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Edited Transcript of WMS earnings conference call or presentation 23-May-19 2:00pm GMT

Q4 2019 Advanced Drainage Systems Inc Earnings Call

Hilliard Jun 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Advanced Drainage Systems Inc earnings conference call or presentation Thursday, May 23, 2019 at 2:00:00pm 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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* 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

* Scott Evan Schrier

Citigroup Inc, Research Division - Senior Associate

* Timothy Ian Daley

Deutsche Bank AG, Research Division - Research Associate

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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 Fourth Quarter and Fiscal 2019 Results Conference Call. My name is Lindsey, 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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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, I'll 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. I'd like to begin with a few highlights for the quarter and the year.

We had a strong finish to fiscal 2019, achieving our financial targets for the second year in a row. We're making good progress, executing on the programs outlined at our Investor Day last November, including sales growth, margin expansion and cash flow generation.

As Scott will discuss in a moment, our fiscal 2020 financial guidance reflects continued progress in each of these areas. Our strong performance and healthy balance sheet give us financial flexibility to return capital to shareholders, which we will do through the special dividend we announced this morning.

We're excited about where we're headed and the opportunities we have in front of us and intend on continuing to execute against them.

With that, I'll start out with our fourth quarter performance. We had good line of sight coming into the quarter and our team did an excellent job executing our plans to meet our commitments. Our fourth quarter revenue increased 9% driven by strong growth in both Pipe and Allied Products as well as favorable pricing.

Sales in our core domestic construction markets increased 13% and our team did a great job managing the business through the start of the spring selling season. The top line strength of January we discussed last quarter continued into February and March, particularly in the Southeast, Texas and Arizona. We had very good coordination between our sales, manufacturing and logistics teams to line up demand with operations, including having products and drivers in the right place and better loading utilization of our trucks.

International sales were down 12% this quarter, driven by a slowdown in Mexico, caused by the transition phase of the new government, which resulted in lower infrastructure investment and construction spending. We expect it may take some time for spending to ramp up or new programs to be put in place in Mexico.

Conversely, sales in both Canada and our export business were up slightly in the quarter.

Our adjusted EBITDA increased to $37 million this quarter, representing a margin increase of 270 basis points, driven by volume growth, favorable pricing as well as operational efficiency in manufacturing and logistics.

This strong fourth quarter performance led us to close out the year right in line with our fiscal 2019 guidance as presented on Slide 5.

We were able to achieve our fiscal 2019 results by providing best-in-class water management solutions to our customers, executing our conversion strategies to displace traditional materials and capturing some of the benefits of our operational and transportation initiatives.

Our fiscal 2019 revenue increased 4% to $1.385 billion, driven by favorable pricing and volume growth in our domestic construction markets. We stayed focused on factors within our control, executing on our market share model, driving growth in key geographies and selling our complete line of water management solutions.

International sales increased 3%, primarily driven by growth in our export business. In Canada, sales were relatively flat as the agriculture market faced the same headwinds as our domestic business.

Importantly, construction market sales in Canada increased high-single digits and we continue to work our market share model to grow that portion of the business.

Finally, sales were up 2% for the year with a strong performance in the first half of the year, partially offset by a decline in the back half for the reasons I mentioned earlier.

Turning to profitability, successful execution of our growth strategies and efficiency initiatives as well as our commitment to continuous improvement resulted in double-digit year-over-year growth in adjusted EBITDA and 100 basis points of margin expansion. This increase in our profitability, together with our working capital initiatives, increased our free cash conversion by 200 basis points to 47%.

This year's results are right in line with our 3-year sales growth, margin expansion and cash flow generation targets we presented last November at our Investor Day.

As you can see on Slide 6, we significantly outperformed the broader market this year in our 2 largest markets, nonresidential and residential construction, which in aggregate, make up over 80% of our domestic sales. Growth in both markets was driven by favorable pipe volume and pricing as well as increased demand for our Allied Products.

In the nonresidential market, our 8% sales growth outpaced the broader market by 500 basis points for the second year in a row, driven by high single-digit growth in both Pipe and Allied Products. We also experienced double-digit sales growth in over half the states in the U.S.

