Advanced Drainage Systems, Inc. (NYSE:WMS) Q1 2024 Earnings Call Transcript

Advanced Drainage Systems, Inc. (NYSE:WMS) Q1 2024 Earnings Call Transcript August 5, 2023

Michael Higgins: Thank you, and good morning. With me today, I have Scott Barbour, our President and CEO; and Scott Cottrill, 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 8-K submitted to the SEC. We will make a replay of this conference call available via webcast on the Company website. With that said, I'll turn the call over to Scott Barbour.

Scott Barbour: Thank you, Mike. Good morning. Thank you all for joining us on today's call. We appreciate your time. The first quarter was a solid start to the year and highlighted the resiliency of the ADS model even in the face of lower market demand. The net sales and adjusted EBITDA results exceeded expectations, primarily driven by better-than-expected performance from the Infiltrator business and the Allied Products portfolio. Importantly, the positive mix effect from these two segments as well as strong execution on pricing, good control over material and operational cost and the benefit from actions we took during the second half of last year to reduce manufacturing and transportation costs in the lower demand environment led to a record 36.2% adjusted EBITDA margin.

This is the highest quarterly margin in the Company's history and 350 basis points higher than the same quarter last year. This record profitability was achieved despite a 15% demand-driven sales decline in the quarter. I'd like to highlight growth in three highly strategic areas of the business today that are in part representative of the large opportunity in front of the business. Sales of Infiltrators active treatment products and ADS' HP Pipe and Water Quality products all increased this quarter due to the successful execution of the market share model. In particular, sales of the active treatment and water quality products are dependent upon the intensely local knowledge of our sales force as product requirements and standards vary significantly depending on the local regulations.

Our business model incorporates a high-touch sales team, combined with a national distribution footprint and engineering services support. The growth of these products in the quarter demonstrates the resilience of that business model even in the unfavorable demand conditions. As communities and developers deal with the increasing effects of heavy rainfall and water scarcity, ADS is a trusted resource in the development of standards and practices around management of water, the world's most precious resource, helping to safeguard our environment and communities. Developers, contractors and distributors recognize our expertise and value proposition as they continue to choose ADS and Infiltrator as the premier partner for water management solutions.

Water management remains a critical aspect of proper infrastructure development and storm water management, highlighting the ADS brand promise, our reason is water, whether it be flood mitigation, nitrogen removal, water quality improvement or water conservation, we remain focused on staying true to our foundational mission to provide clean water management solutions to communities and deliver unparalleled service to our customers. Now let me provide an update on what we are seeing in the end markets. From a residential perspective, the overall shortage of available housing and lack of existing homes for sale in the United States, continues to give us confidence in the long-term market growth potential and opportunity for further market penetration.

The outlook for single-family housing starts has improved since the beginning of the year which in turn benefited sales of infiltrators, leach field chambers and septic tanks. Though demand was down overall, sales picked up sequentially through the quarter alongside the improvement in single-family housing starts. This improvement in outlook has not yet resulted in increased residential land development activity where ADS products are sold early in the development cycle. However, as single family housing starts improve, the available inventory of land will decrease, driving the land acquisition and development activity to follow. In the nonresidential market, we primarily participate in horizontal low-rise construction projects. Financing in the nonresidential market can be impacted by credit availability from small and regional banks including tightening credit standards and higher loan-to-value requirements.

We are seeing this impact the demand for speculative development projects, four purpose projects such as the ADS engineering and technology center we are building and many large-scale development projects continue to move forward. There continues to be uncertainty as to how the back half of this year will play out and whether the government stimulus programs like the IIJA, IRA and CHIPS Acts will be able to offset the impact of lower demand in other segments of the residential market. We are closely tracking projects related to these government stimulus programs, including semiconductor, automotive, battery and EV projects among others. We quote on these projects utilizing our business development team to pursue relationships with contractors, distributors and engineers that are working on these projects.

