Advanced Drainage Systems, Inc.

Ladies and gentlemen, thank you for standing by. Today's presentation will start in two minutes. Thank you for your patience. You will be placed back on music hold until the call begins. Good morning, ladies and gentlemen, and welcome to advantage drainage systems, first quarter of fiscal year, two thousand twenty six results conference call. My name is Tamika 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, press star followed by the number one on your telephone keypad. If your question has been answered and you would like to remove yourself from the queue, press star one. I would now like to turn the presentation over to your host for today's call, Mr. Mike Higgins, vice president of corporate strategy and investor relations. Sir, you may begin.

Good morning, everyone. 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 case submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. With all that said, I now will 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 generated strong results in the first quarter, delivering a resilient thirty three point five percent adjusted EBITDA margin despite a challenging market environment. The ADS and Nipple Trader teams executed well and remained focused on driving profitable growth and operational excellence by executing our market share model, introducing new products, pursuing acquisitions and and investing capital for long term growth. Revenue increased two percent overall, primarily driven by the Orenco acquisition. Organic sales were down slightly, though our core non-residential and residential in markets were resilient in the quarter. Importantly, Allied Products and Nipple Trader, which are two of our higher margin categories, increased revenue in the quarter. We continue to build on the strong foundation of the ADS story. We operate in highly attractive water segments supported by secular tailwinds from changing climate patterns, as well as the increasing awareness of the societal value of proper stormwater and on site wastewater management, ultimately driving long term demand for the company's products. ADS is the only company with solutions that extend throughout the entire stormwater system on a national scale. Through our best in class portfolio of water management products, we deliver solutions that are safer, faster to install and lower cost through savings on labor and equipment. To meet the needs of our customers and communities, we continue to bring innovative solutions to the market that expand and evolve our product offering. In June, ADS launched the Arcadia Hydrodynamic Separator, a high performance water quality separator product designed to remove suspended solids. With industry leading performance, this product addresses the need to protect water resources from pollution. This product comes on the heels of the new stormwater treatment solution, the EcoStream biofiltration product launched in the latter half of physical 2025. Both of these water quality products are designed to remove pollutants such as nitrogen, phosphorus, sediments, metals and hydrocarbons in different applications. Water quality remains a key growth area for ADS and this category has grown at high teens' cage over the last three years as regulations requiring stormwater treatment continue to evolve. Our new engineering and technology center equipped with a 90,000 gallon closed loop hydraulics lab allowed us to test and commercialize these products more quickly than was previously possible. For context, that is the amount of water used by the average US household over the course of two and a half years. This lab has the capacity to move water at 2,300 gallons per minute and compare that to the water pressure in your average kitchen sink of two to three gallons per minute and it will give you an idea of the capability of our new engineering and technology center. Additionally, demand in the advanced treatment market is also a key focus area and we are pleased with ARINCO's strong start to the year with growth in commercial applications as well as controls. ARINCO's performance was a significant contributor to driving infiltrators' 21% growth this quarter, complimented by double digit organic growth and on-site wastewater tanks where conversion to plastic remains highly relevant. Domestic allied product sales increased 1% driven by demand in the multifamily residential market where we experienced double digit growth of key products like retention detention chambers, water quality products and our stormwater capture structures. More broadly, residential market demand was highly variable depending on geography and application. While multifamily construction improved, single family housing continues to be impacted by the interstate environment and affordability constraints. From a geographic lens, we saw better land development activity in the west and northeast but the DIY channel we serve through service through big box retailers was challenged. Infiltrator core products, both leach field chambers and septic tanks, significantly outperformed the market. We will continue to drive growth through product introductions and material conversion opportunities while also building on the relationships with the large national and regional home builders to drive above market growth in residential construction. In the non-residential market, growth was driven by acquisitions and strong execution from our sales team, particularly commercial construction activity in the Midwest, Atlantic Coast, South and Southeastern United States. We continue to see good activity in data centers and large projects and believe that underlying demand in key geographies was impacted by heavy rainfall and high temperatures, particularly in May and June. With respect to infrastructure, despite revenue being down this quarter compared to the prior year, it was actually the third highest revenue quarter in the company's history. As a reminder, this segment is more concentrated in geographies where we have stronger approvals and often large projects like airports can make quarterly performance uneven. That said, over the long term, the demand drivers remain strong. Over 50% of the IIJA's highway and street funds will be spent over the next five years, so we continue to feel good about the overall direction of the infrastructure market. Moving to profitability, this