Advanced Drainage Systems, Inc.

Hello everyone and welcome to ADS's fourth quarter and fiscal year 2023 financial results call and thank you for standing by. My name is Daisy and I'll be coordinating your call today. If you would like to register a question, please press star followed by one on your telephone keypad. I would now like to turn the call over to your host, Mr Mike Kiggins, Vice President of Corporate Strategy and Investor Relations. Sir, you may begin.

Thank you. Good morning, everyone. Thank you for being with us here today. I have Scott Barber, our President and CEO, and Scott Cottrell, our CFO, with me. 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 everyone joining us on today's call. Fiscal 2023 was ADS's sixth consecutive year of record revenue and profitability. Net sales grew 11% to $3.1 billion, and adjusted EBITDA increased 34% to $904 million. resulting in an adjusted EBITDA margin of 29.4%. In addition, net income per diluted share was $6.08. I'd like to point out that over the last six record-producing years, net sales and adjusted EBITDA have increased at a CAGR of 16% and 29%, respectively, as a result of ADS's strong business model and long-term strategies to drive profitable sales growth above the market. Both ADS and Infiltrator executed these strategies well in a dynamic macroeconomic environment over the past 12 months. Full year results came in above our guidance range as we executed well to close out the fourth quarter and the year despite overlapping demand weakness in our core non-residential and residential end markets. We had a very strong start to the year with demand, shipping rates, and pricing all favorable. Beginning in September, demand in the residential market weakened, shortly followed by weakness in the non-residential market. In response, we made the necessary adjustments to our operations and plan and executed well against them. Long term, we remain confident in the non-residential and residential end markets, but we expect the slower pace to continue through this calendar year due to the higher interest rates, inflation on building material costs, and tightening lending standards, all of which impact the pace of construction and the customer. Despite the short-term weakness in demand, the need for water management solutions remains highly relevant. We are actively engaging with communities that are improving standards for stormwater and onsite septic wastewater management staying true to our brand promise to protect and manage water, the world's most precious resource, safeguarding our environment and communities. We have a runway for long-term growth in both the stormwater and onsite septic wastewater markets due to the value proposition, solutions package, conversion to plastic from traditional materials, and unique sustainability position of ADS in water management and recycling. As one of the largest plastic recyclers in North America, we remain committed to finding innovative ways to increase the use of recycled plastics, thereby improving the circularity of the plastics economy and giving us additional scale to manage costs and financial performance. Last October, we broke ground on a world-class engineering and technology center to expand our efforts to innovate with both recycled and virgin plastics, develop new products, and develop technology for manufacturing operations. Importantly, we are being recognized for our impact, effort, and value proposition as companies continue to choose our products for water management in large scale development projects. While there is weakness in our core markets, the agriculture, infrastructure, and onsite septic markets have a more favorable outlook. The agriculture economy remains healthy and landowners continue to invest in field drainage as a high return investment to improve crop yields. We are pursuing growth in new geographies where agriculture drainage is less widely accepted. In addition, the agriculture market team is actively cultivating relationships with universities, farming groups, and contractors to better understand technologies and opportunities for growth on a very local scale. Within infrastructure, I'd like to highlight secular growth trends around the Infrastructure Investment and Jobs Act funds that will come into play later this year, as well as on-shoring projects and the Texas Department of Transportation's approval for the use of thermoplastic pipe last November. We're actively bidding on projects in each of these areas and tracking opportunities to be specified on project plans. This is a great example of ADS's proven market share model at work. As shown on slides five and six, we had an excellent fourth quarter from a profitability standpoint. Adjusted EBITDA margin increased to a new fourth quarter record of 27.8%, 300 basis points above the prior year, despite a 9% decrease in revenue. Favorable pricing and material costs offset inflationary cost pressure, lower relative infiltrator volume, and lower fixed cost absorption from the production adjustments made over the last two quarters. Non-residential and residential construction activity was resilient in areas like the southeast, Atlantic coast, and southern United States where we have focused resources over the last five years as a part of our key state sales strategy. The northeast, midwest, and western United States remain challenged. Notably, revenue in the infrastructure market increased 6% in the fourth quarter and remained a bright spot throughout the year, with year-over-year increases in each quarter. From a product standpoint, ADS's HP pipe, nanoplast catch basins, and water quality solutions all grew double-digit year-over-year. In addition, sales from infiltrator tanks and delta active treatment systems also increased this quarter compared to last year. There's no doubt that the demand environment we are facing today is challenging. The strength of the seasonal uptick in order activity was not as strong as we would normally see. We are cautious about the impact from interest rate increases and the effect that local banks tightening credit standards will have on the commercial construction market, which is all reflected in our fiscal 2024 guidance issued today. In the agriculture market, the heavy snowfall in the Great Plains region prevented contractors from installing fuel drainage, compressing the spring selling season. The underlying fundamentals, however, remain healthy in the market, and we expect to see growth in that business in the fall. On our last earnings call, we announced several actions to right-size the business for the current demand environment. We completed three plant closures and reduced headcount in manufacturing and transportation. We also increased the fleet utilization and reduced usage of third-party logistics services, which resulted in better sequential transportation costs in the fourth quarter. The actions we took on plant closures and headcount will largely benefit fiscal 2024. We have taken the appropriate steps to level set production and inventory levels, and we will continue to assess our cost and network to take action if necessary. Scott Cottrell is going to get into the specifics on fiscal 2024 guidance momentarily. but you will see we remain committed to the adjusted EBITDA margin range of 28% to 29%. We will continue to invest in capacity for growth regions and new products, productivity, maintenance, and automation in the organic business because of the significant long-term opportunity in the stormwater and onsite septic wastewater markets. A strong balance sheet in combination with a strong cash flow generation profile give us the ability to continue investing in the business, preparing for the upturn that we know will occur in our markets. Finally, Roy Moore, the president of Infiltrator, is retiring at the end of May. Roy's 35-year career at Infiltrator is full of innovation in products, material science, and manufacturing technology. His vision and leadership of Infiltrator is remarkable and provided us with a tremendous foundation to continue building upon. As part of a planned succession, Craig Taylor will be taking over Roy's position. Craig joined the business in February 2020 and has been a significant contributor in his relatively short time with us. On behalf of the whole organization, I want to thank Roy for his contributions and wish him the best in his retirement.