Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Training Systems' third quarter fiscal 2021 results conference call. My name is Tammy, and I am your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Thank you, and good morning. Thanks, everyone, for joining us today. With me, I have Scott Barber, our President and CEO, and Scott Cottrell, our CFO.

I would also like to remind you that we will discuss forward-looking statements Actual results may differ materially from those forward-looking statements because of various factors, including those discussed in our press release and the risk factors identified in our Form 10-K filed with the SEC. While we may update forward-looking statements in the future, we disclaim any obligation to do so. You should not place undue reliance on these forward-looking statements, all of which speak only as of today. Lastly, the press release we issued earlier this morning is posted on the investor relations section of our website. A copy of the release has also been included in the 8K submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. With that, I'll turn the call over to Scott Barber. Thanks, Mike, and good morning, everyone. Thank you for joining us on today's call. We delivered another quarter of record financial performance in the third quarter of fiscal 2021. Sales grew 24% year-over-year, driven by 17% non-residential sales growth and 36% residential sales growth as we continued to execute at both ADS and Infiltrator in a favorable demand environment. In fact, sales across each of our end markets increased double digits in the quarter. It was very encouraging to see the demand in our non-residential in-market increase 17% this quarter. We continue to benefit from growth in horizontal construction, such as warehouses, distribution centers, data centers, and developments that follow the residential build-out. There was continued strength in the regions we have experienced growth this year, such as the Atlantic coast and southeast. And we experienced a rebound in regions that have been softer this year, like the Northeast and Western United States. In addition, allied product sales in the non-residential market increased 23%, giving us confidence in the underlying market strength. We also continue to experience strength in our residential market with 36% growth in the quarter driven by favorable dynamics and new home construction, repair, remodel, and onsite septic accelerated by the material conversion strategies at both businesses. Our indicators are showing that home builders continue to acquire land for future development and that there's an overall shortage in available homes, which bodes well for both the front end, new community development stage with ADS, and at the home completion stage with on-site septic at infiltrator. The retail market, which is roughly a quarter of our residential sales, continues to experience strong growth as well with the continued strength in remodeling and home improvement. Sales in the agriculture market increased 33% this quarter, driven by the programs we put in place around organizational changes, new product introductions, and improving execution, as well as favorable weather and market dynamics. These dynamics are being driven by favorable indicators such as higher farm income and strong crop pricing, which is leading to farmers to invest in land productivity through better field drainage. Improving field drainage is a low risk, proven method of increasing per acre yield for farmers. International sales also increased 18%, primarily driven by double-digit growth in our Canadian business, which represents about 70% of the international revenue. Canada is doing well across both the construction and agriculture end markets, with similar market trends to the United States. Additionally, this quarter, we were able to leverage our pipe manufacturing facilities in Mexico to help service the strong demand we experienced in the United States. We expect a slower recovery from the COVID-19 pandemic in our Mexico and our export businesses, but these markets will recover and return to growth. Finally, Infiltrator continues to exceed expectations with 37% sales growth in the third quarter. Infiltrator continues to see double-digit growth in tanks and leach fuel products with strong growth in Georgia, North Carolina, Florida, and Tennessee, among other states. This was led by their material conversion strategy of displacing concrete septic tanks with plastic tanks and the economic advantages of septic chambers in leach field systems. Moving to our profitability results, we achieved another quarter of record adjusted EBITDA during the period. Adjusted EBITDA margin increased 540 basis points overall in our first full quarter of comparable results from the infiltrator acquisition. The increase in profitability in both businesses was driven by leverage from the strong sales growth, favorable pricing and material costs, as well as contributions from our operational productivity initiatives. In January, we hosted a well-attended ADS distributor conference to touch base with our partners and outline how we are thinking about the business moving forward. We have many new faces and roles among our senior leadership team, and with that comes new focus programs to build on the ADS value proposition, including the service component of our business. The ADS value proposition includes not only the products we design and manufacture, but It includes the delivery and design services led by the logistics and transportation we provide to our distribution partners and customers. This speaks to ADS's unique model as not just a pipe manufacturer, but also a large, specialized logistics and transportation company. We are committed to investing in the people, processes, technology, and