This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Thank you for your patience. The advanced drainage systems first quarter fiscal 2023 results conference call will be starting in a few minutes time. Thank you for your patience. And if you'd like to ask a question today, please remember that is star followed by one on your telephone keypads. Thank you. © transcript Emily Beynon Thank you. Good morning, ladies and gentlemen, and welcome to Advanced Training Systems First Quarter Fiscal 2023 Results Conference Call. My name is Brika 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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. And for operator assistance at any time, please press star zero. I would now like to turn the presentation over to your host of today's call, Mr. Mike Higgins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.
spk08: Thank you. Good morning, everyone. Thanks for joining us today. With me today, 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 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.
spk04: Thank you, Mike, and good morning. Thank you for joining us. on today's call. We achieved a record $914 million in sales in the first quarter, an increase of 37% compared to the same period last year. Sales growth was primarily driven by strong demand across our geographies and construction in markets supported by continued strength in our priority states. We saw attractive volume growth in Allied Products, Infiltrator, and within our residential in-market driven by share gains from our storm sewer pipe and on-site septic products. Pipe volume in our non-residential and agriculture end markets started slower than anticipated due to a wet spring for agriculture, job site delays, production limitations, and difficult comps relative to the last year. However, volumes improved month over month through the end of June and into the second quarter. In working closely with our distribution partners, engineering partners, and contractors to monitor market demand, we collectively remain bullish on activity through fiscal 2023. Infiltrator sales increased 31%, driven by favorable pricing and strong volumes of septic tanks and storm tech chambers. Growth was strong in the southern and western regions of the U.S. The new production equipment installed during the fourth quarter of fiscal year 2022 at both Infiltrator and ADS is producing to expected rates and helping to bring down elevated backlogs. Although housing growth has slowed from the previous levels, Infiltrator has a good line of sight and continued, if somewhat moderated, growth for the remainder of fiscal 2023, given its healthy backlog and the impact of new capacity additions that will accelerate share gains. Looking beyond Infiltrator into the legacy ADS residential business, performance was strong overall. ADS residential sales increased 62% compared to the first quarter of fiscal 2022. Growth was robust in both our residential segments, with growth related to single-family and multifamily development increasing 75% year-over-year, led by share gains against traditional materials, pricing, and demand in single-family subdivision development and multifamily development. Our retail segment increased 40%, primarily driven by pricing. We continue to see a strong pace of orders and sales in the residential end market and are closely watching our leading indicators with the uncertainty that exists with forward-looking housing construction. We also continue to see strong growth in our non-residential end market. Revenue growth through the quarter was 47% and driven by strong sales of pipe and allied products. specifically our StormTech and Myloplast product lines. Project identification, quoting, and order activity remains positive in the horizontal, low-rise type of non-residential projects we participate in, including warehouse, distribution centers, commercial, and institutional projects. Rounding out our top-line performance, international sales increased 9% this quarter, driven by sales growth and our Mexican and exports businesses. Moving to profitability, our adjusted EBITDA increased 80% this quarter. Favorable pricing continued to cover inflationary cost pressures on transportation and labor, as well as raw material costs, which have moderated but remained elevated as compared to previous years. This is our third consecutive quarter, dating back to Q3 of fiscal 2022, that we have covered inflationary cost increases, and the second consecutive quarter where we have experienced year-over-year adjusted EBITDA margin improvement. Overall, our backlog and cadence of orders remain favorable, as well as our ability to capture price in the market. While there is uncertainty around the current macroeconomic environment, especially in residential construction, the momentum we are seeing in project identification, quoting, book-to-bill, and order trends gives us confidence in our ability to achieve the updated guidance we issued today. Now I want to highlight some other recent announcements. The integration of our two recent acquisitions, Jet Polymer and Caltech, are progressing well. Integration activities remain on plan and both businesses are meeting expectations. As previously announced in May, Bob Kidder retired as Chairman of our Board of Directors effective as of our annual shareholder meeting on July 21st, 2022. Bob Ebersole was previously selected and announced as the new chairman of our board of directors in May and was reelected as a director at our annual shareholder meeting. I'm excited to continue working with Bob as chairman as we execute on the growth strategies of ADS. We also elected Kelly Gast to our board of directors at our annual meeting on July 21, 2022. Kelly brings broad financial experience from her leadership positions at Bayer, as well as business strategy and commercial expertise. Her capabilities strengthen our board, and we look forward to working closely with her going forward. Lastly, we issued our fiscal year 2022 sustainability report this week. Sustainability is a core part of ADS, and we are pleased to share how we are furthering 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 in this report. With that, I will turn the call over to Scott Cottrell to further discuss our financial results. Thanks, Scott.
