Advanced Drainage Systems, Inc.

Good morning ladies and gentlemen and welcome to the Advanced Drainage System third quarter of fiscal year 2023 results conference call. My name is Bailey and I'll be your operator for today's call. At this time all participants are in listen only mode. Later we will conduct a question and answer session. If you would like to ask a question please press star followed by the number one on your telephone keypad. 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.

Good morning. Thank you 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.

Thank you, Mike, and I appreciate you all joining us on today's call. As you saw from our press release issued earlier this morning, the demand environment we are facing today is challenging. We're seeing domestic construction demand slow due to rising interest rates and inflation, which in turn is causing uncertainty in the market and slowing the release of projects for shipment and order rates. Before I provide more details on the current environment, I want to talk about the brand promise and value proposition, which have never been more relevant. As you have heard me say many times before, our reason is water. We protect and manage water, the world's most precious resource, safeguarding our environment and communities. This business is driven by water and sustainability. As a pure play water company, the need for ADS and infiltrator products is as important today as it was a year ago. We have a runway for long-term growth in both the stormwater and onsite septic wastewater markets due to the value proposition and from converting projects from traditional materials to environmentally friendly solutions. We also use a high volume of recycled materials, which allow us to better manage our material costs, and we are the largest consumer of recycled plastics in North America, giving us additional scale to manage costs and financial performance. We are effectively executing our material conversion strategy. ADS and Infiltrator provide superior products and solutions which set us apart from the competition. From capture to conveyance, storage and treatment, ADS's comprehensive suite of products is designed to meet the needs of customers for the entire lifecycle of a raindrop. ADS and Infiltrator products install more quickly than traditional materials, saving the contractor labor and time. Lighter weight materials are safer on the job site than traditional materials, which are much heavier and require additional machinery to unload and install. As part of the material conversion strategy and broader value proposition, we have a vast sales and engineering team in the field working with contractors and civil engineers every day to ensure our products are specified on project plans. ADS products go to market through Water Works distribution partners that extend our sales coverage thereby ensuring we have great visibility into local construction activity. The value proposition is so much more than simply our superior products and coverage. From a service standpoint, we have internal engineering services and design tools to assist civil engineers in their site design for underground construction. Through ADS's company-owned fleet, we deliver directly to the job site and in fewer truckloads than traditional materials. That's a big advantage for our distribution partners as we enable an asset-like model for ADS products. It is also an advantage on the job site, especially in areas of high security like airports or in traffic-sensitive areas like highways. Fewer deliveries means less job site disruption and better logistics costs. Last, effective capital deployment remains a key pillar of our strategy. Because of the long-term opportunity for growth, we will continue investing in growth regions and products, as well as productivity initiatives, including automation and safety. We continue to execute our M&A strategy, including tuck-in acquisitions, such as Jet Polymer and Cultec, which support our recycling and allied product strategies. Lastly, we remain committed to shareholder returns, as Scott will discuss in more detail. Let me now shift gears to the challenging demand environment we are facing. Through October and November, demand continued largely at the pace we expected after the last time we spoke to you. In December, non-residential and residential demand slowed significantly. In addition to the slowdown in the Northeast and the Northwest that we talked about last quarter, we began to see weakness emerge in other geographies like the Midwest and the West more broadly. From a macro perspective, we look at the same data as you. For example, the architectural billing index has been showing signs of declining for the past few months. Similar indicators are negative and expected to remain weak for most of calendar 2023. Now let's transition to results for the quarter. Consolidated net sales declined 8%. The ADS business was down 3%, primarily due to weakness in the non-residential market and shipments to retail partners. The 30% decline in infiltrator sales was a result of reduced housing starts and completions and the last of the inventory destocking, which completed in the fiscal third quarter as we previously communicated. As we look at the significant change in market dynamics that impacts construction activity since the beginning of the fiscal year, interest rates nearly doubling, and significant inflation, there is no doubt this is creating uncertainty in our construction and markets. This combination has slowed down demand for the ADS and infiltrator products, and we expect this challenging demand environment to persist through the majority of calendar year 2023. This slower market environment creates two key areas of focus. lower demand volume, and two, higher absorption costs. Lower demand volume will be partially offset by material conversion and growth strategies, including the priority focus states and new products. We will address the higher absorption costs through headcount reductions, plant closures, and manufacturing improvements. We will continue to hold the favorable pricing we have established for the products and services we provide to our customers. Importantly, we remain committed to the 28% to 29% adjusted EBITDA margin range we communicated at Investor Day in March of last year. We have a number of levers we are working to execute margin performance during this period of slower in-market demand. We are optimizing the network, closing three facilities by the end of March. From our peak, we are taking out approximately 15%. of the manufacturing and transportation workforce through reduction and attrition. We have also eliminated temporary labor and minimized our overtime. In transportation, we are removing many of our high cost lanes and reducing the use of third party logistics services, both of which we use quite frequently during periods of higher demand. We are doubling down on improving productivity through our commitment to continuous improvement initiatives This includes investment in automation, improvements in downtime, and better training and tools for our employees to drive higher overall productivity. Lastly, we are right-sizing inventory to reflect current demand levels, which is contemplated in the guidance issued today. While we look at all cost control measures, we will also continue investing in our business to ensure we exit the current environment in a stronger competitive position. This includes continuing to invest in high growth areas in the priority states. The recent Texas Department of Transportation approval for the use of thermoplastic corrugated pipe is evidence of the additional market participation opportunity and the strength of ADS's market leadership. For your reference, Texas is the largest stormwater market in the U.S. We will also continue to lean in on markets that we know will grow in calendar 2023 like the infrastructure market due to the Infrastructure Investment and Jobs Act, industrial manufacturing such as onshoring, EVs and batteries, as well as the agriculture market, which remains strong. In summary, the strength of our model remains intact, and the brand promise and value proposition have never been more relevant. We continue to generate significant cash flow and are in excellent financial health. With that, let me turn it over to Scott Cottrell.