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Edited Transcript of WMS earnings conference call or presentation 6-Feb-20 3:00pm GMT

Q3 2020 Advanced Drainage Systems Inc Earnings Call

Hilliard Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Advanced Drainage Systems Inc earnings conference call or presentation Thursday, February 6, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald Scott Barbour

Advanced Drainage Systems, Inc. - CEO, President & Director

* Michael Higgins

Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR

* Scott A. Cottrill

Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer

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Conference Call Participants

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* John Lovallo

BofA Merrill Lynch, Research Division - VP

* Joshua Charles Pokrzywinski

Morgan Stanley, Research Division - Equity Analyst

* Matthew Adrien Bouley

Barclays Bank PLC, Research Division - VP

* Michael Patrick Halloran

Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. And welcome to Advanced Drainage Systems Third Quarter Fiscal 2020 Results Conference Call. My name is Amy, and I am your operator for today's call. (Operator Instructions)

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.

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Michael Higgins, Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR [2]

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Good morning, everyone. Thank you for joining us today. With me, 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 the 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 now turn the call over to Scott Barbour.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [3]

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Thanks, Mike, and good morning, everyone. We're happy to have you all join us today on our call. Our third quarter financial results were very strong, building on the momentum from the first half of the year as we continue to execute on our growth and strategic priorities. There were a handful of performance drivers this quarter, which I would like to hit right up front. First, the legacy ADS business continues to outpace the broader market, and we are confident that our business is positioned to continue to outperform as we move into calendar 2020. The traditional ADS profitability levers of strong growth, favorable pricing and material cost as well as disciplined execution drove margin expansion and improved profitability during the quarter. The Infiltrator Water Technologies business is performing ahead of initial expectations driven by double-digit growth in chambers and tanks and strong volumes in the South, Midwest and Eastern United States.

The strong growth across both businesses, in addition to improved profitability, resulted in a record third quarter adjusted EBITDA margin. When combined with effective working capital management, we were able to generate $133 million more in free cash flow compared to the prior year period. This allowed us to pay down an additional $50 million in debt this quarter and rapidly deleverage. We ended the quarter 2.5x levered on a pro forma trailing 12-month basis and 3x levered on a reported basis, approximately 9 to 12 months ahead of our previously stated expectation to reduce leverage to 3x by the end of calendar year 2020.

Overall, the performance of both the legacy ADS business and the Infiltrator Water Technologies business positions us very well as we move into the last quarter of the year and into our fiscal 2021. Given our outperformance on all fronts in the past 9 months, we are currently tracking to the high end of our revenue and adjusted EBITDA guidance ranges.

With that, I'll provide a bit more color on our performance for the quarter, starting with sales. Top line growth of 24% was driven by strong organic growth of 5% as well as the meaningful contribution from Infiltrator Water Technologies.

Turning first to the legacy end markets. Core domestic construction market sales grew 4% driven by successful execution of our conversion and water management solution strategies as well as our focus on our key growth regions of the U.S. We continue to expect favorable tailwinds such as low interest rates, favorable housing trends and healthy consumer confidence to support the domestic construction markets through the balance of fiscal 2020, reinforced by the strong backlog and order activity that we see. Domestic agriculture sales were up 29% in the third quarter due to the same favorable market dynamics we saw last quarter, including the prevented plant acres and the pent-up demand, which we were able to capitalize on through our organizational changes, new product introductions and focused execution. Although overall, domestically, we generated broad-based growth across the United States with strength in key states such as Florida, Indiana, Utah and Wisconsin. We also experienced strong growth in Allied Products, particularly in our Storm Tech retention/detention chambers and Nyloplast catch basins, as we focus on getting more product specified and sold as a solutions package.

Turning quickly to international performance. Our international business finished the quarter just marginally down. Sales in Canada were strong, up 8% this quarter, primarily due to robust growth in Ontario agriculture market and partially offset by a softer-than-expected Quebec construction market. I was in Canada last week visiting with our sales and operations teams in both Ontario and Quebec. We are focused on building a solid plan for fiscal 2021. Our profitability has improved in Canada over the last 2 years, and we'll work together with our Canadian team to drive our water management solution strategy and our agriculture business to profitable growth in this important segment of our business.

