Q1 2021 Advanced Drainage Systems Inc Earnings Call
Until that time your lines will again be placed on hold thank you for your patience.
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Ladies and gentlemen, today's conference essential to begin momentarily until that time your lunch, which can be put on hold thank you for your patience.
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Good morning, ladies and gentlemen, and welcome to the advanced systems first quarter fiscal two fell from 21 results Conference call. My name is keeping an eye and your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session at that time. If you. Please ask your question over the phone lines Superstars in London.
Oh Gee.
If you would like to withdraw your question. Please press the county.
If you need further operator assistance. Please press star Zero I'd now like to turn the presentation over to your host for todays call is.
Oh.
Hey, Thank you and good morning, thanks for joining us today.
We appreciate your patience, while we work through.
Some of the technical issues as you know, there's a new process a procedure for calling in to these calls and though the vendor in the operator working through that so again, we appreciate you being patient walk during the delay.
Me today, Scott Barber, our president and CEO and Scott control 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 our form 10-K filed with the FCC.
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 FCC.
We will make a replay of this conference call available via webcast on the company website.
With all of that I'll turn the call over to Scott Barber. Thanks, Mike Good morning, everyone.
I appreciate your patience and for joining us on on todays call a fiscal 2021 started off strong as demand and business activity in the first quarter remained stable at the top which some underlying variability by state and end market.
Organic sales grew 3% and recall that we communicated to you in may the customers bought approximately 20 million of product in the fourth quarter fiscal 2022 pre buying in our construction end markets and favorable weather conditions in our agricultural end market.
Absent this dynamic first quarter organic sales would have increased 8% and nonresidential would've been flat year over year.
Domestically, we had strong performance in key growth stage like the Carolinas, Florida, the southeast and Utah, and we were able to offset sales in states that reduce construction activity due to the coated pandemic early in the quarter.
As a whole we benefited from our national presence as well as our geographic in end market exposure included the increased exposure that ample trader in Ats is focused homebuilder programs provide to the residential end market and our strong presence in the agricultural market.
We had another strong quarter in the domestic agriculture business, where sales grew 36%. This growth was primarily driven by actions previously taken to increase our focus on performance in this end market as well as positive underlying demand in this market and what was a strong spring selling season.
A lot of good work is being done in the sales and operations initiatives, we defined as part of the renewed focus on agriculture to adss in the fall season is shaping up favorably.
International net sales decreased 9% in the quarter.
Sales in our Canada business did well, but it was not enough to offset weakness in Mexico, and our exports business.
We recently hired a new senior Vice President of our International segment, Tom One Tom comes to Ats. After a successful career to Emerson and we're excited to have him as a member of our team.
Tom has decades long experience in executive management strategy in sales and I look forward to working with time to improve the performance of our international segment.
Infiltrator once again exceeded revenue expectations with sales growth accelerating as we progressed through the first quarter.
Simple trader sales increase across their product portfolio with the strong underlying demand in the residential and repair remodel end markets ROI and his team believe and I agree that the favorable trends for single family housing brought on by the pandemic are quite favorable for infiltrator. So we were making it.
Additional capital and resource investments there.
As we get into the second quarter demand looks very similar to what we experienced in the first quarter. Our order book project tracking book to Bill ratio and backlog are all positive and we feel good about the first half of our fiscal 2021.
We expect a normal cesar seasonal patterns to apply to the business, which only sharpens our focus for this first half of the year.
As mentioned previously our national presence distribution model and end market exposure enable us to capitalize on growth in activity across the U.S.
As you can see on the chart on the screen our residential end market exposure has increased to 38% of domestic sales our second largest domestic end market behind red nonresidential.
We view this as favorable given current market trends and the uncertainty in the non residential market.
Residential market should benefit from single family housing Undersupply in potential future suburban trends as people look is spread out in the aftermath of the cobot pandemic.
This dynamic should also benefit horizontal nonresidential and infrastructure development as developers look to support the increase in single family homes and communities.
I think in the first quarter with the residential portions of Ats and of course, it will trade are growing at double digits. The success of our renewed focus on agricultural market and the uptick in the sales to the retail segment driven by the de Iwai and stay at home project activity demonstrated to us the power of this end market diverse.