In the residential market, new residential sales increased 14%, significantly outperforming the housing starts over the same time period, and our retail sales grew 8% due to our strong partnerships with retail and national account customers.

In the infrastructure market, sales declined 4% year-over-year as the Midwest and Northeast saw a decline in related infrastructure spending over the past 12 months, offsetting growth in the Southeast and the West.

As you know, our infrastructure sales are more vectored to the Midwest and Northeast due to better public approvals. We are very focused on gaining additional approvals in key geographies, adding personnel and strategic markets like Colorado and leveraging investments we have already made in our facilities, such as in North Carolina. With additional stimulus from national or state level funding, we have a potential to accelerate our growth and participation in this market.

For the year, our core construction market sales increased in cost all the key geographies, outpacing the broad-based growth in our end markets by 400 basis points. We experienced strong growth in key states like Texas, Florida, North Carolina, Georgia and Arizona. This gives us confidence in our ability to grow our sales throughout the Southern Crescent of the United States, which is key to our 3-year growth plan.

Turning to our agriculture business. The market remained challenged throughout the year. Heavy precipitation in both the fall and spring impacted the selling seasons, and we were not able to make up for the missed time. We remain committed to driving results in this market. We have made organizational changes and investments to support this business, including new products and product improvements as well as actively expanding our customer base to create more opportunities for growth. Candidly, it may take a couple of selling seasons to see the impact of these initiatives we have set in motion.

Overall, our top line performance demonstrates the success of our material convergent efforts and best-in-class solution strategies. We are confident these strategies will enable us to continue delivering above market growth in fiscal 2020 and beyond.

Turning to Slide 7. You can see our capital deployment priorities, which had not changed from what we outlined during our Investor Day. Our top priorities remain organic investments in the business and strategic acquisitions, followed by returning cash to shareholders. Our fiscal 2020 capital plans focus on investing in growth and capacity to support high-growth products in our key regions. We will continue to execute on productivity and efficiency initiatives such as continuous improvement, automation and increasing our recycling capacity. This also includes investing in technology solutions that better align our sales, engineering and customer service teams to improve the customer experience while gaining efficiencies in our back-office functions.

In addition to investing in organic growth, we have developed a robust acquisition targeting process and are working on active pipeline of targets. Consistent with what we outlined at Investor Day, we have widened the aperture of potential deals, developed a more rigorous process, put dedicated resources in place to help execute and are having active dialogue with our board members who have been highly engaged in this process. We're looking at companies, product lines and potential relationships based on their relatedness to our core markets and the opportunity attractiveness of these targets. We believe these 2 priorities, organic investments and acquisitions, will create significant value for our shareholders.

As you saw earlier this morning, we also announced a $1 per share dividend, special dividend, and a $0.01 increase to our normal quarterly dividend. This special dividend demonstrates our commitment to returning capital to shareholders as well as our confidence in the strength of our balance sheet. The special dividend payment will be approximately $75 million, bringing the total to over $170 million of cash returned to shareholders since our IPO 5 years ago this July. But just as important to our deployment priorities, we are returning this cash without impacting our ability to execute on our organic growth and acquisition priorities.

With that, I will turn the call over to Scott Cottrill to discuss our financial performance and guidance for fiscal 2020.

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

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Thanks, Scott. Jumping right into profitability. Our fourth quarter adjusted EBITDA increased $10 million or 37% year-over-year to $37 million, and our adjusted EBITDA margin increased 270 basis points to 13.5%. This margin improvement was driven by volume growth in our Pipe and Allied Products, favorable pricing and effective cost containment. Manufacturing and transportation expenses were flat, overall, marking expected relief from the inflationary pressures we saw on our diesel and common carrier rates that persisted throughout fiscal 2019. We had good visibility coming into the quarter on how we would achieve these results and are pleased to have delivered on our guidance for the second consecutive year.

Moving to Slide 9. Our fiscal 2019 adjusted EBITDA increased 10% to $232 million and our adjusted EBITDA margin expanded 100 basis points to 16.8%. This year's margin expansion was driven by favorable pricing and top line growth of our Allied Products as well as lower manufacturing costs year-over-year. Another year of double-digit growth in some of our key higher-margin products, such as our Storm Tech retention/detention chambers, Nyloplast catch basins and water quality products gives us confidence in our ability to continue to sell the complete solutions package and grow our top line profitably.

