Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' third quarter of fiscal year 2025 results conference call. My name is Jael, and I'm your conference operator today. 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 this time, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. 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. Thanks for joining us today. With me, 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 all of that 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. We executed well in the third quarter, meeting our commitments on safety, delivery performance, and operational execution. Financial results were consistent with our expectations communicated in November. Net sales increased 4% to $691 million, including the acquisition of Orenco. Demand in the domestic construction markets continued to trend positively overall, and this marks our fifth consecutive quarter of volume growth in the domestic construction markets. Pricing remains in line with expectations as well, sequentially stable from the second quarter. Sales in the non-residential market increased 7% as demand improved in the third quarter. Non-residential is about 45% of total sales. We saw good demand in the South and Southeastern United States, such as Florida, Texas, and Georgia. To support growth in the Southeast, we recently broke ground on an expansion of the ADS recycling facility in Cordial, Georgia. This expansion will increase recycling capacity in this region, allowing us to more efficiently service the seven facilities in this growing market. As one of the largest plastic recycling companies in North America, expanding our operations in Georgia will allow us to deliver more high-quality recycled material to our manufacturing sites throughout the Southeast region, while expanding ADS's overall use of recycled plastic in our pipe products and advanced stormwater and onsite septic wastewater solutions. We have a great team and core deal with many talented, long-serving employees, and we're excited to see the value that will be created with this investment. Sales in the residential market, which are about 35% of total revenue, increased 9%. Infiltrators' organic revenue increased 6% in the quarter, driven by double-digit growth in both tanks and the advanced treatment products. The ADS residential land development business continues to perform well as homebuilders continue to acquire and develop land for the structural undersupply of homes in the U.S. Orenco contributed $25 million of sales in the period, slightly ahead of expectations. Sales in the infrastructure market were down 6% in the quarter on a difficult comparison. As a reminder, sales in the infrastructure market increased 22% in the third quarter last year. This is a market where ADS historically under-participated, representing about 7% of overall revenue. But we are now positioned well following investments in go-to-market resources and additional capacity in key geographies. Because it is a small portion of the business and revenue is concentrated to geographies where we have stronger approvals, swings in this market can appear more dramatic than the non-residential and residential markets. Our leading indicators in the infrastructure market remain favorable over the long term as we continue to benefit from funds allocated under the IIJA as well as increased market participation. As we think more broadly about ADS and how climate patterns are evolving, we have a significant role to play in investing in the future of stormwater management. It's clear by the trends shown on slide five that these large-scale storm events are increasing in frequency over time. In 2024, the National Oceanic and Atmospheric Administration recorded 27 large-scale weather and climate disaster events in the United States, collectively costing over $180 billion. The frequency of these events in 2024 is more than double the average number of events from the previous decade, which was 13. ADS and infiltrator products help build resiliency into communities by mitigating flooding, returning groundwater to aquifers, rivers, and other natural sources, as well as securing agricultural resources and food supply. As large-scale storms become more frequent, it is no surprise that Americans are growing increasingly concerned about stormwater management in their communities. In November, we conducted a second Stormwater Awareness Survey in partnership with the Harris Poll, following up on the first Stormwater Awareness Survey in 2023. The survey results showed 60% of Americans are concerned about the stormwater infrastructure in their communities, a notable increase from 51% in 2023. In addition, nearly two-thirds of Americans indicated stormwater negatively impacts their community, with flooded streets, property damage, and standing water identified as the most frequent consequences of insufficient stormwater management. The increased concern is not surprising given the strength of the 2024 Atlantic hurricane season, which runs from June through November. The Atlantic Basin experienced an above average 18 named storms, including five hurricanes that made landfall in the continental U.S., impacting areas from Texas to Florida and up into North Carolina and Tennessee. To help communities mitigate water management challenges, we continue to build out our product portfolio. We recently launched a new stormwater treatment solution, the EcoStream biofiltration product. Biofiltration is a category in water quality designed to remove pollutants such as nitrogen, phosphorus, sediments, metals, and hydrocarbons through low impact, environmentally friendly systems that often incorporate green infrastructure. ADS's new biofiltration product has been approved by both the Washington DOE and the New Jersey CAT, the two