spk03: On slide five, we present our first quarter fiscal 2023 financial performance. From a top-line perspective, we generated significant growth year-over-year across our business. Legacy ADS pipe products grew 36%, allied product sales grew 54%, and infiltrator sales increased 31%, with double-digit sales growth across our domestic construction and markets. Consolidated adjusted EBITDA increased 80% to $299 million, resulting in an adjusted EBITDA margin of 32.7% in the quarter. As Scott mentioned, favorable pricing continued to cover inflationary cost pressures related to our material input costs, transportation, and labor. As we do not expect these cost pressures to abate this year, we will continue to work all of the levers in our playbook, in addition to pricing, to improve efficiencies and optimize costs. From a resident perspective, costs have moderated a bit, but they remain at elevated levels from a historical perspective. Price cost continues to be favorable due to the pricing actions we've already taken, And as we move through the year, we expect price costs to remain favorable. Moving to slide six, we generated $214 million of free cash flow year to date, compared to $79 million in the prior year. Strong growth in adjusted EBITDA, coupled with improvements in working capital, helped drive significant free cash flow generation, which was approximately 71% of our adjusted EBITDA for the quarter. Our year-to-date capital spending increased 42% to $36 million as we continue to make investments to grow capacity and increase the efficiency of our operations. From a capital allocation perspective, our priority remains focused on investing organically in the growth of our business to increase our competitive position and accelerate market share gains. For the full year, we continue to expect between $150 million and $180 million in capital expenditures, with the largest investments focused on future growth, followed by our productivity and automation initiatives. In addition, we are monitoring our acquisition pipeline to identify opportunities that fit within our solutions offering, strategically increase our pipe capacity, and grow our recycling capability to support the growth of the business. Lastly, we continue to opportunistically buyback shares as part of our share repurchase program. In the first quarter, we purchased 800,000 shares for a total of $67 million, and as of this call, that number now stands at approximately 1.4 million shares for $125 million in total, leaving $875 million remaining on our previously announced $1 billion share repurchase program. From a balance sheet perspective, in May, we increased our revolving credit facility from $350 million to $600 million. And in June, we issued $500 million of six and three eighths senior unsecured notes due in 2030. We issued a portion of the proceeds. We used a portion of the proceeds to repay the outstanding borrowings under our senior secured revolving credit facility. These actions provide us with flexibility and allow us to operate effectively in various economic conditions. Overall, our liquidity and leverage position remains strong with over $1 billion of liquidity and a trailing 12-month leverage ratio of 1.1 times. Moving on to slide seven, we are raising our fiscal year guidance for both revenue and adjusted EBITDA. Net sales are now expected to be in the range of $3,250,000,000 to $3.35 billion. An adjusted EBITDA is expected to be in the range of $900 million to $940 million. While there is uncertainty in the market, particularly in residential construction, the strength we are seeing in our leading indicators, including project identification, quoting, book to bill, and order trends, give us confidence in the updated guidance we are issuing today. Our updated guidance reflects the better than expected performance we delivered this quarter and anticipates that these favorable performance trends continue into the second quarter, but leaves the second half expectations from our prior guide unchanged for now. As always, we will continue to monitor the market environment and our leading indicators, and we'll make adjustments, if any, to our outlook as and when appropriate. With that, I will open the call for questions. Operator, please open the line.
spk00: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star two. Please stand by whilst we order today's queue. The first question we have comes from Matthew Bowley of Barclays. Your line is open, Matthew.
spk07: Hey, good morning, everyone. Thanks for taking the questions. So a question on that, I guess, last point you made there, Scott, it sounds like the second half expectations haven't changed in your, you know, basically what you saw in Q1 and to date in Q2 is, you know, I don't want to put words in your mouth, but it sounds like that's the bulk of the change. Can you maybe sort of bridge from the prior guide to the new guide, just in terms of the components around volume, you know, price over cost, sort of what's coming in, you know, better than what you expected versus the prior guide. Thank you.