Regarding our operating cost and expenses, we had to deal with high input costs and higher transportation costs in the form of elevated diesel prices and common carrier rates throughout most of fiscal year '19. That being said, we were able to effectively offset these headwinds throughout the year with our pricing strategies.

Overall, we are confident in the actions we took this year to grow our adjusted EBITDA margin by 100 basis points and we continue to plan to deliver profitable growth as we move forward into fiscal 2020.

Moving to Slide 10. Our cash flow from operating activities increased $15 million year-over-year to $152 million, and free cash flow increased by $14 million to $108 million. Our target this year was to deliver free cash flow in excess of $100 million, which we achieved.

In fiscal 2020, we plan to make further progress towards our 3-year target of converting more than 50% of our adjusted EBITDA to free cash flow. This year, we invested $44 million of capital into our business. In fiscal 2020, we plan to spend between $55 million and $65 million on capital expenditures, primarily to support productivity, efficiency and growth initiatives, as Scott discussed earlier. We've finished fiscal 2019 with $310 million in debt, down $52 million from the prior year and a leverage ratio of 1.4.

This balance sheet flexibility was one of the reasons why we decided to return $75 million to our shareholders through the special dividend declared today. The impact of the special dividend on our leverage will be approximately a [0.25] turn of debt. It is important to reiterate that we are in no way taking our foot off the gas regarding our acquisition efforts and will continue to actively pursue opportunities as we move forward.

Regarding the special dividend. Our ESOP plan is required to use the proceeds it receives from the dividend to repay a portion of its loan from the company. This loan repayment will trigger an allocation of 11.6 million preferred shares to ESOP participants, resulting in a large onetime, noncash charge in the first quarter of fiscal 2020, which will impact our GAAP earnings per share.

While the magnitude of the charge will record as dependent on the share price at the end of our fiscal first quarter, if you were to use yesterday's closing price as a proxy, the charge would have been $245 million. Importantly, this will not impact our adjusted EBITDA, operating cash flow or free cash flow.

Looking ahead, on Slide 11, we present our financial targets for fiscal 2020. Based on our order activity, backlog and current market trends, we anticipate net sales to be in the range of $1.425 billion to $1.475 billion, representing year-over-year growth between 3% and 6%. We expect adjusted EBITDA to be in the range of $245 million to $265 million, representing growth of 6% to 14%. These ranges represent an adjusted EBITDA margin of 17.2% to 18% or margin expansion of 40 to 120 basis points.

While the midpoint of our guidance for fiscal 2020 represents 80 basis points of margin expansion, it is important to note that all of this will come in the second, third and fourth quarters of next year. In other words, we anticipate flat margins in Q1 on a year-over-year basis. The first quarter will have a headwind from higher inventory costs year-over-year, primarily as a result of our strategic decision to retain experienced employees and line operators despite a decrease in production pounds late in fiscal 2019. While this impact is fully reflected in our EBITDA guidance for the year, it is important to understand the expected phasing of such.

We will achieve our projected top and bottom line growth targets in fiscal 2020 through Pipe and Allied product growth, maintaining favorable pricing, abatement of inflationary pressures on resin and common carrier rates as well as efficiencies and productivity improvements we expect to get from our continuous improvement initiatives.

Finally, let's talk about what to expect for the coming year. Note that our top line guidance is based on the market outlook provided on Slide 12. We expect the fiscal 2020 domestic construction markets to be similar to fiscal 2019 and grow low-single digits. We will accelerate our growth in these markets through our conversion strategy and best-in-class water management solution strategy. The agricultural market should be flat to up low-single digits as we move past the unfavorable wet weather conditions and hopefully start to see some ramp-up in sales.

Internationally, we expect growth in our Canadian construction markets and export business to offset the decline we expect in Mexico.

With that, we'll be happy to take 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) Our first question comes from Mike Halloran with 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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So let's start on the demand cadence through the quarter and into the fiscal first quarter here. Was weather an impact in the quarter? Help kind of give some context around it. Obviously, growth rates were robust, but wondering if there was any spillover? And then also, can you put some of the guidance commentary in context about the excess inventory coming into the first quarter if that's demand or if it's just the conscious decision on your side. In other words, kind of help with that cadence as we look back over the last couple of months and what it means for the first part of the fiscal 2020 year.