fixed capital to deliver on customer expectations and increase capacity to meet our customers' needs. We also talked to our customers about the new ADS brand and our digital marketing initiatives. You may have noticed we updated the ADS logo and are in the process of rolling out our refreshed brand to encompass the progress we've made over the last several years. Our new brand identity not only visually updates the look of ADS to reflect who we are as a company today, it reflects where we are going. Our products and services platform, sustainability initiatives, and community involvement all drove the new brand look and tagline, Our Region is Water, setting the tone for our updated mission and values, which will be rolled out over the next several months. Looking forward, we believe the demand environment in calendar 2021 will look similar to what we experienced overall this past year. We are certainly fortunate that as part of the construction industry supply chain, we could manufacture and ship our products over the last 12 months without significant interruption. My observation is that the construction industry, including the manufacturing, distribution, and contractors, weathered the pandemic and related economic disruptions better than many parts of the economy. We will continue executing on our material conversion and water management solution strategies in what I expect to be a favorable demand environment, benefiting from our national presence as well as our favorable geographic focus and in-market exposure. Our confidence in these favorable trends is supported by the strength of our order book, our project tracking, the book-to-bill ratio, and the backlog. While we have some cost headwinds coming at us in the fourth quarter, including inflationary costs such as materials and transportation, we are confident we will be able to offset them through favorable pricing, level loading at our facilities, operational productivity initiatives, our recycling programs, and the capital deployment initiatives. In summary, we did a great job executing this quarter, and we look to build on our strong market position execution and new levels of profitability going forward i want to thank our employees without whom our success would not be possible we will stay focused on employee health and safety and delivering on the needs of our customers as we look ahead we are well positioned to capitalize on residential development and horizontal construction while continuing to generate above market growth through the execution of our material conversion and water management solution strategies We will remain focused on disciplined execution as we look to close out on a very strong 2021. With that, I will turn it over to Scott Cottrell to further discuss our financial results. Thanks, Scott. On slide six, we present our third quarter fiscal 2021 financial performance. I'll be brief on this slide. Scott has already covered a lot of the details here, but I want to reiterate a few key points. The very strong 24% revenue growth we reported this quarter was driven by both volume and pricing, as well as strong growth across both our ADS legacy and Infiltrator businesses, as well as in each of our end markets and product applications. The demand environment for our products remains strong, and we expect the strength to continue as we move forward into calendar 2021. The 52% growth in consolidated adjusted EBITDA was driven not only by this strong top-line growth, but by favorable material costs, operational efficiency initiatives, as well as our synergy programs. Finally, we continue to monitor our costs and are committed to offsetting increases that materialize through a combination of pricing as well as operational and productivity initiatives, and continue to look to expanding margins year over year as we move forward. Overall, we are very well positioned to leverage the favorable demand environment anticipated due to our market-leading position, national relationships, breadth of product and services, as well as our geographic and end-market diversity. Moving to slide seven, our year-to-date free cash flow increased $141 million to $391 million, as compared to $250 million in the prior year. These impressive free cash flow results were driven by our strong year-to-date sales growth and profitability, as well as execution on our working capital initiatives. Our working capital decreased to 16% of sales, down from 19% of sales last year. In addition, we ended the quarter in a very favorable liquidity position, with $224 million of cash and $339 million available under our revolve. involving credit facility, bringing our total liquidity to $563 million. It is also worth noting that our trailing 12-month leverage ratio is now 1.1 times. Given our strong balance sheet position, capital deployment remains one of our top strategic initiatives. Our first priority continues to be investing organically in the ADS and infiltrator businesses to support growth, innovation, productivity, safety, and new product development. M&A is our next priority. We remain very focused on following our disciplined acquisition process as we move forward into calendar 2021. Finally, on slide eight, we increased our revenue and adjusted EBITDA guidance ranges for fiscal 2021. Based on our performance to date, order activity, backlog, and current market trends, We currently expect net sales to be in the range of $1,915,000,000 to $1,950,000,000 representing growth of 14% to 17% over last year. Adjusted EBITDA to be in the range of $550,000,000 to $565,000,000 representing growth of 52% to 56% over last year. And we expect to convert our adjusted EBITDA to free cash flow at a rate of greater than 60% for the full year. With that, I'll open the call for questions. Operator, please open the line.