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This is the same strategy we previously used to successfully build relationships with the related parties in warehouse and data center development as well as the large national and regional homebuilders. Within the infrastructure market, which increased 1% this quarter for us, the IIJA activities are starting to pick up. As we have talked about before, the initial funding has primarily been allocated to repair work, and the real capacity expansion projects are still to come. We continue to see good quoting activity for airport projects where the transportation benefits of ADS products are very attractive to contractors. In the agriculture market, our outlook remains favorable as farm economics continue to do well. The contractor installation window in the upper Midwest was compressed in the spring due to weather, but we expect to see that business pick up in the fall, in areas less impacted by late-breaking winter or heavy participation like the Lower Midwest, the spring season was basically on plan.

Moving to profitability. Our adjusted EBITDA decreased 6% this quarter on a dollar basis due to the lower demand environment. The adjusted EBITDA margin increased 350 basis points to 36.2%. The short-term weakness in demand we began to see in the back half of calendar year resulted in lower fixed cost absorption in the period. However, the actions and initiatives we've taken to align our cost with this lower demand environment allowed us to mitigate some of the headwinds we faced and our first quarter results are the product of the ADS resilient business model and the successful execution of operational strategies at both ADS and Infiltrator. I want to highlight the progress on our world-class engineering and technology center. As we talked to you last, we directed steel beams for the structure, which is on track to open in 2024.

I'm very excited that this facility will bring product design, material science and manufacturing technology under one roof to increase our pace of innovation and incorporate more recycled content into our products. In summary, we're off to a very good start to the year in the lower demand environment. ADS' value proposition, solutions package, conversion strategy and unique sustainability position in water and recycling remain highly relevant and we are committed to being the leader in sustainable water management solutions. We will continue to manage cost and production to meet our commitments in this lower demand environment that's in front of us. But importantly, we are managing the business for the upturn in the residential and the nonresidential markets.

We will continue investing in capacity in underpenetrated geographies, new products, automation, safety and maintenance to ensure that when the market ramps up, we have good service and the right capacity to be the partner of choice for contractors and engineers. With that, I'll turn the call over to Scott Cottrill to further discuss our financial results.

Scott Cottrill: Thanks, Scott. As Scott has largely covered revenue and profitability results for the quarter, I will move straight to Slide 7, where we present our free cash flow. We generated $202 million of free cash flow year-to-date compared to $214 million in the prior year. Our year-to-date capital spending increased 17% year-over-year to $42 million as we continue to make investments to grow our manufacturing and recycling capacity, make productivity improvements as well as build out our new world-class Engineering and Technology Center here in Columbus, Ohio. Our capital allocation strategy and priorities remain unchanged: first, investing in the business organically through capital investments in growth, productivity, recycling and innovation.

For the full year, we expect to spend between $200 million and $225 million on capital expenditures. Second, we'll continue to focus on acquisitions that are close to our core, while being open to close adjacencies that will provide future platforms for growth and expansion of our current addressable market. Third, we will continue to buy back shares under our current share repurchase program. In the first quarter, we repurchased 500,000 shares for a total of $48 million leaving $377 million under our current existing authorization. Finally, we are committed to the quarterly dividend paid to shareholders. This year, we are returning $0.14 per share quarterly, an increase of 17% from the $0.12 per quarter we paid in the prior year. We also will continue to return excess cash to shareholders through our share repurchase program and recurring dividend as we move through the year.

Moving on to Slide 8. We show our fiscal 2024 guidance ranges, which are unchanged with revenue at $2.6 billion to $2.8 billion and adjusted EBITDA expected to be between $725 million to $825 million. We are encouraged by our results in the first quarter. The demand environment in July continued to perform in line with the trends we saw in the first quarter. We are also keeping a close eye on order rates and backlog so we can respond quickly to changes in the demand environment when needed. Given today's results, it is fair to say we are trending to the upper end of our adjusted EBITDA guidance range, though there still remains uncertainty in the nonresidential market as to the impact of credit tightening on developmental projects. We will revisit our guidance at midyear and update you as appropriate on our next quarterly earnings call.

We remain focused on executing the plan and investing in the business for the long term, for long-term growth, margin expansion and free cash flow generation. With that, I'll open the call for questions. Operator, please open the line.

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