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

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All right. So Michael, this is Scott Barbour. So cadence. If you might recall, we were with you 90 days ago. We had good line of sight of the quarter, and the January had been pretty good after kind of a disappointing December. February and March continued at a nice pace, and we've seen that kind of continue right along. You asked about weather impacts. There were certainly weather impacts, but we -- negatively, but we focused very hard in February and March in doing 2 things. One, in the Southern regions, the Southern Crescent, we made sure that we had great delivery capabilities there. We prepositioned that delivery, we kept those plants running hard. So when demand began to materialize, we could quickly, quickly grab it. And our teams did a nice job of positioning ourselves that way. And that kind of continued in April and into May. So I would say demand cadence is right on target, right online. And I think your inventory question might be related to kind of how it's flowing through into the first quarter of our fiscal year and Scott's comments around how that's affecting our cost. And quite simply, we usually take our labor down in December, January, February, March. We had such a difficult time getting labor a year ago that we held extra people through that period of time. And as we held those extra people, better volume kind of normally came down because we don't start building up yet until really March. That caused some cost dislocation. Now we look at that very hard, but we feel like holding on to that labor gives us a better ramp-up in late March, April, May, June because those are people are trained, they're in place, they're retained, and as if you will, we try to use some of this, what we saw coming in terms of our working capital and our cost positions to make a smart tradeoff and keep that labor, and we're glad we did. So I think that's kind of the unpacking of that particular issue.

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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 the inventory piece was solely on the cost side and not a reflection of kind of swings in demand in any which way or form. There's still pretty consistent momentum?

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

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Correct.

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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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Okay, good. So then follow-up then is just on the margins cumulatively for fiscal '20. Could you just help kind of directionally with how you're getting to some of the expansion? Obviously, volume leverage is a piece of it, but some of these transportation costs had been a headwind, how are those tracking? Resin, what's the thought process there? And then also what kind of contribution on the internal initiatives or anything else I might have missed?

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

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No. Mike, you're basically answering the question for me here. But that's basically it. On the manufacturing side, we'll have this first quarter headwind. But net-net, with the CI and other initiatives that they've got going on there, it'll be favorable as we look at Q2 through Q4. When you look at transportation, with the initiatives that they have there, again, you look at diesel, again, we think it'll be flattish this year, but that compares to it being up 15% last year, 10% to 15% last year. So again, on a relative basis, that's good, with a bit of common carrier rates also coming back down more in line with what we expect, so more flattish to favorable. So again, when we look at the margins that we expect, unless I'm remiss and not mentioning resin, which we also think will be favorable year-over-year kind of on a low single-digit type of basis. We get excited by that trajectory. And you got a look at the top line growth, where it's coming from. It's going to be good growth on the pipe side. But Allied continues to grow at that high single-digit rate, which at their profitability gives us a nice leverage as we move forward.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [8]

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Can I add one thing to that? I'm just saying -- this is Scott Barbour, Mike. I just want to add one thing. We -- the resin environment is a tough environment and difficult to predict. So we're not packing a lot of -- we have some favorability in there, but we're not banking our whole year on a hugely favorable resin or input cost environment there. We're going to be cautious and manage that in our pricing very closely.

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Operator [9]

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And our next question comes from Matthew Bouley with Barclays.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [10]

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Congrats on the quarter. I wanted to follow up on the last point around the margin side within the guide and specifically on the continuous improvement initiatives that you guys called out. Are you able to kind of frame a little more detail around the impact or the benefit, I guess, from those initiatives this year? I think what we're trying to figure out is basically, I guess, just like a baseline for what's most under your control relative to kind of industry volumes and price cost and all that.

