Advanced Drainage Systems, Inc.

Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems' fourth quarter and fiscal year 2026 results conference call. My name is Tracy, 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, press star 1 to raise your hand. To withdraw your question, press star 1 again. 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. Thanks for joining us today. With me today, I have Scott Barber, our President and CEO, Scott Cottrell, our Chief Financial Officer, and Craig Taylor, President of our Infiltrator business. 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 AK submitted to the SEC. We will make a replay of this conference call available via webcast on the company website. I'll now 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 are pleased to close out fiscal year 2026 with strong results, and we have a lot to cover today, including our fourth quarter performance, full year results, an update on the NDS integration, and a preview of what lies ahead as we prepare for our upcoming investor day. A lot happened in the fourth quarter. Despite the quarter being our most weather-dependent and seasonally variable period, we executed well and delivered results that reflect the strength and breadth of our portfolio. The diversification across our allied products, infiltrator business, and the HP pipe products, combined with the continued execution of our market share model, allowed us to navigate a challenging demand environment and close the fiscal year on a strong note. Let me touch on a few highlights. As you saw in the press release, following the acquisition of NDS, we updated our reporting segments to stormwater and wastewater as reflected in the results today. The stormwater segment contains the legacy ADS business, pipe and alloy products, as well as acquisitions we have made in the space, NDS, Coltec, and River Valley Pipe. The wastewater segment contains the legacy infiltrator business, as well as the acquisition of Orenco. Excuse me. Stormwater revenue increased 12%, driven by a 43% increase in allied product sales, including the $49 million contribution from the NDS acquisition that closed February 2nd. On an organic basis, stormwater sales increased 2% overall, with a 12% growth in allied products. Once again, revenue in several highly profitable products grew double digits. including the StormTech retention detention chambers, the Nidal Plast capture structures, and our water quality product line. These product lines continue to benefit from new product introductions and ongoing customer programs. Pipe revenue decreased 2%, reflecting softness in the residential and infrastructure markets. Agriculture sales increased 30% in the quarter as customers bought ahead of price increase. Pricing remained stable throughout the quarter, and material costs were favorable relative to the prior year. Waste water revenue increased 4% with strong activity in the southeast and south. Tank products increased double digits, driven by material conversion, product line expansion, and additional distribution. Leach field sales remained resilient, and our advanced treatment systems, including Orenco, continued to gain share in both residential and commercial applications. From an in-market perspective, sales in our core non-residential market increased 6%. With strength in the West and Midwest, sales of Allied products experienced broad-based growth across the U.S. as we continued to focus on selling the complete package. Sales in the residential in-market increased 18%, including the impact from NDS. Excluding NDS, residential sales decreased 1%. Single-family housing continues to face headwinds from affordability and interest rate dynamics, in addition to geopolitical uncertainty. Importantly, we continue to see improving trends in the multifamily development. The infiltrator core residential business continues to significantly outperform the market, driven by new products and new distribution partners. we remain confident we have the right strategies in Portolio to increase our participation in the residential market as conditions inevitably improve. Moving to profitability, adjusted EBITDA increased 6% in the quarter, resulting in an adjusted EBITDA margin of 27.8%. This quarter's resilient margin is a reflection of the favorable growth, product mix, and price costs, as well as operational self-help initiatives, and the capital invested over the last several years. Turning to the NDS integration, we are pleased with the progress made since closing the acquisition in February. The NDS team is a strong cultural fit, and we are on track to achieve our integration milestones. We continue to expect $25 million in annual cost synergies by year three, and we are increasingly excited about the revenue synergy opportunities as we expand the collective product portfolio across our distribution and retail channels. We look forward to talking about NDS at Investor Day. Regarding the upcoming Investor Day, which will take place on June 18th at our Engineering and Technology Center in Hilliard, Ohio, we are looking forward to sharing updates on our differentiated growth strategy and our resilient profit platform, as well as our medium-term financial targets and the payoff from the significant capital we have deployed over the last several years. We hope to see you all there. Please reach out to the investor relations team with any questions about the event. Fiscal year 2026 was a milestone year for ADS, and I'm very proud of the entire organization for how we executed. We closed the highly strategic acquisition of NDS almost entirely with cash on hand, delivered one of our most profitable years in our history, generated significant free cash flow, returned $155 million to shareholders, and continued to invest in the capabilities that will define our next phase of growth. We significantly outperformed our two largest markets, non-residential and residential, increasing 8% and 7% respectively. These two markets represent over 80% of our revenues. The self-help operational initiatives we launched over a year ago are clearly bearing fruit and our teams executed at a high level, despite a challenging demand environment, resulting in the second highest adjusted EBITDA margin in the company's history of 31.6%. As we look into fiscal 2027, overall demand at this point looks similar to fiscal 2026, with a slightly more negative outlook on agriculture and single family housing. Demand is very choppy. with order patterns shifting as customers try to get orders in ahead of price increases. This could result in an air pocket this summer, though we expect this to normalize overall within the first half of the year. The non-residential market is modestly