spk03: Yeah, Matt, Scott here. I think if you look at the EBITDA bridge in the earnings presentation for the first quarter, it gives you kind of that sense of the trends that we're seeing. Again, as we've often talked about, we have really good visibility as you go out three plus months. So, Really, as we looked at kind of the guide and the performance, we kind of looked at, again, that first quarter performance that we had, those favorable trends, kind of what we're seeing through July into the second quarter. And then right now, we felt it prudent just to leave the second half consistent with our initial expectations. So again, a little bit of wait and see there. But again, some very favorable trends that we're monitoring as we go through. I think it's important to highlight again, price cost. We see that covering. that as we go through the entire year, quarter over quarter. I'm sorry, year over year as we do that. So again, I think those dynamics prove out. And remember, the second half of the year, the comps get a lot more difficult as we go and still dealing with some of the labor, transportation, and manufacturing costs as we look through kind of those trends in the back half. But again, very favorable trends, line of sight, and kind of just leaving it for kind of a one H two H look right now.
spk07: Got it. No, that's, that's really helpful. Thank you for that color. And second one, just taking a step back on sort of the longer term profitability. So now, I mean, you're guiding this year to, you know, 350 basis points of margin improvement at the, at the midpoint. And, you know, the long-term guide was, I believe 400 to 500 basis points. So just, just given where the, I guess, starting point is this year, you know, does that at all change sort of the longer-term view to margins, you know, and or is there any more perhaps price-cost tailwind that, you know, is now showing up relative to, you know, what was in that prior long-term guide? Any kind of thoughts on that would be great. Thanks, everyone.
spk03: Yeah, Matt, Scott here again. You're correct. If you remember Investor Day for three years, the plan horizon that we put out there, we did say 400 to 500 bps margin expansion. We did talk about the opportunity for that to be more front end loaded. then back end loaded. And that's what we're seeing right now. So are we ready to kind of call the ball and basically say that we'll overshoot those numbers? We'll wait as we go through the year and issue next year's guidance and so forth. But suffice it to say, the management team is very happy with the trends and performance that we see.
spk04: So I'll just leave it at that. Scott Barber here, Matt. I would just say it's the first quarter of the first year of that plan. So I'm kind of not ready to do that. But I do recall this conversation in the past where we said it would be a front end loaded potentially. And we kind of had some line of sight on that price cost as we came out of last year. We didn't think it would be to this magnitude. But we did have an idea that we could front-end load that, which we view as good, front-end getting ahead of the plan.
spk07: Absolutely. All right. Well, thank you both, and good luck in the next quarter.
spk02: Okay. Thanks.
spk00: Thank you, Matthew. The next question comes from Michael Halloran of Beard. Your line is open.
spk05: Hey, good morning, everyone. So not to belabor the front half, back half thing, because I certainly understand the messaging. But on the margin side, obviously exceptional margins in the quarter. You know, you run right those margins out and you get something meaningfully ahead of where you are right now from a guide perspective. Certainly understand the conservatism part. And so maybe the way I'll just ask it is, is there anything in this quarter that you thought was, one time in nature, not sustainable, that shifts on a forward basis. I certainly understand all the price-cost commentary you've been making, Scott. So is there anything else in there I should be thinking about? Good morning, Michael.
spk04: Scott Barber here. No. There's nothing extraordinary that occurred there. It was a good quarter. I think we said it in the commentary, but as we got through the quarter, it got better So kind of the volume got better, the leverage got better, our performance, you know, particularly in deliveries, got better. We're really delivering a lot better for our customers than a year ago. But there was no kind of one-timers or a big job or anything like that that we would point towards in there.
spk05: That makes sense. And then from a capacity perspective, Obviously, you're doing more work on the Infiltrator campus right now. On the legacy side, do you think the capacity is at the point where you're meeting that underlying volume, or do you think there's still some more catch-up to do to be at that, you know, I wouldn't call fully optimized because that's a journey, but, you know, towards something a little bit more optimized? And also, I might have missed this. You might have said it. Were volumes positive in the quarter on the legacy side? Any thoughts on that side?
spk04: So, Scott Barber here again. Boy, the work at Infiltrator is going great. I mean, the equipment there has meaningfully impacted the Allied product and the Infiltrator tank sales. The new equipment in the legacy business is performing well, but you are correct in that there is additional capacity needed outside of just the southeast and the eastern seaboard where most of that new pipe equipment went, that would allow us to get volumes up better or more aligned with when the customer wanted it. So I kind of think of it as like peaking capacity of pipe. And our ability to kind of produce that more on demand is something we can improve upon. will be further investments, gives us upside potential, you know, as we go forward. Is that kind of, I think that was the question. Did I get it?