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [11]

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I'll start. Our intention every year is when you look at the inflationary cost pressures we're under, whether that's labor rates or resin or anything else that we're looking at, we look at these ops excellence initiatives to offset those inflationary cost pressures we have. We really look to get the leverage from the top-level growth -- top line growth, to come through all the way down into the income statement. So that's how we're going into it, the approach. But then when you look at it and you look at the new folks we have and some of the initiatives that they're bringing and what they're bringing to the table, it's really what's the investment, how quick is the payback and how do we prioritize such. Really exciting items that are coming to bear. But we want to be really reasonable in how we phase the benefit of those as well as the cost. So I would say, we look at it very detailed. There's -- on the recycled resin side of the house, there's initiatives there that get looked at. The manufacturing supply chain, procurement side of the house, definitely a lot of initiatives there that get looked at. And on the transportation side of the house, a lot of initiatives there. So we look at to them, we prioritize them, and again, it's all about investment and return. So we've talked about our CapEx process and how we look at and prioritize CapEx and the hurdle rates we use. We look at the same thing here when you look at these SPP initiatives and prioritize of those. So I hope that helps.

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Matthew Adrien Bouley, Barclays Bank PLC, Research Division - VP [12]

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It does. And for my follow-up, I wanted to ask about the resin side again, just because we have seen some different trends in the different resins, polypropylene, polyethylene. Are you able to -- I guess, kind of remind us, I guess, of your approximate exposures to the different materials, but then more importantly, what's the implication to pricing across the different product categories as a result of those different trends?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [13]

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So this is Scott Barbour, I'll take this one. And you're correct, we do look at this differently, polypropylene versus high-density polyethylene. Although polypropylene, we're more exposed to virgin material costs because it was basically 100% virgin material. Those prices versus a year ago, those input costs have come off some. It's probably the majority of the -- kind of what we put into our plan is those coming off. That said, we're being very cautious about things that are in the back half of the year, in particular, around polypropylene, any volatility there that comes up, we're more than prepared to address that in terms of pricing of our product into the end market. Right now, I'd say, through the first 6 months, we have line of sight and we think that that's going to be a favorable thing year-over-year. But again, we certainly absorbed a lot of polypropylene costs last year, responded with pricing and other initiatives to offset that, and I think that why we were able to expand our margins some last year. Polyethylene, a little bit different story. Obviously, we have a lot of recycled material in that part of our product line. We endeavor to use more recycled product or input there so that kind of is going up year-over-year. The polyethylene virgin costs, I've describe them as kind of stubbornly sticky and in a very narrow range. And a lot of work we've done, talking to that industry and that supply base, I think it's going to be more of the same in a relatively narrow range this year on the virgin high-density polyethylene that we buy. That said, again, we kind of got visibility on it through the first couple of months, and it's going to be in that narrow range. But I don't anticipate any big change in that in the back half of the year due to supply or really demand. I mean it's going to be pretty stable I think. And the producers there have done a very nice job on their part of metering in and bringing in the capacity that they've added down in the Gulf Coast. So they're very effective in doing that on the supply side.

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Operator [14]

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Our next question comes from Scott Schrier with Citi.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [15]

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Nice quarter. First question, I'm curious, and I understand, seasonally, it's a light quarter. But we saw that Pipe outperformed Allied, which I only saw one time a couple of years ago. So I'm wondering if there's any reason for that or if there's any trends emerging? Or how we should think about the cadence on both Pipe and Allied Products?

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

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So that's a good catch. This is Scott Barbour. And that's a really good catch. I think that it's primarily driven by the hard work we did in the quarter just ended in our retail and residential space. That's a pipe-heavy space. It's a space that is geographically, at this time of year, centered in the South, and we worked very hard to make sure that we were lined up on that demand, pursuing, lined up on demand and logistics and trucking available to meet that. And we did something new this year with an initiative in our logistics and transportation around servicing that region and the retailers and national accounts, think of Home Depot and Lowe's and those kind of guys, they spike up. That tends to put a little pressure on our trucking and delivery to the construction sites. It tends to be Pipe-dominant, the national accounts and the retailers, the big retailers. So we did a lot of planning, call it, our Christmas season like UPS or FedEx getting ready for Christmas. And so beginning last fall, we began to kind of plan that battle for February and March, and I think that's what sprung that change in mix that you noticed between Pipe and Allied.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [17]

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Right. And wanted to ask you how we should be thinking about free cash flow generation in '20. Working capital was fairly even in '18, '19. Is that a good run rate for '20? Is there anything else that we should be thinking about in terms of your free cash flow conversion rate for '20?

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

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Well, Cottrill, you want to take that?