Moving on to Mexico. We believe the market has stabilized. While sales in the country were still down this quarter, order pace has improved against easier year-over-year comparisons. However, we still think that there is some uncertainty in the condition of the local market. Finally, Infiltrator Water Technologies had a very good quarter with revenue ahead of our initial expectations as we capitalize on the strengthening domestic housing market. Third quarter revenue was $72 million with strong growth in plastic tanks and chambers as those products continue to drive conversion from traditional materials and on-site septic systems.

From a profitability standpoint, adjusted EBITDA grew 89% in the third quarter, and margins expanded 800 basis points driven by strong organic margin improvement as well as margin growth for Infiltrator Water Technologies. Organic profit growth was driven by the traditional ADS levers of strong top line growth, disciplined pricing as well as favorable resin and recycling costs. We are also gaining traction on our transportation and operations initiatives with better payload efficiency and lower manufacturing cost in the third quarter. On a stand-alone basis, the legacy ADS adjusted EBITDA margin increased 440 basis points. Coupled with the incremental benefit from consolidating Infiltrator Water Technologies, this improvement in organic profitability increased our margin to 23.2% on a consolidated basis. Higher profitability, along with better working capital management, drove another quarter of significant free cash flow generation which we used to pay down debt and allowed us to delever ahead of schedule. We will continue to prioritize debt pay down as well as our organic investments in our businesses.

Today, we announced a $0.09 quarterly dividend to shareholders payable in March. Upon payment, our total cash return to shareholders will be just north of $100 million in fiscal 2020. Our consistent quarterly dividend demonstrates our commitment to returning value to shareholders as well as our confidence in the strength of our balance sheet to be able to return this cash without impacting our other capital deployment priorities.

All in all, we did a great job executing this quarter, meeting our commitments and exceeding our targets in some cases and positioning ourselves for a strong finish to the year. We remain focused on mitigating inflationary pressures and delivering continuous improvement across our manufacturing and logistics activities to drive improved and sustained profitability. Finally, we will continue to execute on our strategic capital deployment plan with a focus on executing the working capital initiatives and the rapid debt pay down.

Lastly, I'd like to note that, as always, we will not provide fiscal 2021 guidance until our first quarter call. However, based on what we are seeing in the market, the outlook of our representatives in the field and the confidence of people we do business with, we do expect to continue to leverage the current favorable market environment next year. We expect the legacy ADS business to continue to grow in line with our long-term growth targets and Infiltrator Water Technologies to grow at a similar rate to our allied product portfolio. Based on our progress to date, the legacy ADS business is well ahead of the long-term plan we presented in November 2018 at our investor conference. While we have made significant progress to grow our profitability margin over the last 2 years, we still have many initiatives in place to grow sales, expand margins and generate cash. We're excited about the fundamental strengths that Infiltrator Water Technologies adds to the company for sales growth, margin expansion and cash flow generation. Additionally, the recycling scale, material science and engineering capabilities of Infiltrator is exciting when combined with Advanced Drainage Systems, and we continue to reveal opportunities for the go-forward enterprise.

With that, I'll turn the call over to Scott, who will further discuss our quarter performance.

