the call with us today. Protecting the health and wealth of our team members is our highest priority, followed closely by meeting our customers' expectations. I want to thank each of my teammates for their continued diligence toward keeping their fellow team members safe and their commitment to meeting our customers' expectations. With respect to COVID-19, we remain vigilant. In the macro environment of increasing cases, we are becoming more efficient managing through positive test results among our team members while continuing to meet the needs of our customers through the safe business practices. During the third quarter, we continued the execution of our five improvement pillars: health and safety, plant level operational discipline, enhanced commercial capabilities, working capital efficiency and G&A effectiveness. This progressive execution led to further expanded gross profit margins in both of our operating segments and a record quarterly EBITDA and adjusted EBITDA. We achieved these record outcomes despite a decline in our shipment volumes, particularly in our Drainage business, which I'd like to expand on further.

Our drainage shipment volumes declined 16% during the quarter compared to last year. Contributing to this decline is a combination of two things: less stable weather year-over-year and the effect of the early stage of our margin-enhancing value before volume commercial strategy. Otherwise, last year, when we reported our third quarter results, we noted favorable weather within the quarter, which created a difficult comp for this year. Across our footprint -- across our footprint, precipitation increased by approximately 11% during the third quarter compared to last year. And in some areas, the increases were higher, such as Texas and Florida, where it was 43% and 56% respectively. With respect to commercial strategy when implementing a value before volume strategy, the first stage in the process can lead to some short-term relative market share declines. Although not ideal, this is not unexpected and is typical of the many times I have been involved with implementing this commercial strategy. The objective of the next stage and we train -- and what we train to is to achieve a fair return on the products we produce and the capital we have deployed without, and this is very important, without sacrificing our long-term market positions. We have made the proper adjustments as we moved into this next stage. And as a result, our current drainage backlog, tonnage and prices are both higher than last year's levels. For the quarter, we achieved an 8% year-over-year increase in our average selling price. Similar to last quarter, the 8% year-over-year increase is a combination of both crude pricing improvement and the effect of product and geographic sales mix. In our Water business, volumes for the quarter were largely flat, down just 2%, and average selling price was up 17%.

This price increase is the result of the compounding effect of our two increases last year. On August 1, we announced a 5% increase that became effective October 1. Due to the support of our distribution partners, we anticipate this increase to be as successful as the ones last year. That being said, we won't see much of its financial impact until the second quarter 2021. As we have previously discussed, our goal is to increase our prices to a point where we earn a fair return on the capital we have deployed when scrap, our largest and most voluble cost input is at its historical top quartile levels. While our product pricing is not at that point yet, we feel with the successful implementation of these increases, the size and future increases is likely to be more moderate. We also expect to see continued margin expansion in our Water business through the improvements in our operational performance. The source of our five improvement pillars is working capital efficiency. With continued focus on better managing inventory and collections, we have reduced our net working capital as a percentage of rolling 12-month sales by about 450 basis points on a year-over-year basis. These improvements, coupled with higher earnings and less cash interest payments, have increased our year-to-date operating cash flow by $97 million year-over-year. As a result, we had voluntarily repaid $144 million of our term loan by the end of the third quarter. I will now turn the call over to Charlie, who will go through our financials, and then I'll wrap it up with a look ahead. Charlie?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Thanks, Karl, and good morning, everyone. I'll provide some additional comments and financial details on our business segments for the quarter. Starting with Drainage, as Karl mentioned earlier, our drainage volume decreased by 16% year-over-year, largely due to less favorable weather conditions compared to last year as well as the early stage impact of our value before volume commercial strategy. Drainage gross profit margin improved 150 basis points year-over-year, benefiting from higher average selling prices. Similar to last quarter, while the average selling prices were up 8%, approximately 50% of this price impact is the result of product and geographic mix. The increase in price more than offset the increase in cost, which is mostly labor cost, resulting in higher gross profit margin and EBITDA margin. Most importantly, our current Drainage backlog tonnage and prices are both higher than last year's levels. Switching over to the Water segment. That business continues to demonstrate significant growth in revenue, gross margin and adjusted EBITDA as compared to last year. Volume for the quarter were decreased slightly compared to last year, down about 2%. However, our backlog at the end of the quarter was much higher than last year. Karl already discussed the water pricing, so I won't repeat here other than to note that future price increases are unlikely to compound as such a high rate.