leading testing agencies in water quality. Our new engineering and technology center is equipped with 90,000 gallons of a closed-loop hydraulics laboratory, which allowed us to test and commercialize this product much more quickly than was previously possible. We have also expanded our storage product offering with two new chambers, as well as a partnership with a plastic crates manufacturer. Expanding into plastic crates give us the ability to participate in deep storage applications that our current chambers are not designed to meet. Infiltrator continues to roll out their single tank residential advanced treatment solution, the Ecopod NX. This product is designed to meet new regulations that require higher levels of nitrogen removal to protect watersheds and the environment. Already, Infiltrator organic sales in the residential advanced treatment market have doubled this fiscal year, and advanced treatment remains a significant growth opportunity for Infiltrator. To that end, in the third quarter, we closed the acquisition of Orinco. This acquisition further enhances our product offering and complements Infiltrator products in the decentralized wastewater treatment market. Orinco is an excellent strategic fit for Infiltrator. We identified the advanced wastewater treatment opportunity at our 2022 Investor Day, and market demand has continued to grow since then. This acquisition establishes a leadership position and 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. On slide seven, we highlight three of Renco's product categories we are most excited about. The Advantex advanced treatment systems are complementary to the infiltrator products and increase our exposure to commercial systems as well as residential systems for infiltrators already used today. There's also an opportunity to use infiltrator tank products in the Advantex product line, which is historically only used tanks made of composite and concrete materials. The Pre-Lost product separates waste from wastewater, sending the liquid-only sewer to secondary treatment. This product is used in septic to sewer conversion and makes the process lower cost and less intrusive by avoiding significant disruption and investment in the existing infrastructure. The preloads product line and the controls business are incremental to today's Infiltrator offering. In addition, the controls business provides another cross-selling opportunity between Infiltrator and Orenco as Infiltrator currently purchases control panels from a third party. We're very excited about bringing Orenco to the infiltrator business and the collective opportunity in decentralized wastewater management. Finally, today we're announcing our 2025 Investor Day. We will be held on June 26 in Hilliard, Ohio at ADS's new Engineering and Technology Center. In addition to business updates and a new three-year plan, attendees will have the opportunity to tour the center which is the largest and most advanced stormwater engineering and technology center in the world. Invitations will be sent in the next couple of months, and we're very excited to display this one-of-a-kind facility that demonstrates our commitment to advancing material science, engineering, and product design for stormwater management. With that, I will turn the call over to Scott Cottrell to discuss our financial results. Thanks, Scott. The third quarter adjusted EBITDA decreased 6% year-over-year to $191 million. Favorable volume in the period was offset by unfavorable price costs, while manufacturing and transportation costs were relatively flat to the prior year. It's important, again, to highlight that pricing in the quarter was sequentially stable as we had expected. We continually evaluate our manufacturing network and costs, with a goal of optimizing our footprint without disrupting product availability and customer service. To that end, we recently announced the consolidation of one pipe manufacturing plant and two of our distribution yards. This strategic move is aimed at optimizing operations and ensuring that we allocate resources more effectively across the network. These actions will enhance overall efficiency, reduce operational costs, and continue to deliver high-quality service to our customers. On slide nine, we present our free cash flow. We generated $374 million of free cash flow year-to-date, compared to $564 million in the prior year. Our year-to-date capital spending increased 22% year-over-year to $166 million, and we now expect to spend approximately $225 million for the full year. At the end of the third quarter, our net debt to adjusted EBITDA leverage was one time, with $489 million of cash on hand and $590 million of availability under our revolving credit facility. With ample liquidity and low leverage, we are in a great position to execute on our capital deployment priorities. On slide 10, our disciplined approach to capital allocation remains unchanged. Our first priority is to grow the business organically, through capital investments and innovation, closely followed by strategic M&A to enhance our market position and scale. The capital investments we've made in the last several years are clearly paying off and one of the reasons for our continued strong profitability profile. We have reinvested $416 million back into the business during the first nine months of this year, as compared to $136 million in the prior year. while also returning $107 million to shareholders through dividends and share repurchases, staying true to our disciplined approach to capital allocation. Finally, on slide 11, based on our performance to date, current visibility, backlog of existing orders, and business trends, our fiscal 2025 revenue and adjusted EBITDA guidance remain unchanged. With that, operators, you may now open the line for questions.