Advanced Drainage Systems, Inc. (NYSE:WMS) Q3 2024 Earnings Call Transcript
Advanced Drainage Systems, Inc. (NYSE:WMS) Q3 2024 Earnings Call Transcript February 8, 2024
Advanced Drainage Systems, Inc. beats earnings expectations. Reported EPS is $1.34, expectations were $0.93. Advanced Drainage Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to Advanced Drainage Systems Third Quarter of Fiscal 2024 Results Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. I'd 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.
Mike Higgins: Thank you. Good morning, everyone. Thanks for joining us today. 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 all of that said, I'll turn the call over to Scott Barbour.
Scott Barbour: Thank you, Mike, and good morning, everyone. Thank you all for joining us on today's call. ADS had a very strong third quarter, generating better-than-expected growth and profitability as we saw the return to volume growth for the first time in several quarters. But before we get into the details, let me provide a bit of context to connect our water markets and the resiliency of the business model as we have navigated the last 18 months. As you know, ADS and Infiltrator are both highly relevant pure-play water companies and we play a critical role in developing sustainable water management solutions to protect and manage water, the world's most precious resource. I think we would all agree that the storm water infrastructure has not kept pace with climate trends related to water events creating a real problem for many communities.
I'd add to this, there is a growing need to more aggressively capture and reclaim water to recharge aquifers and rivers. Over the last several years, we have seen a secular trend of large-scale water-related climate events that are increasing in frequency, duration and intensity yet the existing water management infrastructure is not capable of mitigating the new normal. To obtain some data around this in November, we partnered with a Harris poll to survey Americans about water management and infrastructure. Over half of the participants indicated concern about the storm water management infrastructure in their communities. In fact, one out of five surveyed reported having experienced flooding in their homes. The results made it clear that Americans are not just worried about protecting their homes, but also ensuring storm water management practices are environmentally sustainable and improving the quality of life in their communities.
These results are collaborated by a growing body of evidence concerning the state of water management practices. In November, the Fifth National Climate Assessment was delivered to Congress and the President. The report indicates and I quote "climate change is intensifying rainfall and floods, deepening droughts and shifting weather patterns across the globe, causing profound effects on freshwater supplies and quality, rising sea levels, reduced snowpacks, shrinking rivers and declining groundwater threatened cities and rural communities and endanger forests, rivers and other ecosystems across the United States". Further, and I quote again, "while data and tools for water resources planning are improving, water infrastructure standards and management policies have been slow to meet the new challenges".
In addition, the New York Times recently published a series on the causes and consequences of disappearing water. According to their study, many of the aquifers that supply 90% of the nation's water systems are being severely depleted threatening irreversible harm to the American economy and society as a whole. As the leading storm water management company, we have an important role to play in highlighting these concerns to drive awareness and education as well as engineering solutions to mitigate the impact of these water-related climate events for the millions of people affected. Our products prevent flooding and build resilient communities in the face of these changing weather patterns. For over 30 years, ADS and Infiltrator products have helped recharge groundwater, returning it to aquifers, rivers and other natural sources.
To further enhance our offering, we recently established a strategic partnership with Rainwater Management Solutions, a provider of cutting-edge rainwater harvesting and reuse systems, Rainwater Harvesting Systems capture, divert and store rainwater runoff to be reused for applications such as irrigation, helping to combat water scarcity. This partnership brings together the technology and solutions built by David Crawford and his team at Rainwater Management Solutions and ADS' best-in-class go-to-market sales resources and distribution relationships, utilizing the StormTech stormwater chambers and infiltrators industry-leading in-ground tanks. By utilizing ADS' expertise in managing the entire life cycle of a rain drop, and RMS' innovative water harvesting solutions, the combined knowledge and innovation will deliver -- will enable the delivery of leading end-to-end storm water treatment systems in the complementary commercial and residential markets.
I'm personally very excited about this partnership with David and his team. In addition, Infiltrator recently launched the ECOPOD-NX, an advanced treatment solution for active on-site septic wastewater management. This product is the next generation of advanced wastewater treatment technology designed to meet new regulations that require higher levels of nitrogen reduction to protect water sheds and the environment. With this new product, Infiltrator will leverage its leading market knowledge and distribution network to penetrate new areas of the growing advanced treatment market. Infiltrator also introduced two new tank sizes IM-300 and IM-1250 as well as two new chamber products, the Quick 5 series, broadening our portfolio of products. The new tanks are manufactured using Infiltrator's unique 2-piece design technology which allows for increased transportation efficiency and ease of installation compared to other products on the market today.
Like other Infiltrator products, the new tanks and chambers are manufactured using recycled plastic material supporting our commitment to reducing our environmental impact in creating a circular economy for plastics. These partnerships and product launches demonstrate our strategic commitment to improving the environment and the communities where we work through innovative water management solutions. In our space, no one is innovating and investing in manufacturing at scale like ADS and Infiltrator bringing new solutions to market that address the need for better water management solutions in the United States. On that note, construction continues on our world-class engineering and technology center in Ohio. This facility will allow us to innovate faster and launch new products more quickly.