On the cost side, scrap costs during the quarter was comparable to last year and the higher labor cost was offset by improvements in manufacturing efficiency, resulting in a slight decrease in unit cost compared to last year. The higher labor cost is mostly attributable to higher bonus accrual. As a result of these factors, Water gross margin for the quarter nearly doubled compared to prior year. I would also note that our Water segment G&A expense had an increase during the quarter driven by a nonrecurring legal accrual. Our corporate adjusted EBITDA loss was higher than prior year results, primarily due to higher incentive expenses. As I've mentioned before, we switched our incentive compensation system this year from EBITDA-focused to economic profit-focused, a system that is more aligned with shareholder value. Our team members are incentivized to maximize the return of investments and continuously create value. Higher operating profit, prudent capital spending and reduced investment in working capital all contributed to improvements in economic profit, thus resulting in higher incentive rewards. In addition, corporate costs were impacted by an $11.5 million loss on the extinguishment of debt, a noncash charge, which was excluded from adjusted EBITDA.

This was a result of paying down more than $600 million of our term loan in the third quarter that required us to write off the prorated portion deferred debt issuance cost. Karl mentioned earlier about our significant cash generation and debt paydown during the quarter, which further reduced our net leverage ratio at the end of the quarter to 4.2 times. With the favorable earn-out arbitration ruling, we now believe that we can achieve our stated leverage target of 3.0 times to 3.5 times in the near term. Because of the continuous improvements we have demonstrated as well as the rapid reduction in our leverage ratio, we received double upgrade in our credit rating from Moody's and a single upgrade from S&P. Lastly, I want to make a comment about -- on our capex. We disclosed in our earnings release and 10-Q that our year-to-date capex was $16 million, much lower than our normal pace, primarily due to temporary delays in projects during the second quarter as a precautionary measure in response to COVID, all to conserve cash. We resumed our capital spending at the end of the second quarter and are appropriately ramping up projects, but now expect our full year capex to be between $30 million and $35 million. This is $15 million to $20 million below our targeted annual capex expenditure of $45 million to $55 million.

Many of these delayed projects have already been engineered, and they will be slotted into our schedules when feasible. As a result, the delays in capital spending this year will get caught up in subsequent years. During last quarter's call, we stated that we were focused on the things that we can control, which is the execution of our five improvement pillars: health and safety, plant level operational discipline, enhanced commercial capabilities, working capital efficiency and G&A effectiveness. Our third quarter success was another demonstration of that focus. With that, I'll turn the call back to Karl, who will discuss our full year 2020 guidance.

Karl H. Watson Jr -- Chief Executive Officer

Thanks, Charlie. Looking ahead, we still face uncertainties in the near future and remain cautious on the potential impact from the pandemic. Although 2021 view is still uncertain, with only two months left, we feel we can share our view of the full year 2020 results. We expect our pricing momentum in both businesses to continue into the fourth quarter and the year-over-year Drainage volume decline in the fourth quarter is expected to be less than what we experienced in the third quarter and Water volume to be about the same as we experienced in the third quarter. On the cost side, scrap prices have increased recently. And if the trend continues, we anticipate Q4 scrap costs to be higher than last year. As a result, we estimate our full year 2020 net income to be $30 million to $40 million and adjusted EBITDA to be $265 million to $280 million. In addition, we are further revising our debt reduction guidance. Our previous term loan bond trade prepayment guidance was $125 million to $175 million. With the $144 million voluntary prepayment at the end of the third quarter, we now expect the full year range to be $170 million to $185 million. So this concludes our prepared remarks. Operator, will you please open the line for questions?

Questions and Answers:

Operator

[Operator Instructions] Our first question is from the line of Rohit Seth with Trust Securities. Please go ahead.

Thomas Harry Buckley -- Truist Securities -- Analyst

Hey. Good morning. This is Tom Buckley on for Rohit. Congrats on the quarter, the price increases and the margin was really impressive there. First question, just -- I appreciate you guys think that scrap prices are going to be higher next year. But just also curious on what you think about aggregate and cement input costs going into 2021?

