Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' second quarter of fiscal year 2025 results conference call. My name is Regina, and I am 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'd like to ask a question at that time, simply press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. We do ask that you please limit yourself to one question and one follow-up. Thank you. I would now like to 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. I'm here with 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 that release has also been included in an AK submitted to the SEC. We will make a replay of the conference call available via webcast on the company website. With that, 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. One of our board members summarized the second quarter environment very well. In a demand environment challenged by economic and political conditions, plus severe weather events, Some friction has developed versus our expectations. ADS is addressing the current environment by making high quality decisions day by day with an eye on the long term objectives of the company and what is needed from an investment and resource perspective to achieve those objectives. We're doing this while also enhancing safety, improving delivery and operational execution and wisely investing capital. Additionally, we continue to return capital to our shareholders and have maintained an adjusted EBITDA margin of over 30%. So I think about the current environment in terms of what's good and what's not so good. Let's start with the good. ADS's residential and infrastructure end markets continue to grow. Sales in the residential end market increased 6%, driven by the infiltrator growth of 11%, as well as 8% growth in the legacy ADS sales that go in at the land development stage of the residential cycle. Residential market sales are benefiting from previous investments and programs to help strengthen our partnerships with large national and regional homebuilders, solid market penetration, and favorable supply-demand dynamics due to the long-term undersupply of housing. Infiltrator continues to perform well as revenue growth was driven by 14% growth in tanks and 40% growth in advanced treatment products, as well as additional distribution and a strong residential demand backdrop. We remain excited about this offering, and with the addition of Orinco Systems, we will continue to grow our portfolio in wastewater and advanced treatment. The infrastructure market sales increased 7% in the quarter, due to continued strength in roadway and airport projects aided by funds allocated under the IIJA and other publicly funded projects. This is a segment where ADS historically under-participated, but we are now positioned well following the investments in go-to-market resources and capacity in key geographies. Our outlook remains favorable for this market. Profitability remains strong, demonstrating the resiliency of the ADS business model and we are consistently posting adjusted EBITDA margins around or above 30%. Capital spending, deployment, and the return on previous investments remains favorable. We have steadily increased capital expenditures over the last several years, and we are seeing those investments pay off. Infiltrator is an excellent example. Adjusted gross profit increased 70% over the prior year, and they are performing well across the platform. These results are fueled by the capital, new products, and resource investments made since we acquired them in 2019. At ADS, the capital investments in the pipe network are improving downtime, efficiency, safety, and scrap performance. All of these measures improved in the second quarter. In addition, delivery performance also continues to improve, driven by the higher inventory levels as well as new distribution, and automation investments being made to further improve the customer experience. From a capital allocation perspective, in the first half of this year, CapEx increased 36%, the dividend is up 17%, and we dialed back our share repurchase program to allocate capital to the Orinco acquisition, which closed October 1st. Between those four priorities, we have doubled the amount of capital we either reinvested in the business or return to shareholders thus far in this fiscal year. Now, moving to what's not so good. Demand. Demand in ADS's largest market, non-residential construction, which is about 45% of the sales, this demand was choppy by segment and geography. The impact manifests itself in two ways for ADS. Non-residential construction is our single largest market for pipe products, and two-thirds of our allied product sales. We adjusted expectations for the non-residential market from low single-digit growth to flat for fiscal 25, reducing our revenue outlook by approximately $40 million for the year. Second, weather played a factor in both our second quarter and the start of the third quarter in key geographies. I don't like to talk about weather on these calls, but due to the severity and intensity of various well-documented storms, It would be imprudent not to mention their impact on ADS results. Accordingly, we reduced revenue outlook due to weather by an additional $40 million. The ADS and infiltrator employees in the southeast are accounted for and safe after the hurricanes in September and October. We had a few with property damage, and most had disruption to their lives, and we've provided support to those that needed assistance. Our five facilities in the southeast were up and running again shortly after the hurricanes, and suffered no damage. The ADS Foundation also contributed to Florida and North Carolina organizations assisting those most affected in the region by these hurricanes. These weather events are typically disruptive in the short term, yet favorable over the medium to longer term. In the short term, shipments slow down significantly as products are not able to be brought onto job sites. Then in the recovery phase, it is excavation contractors that clean up the sites which further delays installations. We do a lot to make emergency shipments with our fleet in these situations, but this does not overcome the slowdown in overall installation activity. Over the medium term, we typically see a favorable impact from the catch-up and repair, and over the longer term, new projects and regulations