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [19]

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We're excited about the free cash flow generation that we've had and the opportunity. So we're targeting north of 50% conversion of our EBITDA as we go into fiscal year '20. We're going to be taking the midpoint of our guidance range of EBITDA of $255 million. That will insinuate a number of north $130 million. We have line of sight to that. It's obviously going to come from our EBITDA and our profitability year-over-year.

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

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And our working cap...

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Scott A. Cottrill, Advanced Drainage Systems, Inc. - Executive VP, CFO, Secretary & Treasurer [21]

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Where Scott just went is the biggest area for improvement that we need to do year-over-year, and that's working capital. So everywhere from receivables to payables as well as inventory, we have rededicated efforts here. We're not very happy with our performance in fiscal year '19 to be honest. And we're doubling down on that here on working capital and expect to get that. We also, based on the CapEx guidance we've given, we're very much aware of how our future performance and earnings and growth are dependent on getting that CapEx spend. So again, doubling down our efforts there to make sure that we've got the resources and the projects in place on the time horizon that we've committed to. So again, a lot of effort on the cash flow side of the house to make sure that it performs as well as what we're seeing on the EBITDA and the top line growth perspective, so doubling down.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [22]

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Okay. So just to add to that because I can't help myself, this is Scott Barbour. We -- Cottrill is right. Neither he nor I are pleased with how we did in that dimension in FY '19, and we're really very focused on working capital improvements, and that's a measure of how good an operator you are, and we take that very seriously. That said, this is one of our tougher challenges here, and you'll see, as you talk with us over the next year, initiatives that we have in place. We mentioned in the dialogue, the narrative there about investments in customer service, in tools to be better in the back office. That's all tied to the working capital initiative and what we've got to go do there. So we understand that, and we know we need to do a better job on that.

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Scott Evan Schrier, Citigroup Inc, Research Division - Senior Associate [23]

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And if I ask another one. It seems like 50% free cash flow conversion on elevated CapEx is pretty impressive. So I know you've outlined many times your capital allocation priorities. But if you're at $125 million, $130 million of free cash flow, and you had said in your prepared remarks that you're not taking your foot off the gas on the acquisition front, what are you seeing there? Are there some good opportunities in Allied? Or is it slowing? Are there certain adjacent products that you're looking to actively add to your portfolio? If you just kind of give us the lay of the land there, that would be great.

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

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That's good question, probably takes up the majority of the discussion with our Board of Directors. As we get into that and making intelligent capital allocations, particularly in the acquisitions space, we're really focused on 2 things there. What's in our core business, Allied Products, Pipe products in North America. And how attractive they are in that core in terms of technology, market share gain, access to customer, things like that. And when we talked about widening our aperture and having a better process, that process is bringing kind of a fuller funnel to us at things that you can go and see, and I think through the discussion on the special dividend and the narrative and the things we -- we're very conscious about leaving ourselves a lot of financial flexibility to go and do things there in a very disciplined and programmatic way. And like I said, it takes up a lot of the conversation with our board when we're with them.

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Operator [25]

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(Operator Instructions) Our next question comes from Nishu Sood with Deutsche Bank.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [26]

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This is actually Tim Daley on for Nishu. So just quickly, the first one. To follow up on the weather commented that you guys provided. In the last call, you noted that there was going to be some catch-up in the fourth quarter from some weather delays that happened in the third quarter. And just curious, how much of this quarter's growth was due to that? And then as well, this quarter didn't really have particularly perfect weather. So was all of that -- were you able to realize all of that, I guess, delayed work? And could potentially even be some more from the fourth quarter that might be pushed into 1Q?

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [27]

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So that's a good question. I think that any spillover from the October, November, December happened in January, and it happened really fast in January. And you're right, the weather wasn't great in February and March, but we really focused hard on the states that had good weather and had the earlier season in the Southern Crescent. And I would say that, the terms I used with our team is, no one gave us anything in February and March, we went and made it happen. And that's what gave us really good year-over-year sales growth in that quarter. I don't think the demand spillover from the quarter just completed into this coming quarter, is -- I don't see it right now. You might talk about pent-up demand. People waiting for the season to start, but I don't think that's spillover necessarily. I think that's just people in the Northeast and the Midwest, a lot of work to do, anxious to get out there and start doing it, trying to get an early start on the year in those regions because they know labor is going to be tight. So I don't think there's any spillover from the prior quarter into this quarter. I think that's kind of done for us.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [28]

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All right. Got it, I appreciate those details. And then just moving on to the growth outlook for the overall year. Could you guys help us understand the end market growth expectations for the year that underpinned that mid-single-digit domestic construction growth implied in the guidance? And if you can you maybe provide a bit of color along the 3 major construction end markets, that would be really helpful.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [29]

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Do you want to do that Mike?