Karl H. Watson Jr -- Chief Executive Officer

Rohit -- I mean, Seth, did you say that we expect scrap prices to be higher next year?

Thomas Harry Buckley -- Truist Securities -- Analyst

Yes. I thought you said that in your prepared remarks that you thought [Indecipherable].

Karl H. Watson Jr -- Chief Executive Officer

No, we said that in the fourth quarter, we're still uncertain about this year, but that was the fourth quarter. As far as aggregate cement prices, if the past is the future, it does appear that aggregate prices -- we did put higher aggregate prices this year and slightly higher cement prices this year. We will not know what next year is going to look like until our negotiations start in January through April. There's different time frame for different markets. But I would expect both aggregate and cement suppliers would certainly tend to get increases, and we would certainly attempt to negotiate those increases.

Thomas Harry Buckley -- Truist Securities -- Analyst

Okay. Thanks. And then with leverage coming down at 4.2 times, looking more likely that you're going to hit that near-term target of 3.0 times to 3.5 times, how do you guys like look at capital allocation going forward maybe once you hit those targets?

Karl H. Watson Jr -- Chief Executive Officer

Well, I think we have a range of --

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Tom, I was -- yes.

Karl H. Watson Jr -- Chief Executive Officer

And the options are to continue to pay down debt. At that point in time, we look to grow inorganically through acquisitions. We're discussing that with the Board now, and we're in the milling of our planning process. When we think once we get to those levels, we will have a much clearer view of what we are intending to do, and we'll be able to communicate that more specifically and more broadly.

Thomas Harry Buckley -- Truist Securities -- Analyst

Thank you.

Operator

Your next question is from the line of John Lovallo with Bank of America. Please go ahead.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thank you for taking my question, as well. The first one on the 16% decline in Drainage shipment volume, and I appreciate the color on the weather. The question is, is the component that is weather-related directly correlated with that 11% increase in rain that you saw across your portfolio, meaning that the value strategy was attributable -- about 5% of that decline was attributable to that?

Karl H. Watson Jr -- Chief Executive Officer

Yes. I mean the rain definitely affected us and our value before volume strategy affected us. There's no doubt that we lost a little bit of share. And like I said in my remarks, that is to be expected. I think in our Water business, we executed it absolutely perfectly. And so the same strategy in Water, it's the same strategy in Drainage. But it's a little bit easier in Water. It's a national market, three competitors, whereas Drainage business is in many local markets with different competitive intensities, and many more people who have to understand it, be able to execute it properly. We -- I would say that I would give ourselves an A for effort, but I wouldn't give ourselves A for execution in that first stage. But once again, that's not to be expected, it's such a distributed market. We have made the proper adjustments. And like I said in my remarks, our backlog currently, we have both volumes and prices that are higher than where we were at last year. So I would say it's -- we didn't do it perfectly, but we did it successfully.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful.

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Hey John, you're specific about, if it was a tie to 11% precipitation increase doesn't necessarily tie out with the remainder being value before volume. It's very hard, as you can imagine, to make weather work that perfectly. We're not that good. It does go across a number of different regions. I mean that's the component Karl talked about Texas having a 43% increase in precipitation, Florida having a 56% increase in precipitation from last year. Unfortunately, it just doesn't -- it doesn't work perfectly. But I can say a significant component of that decrease in volume is tied to weather.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Would you say more of it is weather-driven than the profitable growth strategy?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

I'd say 50-50 just for -- because I don't have a better number.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Got it. Okay. And then turning to scrap for a second. In 4Q '19, and you guys touched on this briefly, but in 4Q '19 scrap fell sequentially pretty sharply. So if 4Q '20 scrap remains even at similar levels to 3Q '20, it would be up, call it, 10% year-over-year. So I'm just trying to gauge the magnitude of increase in scrap that you guys are contemplating in your 4Q outlook.

Karl H. Watson Jr -- Chief Executive Officer

We don't -- we've not actually talked about what we're actually buying scrap for, but -- or the trend. So I want to be careful not to start safer than we have in the past. But it's very similar to what the -- I think it's called #2 bushel scrap prices are from American Metals. What they're showing in trends is what we expect to pay in trends. It's not the prices that we pay, but the trends are very similar.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. And how -- lastly, how quickly does it flow through the P&L when you buy scrap at spot?