spk05: Yeah, no, it was the tail end I added at the end. Remind me if volumes were positive in the quarter or not.
spk04: So pipe volume is positive in everything but the retail shipments and the agriculture shipments.
spk03: And the Allied products were positive. And the Allied products were very positive. Diffiltrator and Allied were positive.
spk04: And that small negative of $3.3 million in the bridge is really driven by a wet spring, which impacted agriculture, some northern markets of non-res, and we saw that recover late in the quarter and in July.
spk08: Yeah, that year-over-year column is pretty good, too. We had a really good April last year. Yeah, April and May. And, Michael, it's Mike Higgins. I go back to the comments made in the opening commentary. You know, as we went through the quarter, the year-over-year volume performance improved. Right. And we saw that trend continue in the month we just completed, July.
spk05: So that's a good segue to the next question, then. So the... leading indicators that you guys talked about um obviously part of it is the trend you're seeing through this july time period but maybe just a little more depth on what you're seeing on the leading indicator side why the confidence of the year is this what you're booked already customer conversations with the distributors are saying any more detail on that would be great scott barber here again um so the way we look at that is uh we look at um
spk04: When we start working with a contractor or developer on a project that's a project formation, we then quote that job, we then take an order on that job, and then we ship it within 30 to 60 days. And all of those are up positive year over year. And I'm talking about the pipe side right now, which is driving the allied products, which is driving the residential pipe, which is driving the non-residential pipe. In addition, the agriculture segment is going to be pretty good. We saw good order increases in that over the last 30, 60 days, and that'll mature in October, November. At Infiltrator, the order pace has flattened out. We're still working off of a pretty good-sized backlog. And, you know, we don't think that kind of manifests itself into a headwind until we get into next fiscal year. So we're mindful of it. We're watching it. But, you know, it's too early to call. And right now we're very confident that let's call that residential piece tied to starts and completions that drives the onsite septic. you know, it's right on plan. I mean, it's falling right in there nicely where we want it to, and as Roy and the team have said it would.
spk05: Great. Really appreciate it. Impressive quarter, guys. Thanks, Michael. Thanks.
spk00: Thank you. The next question comes from Josh Okolinski of Morgan Stanley. You may proceed with your question, Josh.
spk06: Hey, good morning, guys. Good morning. Hey, Josh. Scott, just first question on, you know, kind of how you're shaking out price-wise in the marketplace. Obviously, you're not really competing a lot with, you know, with other folks who have residences and input. So price drops is good, but maybe relative to some folks who are looking at it a bit differently. How would you square up, I guess, particularly in the pipe business, you know, how do you see that relative price today? And, you know, how has that trended over the last, you know, maybe quarter or two?
spk04: Sure. So our relative price for the pipe products continues to go up. And this is really the pricing work that we started a year ago and consistently kind of went through the year with price increases a year ago. We had a price increase in March also that stuck. That one was largely based on elevated diesel and transportation costs. So, you know, it's still – we're still kind of getting some of the benefits from that, Josh. That levels off as we go through the year, you know, in this plan. Not that we're not taking pricing down. It's just, you know, we're not further increasing the prices unless something happens, and we feel we need to go do that. We also believe we remain very competitive with traditional materials. You know, I think perhaps – And we've talked about this in the past, that they were a bit behind in catching up with their inflationary input costs. So they've been raising prices pretty aggressively. I think you guys have probably all read and seen that in other guys related to the industry. And we believe that's helpful to us continuing to maintain our pricing in the market or do what we have to do to cover our costs and pressures. But we punched and probed on that a lot of different ways, and we feel very good about where we are right now on our price levels and our ability to be competitive and win what we want to win in the market.
spk06: Got it. That's a good segue to my next question is, obviously, you guys are benefiting immensely right now from what's going on on price-cost and the good volume and all that kind of stuff. The, I guess, mix within that what's the aperture or appetite to maybe realize less of that margin benefit and go out there and try to take more share? Like, how do you balance that? And is there any, is there any toggle that you guys are thinking about?
spk04: Yeah, there is a toggle there. Absolutely. There's a toggle there. But, and I would say right now, we think that toggle is appropriately set. And we are gaining, you know, gaining in areas where we have available capacity. Think of our focus states. And we might talk, well, honestly, we haven't had to toggle the pricing much to go win what we want to go win. But I would say that versus a year ago, Josh, where we were actively staying on the sidelines, particularly in the agriculture market, Because we didn't have material. We didn't have capacity. We are not in that situation now. So if we think we want to toggle to get something, we'll do it. But we're not going to do it to the extent where we compromise this bridge on a price-cost right now.