quarter's .5% adjusted EBITDA margin is among the highest in the company's history, despite a challenging demand environment. Excluding a RENCO, the consolidated margin would have been 34.1%. Importantly, overall pricing remains stable sequentially as expected. Price cost was favorable in the quarter, benefiting from favorable material cost as well as product mix. Manufacturing costs were unfavorable as expected due to the fixed cost absorption on inventory produced over the winter months. We were able to offset a portion of that with favorable transportation costs driven by the better performance of new assets and implementation of new programs. Also of note, we recently began to wind down operations at a distribution yard and a small pipe manufacturing operation. With the capacity investments in the region and acquisition of River Valley pipe, we were able to eliminate some inefficient production while also improving our customer service and delivery. Over the last year, we have taken fixed costs out of the ADS network by closing two pipe production operations, a recycling facility, and three distribution yards without compromising any customer service. We can do this because of the investments we have made in new lines, rebuilds, and the planning programs implemented over the last several years. To illustrate this point, on average, ADS production per line increased by over 20% compared to pre-COVID levels. And the strategic capital invested over the last several years has allowed us to remove inefficient equipment from the network. I'm very proud of the team for the performance delivered in a challenging quarter, their disciplined execution and commitment to continuous improvement resulted in our safest quarter ever, achieving a record low total recordable incident rate below 1.5 compared to an industry average of 3.2. These achievements reflect our ongoing focus on operational excellence and safety, which are foundational elements of our sustainable growth strategy. When you stack up our strengths, the scale, the product portfolio, our go-to market strategy, and the ability to invest in both our businesses, our people, and industry growth, you can see ADS as a powerful value proposition. In summary, we continue to execute effectively in a challenging environment, preserving strong margins, and enhancing our mix towards more profitable products and geographies. Our self-help operational initiatives are now bearing fruit. We've increased the capacity of the existing production lines and added new ones in strategic areas to meet customer demand. We've also upgraded the service and delivery experience for our customers, leveraging new digital tools across our platform. While we navigate the near-term environment, we do so with an eye towards the future. We remain firmly committed to our long-term vision and will continue investing in the capabilities that will position us for future success. Overall, that long-term outlook for our business remains strong, supported by compelling secular tailwinds driving demand for water management solutions across the U.S. Now I'll turn the call over to Scott Cottrell. Thanks, Scott. On slide five, we present our first quarter of fiscal 2026 financial performance. Revenue increased 2% to $830 million, despite challenging end-market demand. Importantly, we believe our results outpaced our end markets overall, demonstrating the resilience of the ADS business model. As Scott noted, from a profitability perspective, we are very pleased with the .5% adjusted EBITDA margin in the first quarter. A couple of things I feel are worth reiterating. First, pricing remained stable sequentially, as we had indicated and expected. Second, price cost was favorable year over year. From a manufacturing perspective, while we did experience unfavorable fixed cost absorption during the quarter, we were able to partially offset such with favorable transportation, as well as favorable variable manufacturing cost performance. Regarding SG&A costs, the -over-year increase was primarily driven by the acquisition of Orenco, as well as continued investments in areas that drive long-term shareholder value, such as resources and talent at our world-class engineering and technology center. We have worked to offset these increases by containing costs in travel, marketing, and other discretionary expenses. Again, despite choppy end-market demand, it is important to highlight the company's performance and the resulting .5% EBITDA margin, one of the highest margins in the company's history, despite end-market weakness, demonstrated the continued resilience of the ADS business model. On slide six, we present our free cash flow for the quarter. We generated $222 million of free cash flow year to day, compared to $126 million in the prior year, primarily driven by better working capital performance. Of note, we expect the OBVBAA to result in an incremental $30 to $40 million of free cash flow this fiscal year. Thoughtful capital allocation continues to be a key focus for the management team and our board, given the strong cash generation of this business. We spent $53 million on capital expenditures in the first quarter, and we now expect to spend approximately $200 million to $225 million for the full year, focusing on innovation and product development at the new world-class engineering and technology center, as well as increasing our recycling capacity in the Southeast, continued investment in customer service, productivity, and automation, as well as executing on growth and key geographies. We ended the quarter with less than one turn of net leverage and over $1.2 billion in available liquidity, including $638 million of cash on hand. This level of financial strength gives us exceptional flexibility to invest with conviction and respond quickly to strategic opportunities as they arise. Our capital allocation priorities remain focused on value creation levers, such as capital expenditures, innovation, and acquisitions. Moving on to slide seven, while pleased with our performance in Q1, given the continued uncertain demand environment, our guidance ranges remain unchanged. We remain focused on executing our long-term strategic plan to drive consistent long-term growth, margin expansion, and free cashflow generation. With that, I will open the call for questions. Operator, please open the line.