Karl H. Watson Jr -- Chief Executive Officer

We -- it probably flows through within 45 days, which is the reason why that we had to decouple our pricing strategy to our input costs. They just don't match up. We have a buy cycle that -- buy-use cycle. It's probably 45 days on average. And we have a sales cycle that can maybe stretch out to six to nine months, which is why we say that our price increases won't show up until the second half of next year.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you, guys.

Operator

And your next question is from the line of Seldon Clarke with Deutsche Bank. Please go ahead.

Seldon T. Clarke -- Deutsche Bank -- Analyst

Hey. Good morning. Thanks. Just going back to your comment on M&A and your 3.0 times to 3.5 times leverage target, could you just clarify whether you're implying that if things drift meaningfully below that level you're willing to lever back up for the right deal? Or is the goal to sort of get to that bogey and then revisit M&A? And if that's the plan, where would you be comfortable then bringing leverage in that scenario?

Karl H. Watson Jr -- Chief Executive Officer

I think in the ideal situation, and this is ideal, and nothing ever works out exactly as you plan it, we would drift down a bit below, and then we would buy stuff to be back up. I mean, we don't want to ever be where we are -- where we were, or quite frankly, even where we are today for any extended period of time. So we would like to be in that 3.0 times to 4.0 times range if we were to buy something and then lever it back down. But that's in the ideal situation. We don't ever know what's going to come to fruition, what's going to be available. And the improvements we think we can bring to a business, we may go above that for a shorter amount of time. But it is our intention to stay as a cyclical business in a lower leverage position than we have been over the last couple of years.

Seldon T. Clarke -- Deutsche Bank -- Analyst

Okay. That's helpful. And then you gave EBITDA guidance for the year and increase your expected debt repayments. Is -- could you help us just think about the bridge to free cash flow then? Is that $170 million sort of maybe the right way to think about it just based on your strategy right now to delever the business?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Yes, Seldon. So yes, all of our free cash flow at this point is being driven to debt repayment. So that $170 million and $185 million is appropriate. A couple of caveats there. As I mentioned, our CAPEX spend this year is much -- is lower by $15 million to $20 million than what it would typically be. I would also say our working capital, Karl has said it in the past, we're actually exceeding our expectations for the year. So we'll be over $30 million of benefit from working capital. So those are two big items that we've not necessarily quantified in the release before. So I just want to make sure that you capture that in your model.

Seldon T. Clarke -- Deutsche Bank -- Analyst

Okay. That's really helpful. And then just one more, if I could squeeze it in. I realize there's a lot of moving parts here. But when you take a step back and look at the relationship between volume and pricing in your Drainage business, if we just sort of assume a natural -- a gradual shape recovery in the macro from here, kind of in line with how a consensus is thinking about it, under that scenario, do you have a sense of when you think volumes could turn positive? Or maybe when you would stop seeing these sort of more meaningful double-digit declines at least? Or just some sort of sense on how the shape of the recovery will look there as pricing increases, I imagine kind of slow from this high single-digit level?

Karl H. Watson Jr -- Chief Executive Officer

So a couple of things. Clearly, there remains some tremendous amount of uncertainty in the macro-environment. So I just want to step back a little bit to tell you how we're thinking about this as it relates to volumes, but also the other things that we're looking at. We're going to continue to focus on becoming a safer workplace. Our backlog suggests stable demand in total. Both -- the backlogs in both of our businesses are at a higher level than they were last year at this time. So we think that is going to flow through in the near future. It won't be in the next quarter as this releases. But if our backlogs are higher today than they were last year at this time, it suggests that likely in the near future, these double-digit increases moderate to disappear. We see pricing momentum we will carry into next year, but not at the same pace, especially in the Water business. We have tremendous opportunities to improve our conversion cost in both businesses to help drive unit margin improvement. And we really continue to focus on our G&A productivity and believe that we can make significant improvements in that over time. The S of our business, we'll continue to make the investments in our sales force because that is so key to our value over volume execution. And we're going to be investing quite a significant amount in our technical engineering resources to promote both our ductile iron product and our concrete product. As a company, and I would say as an industry we've underinvested in this in the past. But that's sort of thematically what we're thinking about going into next year. And I know it's more than just a volume question, but I think it's important that it's a bit more than just volume as we execute on these five pillars.

