Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' fourth quarter and fiscal year 2024 results conference call. My name is Danica, 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 that time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the presentation over to your host for today's call, Alison Justice, Director of Investors. Ma'am, you may begin.

Thank you, and good morning. 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's website. With that, I'll turn the call over to Scott Barber.

Thank you, Allison, and good morning, everyone. Thank you all for joining us on today's call. Mike Higgins, Vice President of Investor Relations and Corporate Strategy, is in New York this morning at RBC's Future of Water Conference. Mike's participating in a panel discussion on future-proofing water infrastructure, a very important topic given our position in this market. So we are dividing and conquering this morning with Mike in New York and Allison, excuse me, in charge of Scotch Sea and I here in Ohio. We are pleased to present the fiscal 2024 results on today's call. Both revenue and adjusted EBITDA results came in above our guidance range at $2.9 billion and $923 million, respectively, marking ADS's ninth consecutive year of record profitability. As you can see on slide four, in-market demand improved significantly in the second half of fiscal 2024, resulting in a 3% increase in second-half revenue, primarily due to the notable improvement in the residential and infrastructure in-markets, which grew 8% and 14% respectively. The non-residential, agriculture, and international end markets also improved in the second half of the year. With the improvement in end market demand, we were able to partially offset the week start to the year, resulting in a full-year revenue decrease of just 6% overall. Most notably, fiscal 2024 adjusted EBITDA increased 2% to $923 million, An adjusted EBITDA margin increased 270 basis points to 32.1%, despite a year-over-year revenue decline. These strong profitability results are due to better-than-expected performance from an infiltrator business and allied products portfolio, effective management of price costs, solid operational execution, and the benefit of previous capital investments in the business. Importantly, this year's financial results highlight the resiliency of the ADS business model, demonstrating our ability to achieve strong profitability levels in the challenging demand environment seen over the last 18 months. The strength of our market position and resiliency of the ADS business model give us confidence in the long-term business outlook as we benefit from the secular tailwinds of changing climate patterns which drive the need for resilient water management solutions. As a pure play water company, our products and solutions play a critical role in preventing floods, recharging aquifers, improving food security, and mitigating the risk of water scarcity to ensure the quality of life in communities. On slide five, you can see the upward trajectory and the frequency of these large-scale storm events over time as climate patterns change. In 2023, there were a record 27 of these events in the United States, resulting in a total cost of over $88 billion. These events ranging from severe storms and hurricanes to floods and droughts has devastating impacts on communities and highlight how the existing stormwater infrastructure has not kept pace with increasing climate challenges. The products and solutions that we provide, along with the expertise and distribution we have at the local level across North America, are integral to solving these issues for communities, while also providing ADS, our distribution partners, and contractors substantial growth opportunities. In addition, the company's leadership positions in both stormwater and onsite septic wastewater management gives us a platform to further advance the industry. As demonstrated with this year's product introductions, such as the Ecopod NX advanced on-site septic treatment product and partnerships like rainwater management solutions, we're committed to bringing highly engineered solutions to the market to solve communities' toughest water challenges. Advanced on-site treatment products like the Ecopod NX increased nearly 40% in the fourth quarter as we ramp up our participation in this growing and attractive market. In addition, the Rainwater Management Solutions Partnership is off to a great start, and we continue to identify promising rainwater harvesting projects. We are also working hand in hand with David Crawford and his team at Rainwater Management Solutions to influence regulations at the national, state, and local levels to continue to protect water resources throughout the country and provide guidance on water reuse. Construction is nearing completion on ADS's world-class engineering and technology center, located near our corporate headquarters in Hilliard, Ohio, and expected to open this summer. This facility brings material science, product development, and manufacturing engineering under one roof and will enable us to accelerate innovation and the velocity of commercialization. We believe the combination of investments in the business, strategic partnerships, and the Engineering and Technology Center will further strengthen ADS's position as the leading water management solutions provider. Now, moving to the fourth quarter results. We closed out the year strong with the continuation of better than expected performance in the infiltrator business and allied products portfolios. Demand for the ADS pipe portfolio performed slightly better than expectations, and pricing came in as we thought it would. Importantly, this quarter we saw volume growth across each of our end markets, with particular demand strength in the residential, infrastructure, and agriculture end markets. Looking into fiscal 2025, the construction markets where we participate are well positioned for growth. The infrastructure market continues to benefit from the federal funds allocated under the IIJA and where you're seeing good activity at the local level in roads, highways, airports, and rail projects. For context, we have over 20 airport projects in the works, as well as several large interstate projects. ADS has both a superior set of products and the best go-to-market model in the industry for these large and challenging projects. We expect the infrastructure market to grow at high single digits next year with the potential for further upside. In the residential end market, activity was very strong in the quarter at both ADS and Infiltrator, and we expect this to continue into fiscal 2025 with mid-single-digit market growth. We remain cautious on the impact of interest rates on single-family housing starts, though our long-term view on the residential market remains favorable. Not only is the market underbuilt by at least 4 million homes, but this also remains an important market share opportunity for both ADS and Infiltrator. Over the last several years, we have dedicated resources to the residential market in order to establish relationships with large national and regional home builders, and these efforts continue to pay off as developers value the benefits of faster and safer installation as well as the expertise and resources ADS provides to contractors at the local level. To remind you, the ADS residential business participates in the land development phases of residential building and is approximately 14% of the business. The infiltrator business participates closer to completion and is approximately 16% of the total business. Finally, we expect the non-residential market to grow at low single digits reflecting improving