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [4]

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Thanks, Scott. Good morning, everyone. Moving to Slide 6, we present a snapshot of our third quarter fiscal 2020 financial performance. Organic net sales were $335 million, representing an increase of $17 million or 5% from the prior year period. Infiltrator Water Technologies contributed an additional $72 million, bringing consolidated net sales to $393 million, an increase of 24% over the prior year. Organic Pipe sales increased 6% driven by strong domestic construction and agriculture market sales. Organic Allied Product sales increased 8% driven by strength in both domestic and international end markets. Consolidated adjusted EBITDA increased $43 million or 86% to $91 million from the prior year, and our consolidated adjusted EBITDA margin increased 800 basis points to 23.2%. Organic adjusted EBITDA increased $17 million from the prior year, and our organic adjusted EBITDA margin expanded 440 basis points to 19.6% in the third quarter. The improvement was driven by sales growth in both Pipe and Allied Products, favorable material cost and disciplined pricing as well as our effective cost-containment initiatives. Additionally, we are beginning to realize benefits on our manufacturing and transportation initiatives which were modestly favorable in the period. This improvement was partially offset by an increase in selling, general and administrative expenses, resulting from investments in our sales team to drive our growth initiatives as well as higher compensation expense due to our current and expected outperformance for the year. During the quarter, Infiltrator Water Technologies contributed an additional $26.5 million to adjusted EBITDA and delivered an additional 360 basis points of improvement to our consolidated adjusted EBITDA margin. On a stand-alone basis, the adjusted EBITDA margin of the Infiltrator Water Technologies business was 36.8%.

Moving to Slide 7, we highlight our very strong year-to-date free cash flow performance. Year-to-date, we have generated $250 million of free cash flow, an increase of $133 million over the same period last year. This was driven primarily by higher profitability as well as our favorable working capital performance. The favorability in working capital was driven by improved receivables performance through better enforcement of our collections policies that's resulted in a significant reduction in late payments by our customers as well as continuing to work to reduce terms where possible with our customers. Improved inventory performance driven by greater inventory turns and reduction in slow-moving inventory, as well as lower resin costs was also a factor. And finally, we've been able to extend payables through negotiations with our vendors. While we have made great progress year-to-date, we have more opportunities in front of us, and we'll continue leveraging our working capital initiatives to drive free cash flow in the future.

Moving on to Slide 8. Although we shared this slide with you last quarter, we thought it was important to include it again given our continued focus on free cash flow generation and debt reduction and the resulting reduction in leverage. Our pro forma trailing 12-month leverage ratio was 2.5x, down from 2.9x at the end of the prior quarter. On a reported basis, our leverage ratio was approximately 3x, almost 1 year ahead of our expectations, as you heard Scott mention. As we've stated previously, we will continue to prioritize organic investments and debt pay down for the foreseeable future.

Finally, on Slide 9, you will see that we are reiterating our fiscal 2020 financial guidance, which includes 8 months of Infiltrated Water Technologies results. Based on our order activity, backlog, current market trends and performance to date, we are tracking to finish the year at the high end of both our revenue and adjusted EBITDA guidance ranges.

With that, I'll open the call for questions. Operator, please open the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question today comes from the line of Michael Halloran of Baird.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [2]

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Thanks for the Wisconsin shout-out. I don't hear too many of those in prepared remarks. So a couple of questions here. One, really great job on the debt pay down, obviously way faster than any of us were thinking. Does it change your -- what your approach is to capital allocation at this point? Or are we still in that pay down mode for the foreseeable future?

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [3]

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Michael, Scott Cottrill here. No, it does not. I mean we've talked about our guardrails of 2 to 3x. We're a cyclical company. We really like being in that low 2s area. That being said, we're not sitting on our hands. We're looking at other options as we get there, which we plan on getting there here as we go through next year. So right now, it is organic investments, which we have plenty of those in front of us, as well as looking at paying down debt and getting into that low 2x area pretty quickly.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [4]

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So certainly appreciate the commentary on next year. I think the kind of commercial residential pieces make sense to me. Could you maybe touch on the ag piece? Obviously pretty dynamic so far this year, in part, because of what the planning trends look like and how farmers are going about insurance, and everything like that.

