Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' first quarter of fiscal year 2025 results conference call. My name is Amy, and I'm 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, and if you would like to ask a question after the presentation, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and the number one. I would like to now turn the presentation over to your host for today's call, Michael Higgins, Vice President of Investor Relations and Corporate Strategy. Sir, you may begin.

Good morning, everyone. Thanks for joining us. Appreciate everyone taking the time to listen to our results today. With me, I have Scott Barber. our President and Chief Executive Officer, and Scott Cottrell, our Chief Financial Officer. 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 the conference call available via webcast on the company website. With all of this said, I'll turn the call over to Scott Barber.

Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. The first quarter of revenue results were in line with our expectations, and we achieved an impressive 33.8% adjusted EBITDA margin. Demand in the construction market was strong for both ADS and Infiltrator with growth across the non-residential, residential, and infrastructure markets. From a non-residential perspective, the first quarter showed the strongest growth in nine quarters. We saw good activity at distribution and in the commercial end markets. Geographically, places like Florida, Texas, and other southeastern states continued to perform well, giving us confidence in our long-term material conversion strategy. The residential market also continues to perform well with 4% growth overall. Infiltrator revenue increased 6% in the quarter driven by double digit growth in tanks and advanced treatment products. In addition, the ADS residential business tied to land development increased 8%. As many of you know, residential is an important market share opportunity for both ADS and infiltrator And our long-term view of this market remains favorable due to the 4 million unit under supply of single family homes. 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 and its distribution partners provide to contractors at the local level. The robust residential market growth in the infiltrator and ADS land development businesses was partially offset by weaker multifamily development, as well as a 12% decrease in the retail business, which is only about 6% of our sales overall. We continue to see strength in the infrastructure market with 90% growth in the quarter. This market benefits from the federal funds allocated under the IIJA, and we continue to see good activity at the local level in roads, highways, airports, and rail projects. We expect the infrastructure market to continue to outperform other construction end markets throughout fiscal 2025. Importantly, the pricing environment and the overall construction markets remains in line with our expectations. In the agricultural market, the Midwest area of the U.S. experienced heavy rainfall in the quarter, which is where ADS's agricultural sales are concentrated. The wet spring combined with weakening crop prices, farmer sentiment, and an early breaking winter impacted sales negatively in the first quarter. Moving to profitability, the 33.8% adjusted EBITDA margin in the first quarter marks the second most profitable quarter in company history, only suppressed by last year's first quarter margin of 36.2%. Profitability was generally in line with expectations as we saw the benefit from positive volume in the quarter due to the favorable demand backdrop, as well as strong sales mix of allied products and infiltrator growing faster than the pipe business. Manufacturing costs benefited from favorable fixed cost absorption, which was partially offset by higher transportation costs as we continue to invest in customer service, for example, by moving inventory throughout the network to the appropriate locations. In short, the year started right on plan. We saw good activity generally across our end markets in April and May. In June and July, the market activity remained favorable albeit a little bit choppier, but generally in line with the plan. Our forward-looking indicators, such as backlog and order rates, also remain stable, and therefore we are reaffirming our previously issued guidance today. We will continue to monitor the further-reaching indicators, such as project identification, quoting, and design services activities to give us better insight into expected activity in the back half of the year. As you may have seen, two weeks ago we released our physical 2024 sustainability report. One of the great things about ADS is how sustainability is embedded in the business. We manage water, the world's most precious resource, and we are committed to protecting and managing water by providing sustainable solutions that safeguard the environment and build resilient communities. In addition, we do this using a high content of recycled material. As one of the largest plastic recyclers in North America, we consume over half a billion pounds of recycled material every year, a critical component driving a circular economy and reducing the carbon footprint of water infrastructure. We included some new information in this year's report, including statistics on our waste footprint and diversion efforts, as well as our approach to materials and chemical safety. In addition, we saw limited assurance of scope one and two greenhouse gas emissions for the first time, further underpinning our commitment to sustainable business practices in transparency and reporting. The strength of our market position and resiliency of the ADS business model gives us confidence in the long-term business outlook as we are well positioned to be part of the solution to changing climate patterns. Significant storm events have