trends in commercial construction and good activity from large onshoring projects that we continue to track and pursue. Similar to how we added resources to support the growth opportunities in the warehouse and residential markets, we have also dedicated business development and sales resources to support the opportunity on onshoring projects, which we believe is a long-term secular tailwind for years to come. From a margin perspective, adjusted EBITDA margin increased 140 basis points to 29.2% this quarter, a fourth quarter record, once again demonstrating the resilience of the business model. Despite unfavorable price costs in the period, this marks the ninth quarter in a row of year-over-year margin expansion. The margin performance this quarter benefited from volume, sales mix of Infiltrator and Ally products, as well as previous investments in the business, including automation, more efficient production lines and tooling, effective management of price costs, and continuous improvement within operations. As reflected in the guidance issued today, we expect the all-time record adjusted EBITDA margin performance to repeat in fiscal 2025, which I'll note is after a 770% basis point increase over the last two years. Importantly, we expect to achieve this without the benefit of favorable price cost, which has been a significant contributor to our margin performance over the past couple of years. In fiscal 2025, we will achieve our guidance through volume growth and fixed cost absorption, as well as operational efficiency, as we reap the benefit from capital investments we have made in manufacturing and transportation over the last several years. Since August of 2019, when we purchased Infiltrator, we have consistently invested in large capital projects and supporting engineering talent to improve designs, processes, tooling, and machinery to reduce our costs. Today, we are seeing the benefits of these investments and are executing a very similar playbook for ADS. As you will recall from previous quarters, we have talked about investing in our business to strengthen our competitive position when the market recovers, and that is exactly what we're doing today. Of course, we will continue to effectively manage price costs against market participation objectives. We will stay competitive in the market while also continuing to deliver exceptional service to our customers and pursue profitable growth through attractive products, markets, and partnerships. With that, I will turn the call over to Scott Cottrell to further discuss our financial results. Thanks, Scott. The fourth quarter revenue results were strong. As Scott mentioned, we saw the return of volume across growth across all of our end markets. Infiltrators revenue increased 22% in the quarter with double digit growth in both chamber and tank products. On the ADS side, we continue to see exceptional performance from our high performance polypropylene pipe, which is really the tip of the spear in converting the market from traditional materials to ADS's lighter, more efficient products. The price cost performance during the quarter was in line with our expectations. Equally of note, this is the second quarter in a row of favorable manufacturing costs on a year-over-year basis, as we are seeing the benefits of fixed cost absorption with the increased volume, as well as improved operational efficiency from investments we've made in new equipment, automation, and tooling. As Scott noted, Infiltrator is operating very efficiently, benefiting from the newer, more efficient equipment we've invested in since the acquisition. In addition, due to the strong results for fiscal 2024 and to reward the service and dedication of our employees, we paid a discretionary bonus to employees who are not part of our annual incentive compensation plans, resulting in approximately $4 million of additional compensation costs in the quarter. On slide nine, we present free cash flow. We generated $534 million of free cash flow during fiscal 2024, compared to $541 million in the prior year. Capital spending increased 10% to $184 million as we continue to make investments to increase automation, grow manufacturing and recycling capacity, and increase productivity, as well as to build the new world-class engineering and technology center here in Hilliard, Ohio. In fiscal 2025, we expect to spend between $250 million and $300 million as we build the new manufacturing facility in Florida and continue to invest in areas that align with our long-term strategic objectives, including improving customer service through investments in technology and better order management processes, accelerating innovation in new products and new technologies that add to our stormwater and wastewater solutions packages, Increasing our production capacity in certain regions and in certain products that have superior demand, profitability, and growth characteristics. De-bottlenecking and expanding our recycling operations, as well as our material science and blending capabilities. Increasing the safety, productivity, and efficiency of our manufacturing network. And finally, upgrading our transportation assets, including the use of the latest telematics and safety technology to provide superior delivery and customer service. Thoughtful allocation of our shareholders' capital continues to be a key focus for the management team and the board, given the strong cash generation of the business. In fiscal 2025, we invested $184 million in capital expenditures and returned over $251 million to shareholders through dividends and share repurchases. In addition, today we announced a 14% increase in our dividend to $0.64 per share per year, starting with the May 31, 2024 dividend. We will continue to buy back shares under the current $1 billion share repurchase program, which has $216 million remaining. Since the inception of this share buyback program in 2022, we have repurchased approximately 7.8 million shares. or 9% of the shares outstanding when the program was announced. 1.8 million shares were repurchased just in fiscal 2024. Moving on to slide 9, we present our fiscal 2025 guidance ranges. We expect revenue to be in the range of $2.9, $2,925,000,000 and $3,025,000,000, representing growth of 2% to 5%. and adjusted EBITDA to be in the range of $940 million to $980 million. These ranges result in an adjusted EBITDA margin of 32.1% to 32.4%, repeating this year's record margin. Today's guidance reflects improved end market demand, continued success of our conversion strategy and market share model, positive sales mix contributions from the infiltrator business and our allied products portfolio, and improved manufacturing efficiency from fixed cost leverage, as well as operating efficiency resulting from prior investments. From a margin perspective, we expect our full-year margin to be flat to slightly up on a year-over-year basis. That being said, our fiscal first quarter margin will be our most challenging, primarily as a result of the fixed cost comparison to the prior year. the price cost, sorry, comparison to the prior year. We will more than offset this through favorable volume and fixed cost absorption, segment mix, as well as manufacturing efficiencies and initiatives in the second quarter and beyond. April's results reflected a continuation of the trends we saw in the fiscal fourth quarter, as well as the normal seasonal ramp going into the construction season. April's results were obviously contemplated in the guidance issued today. We remain focused on executing on our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cash flow generation. With that, I'll open the call for questions. Operator, please open the line.