Seldon T. Clarke -- Deutsche Bank -- Analyst

Understood. That's helpful. I appreciate the time. Thanks, guys.

Operator

And your next question is from the line of Mike Dahl with RBC Capital Markets. Please go ahead.

Michael Glaser Dahl -- RBC Capital -- Analyst

Thanks for taking my questions. Nice job on the continued progress on the margin front. Karl, I just wanted to follow up on the backlog comments. Could you elaborate on just order of magnitude in terms of the increases, maybe overall, but also on a tonnage basis? And remind us kind of the differences in between the two businesses of how much that backlog typically represents for you.

Karl H. Watson Jr -- Chief Executive Officer

Well, I have -- we've never really given the detail on what our backlog tonnages are. So I'm going to sort of gloss over that. But I think you asked a very good question about the backlog as a percentage of our total business. Our backlog gives us a pretty good view in our Water business about a quarter out, maybe a little bit more in our backlog in our Drainage business gives us a pretty good view, maybe almost six months out. That's just sort of the nature of it. As far as the percentage of it being up, it's in single digits on both. It's not double digits. But I'd want to shy away from the exact tonnages and what that means.

Michael Glaser Dahl -- RBC Capital -- Analyst

Okay. That's still helpful. Thanks. And then second question, just on the Drainage side. This -- yes, I know it's still -- as you phrase it Phase I in Drainage and you expect some of these dynamics. But I think it's -- it may still be a quarter or a couple of quarters into this. And it still appears like the results in 3Q deviated a little bit from expectations. So I'm curious if there's any specific area, customer issue, anything specific that you can kind of call out as, hey, this changed from a competitive or a customer dynamic? And here's what's different about 4Q or '21 that gives us that confidence in the declines easing.

Karl H. Watson Jr -- Chief Executive Officer

And that's actually a great question. We haven't seen really any changes in the competitive dynamics other than our actions and our behaviors. And we have begun to regain our position that we temporarily gave up, but we're regaining it at higher prices, and we're not seeing a big negative effect in the market. To give a little bit more color on where that happened, it was Florida for us. It was in certain markets in Texas, specifically South Texas and Central Texas, not North Texas. And some in California, but what's important -- I think it's really important in the comments, we -- anybody, in my opinion, can raise prices and lose market share. Anybody can lower prices and gain market share. That doesn't take any commercial skill. Commercial skill is being able to be a market leader and retain your share while also improving your unit margins, at least that part of the unit margins. So like I said, we give ourselves an A for effort, not really an A for execution, but -- and that's not to be expected when changing commercial capabilities are on the table when it comes to this value before volume, but we are quickly regaining what we temporarily gave up. And you'll -- yes. And this won't happen again.

Michael Glaser Dahl -- RBC Capital -- Analyst

Okay. Great. Thank you.

Operator

[Operator Instructions] And your next question is from the line of Jerry Revich with Goldman Sachs. Please go ahead.

Jerry David Revich -- Goldman Sachs -- Analyst

Good morning, everyone. Karl, I'm wondering as you look at the pillars that you outlined on your first conference call, can you talk about in what inning of the progress efforts you are across the key areas? Obviously, COVID slowed down some of the targets I'm sure that you've had. But maybe take a step back if you don't mind and give us an update on where the organization stands on the key areas that you outlined on your first call.