more resilient, expected to be flat to up low single digits. Activity in this market is driven by strength in large projects like data sets. We are well positioned to win these jobs due to the solutions package, installation benefits, last mile delivery, and the national network that we have, all of which position us to capture a larger portion of the stormwater systems. The residential market remains under pressure with interest rates as well as economic and geopolitical uncertainty impacting construction activity. We expect to outperform the market driven by our sales efforts to work with large national and regional home builders, focus on the cross-selling opportunities, and capitalize on the growing portions of the market, such as advanced treatment and the multifamily development. When you stack up our strengths, the scale, product portfolio, go-to-market strategy, installation benefits, logistics capabilities, and our ability to invest in the business, people, and industry growth, you see the ADS value proposition remains both relevant and powerful. Overall, the long-term outlook for our business remains strong, supported by compelling secular tailwinds, driving demand for water management solutions across North America. Now I'll turn the call over to Scott Cuthrow. Thanks, Scott. Before I get into the details, I want to step back and highlight a few key takeaways from the quarter. We delivered excellent financial performance, exceeding the top end of both our revenue and adjusted EBITDA guidance ranges. We also closed the NES acquisition in early February, representing a $1 billion investment that strengthens our portfolio and positions us well for long-term growth. As you saw in our press release, we announced a new segment and reporting structure to better align with how we think about and manage the business. And finally, we fortified the balance sheet through a series of capital structure actions that extended our weighted average maturities to more than six years, while lowering our weighted average cost of debt by 30 basis points. These actions, combined with our strong cash generation, resulted in year-end leverage of only 1.6 times, inclusive of the $1 billion NDS acquisition, and most importantly, provided the flexibility and optionality to support our capital allocation priorities in fiscal 2027. For the fourth quarter, revenue increased 10% to $677 million, including the impact from NDS. On an organic basis, revenue from allied products, tanks, and residential advanced treatment all increased by double digits, as Scott mentioned. Importantly, we believe our results outpaced the underlying end markets, demonstrating the differentiated growth strategy and resiliency of the ADS business model. From a profitability perspective, we are very pleased with the 27.8% adjusted EBITDA margin for the fourth quarter. A couple of things I feel worth noting regarding the quarterly results. First, the fourth quarter is the fourth consecutive quarter of volume growth and favorable price costs. Regarding manufacturing and transportation costs, we are seeing significant inflation on diesel and common carrier rates, and we experienced incremental transportation costs related to the strong demand during the quarter, particularly in the West, coupled with increased oil prices and greater macroeconomic uncertainty. Importantly, we continue to benefit from the capital invested over the last several years in new production lines and automation improvements. Regarding SG&A, the year-over-year increase was driven primarily by the acquisition of NDS, as well as incremental compensation expense related to the strong four-year results. On slide eight, we present our free cash flow. For the full fiscal year, we generated $569 million in free cash flow compared to $369 million in the prior year, primarily driven by increased profitability and effective working capital management. The OBBBA contributed an incremental $35 million of free cash flow benefit in fiscal 2026. Cash flow operations for the full year totaled $819 million. representing an 85% conversion of our adjusted EBITDA. In February, we refinanced near-term maturities of our 2027 senior notes and our term loan B, as well as increased our revolving credit facility to $750 million. Our weighted average cost of debt is now 5.65%, which we view as highly favorable in the current environment. And our weighted average maturities are now over six years. as compared to two years prior to these transactions. We ended the fiscal year with leverage of approximately 1.6 times, as I mentioned previously. In addition, in the fourth quarter, we repurchased 720,000 shares of common stock under existing repurchase authorization. Moving to slide nine, thoughtful capital deployment continues to be a key focus for the management team and the board. given the strong cash generation of the business. In fiscal 2026, we deployed $1.4 billion of capital, with $1.2 billion invested in growth. We spent $250 million of that on capital expenditures, with investments focused on executing growth initiatives in key geographies, customer service, productivity, and automation initiatives, expanding our production capacity at Infiltrator, as well as increasing our recycling capacity in the southeast. We also returned $155 million to shareholders through dividends and repurchases, an increase of 29% over the prior year. Today, in a separate press release, we announced an 11% increase in our dividend, demonstrating our ongoing commitment to returning capital to shareholders while also continuing to invest in the growth of the business. Moving on to slide 10. we are introducing our fiscal year 2027 guidance today. Based on current visibility, backlog of existing orders, our end market outlook, and the trends we see entering the fiscal year, including the continued integration of NDS, we're establishing the following guidance ranges for fiscal year 2027. We expect revenue to be in the range of $3.35 billion to $3.55 billion, and adjusted EBITDA to be in the range of $1 billion to $1.5 billion. For guidance purposes, we're assuming significant year-over-year inflationary cost pressure on input material costs as well as transportation costs. We've taken pricing actions to offset these inflationary pressures on a dollar-for-dollar basis. We expect normal revenue seasonality with approximately 55% of revenue in the first half of the year Quarterly revenue patterns in the first half of the year may be affected by customers trying to buy ahead of anticipated price increases. This guidance also includes approximately $300 million of revenue from NDS for the full fiscal year. We remain focused on executing 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.