are designed and constructed to handle increased volumes of stormwater. So these events cause short-term pain but create medium and long-term tailwinds to the ADS demand profile. Lastly, you can see in the EBITDA bridge that price, material cost, and mix remain a challenge as we knew it would. We've been able to offset the negative impact with volume growth and improved execution in manufacturing and transportation. However, material costs are moving more unfavorably than we expected, which is also reflected in today's updated guidance. As I think about this bridge and how we manage the company, it is about the day-to-day decisions on profitability and market participation in the context of the ADS value proposition at a very local level, balanced with the overall objectives of the company. As you know, ADS has a great value proposition for our customers in the regulatory work we do to gain approval for the use of our products, the breadth of our pipe product lines, the full package we provide with the allied products and solutions we offer to the engineering, distribution, and contractor communities. We stack on top of this the breadth of our network, the inventory we hold locally for superior delivery, and the specialized trucking fleet we operate to deliver to the job site. We remain one of a kind in our industry and will continue to invest in the ADS value proposition to further serve our customers. The hurricanes in the second and third quarter affected several important states in the Southern Crescent, such as Florida, North Carolina, South Carolina, and Texas. These events often encouraged municipalities and other regulators to reevaluate their water infrastructure needs, which presents a long-term opportunity for ADS to provide communities with more resilient water management solutions. In April, the EPA delivered the 2022 Clean Watershed Needs Survey results to Congress. This report assesses the capital investments needed to meet the water quality goals of the Clean Water Act over the next 20 years. The Clean Water Act is designed to prevent, reduce, and eliminate pollution in the nation's water sources to restore and maintain its chemical, physical, and biological integrity. The EPA estimates $630 billion of investments will be needed over the next 20 years, citing an aging infrastructure and climate change as an ongoing challenge to clean water infrastructure nationwide. The stormwater management category was estimated to need $115 billion in funding, an increase of $91 million, or 385%, since the previous survey in 2012. The increase is due to a variety of factors, including changing regulatory requirements, the increase in frequency and intensity of heavy precipitation events, and an increase in impervious surfaces. In addition, decentralized wastewater treatment systems where an infiltrator participates need an estimated $75 billion to rehabilitate, replace, or install new systems, an increase of $47 billion or 172% since 2012. To that end, this quarter we announced the acquisition of Orinco Systems, a leader in advanced treatment for onsite septic wastewater management. Orinco is a great strategic fit for Infiltrator, and we are busy integrating the two businesses. We first started talking publicly about the need for advanced treatment solutions in 2022 at our investor day, and market demand has continued to grow since then. Infiltrator's organic advanced treatment products are already growing double digits consistently, and this acquisition accelerates the company's growth in a highly fragmented and fast-growing segment of wastewater. The enhanced portfolio of complementary solutions combined with a broader sales force, geographic reach, and distribution footprint will drive further penetration in this attractive segment. Craig Taylor and the team at Infiltrator are already working with the Orenco team to continue building on both companies' strengths to deliver exceptional products and services to customers. In October, we hosted the grand opening of ADS's Engineering and Technology Center, the world's largest and most advanced stormwater research and engineering center. This facility brings the talent and tools in one purpose-built facility that allows the ADS teams to collaborate on material science, product design, tooling design, and manufacturing process engineering. This facility will help to bring new products to market faster, drive the industry forward with new innovation, and solidify our leadership position and scale in stormwater management with highly engineered innovative solutions. Just to give you a few examples of what we will be working on, this facility is equipped to open new streams of recycled plastic material and enhance the resins that will divert more plastic waste from landfills and improve the performance of the stormwater products. We will also be utilizing over 90,000 gallons of recycled water in a closed loop system to test stormwater products under precisely controlled real world conditions. We couldn't be more excited about the new opportunities and solutions ADS will create in this center. This type of investment is one example of what sets ADS apart from competitors. We have the ability and capital to invest in advancing products, manufacturing processes, and material science that are unmatched in this industry. In summary, the second quarter results reflect strong demanded infiltrator, as well as the ADS residential and infrastructure end markets, which drove the fourth consecutive quarter of construction market volume growth. In spite of continued choppiness in the RON residential end market, Coupled with the short-term disruption of significant storm events, we achieved an adjusted EBITDA margin of 31.4%, underscoring the resiliency of the ADS business model. Demand for localized water management solutions remains strong, driven by aging water infrastructure and changing weather patterns, highlighting the continued opportunity for ADS and Infiltrator to support the development of more resilient water infrastructure. Overall, we are well positioned and attractive in markets with secular tailwinds from the increasing needs to manage and protect water, the world's most precious resource, safeguarding our environment and communities. With that, I will turn the call over to Scott Cottrell to further discuss our financial results.