Karl H. Watson Jr -- Chief Executive Officer

Sure. With nine innings, it creates a lot of subtlety. So we reduced it down to a scale of one to 5, with 5 being complete and near-complete and 0 being first starting. On safety, I would say, Jerry, we're about a 2. We are making progress. We have two different businesses. Our Drainage business is much further along in the journey than our Water business. And so let's say our Water business is about a one and our Drainage business is about 4. So I guess if you're averaging, that is a little bit more than 2, but somewhere in that area. When it comes to operations, again, our Water business has -- probably has the most opportunity. I'm very excited about our Water business operationally and what is in front of us to be able to significantly reduce our conversion cost there. In our Drainage business, there's opportunity too, but we're just a bit more advanced in what we're doing in Drainage, but there's still opportunities. From enhanced commercial, I would say our Water business is 4 to 4.5, maybe even touch on 5. I mean, they -- it's actually quite stunning what they have done and the transformation they have made and how textbook they did apply the process. In our Drainage business, we still have a lot of work to do. But it's understandable. It's that many -- it's in many separate markets, that means separate people, that means separate competitive -- steps of competitive dynamics. So it's taking a bit more time. From a working capital standpoint, we've done a fantastic job here. We really have. From the 0 to 5, we're probably at about a 4. There's still improvements to be made, but they're going to be less and less over time because there's only so much working capital you can take out of the business. We still -- do still have more to do, but we've made very good progress. And I would say of our G&A effectiveness, we're probably 2-ish. I mean, we still have a ways to go. We still have three ERPs. We have a front-end system in our Drainage business, which is our highest priority right now. That is a spaghetti bowl of processes, and we have a lot of work to do there. And so I would say if I collectively put all that into place, I would say, as a company, we're probably in that 2.5 range out of 5. We still have a ways to go, which actually is quite exciting. It's quite exciting. There's a lot of stuff to do and a lot of self-help that is still in front of us.

Jerry David Revich -- Goldman Sachs -- Analyst

And Karl, on that note, obviously 2020 is the big margin enhancement year from commercial excellence. As we think about the margin opportunity in '21, are you expecting significant progress dropping down to the margin line from manufacturing efficiency gains and G&A efficiency gains? Or are those longer tail benefit that we should be thinking about?

Karl H. Watson Jr -- Chief Executive Officer

Yes. And it's -- I will say this under some macro assumptions that COVID keeps things relatively stable or doesn't cause things not to be relatively stable, we would expect margin improvement in 2021. To the extent of that, like I said, we're just going through our planning process. But we have -- we definitely have almost in hopes, not hopes. We actually have plans for operational improvements to enhance unit margins. And we do think the pricing momentum will carry over into 2021, although clearly not at the same levels as we did in 2020.

Jerry David Revich -- Goldman Sachs -- Analyst

Thank you.

Operator

And your next question is from the line of Matthew Bouley with Barclays. Please go ahead.

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Matt, are you there?

Operator

Matthew, your line is open.

Matthew Adrien Bouley -- Barclays Bank -- Analyst

Wait. Can you hear me now?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Yes.

Matthew Adrien Bouley -- Barclays Bank -- Analyst

Okay. That's odd. Sorry about that. So I wanted to ask about the revenue guide that you gave in the slide. And apologies if you had talked about it earlier and I missed it. But it seemed like there was an implication of a bit of a wide range in the fourth quarter. And presumably, weather is a natural factor when you're thinking about guiding for Q4. But curious if you could just walk us around the assumptions toward the higher or lower end of that? And I guess if you can, what you've seen so far in October?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Yes. It's not high math there, Matt. We basically took the EBITDA range and backed into what the associated volume would be. You're absolutely right, weather is a big factor for us. We always plan for the worst and hope for the best. And right now, October, it's raining outside of my window here in Dallas, so not my favorite. But I think it's safe to say that's a reasonable range given the $15 million range in EBITDA that we put out there. So I'm not trying to say too much more than that. I'd prefer not to talk about weather. I think we've had that conversation before. But it is a factor especially this time of year as to how things go across our many regions.

Matthew Adrien Bouley -- Barclays Bank -- Analyst

Okay. Understood. Thank you for that. And then second. I'm wondering if there's a way to think about kind of what happens after the big reset, which you're clearly successfully undertaking. So Karl, I guess, is the idea that at a certain point in the future, as you get past this sort of an annual inflationary type price increase? Or is it always going to be opportunistic like this? Just kind of what happens when you think you've appropriately reset your product pricing? Thank you.