Maybe just talk a little bit about what you think the sustainable trend looks like underneath from here, how you guys are thinking about it and anything to augment if the comps kind of come up and catch you a little bit next year.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [5]

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Mike, this is Scott Barbour, and I'll take this one. And I think you're kind of dialing it in. Like when you think about it, we had 2 favorable events over the past year. We had a reorganization and some new product introductions, which were very favorable. We had the prevent plant acres, which were really centered where we were strong in Northwest Ohio and Southwest Minnesota and Iowa. So we did -- definitely prevented from those things. The prevent plant acres is not going to repeat in that same way. But the organic growth and investments that we're making, we will continue to see growth, call it, off of that base. We did a lot of work in this market over the last year, and it's what I call a live market. There -- it's not saturated. It's not overbuilt or anything like that. It's still a viable activity for farmers to go and do. There are new territories we can open that are -- that we should be opening aggressively. So while we might print lower as the comps get worse -- I mean, harder, in the coming year, I think, fundamentally, we'll be growing better than the market next year. That's what we're going to bake into the go-forward.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [6]

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Makes sense. And then on the margins, as we look forward from here, anything that happened in the third quarter that you don't view as sustainable? Obviously, the legacy ADS business had some pretty robust year-over-year margin expansion. Anything in that, that you don't think is sustainable as we move into the fourth quarter and beyond, obviously adjusting for seasonality?

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [7]

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No. I don't think so, Michael. I mean obviously, we're benefiting from the lower resin cost environment. But that being said, we're taking full advantage of that, right? We're holding on to our pricing and our construction end markets. We're getting pricing up on our Allied Products. Allied Products is growing at that nice high single-digit, low double-digit rate, very profitable product line. So as you look at that incremental margin performance and so forth, is it going to be difficult to repeat that going forward? Yes, but we're very happy with what we're doing there, and it's not all being driven by resin. So very good margin performance as we move forward.

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Michael Patrick Halloran, Robert W. Baird & Co. Incorporated, Research Division - Associate Director of Research & Senior Research Analyst [8]

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Great. And then last one for me, then I'll turn it over. The synergy side of things, maybe just talk about specific things that you guys are working on now, what you're executing on and then what the cadence looks like on a forward basis as far as what the activities look like.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [9]

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So Scott Barbour, again. And if many of you probably recall, that the synergy program is really built on our raw material buy and recycling activities between Infiltrator and ADS. It's a synergy plan, very focused on those activities, kind of back end. This isn't a, kind of smash the 2 things together. And we're on pace from a run rate basis on that plan. We are reviewing additional opportunities as we get into this. Some of them are going to require some investment, which we're well prepared to do. So I summarize it as on pace and probably more excited about it -- the future of it today than I was 6 months ago, and I was pretty darn excited 6 months ago as we were getting into this.

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Operator [10]

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Your next question comes from the line of Matthew Bouley of Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [11]

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I wanted to ask a bit about the domestic construction markets because I think the organic growth, I guess, in both nonresidential and residential decelerated a bit relative to the second quarter. But obviously, I guess particularly on the residential side, some of the leading indicators would suggest that market is getting a lot stronger. So maybe, I guess, between those 2 markets, can you just speak a little bit about what you're seeing there and how you're expecting the market growth to play out over the next couple of quarters?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [12]

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All right. This is Scott Barbour, and we feel that the market is very solid right now. You might have heard me talk kind of earlier in the year that we had this nice kind of 3% margin going along, and our conversion would add 1 or 2 points to it. But early in our year, you had riding on top of that pent-up demand that didn't get executed in the prior year from weather and all kinds of other stuff. So that was kind of riding on the market to, let's call it, the first 6 months of our fiscal year. I think what we saw in the third quarter was that stuff get cleared up. And we were kind of riding at that market of 3%, converting at 100 or 200 basis points. The Allied Products stuff growing at high single digits. So I think as we deconstruct the third quarter, that's the kind of the conclusion that I see.