spk08: I would add one comment to what Scott said. Yeah, I was going to say... you know, versus using pricing as a toggle. I think what we've kind of learned through the demand environment with the strong demand and these inflationary cost pressures is you can get share by improving service and availability. That's a good point. Just as easily as you can with price. So I think really what we've been focused on so far is let's not use price to do that. Let's just be better value proposition in the market versus who we're competing against.
spk06: Yeah, makes sense to me.
spk04: That's clearly what we've done in agriculture. Clearly what we've done there where we, like I said, we really haven't had to toggle much, if at all, and use better inventory builds, better quality of inventory, our production planning processes. Our fleet guys are doing a great job right now, upturning our fleet capacity and multiple runs in a day to service the agriculture market. I mean, it's astounding the number of trucks we're rolling every day right now. So That's a very good point, Mike. Thanks.
spk00: Thank you. As a reminder, if you would like to ask any further questions, please press star followed by 1 on your telephone keypad. We now have the next question from the line of John Lovallo of UBS. Your line is open, John.
spk01: Hey, good morning, guys. This is Spencer Kaufman on for John. Thank you for the questions. Maybe the first one, just piggybacking off of Josh's question there, you guys have obviously put through a tremendous amount of price into the market. I'm just curious what your current realization on price increases is and what was this, you know, in a pre-COVID world? How much more price season do you guys get and what typically happens to price in a deflationary environment? Go ahead, Scott.
spk03: Yeah, so, again, as you look at our EBITDA bridge and you see that volume is Again, different based on the different segments we have allied and infiltrator up, pipe down, but still getting a lot of pricing year over year. We look at it sequentially as well as that year over year trend. So again, I'll answer the last part of your question first. You know, when you go back and look, I've been here seven years. I've been in, you know, different resin environments, resin going up, resin going down. ADS consistently holds that spread, if you will, and holds that pricing. So I would tell you that, again, it's going to be market dynamics. We'll continue to look at it. And it's the value proposition. Everybody always defaults to resin. It's much more than that. It's transportation. It's labor. It's that value proposition. And as Mike and Scott were just talking about, That ability to serve and that availability of product in the right place at the right time, it's such a regional business. That all matters so much. So when you talk about pricing and keeping it, it's much more than just talking about resin. So the history of the company proves out that we can keep that pricing as we move forward and that spread, if you will. And we're highly confident as we move forward. We talked in our prepared remarks. about that price cost being favorable in the first quarter and the fact that we see it being favorable as we move through the rest of the year. So a high confidence level there. Again, it's a key part of our playbook, if you will, but we're also not letting up on productivity initiatives, CI initiatives, lean. The capacity that we've added, we always said that Infiltrator was going to add that capacity first. and we've seen it really, and Scott mentioned it as well, on the tanks, on the StormTech product that they make that goes into Allied products. Having that inventory being out there to service the demand that we've had, we've really seen that come through in a powerful way, and that's one of those favorable trends that we mentioned that we saw in the first quarter that we're looking forward to as we go into Q2 and beyond.
spk01: Okay, yeah, that makes sense, and appreciate the color there. Maybe for my follow-up Any update on Texas and trying to improve your foothold there?
spk04: This is Scott Barber, and we continue to make a lot of progress in Texas in public approvals. I think our sales in Texas were up like 49% or something like that. So, you know, very strong quarter in Texas. You know, we're not through the whole approval process yet. It's not a short process. But I would say that we feel very, very good about where we are. And ultimately, we believe we will have a big win there.
spk01: Thanks and good luck, guys. Thanks.
spk00: Thank you, John. As a reminder, if you would like to ask any questions, please press start followed by one on your telephone keypads now. We have no questions registered, so I'd like to hand it back to Scott Barber for some closing remarks.
spk04: All right. Thank you very much. And we appreciate the questions today and everyone who participated. It was, you know, certainly a good quarter. Lots of hard work by the people in the company at ADS, Infiltrator, Coltech. Unbelievable kind of journey that we're going through together. in this year. It's turning out different than last year, but a good start. I think we've given some very good guidance here, and we look forward to the next time we all meet. Thank you.
spk00: Thank you. That does conclude today's call. Thank you all for joining. You may now disconnect.
Disclaimer