Karl H. Watson Jr -- Chief Executive Officer

I think both businesses will act a little bit differently. I think the Drainage business will probably, I should say, be a bit more opportunistic on top of yearly executions. And I think the Water business ends up being a bit like the aggregate business. I mean, just steady compounding prices year after year after year. It's well-structured. It has a lot of similarities. Well, dissimilarities also, but a lot of similarities. I think one of the similarities is just what that environment will provide for the steady and compounding price increases.

Charles R. Brown -- Executive Vice President and Chief Financial Officer

One of the important things to me, Matt, is the fact that we still have, as Karl indicated in the last question, a lot of room for self-improvement on the cost side and other activities. So pricing is an important component, but actual margin expansion is certainly the bottom line view that we take, and I'm excited to see, even if we weren't successful in getting pricing, which we won't get the same type of compound growth that we've seen this year in Water. But going forward, we have other places that we can fix that continue to expand that margin.

Matthew Adrien Bouley -- Barclays Bank -- Analyst

Oh, thanks. Appreciate [Indecipherable].

Operator

And your final question comes from the line of Richard Evans with Mara River Capital. Please go ahead.

Richard Evans -- Mara River Capital -- Analyst

See in the G&A cost reduction as you --

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Richard?

Richard Evans -- Mara River Capital -- Analyst

Hello?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Sorry, you just -- we -- the start of your question.

Richard Evans -- Mara River Capital -- Analyst

Hi. I was just wondering if you could give some guidance around the sort of long-term cost opportunity on the G&A side. If you fast-forward several years and you're in a world where you've got one ERP system, and everything is working, how much cost do you think you can take out of that G&A line if you're in your sort of optimal setup? And I guess, secondly, what's the cadence of getting there?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Sure. Tough question, but I will give you my best shot at it. First off, G&A is a simple number for me because Karl has told me you can't go any higher than this. So it will be on a percentage basis less as we grow the business. As far as removing cost, you can imagine, multiple ERPs that we pay a lot of money on and IT staff that supports it, our audit staff -- our audit -- the external auditors who cover it. So there's a pretty sizable number there. And it's -- it would be hard for me to quantify that on this call, but I would say it is -- it's several -- maybe $5 million to $10 million, let's say, as we continue to grow the business. As we turn that around and we talk about cadence, the ability to remove systems, it costs money if you rush it. So we are trying to do that very thoughtfully. Karl talked earlier about our front-end system. We're trying to fix the pieces that create the most challenges right now and add the most G&A. So I see lots of opportunities. I wouldn't want to quantify beyond what broad general terms, yes, it could be as much as $10 million right now. I hope we can do better than that. But I also hope that we'll be growing the business and supporting that growth business with better information faster and at a less expense. So something we're certainly focused on and we'll continue to show improvement in these reports.

Richard Evans -- Mara River Capital -- Analyst

Okay. Great. But I mean, is it sort of a 2- or 3-year process to move down? Or is it more like a 5-plus year process to do it properly?

Charles R. Brown -- Executive Vice President and Chief Financial Officer

I don't think Karl has more patience than 2- to 3-year, and I'll push him on that. But yes, in that shorter range.

Operator

I'm showing no additional questions in queue. At this time, I would like to turn the conference back over to management for closing remarks.

Karl H. Watson Jr -- Chief Executive Officer

Thank you, operator. We're pleased with the results we announced today. However, we realize there's still so much more to do on our five improvement pillars. And Charlie and I would be remiss if we do not end the call as we began it by thanking all of our fellow team numbers. Their continued belief in the company and what it can achieve is inspiring to us both. So thank you. It's a pleasure to be with you all. We look forward to our next call in 2021. Have a good day, and more -- most importantly, stay safe. Take care. [Operator Closing Remarks]

Duration: 43 minutes

Call participants:

Simon Chen -- Vice President, Treasury, Investor Relations and FP&A

Karl H. Watson Jr -- Chief Executive Officer

Charles R. Brown -- Executive Vice President and Chief Financial Officer

Thomas Harry Buckley -- Truist Securities -- Analyst

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Seldon T. Clarke -- Deutsche Bank -- Analyst

Michael Glaser Dahl -- RBC Capital -- Analyst

Jerry David Revich -- Goldman Sachs -- Analyst

Matthew Adrien Bouley -- Barclays Bank -- Analyst

Richard Evans -- Mara River Capital -- Analyst

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