And on residential, on the ADS side, which these exhibits are kind of heavy on, recall that we are really involved heavy in the front-end land development piece of residential on ADS, and that is coming along stronger now than perhaps it was in the third quarter. You look at all the homebuilders guys reporting, I mean, they're kind of ramping that up. So we're kind of excited about that segment as we look forward. But the past quarter, we kind of feel that we were right in line, maybe even gained a bit on that on the Pipe business. Now if you look at Infiltrator, very, very levered to new housing starts. That has accelerated in the past, let's call it, 4 to 6 months and is going to continue to go well. So we like -- really like that greater exposure to residential right now that Infiltrator has given us for the consolidated business.

Yes, Mike, go ahead.

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Michael Higgins, Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR [13]

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Yes. Matt, this is Mike Higgins. I would say inside of that residential piece to what Scott said about this new kind of subdivision construction, multifamily construction, we had a very strong quarter. We were up over 20%. What kind of muted that 5% -- muted out the 5% of residential is, we were a little slower in our retail markets with Home Depot and Lowe's and customers like that, which is mainly due to timing of them bringing in product for inventory. So where we -- what you're talking about in terms of homebuilder strength, we're seeing that same strength. So that's continued from the second quarter into the third quarter. I don't -- when you look at that new subdivision construction, we're not going to apologize for north of 20% growth for the quarter.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [14]

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Yes. That's a good point. I've forgotten that. And overall, just looking at pace of orders, talking to our distribution, looking at the plans and designs that are kind of coming into our funnel, we feel like the coming calendar year is a lot like the prior year with regards to our nonresidential commercial construction.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [15]

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Okay. Appreciate all the detailed color there. And then I wanted to ask on the price cost side because it seems like it was favorable again in the quarter. I believe some of the commentary you guys mentioned that you are maintaining pricing discipline kind of coupled with the lower material costs. So I'd be interested to hear you guys talk a bit about what you're doing on the commercial side that kind of allows you that ability to maintain commercial discipline in light of what you're seeing around lower material costs.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [16]

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So that's a really good question. I think you kind of nailed the dynamics of it, and I would give kind of 2 pieces. I want to add 2 things to that. One is it's a good demand environment, and you need to be disciplined around your pricing in a good demand environment. And I would say both ADS and Infiltrator have good demand environments with good price execution and discipline there. And oh, by the way, we both provide a heck of a product and service to our customers that I think are well positioned against competition.

Number two is we're not a commodity-based product or company. We don't ride up and down with plastic and resins. We ought to ride up -- we were going to ride up and down based on demand, the quality of our service and products there. And we've worked over the last couple of years to make sure that, that gets separated and that we reinforce that because we're just not making stuff out of plastic here. I mean we're making a fairly technical specified sale that's a fair amount of engineering into, not only the product, but the application of that product. And in case of the ADS side, we're providing a heck of a service by transporting this product to job sites in a very big activity with that dedicated specialized fleet we have. So that's worth a lot in the market, and we're going to make sure that we're fairly paid for doing all of that.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [17]

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Got it. Very helpful. And then just lastly, the manufacturing and transportation side with the legacy business, it looks like you're continuing to make good progress there. Seems like there was a small tailwind in the quarter to EBITDA. So I guess, as we go forward and start thinking about fiscal '21, obviously not looking for detailed guidance there, but just wondering how some of those kind of initiatives you've got going on might phase in, in terms of the cost side in fiscal '21.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [18]

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So good insight, and we are working very hard right now to continue to put plans and organization in place around that manufacturing and transportation. I think what we call is kind of the right side of that bridge, we want to see the right side of that bridge green as we move forward and execute crisply around both what we call the four-wall manufacturing of what we do and in that transportation and logistics. And as you probably recall, we made a little bit more progress on the transportation logistics than the four walls, but the four walls are on a nice path and catching up in many areas. So that is how we will look forward is you kind of got to earn it the hard way on the right side of that chart, and that's what we're doing. We're making sure all that's kind of put in place now. Now no plan comes together perfectly like you want it to, but that's how we are driving our plan for next year.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [19]

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All right. Got it. Well, thanks for all the details, and congrats on the quarter.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [20]

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Thank you. Appreciate it.

