Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to the Advanced Drainage Systems third quarter fiscal 2022 results conference call. My name is Katrina and I will be 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. If you have a question at this time, please press star and then the number one key on your touchtone telephone. 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.

Good morning, everyone. I'm here today with 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 an 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.

Thank you, Mike, and good morning. And thank you all for joining us on today's call. We achieved a record $715 million in sales in this third quarter, an increase of 47% compared to the same period last year. Sales growth was driven by both pricing and volume at ADS and Infiltrator. Construction market pipe volume increased double digit in the third quarter, with particular strength in the non-residential new residential, and infrastructure in markets. Agriculture sales were down just slightly, driven by the strategic decision we made earlier this year to serve as commercial markets in areas where we experienced material and labor shortages. This came at the expense of growth in the agriculture market, but importantly, we achieved favorable pricing in this market. The material availability issues are now behind us, and we can again begin to start the work of growing our agriculture market share as we successfully did in FY20 and FY21. Infiltrator sales increased 51%, primarily due to favorable pricing as well as a slight volume increase with strong growth in the southeast and southern regions of the United States. Roy Moore and the entire team at Infiltrator are doing a great job managing record levels of demand and working through material price and availability issues while achieving record production levels in their factories, installing new capacity, and executing the jet polymer acquisition this past quarter. Additionally, international sales increased 23% this quarter with growth in each of the businesses, Canada, Mexico, and exports. Not only were we able to execute price and volume gains in these markets, but we also began importing large volumes of pipe products into the northeast from Canada and into Texas from Mexico to improve service levels to customers and reduce our backlog levels. This past year is the first time ADS has meaningfully used these international facilities at scale to supplement domestic production for U.S. customers. This is a competitive advantage for ADS and demonstrates the scale and capacity we can bring to our distribution partners and customers. I want to take this opportunity to also thank the ADS and Infiltrator employees for their outstanding work in a really challenging environment. The majority of our employees are in manufacturing, transportation, and sales roles. I cannot say enough to give credit to these folks executing at a high level in this environment of dynamic price situations, high production rates, and high rates of transporting our goods while dealing with all kinds of disruptions and labor shortages. Our backlog and pace of orders remain favorable, as well as our ability to capture price in the market, which gives us confidence in the updated sales targets we issued today. Overall, the demand environment remains very favorable, and our leading indicators point to continued strength for the foreseeable future. To that end, we have continued to invest in expanding our capabilities, with production capacity coming online at both ADS and Infiltrator this fourth quarter. The new equipment will modestly benefit production in the fourth quarter, with a larger impact that will be realized in FY23. The infiltrator capacity comes online, will have a more significant immediate impact, and these investments will allow us to bring down the high levels of backlog, build back inventory levels, and service the strong demand we see in our end markets, particularly in the key growth regions like the southeastern United States. Moving to profitability, our adjusted EBITDA increased 27% this quarter. we realized the full benefit from price increases implemented over the last several quarters covering inflationary pressure costs on materials, transportation, and labor. This quarter, we faced many of these same challenges around labor shortages and elevated transportation costs. I want to note that the second half plan for increased profitability over prior year that we shared in November is right on track with what we communicated. The price levels have caught up with the inflationary pressures, and we have line of sight on the year as we have consistently communicated and reflected in our guidance ranges. We took actions this past summer to simplify the production processes, reduce our SKUs, decrease changeovers, all to increase our production rates, and these programs are working as we anticipated. Compared to previous quarters, availability of raw materials has normalized, though material costs remain a little elevated overall. We are beginning to see some modest relief in material pricing as resin supplier inventories rise and availability is robust. However, within the manufacturing organization, we were unable to consistently operate all our production lines we wanted to run due to open production positions and absenteeism. This trend continued in January, though we did see modest incremental improvement as we went through the month. So I want to turn to some other recent announcements that we've made. In January, we issued our third annual sustainability report. Sustainability is a core part of ADS. Our reason is water. We protect and manage water, the world's most precious resource, safeguarding our environment and communities. And as the second largest recycling company in North America, we are committed to advancing quality of life and sustainable solutions to water management challenges. This year's report includes 10-year company-wide sustainability goals, including our commitment to science-based targets to reduce our greenhouse gas emissions. In this report, we furthered our commitment to reducing our environmental impact, enhancing the safety of our people, creating a diverse, inclusive, and equitable workforce, and improving the communities we touch. Through these new goals, we will reduce our absolute greenhouse gas emissions by over 40% for our baseline year, while simultaneously increasing our use of recycled plastics by nearly 100% over this same time period. Additionally, in December, we announced the acquisition of Jet Polymers, further demonstrating our commitment to recycling and strategic M&A, Jet Polymers is the largest supplier of recycled polypropylene to the infiltrator business. Through this acquisition, we will gain access to more recycled material to support the growing business in the southeast, plus diversify and gain scale in the polypropylene materials for the company. Finally, today we made two additional really important announcements. First, this week our Board of Directors passed a resolution that will ultimately lead to the final allocation of the remaining ESOP shares to the participants. The company contributed $325,000 to the ESOP to enable the ESOP to repay the remainder of the loan one year ahead of the ESOP expiration date in March of 2023. Scott Cottrell will discuss some additional information on the ESOP in a moment, but to me there are three key takeaways. Preferred shares in the ESOP will convert to approximately 12 million common shares in April. After this event, participants will be able to diversify and manage their retirement accounts, more like a typical 401k plan. And third, this transaction does not impact our adjusted EBITDA or free cash flow and is accretive to EPS beginning next year in FY23. Second, today we announced that the Board approved a new $1 billion open market multi-year stock repurchase program. This is the largest repurchase authorization we have announced to date. Recall that we executed a 292 million share repurchase in the May to August timeframe this year, and we plan to execute this program over time without hindering our ability to allocate capital to our top two strategic priorities, investing organically in the business to drive growth, productivity, safety, and automation, as well as to make strategic acquisitions. The strength of our balance sheet, our operational excellence initiatives, and cash generation profile of both ADS and Infiltrator give us confidence in executing our capital deployment priorities. This year, we nearly doubled our capital spending to $130 to $150 million, executed on the acquisition of Jet Polymers, increased the dividend by 22 percent, and executed a $292 million of share repurchases. So, before I turn that call over to Scott, this call over to Scott, I'd also like to announce we're hosting an Investor Day on March 10th in New York. The event is available in person and virtually. We will issue new three-year targets do a deep dive on the infiltrator business, and give updates on our sustainability, sales, and operations programs. If you have any questions about the event, please reach out to us through our investor relations team. With that, I'll turn it over to Scott to further discuss the financial results.