become more common, in turn driving the need for more resilient water management solutions. For example, Hurricane Burrell was the fourth hurricane to hit the Houston, Texas area since 2001, whereas in the previous 25-year period, there was only one hurricane. As a result of the changing weather patterns, the city of Houston and surrounding Harris County have increased retention system requirements by up to two to three times their previous capacity, among other regulatory updates. This type of regulatory change takes years to implement and requires intensely local understanding. This is one example of a secular tailwind supporting ADS's future growth and the high relevance ADS has in these local markets. As you know, Texas is a priority state for ADS, as it is the largest stormwater market in the country. In addition, the Texas Department of Transportation approval creating an opportunity for the company to grow in the public markets. We have scaled up our resources in Texas over the last several years, building a team that understands the local regulatory environment, and we also have the manufacturing and logistics capabilities to effectively service the market. As you can tell, we are eager to capitalize on the opportunity in Texas. It is a large market with low plastic pipe penetration that is well positioned to benefit from funds allocated under the IIJA. And we continue to focus on making progress at the local level. And over the last year and a half, we've obtained five additional local approvals for the use of plastic products in the Texas market. As a pure play water company, the products and solutions we provide play a critical role in ensuring quality of life in communities like Texas by reducing flooding, recharging aquifers, improving food security, and mitigating the risk of water scarcity. Our leadership position, scale, and balance sheet give us a platform to continue to advance the industry through highly engineered solutions. And we are excited to share that we began moving into the ADS world-class engineering and technology center earlier this summer. In this facility, we have material science, product development, and manufacturing engineering under one roof, and already we are seeing improvements in the collaboration. Once this facility is fully operational, with all equipment moved in, we look forward to hosting interested parties for a tour and visit. With that, I will turn it over to Scott Cottrell to further discuss our financial results. Thanks, Scott. On slide six, we present our first quarter fiscal 2025 financial performance. From a top-line perspective, we generated year-over-year growth across all of the businesses. Revenue in the legacy ADS business increased 5%, including allied product growth of 8%, and revenue in the infiltrator business increased 6%. Our residential and non-residential end markets increased mid-single digits, and the infrastructure end market increased an impressive 19%. The overall revenue increase of 5% was driven by strong volume growth across the markets previously mentioned. From a profitability perspective, we were pleased with the 33.8% adjusted EBITDA margin in the first quarter. As communicated on our last earnings call, we expected our fiscal first quarter margins to be challenged year over year due to the price-cost comparison. Manufacturing costs were favorable in the period due to fixed cost absorption, as well as the benefit of prior investments we've made in the business. This favorability was offset by investments in transportation, as we continue to deploy resources to ensure we have best-in-class customer service. Selling general and administrative expense was unfavorable in the period, driven by higher commissions associated with the increase in volume year-over-year, as well as continued investments in talent to support strategic areas such as engineering and product development. From a year-over-year comparison, SG&A was largely flat as a percentage of sales, and we continue to expect full-year SG&A expense as a percent of sales to be flat year-over-year or approximately 13%. On slide seven, we present free cash flow. We generated $126 million of free cash flow year-to-date compared to $202 million in the prior year. Our year-to-date capital spending increased 37% year-over-year to $58 million. Thoughtful capital allocation continues to be a key focus for the management team and the board. given the strong cash generation of the business. With that in mind, we continue to expect to spend between 250 million to 300 million on capital expenditures for the full year, focusing on productivity and automation, de-bottlenecking our recycling operations, the completion of our world-class engineering and technology center, and supporting growth we continue to see in certain geographies. With ample liquidity and low leverage, we are in a great position to execute on our capital deployment priorities to grow the business organically as well as through M&A. At the end of the first quarter, our net debt to adjusted EBITDA leverage was 0.9 times, with $542 million of cash on hand and $590 million of availability under our revolving credit facility. Moving on to slide eight, we present our fiscal 2025 guidance ranges, which are unchanged. We expect revenue to be in the range of $2.925 billion and $3.025 billion 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%, approximately flat to last year's record margin. We expect the second quarter revenue overall to be in line with the first quarter. The cadence of revenue in fiscal 2025 will be similar to fiscal 2024, with approximately 55% of our revenue coming in the first half of the year. In addition, we expect the margin in the second quarter to be comparable to the prior year. 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 will open the call for questions. Operator, please open the line.