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Operator [21]

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Your next question comes from the line of John Lovallo of Bank of America.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [22]

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The first one, it appears that your outlook would imply a fourth quarter EBITDA margin that's up, call it, 200 basis points year-over-year versus somewhere between 600 and 800 basis points in 2Q, 3Q. So just curious if there's some conservatism in there. Or was there something in the 4Q '19 margin that was somewhat inflated?

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [23]

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No, John. You're spot on. I think what you'll see there is the fact that March is pretty much -- can be about half of the quarter. And given kind of the variability that we can have, given the significance of that month to the quarter that's coming up, you see us being a little bit weary as we look at our guidance and so forth. So nothing in there that's unusual or that we see Draconian coming at us from a margin perspective or from an inflationary cost pressure performance, so I think it's just being a little bit weary that March is such a big driver for the quarter and wanting to embed that into our thinking. So we thought, right now, leaving the guidance ranges as they were was the prudent course right now.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [24]

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And we raised them last...

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [25]

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Prior.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [26]

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Yes. Prior, we raised them, and we'll be guiding to the upper end of that. And I don't think we see any missiles out there. At some point, comparisons on resin costs get more difficult, but that's not what this is.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [27]

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Got it. Okay. And then the CapEx guide, if I'm not mistaken, of $75 million to $85 million is down from $85 million to $100 million prior. I guess the first question is, is that correct? And if it is, is that project timing? Or is there something else going on there?

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [28]

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Absolutely right. It is down, and it's all due to progress billings with a couple of the large manufacturers and when that cash is going to go out the door. So some of that's moved to the right and will be going out the door in April, May versus going out the door in Feb, March.

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John Lovallo, BofA Merrill Lynch, Research Division - VP [29]

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Okay, great. And then finally, the stabilization you guys mentioned in Mexico, is that really -- is that something happening in the market that is stabilizing? Or is this really just due to your efforts to shift from public to private projects?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [30]

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I think it's the comparisons have gotten easier in the last several months on order rates, and I think we might have -- we tried to pivot to some new distribution and applications. I don't think that's -- we're, by any means, up the curve on that. But it just feels a little more stable, albeit at a lower level, than prior year or what we'd like.

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Operator [31]

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(Operator Instructions) Your next question comes from the line of Josh Pokrzywinski of Morgan Stanley.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [32]

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Just appreciate all the color on kind of the market progression through the quarter there, Scott. Anything that you can tell us in terms of kind of the outgrowth phenomenon that you guys see or anything that changed on that front? I know it's probably hard to calibrate in the short term, but anything that stuck out to you with some regional share gain or -- based on the Pipe business or anything on the Allied side, just with new products that would speak to kind of an accelerating share gain environment?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [33]

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I'll -- this is Scott Barbour, Josh. Let me take that one, and then Higgins will probably have a couple of comments. We have this Nyloplast product line, which is a catch basin -- a plastic catch basin, and that team was the leader. And the sales team that surrounds that, I think they've been outpacing the market very nicely. And it is investment in a new product that kind of extended our range to the investment we made in Texas to be able to do close to the customer assembly of that product line. It's the leader being out there in the field, working that very well. So if I look at something that kind of -- we're really pleased with performance. Don't get us wrong. But those guys have even kind of come above the curve in many ways and been a really pleasant surprise how we've -- how that's occurred. So I would say that. And then again, Florida. Florida is just a really good market for us, and our team down there is -- they're out selling like heck. Every day, we have products that are well aligned and manufacturing capacity well aligned to serve that market. And can we do better? Absolutely. We're not stopping. But I think, if I think about things that get above the curve, Michael, you got it. California's come back nicely this year.