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Michael Higgins, Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR [30]

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Tim, this is Mike Higgins. I think when you look at it, again, I'd go back to what we said in the script, we view the construction end markets largely very similar to how we look at our -- how FY 2019 performed. We see steady, solid growth in the nonresidential construction. I know there's been a lot of noise around housing and housing starts, but again, our activity there in the quarter and early into this fiscal year has not led us to believe that we're going to see a kind of a slowdown in our business in the residential market, as far as new construction goes around subdivisions and multifamily-type projects. Again, that's an area that we have large opportunity for conversion. Our market share is lower there. HP is a great product for us in that market, it's driving a lot of that growth and a lot of that share conversion. When you look at infrastructure, again, a lot of discussion about infrastructure. There's a lot of states that have passed either gas taxes or other type of incremental funding that we think we'll see the benefit from as they wait for a kind of larger infrastructure package to come out of the federal government. Again, I think we would see our growth there really hinged on -- again, going back to the comments we made earlier, we've got a lot of good approvals throughout the South and some states in the West, and we would expect those states to continue to grow like we saw this year. So heavy focus there. I guess kind of broadly speaking, we see kind of 2020, right now, unfolding very similar to 2019. So we see very healthy demand. Our customers see the year playing out that way, so there's nothing that we see right now that would suggest any kind of a major shift from kind of what we've been experiencing over the past, call it, 12 to 18 months.

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Timothy Ian Daley, Deutsche Bank AG, Research Division - Research Associate [31]

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Got it. And just following on that, just hoping we'd dig into your solid steady growth, you guys are expecting in nonresidential. There's been a pretty sharp slowdown in the architectural building index over the past few months, and I was just hoping you guys could help reconcile those trends and the macro indicators with the commentary and the kind of growth that you're providing here, given nonres is your biggest end market. Just any sort of color you can help us reconcile with the kind of slowing macro indicators with the kind of things that you're seeing on the ground and the strength in demand.

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Michael Higgins, Advanced Drainage Systems, Inc. - VP of Corporate Strategy & IR [32]

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I think when you look at our index, that's been a little bit choppy this year. I know it went down the previous months. It just came up this past month and it was kind of back at that 50 range, which is expansion. I think the way we look at that, we monitor very closely. But I believe the number where they kind of go into where it's kind of a distress is below 40. So it's not anywhere near that. It's been hovering at 50 or slightly above 50, even given the choppiness that exists there. Again, I think we see very kind of very solid steady growth, go back to kind of what our salespeople see in the field, what our engineering customers are telling us, what our contractors and distributor customers are telling us, is that, hey, this year looks very much like the past year.

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Operator [33]

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There are no further questions in queue at this time. I'll hand the call over to Scott Barbour for closing remarks.

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Donald Scott Barbour, Advanced Drainage Systems, Inc. - CEO, President & Director [34]

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So we really appreciate all of the participation today and the high quality of the questions. Thank you for joining us. We had a good year and a good couple of years. We're pleased that we kind of got back-to-back years where we met our plan and in some cases, went slightly above it. We're confident in our financial position. The market outlook is, as we just described, as we move into the new year, we have a clear line of sight heading into FY '20 and we expect to continue the momentum we've built over the past year, 1.5 years. We will remain focused on the fundamentals and committed to executing on the 3-year plan that we showed last fall, providing market-leading water management solutions to our customers and maximizing our shareholder value.

So thanks, again, to our employees for a great 2019. They really pulled it together in that last quarter in an extraordinary way, I'm quite proud of them, and we look forward to an even better 2020. Operator, that concludes our call. Thanks.

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Operator [35]

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This concludes today's conference call. You may now disconnect.