As we bring material science, product development and manufacturing engineering under one roof we will drive the velocity of commercialization for our customers and the industry. The investments we are making in partnerships, material science, product innovation and manufacturing technology will continue to strengthen our position as the leading water management solutions provider now and well into the future. Now moving to the third quarter results. We continue to see better-than-expected performance in the Infiltrator business and the Allied Products portfolio in the third quarter. Demand and pricing for the ADS pipe portfolio continue to perform largely in line with expectations. Importantly, this quarter saw volume growth return at both ADS and Infiltrator primarily driven by the infrastructure, residential and agricultural end markets.
Infrastructure sales increased 22% in the quarter, driven by demand at the local funding level as IIJA funds begin to flow. The team is seeing good activity, including spending on roads and highways, airports and rail projects. Residential market sales increased 5% this quarter, driven by 17% growth in Infiltrator. Overall, the residential market has stabilized and land development activity improved during the quarter. Our business development team is doing a fantastic job building relationships with large national homebuilders to get ADS further upstream in the land development process. Nonresidential market sales were down 3% in the quarter, a significant improvement from the first half of this fiscal year as the comparisons improved. While we have seen this market begin to stabilize on a year-over-year basis, we remain cautious due to the higher interest rates, tighter credit standards and continuing macroeconomic uncertainty.
From a margin perspective, we once again demonstrated the resilience of the business model. Adjusted EBITDA margin expanded 490 basis points to 30.8% this quarter, this marks the eighth quarter in a row of year-over-year margin expansion. The margin performance this quarter benefited from sales mix and previous investments in the business, including automation, more efficient production lines and tooling, effective management of price cost and continuous improvement within the operations. As we move into the final quarter of this fiscal year, we updated our guidance ranges to reflect the results to date as well as the improved demand environment and increased profitability. We will continue to focus on delivering exceptional service to our customers and pursuing profitable growth through attractive products, markets and partnerships while at the same time, continuing to invest capital and resources at both ADS and Infiltrator to drive growth and profitability over the long-term.
With that, I will turn the call over to Scott Cottrill to further discuss our financial results.
Scott Cottrill: Thanks, Scott. In the third quarter, revenue increased 1% overall, driven by volume growth at both ADS and Infiltrator. Price cost was also favorable due to material cost favorability, partially offset by modestly lower pricing during the quarter, consistent with our expectations. Equally of note, this quarter's manufacturing cost was favorable as we are seeing the benefit from investments we've made in new equipment, automation and tooling. In particular, the operating performance in Infiltrator has been impressive this year, as we see the benefit from the operation of the newer, more efficient equipment we've invested in since acquiring them in 2019. On Slide 9, we present our free cash flow. We generated $564 million of free cash flow through the third quarter of fiscal 2024, compared to $534 million in the prior year, an increase of 6%.
Year-to-date free cash flow primarily benefited from an improvement in working capital. Capital spending increased 8% to $136 million year-to-date as we continue to make investments to increase automation, grow our manufacturing and recycling capacity, increased productivity as well as build the new world-class engineering and technology center here in Hilliard, Ohio. Thoughtful allocation of our shareholders' capital continues to be a key focus for the management team, given the strong cash generation of the business. Our first priority for capital deployment remains investing organically in the business which we view as the lowest risk, highest return use of capital. We will continue to focus in areas that align with our long-term strategic objectives, including accelerating innovation around new products and new technologies that add to our storm water and wastewater solutions packages, increasing our production capacity related to products and regions that have superior demand and growth characteristics, debottlenecking and expanding our recycling operations, as well as enhancing our material science and blending capabilities, increasing the productivity and efficiency of our manufacturing network.
And finally, upgrading our transportation assets, including the use of the latest telematics and safety technology to better protect our drivers and to provide superior delivery and customer service. We expect to spend approximately $200 million on capital expenditures this year and remain bullish on the pipeline of organic investment opportunities in front of us. Our second priority is acquisitions that are close to our core, while remaining open to close adjacencies that would provide meaningful synergy opportunities as well as new platforms consistent growth and expanding our total addressable market. We employ a disciplined process for identifying and evaluating acquisition opportunities to ensure alignment with our long-term strategic objectives.
Third, we will continue to buy back shares under the current $1 billion share repurchase program. Since the inception of the $1 billion share buyback program in 2022, we have repurchased approximately 7.7 million shares or 9% of the shares outstanding when the program was announced with 1.6 million shares being repurchased in fiscal 2024 year-to-date. Lastly, we remain committed to our quarterly dividend paid to shareholders of $0.14 per quarter, a 17% increase year-over-year. Moving on to Slide 10, we present our updated fiscal 2024 guidance ranges. We increased the revenue guidance, which is now expected to be between $2.8 billion and $2.85 billion. We also increased the adjusted EBITDA guidance, which is now expected to be in the range of $880 million to $910 million.
Today's guidance reflects, first, the stabilization and improvement in demand we've seen in our end markets. Second, a positive sales mix from better-than-expected performance in the Infiltrator and Allied Products businesses. Third, relatively flat price cost year-over-year through the end of this fiscal year. Fourth, January's results, which reflected a continuation of the trends we saw during the third quarter and have highlighted here. And lastly, the volatility that comes with the seasonality of our business in the fiscal fourth quarter. We remain focused on executing on our long-term strategic plan to drive consistent long-term growth, margin expansion and free cash flow generation. With that, I'll open the call for questions. Operator, please open the line.
Operator: [Operator Instructions] Our first question comes from the line of Jeff Hammond from KeyBanc Capital Markets. Your line is open.
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