And then the -- I think I talked a lot about the agriculture business earlier. And sometimes, we got -- I would say we got a little lucky on these prevent plant acres and them being centered on our regions where we have good manufacturing facilities. But yes, it's sometimes good to get lucky, but our teams responded very strongly with production, delivery, capacity to serve that rapid uptick. Wasn't easy, but they did it. And then the organization that we've got going on there in marketing and sales really focused on our customers and finding new ways for us to grow in that segment. And a lot of discussion 2 years ago is the relevance of that for our business. And I think something that we've learned over the last year is it can be highly -- it is highly relevant. And when it pops, it's highly leveraging to our facilities, into our network. So in the past, someone told me, hey, I view you as this option on the ag business. Well, I think that option paid off this year, and we got really nice contribution from that. Now tough to repeat because of the market phenomenon of the prevent plant acres, but I would repeat myself that the fundamentals underneath that, we'll grow off of that. And that's what we want to do, is kind of sustain growth and market share gain in that particular segment.

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Michael Higgins, Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR [34]

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Josh, I would agree. This is Mike Higgins. I would agree exactly with what Scott said. The only kind of thing I would add to that, everybody has heard us talk about the focus on these key states, right, primarily in what we call the crescent, that's give or take, 20 states. And I think our increased focus on those states is helping drive that outsized performance, and those states are very construction-advantaged. That group of states is like 70% of construction activity in the U.S. There are areas where we have large opportunity for market share gains. And in those states, focusing on, driving further penetration and participation in the storm sewer market and driving higher Allied Product sales through what we call attachment. Those states have been performing extremely well on those 2 fronts and that focus there is helping.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [35]

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And that was the $3 million of SG&A increase. There are people on the street in those regions, in those crescent regions selling, which is part of our -- the strategic plan we went through with our Board of Directors and are investing in that heavily. So...

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [36]

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Got it. That's helpful. And then just -- oh, go ahead.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [37]

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No, you please go ahead.

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Joshua Charles Pokrzywinski, Morgan Stanley, Research Division - Equity Analyst [38]

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I was just going to ask, just because, as a follow-up, obviously, with the strong resi growth and I think prospectively for that looking to improve further, anything that we should keep in mind in terms of potential bottlenecks on the IWT side that could pop up here in the next couple of quarters?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [39]

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Yes. That's a good -- that's a really good question, and let me answer that in 2 ways. First, that company has exceeded our expectations in so many ways. And that team, Roy's team, and what's going on there, I mean, ahead of their plan, very, very good people to work with. I mean can't speak highly enough how that's all gone.

Now bottlenecks, we've released some pretty big capital investments there very quickly after the acquisition that we knew were coming. Those take a while to get in. So the way that team has traditionally handled demand/supply things is level loading, building their inventory in the off-season, making sure that they are very careful of how they plan that mix there. So that's how we're addressing some of that bottle -- what we might think of as supply bottlenecks in the future, is through that level loading and that careful inventory building. And given the sharp execution they have and the high uptime they have on those presses, I think that's a very well-known playbook that Roy is executing right now as we speak. And we've also been very careful to make sure we've got enough material ahead of that. So while we're -- we're really thrilled with the cash flow. Frankly, we're using some of that balance sheet to buy material to make sure we have enough recycled material ahead of both Infiltrator and ADS because of pretty favorable environment now. So we're trying to balance all that stuff, but that's how we'll deal with the bottlenecks right now.

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Operator [40]

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(Operator Instructions)

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [41]

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Okay. I'll wrap it up now. Thank you all again for joining us today. As we move into the end of fiscal 2020, we expect to build upon the strong momentum of the year and capitalize on a pretty favorable industry environment, as we just discussed. We're focused on our strategic initiatives to grow sales and profitability, in addition to continuing the work to integrate the Infiltrator business and realize those synergy plans. I want to thank again our employees for all their hard work over the past 9 months but a good quarter, a very good quarter, and they're all working very hard to get us ready for the season as we move into April. Something we've been talking a lot about where you win in the off-season and now's the time we're laying down a lot of solid plans for next year. So we look forward to another good quarter, and we appreciate everyone being on the call today and look forward to seeing you all as we move forward.

Operator, that concludes the call. Thanks.

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Operator [42]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, you may now disconnect.