C and we've initiated several programs to increase success across these markets. So we can be prepared for changes in demand across our business.
From a profitability standpoint, we achieved record adjusted EBITDA in the first quarter organic adjusted EBITDA margin increased 830 basis points, driven by favorable material costs, lower manufacturing and transportation costs, driven by our operational initiatives contributions from the proactive costs.
Cost mitigation steps announced in March leverage from the growth in pipe and Allied products.
It will trade are also had record profitability in the quarter due due to favorable material cost the contributions from the synergy programs and continued execution of their proven business model.
Synergy programs are right on track to achieve the run rate synergies we've previously communicated.
Similar to my comment earlier on that second quarter revenue the second quarter profitability trends continue in much. The same way is the first quarter at both Ats and infiltrator, we're making good progress on our operational improvement initiatives within our manufacturing and distribution network material pricing remains favorable to the prior year.
There was a comparison will become more difficult as the year progresses.
We will continue to watch or spending very closely as we deal with many of the same issues that other companies are dealing with reopening is presenting challenges, including recruiting and retaining production workers absenteeism and all of these challenges we have to deal with on a daily basis, we've had roughly 80% of the salary.
Workforce, including sales pretty much working from home since late March. So there are lot of issues you would expect that we're dealing with daily.
We have made adjustments and proven to ourselves that we know how to run the business and these conditions and that's what we'll continue to focus on as we manage through this period of unique circumstances.
Theres no doubt that uncertainties exist for future demand.
We will be focused on disciplined execution and doing the basics well as we move forward through fiscal 2021 and build on the strong start at both Ats and infiltrator.
With that I'll turn it over to Scott Cottrill to further discuss our financial results.
Thanks, Scott on slide six we present, our first quarter fiscal 2021 financial performance net sales increased 23% with 3% organic growth plus the contribution of infiltrator within any yet domestic sales increased 4% driven by sales growth in both the agriculture and construction.
In end markets importantly, sales increased 4% in both pipe and allied products construction sales accelerated at the end of the quarter as states with more stringent restrictions for the pandemic began to open back up.
From a profitability standpoint, our adjusted EBITDA increased $79 million or 99% compared to the prior year organic adjusted EBITDA increased $38 million with strong performance from our sales operations procurement and distribution teams media is very well positioned to capitalize on that.
Current stability in our end markets as well as lower input costs, given our market, leading position breadth of products and services geographic and end market diversity as well as our national relationships. These attributes or modes make us the premier partner and leader in the industry and led to the margin expansion and financial performance.
In the quarter.
Infiltrator contributed an additional $42 million to adjusted EBITDA and as many of the same benefits as adss in this market environment Infiltrator achieved a record adjusted EBITDA margin this quarter and is in a very good position to grow as a result, as the underlying demand and the residential market as well as their material converge.
And strategy.
Moving to free cash flow on slide seven we more than doubled our free cash flow in the quarter, increasing from $53 million into first quarter fiscal 2000 $20 million to $124 million in fiscal 2021.
The very strong free cash flow results were driven by the strong sales growth and profitability, we achieved in the quarter as well as execution on our working capital initiatives.
Working capital as a percent of sales decreased to about 21% as compared to about 25% last year.
Finally on slide eight we present, our current capital structure, our trailing 12 month pro forma leverage ratio is now 1.9 times below our target range of two to three times Levered. We've previously communicated and well ahead of our original target to achieve a leverage ratio of less than three times by the end of this.
Calendar year.
This performance was achieved as a result of our working capital initiatives as well as a strong profitability performance, we demonstrated both in fiscal 2020 as well as in this quarter.
We ended the quarter and a very favorable liquidity position with $235 million in cash on June Thirtyth, 2020, and $289 million available under our revolving credit facility, bringing our total liquidity to $524 million.
It is also important to note that we have no significant debt maturities until 2026.
Further we paid down the remaining $50 million balance on our revolving credit facility. This past Friday, bringing that balance to zero as of today.
Our capital deployment priorities remain to invest in our business with a focus on safety capacity expansion productivity and efficiency improvements as well as our innovation initiatives.
In addition, we will continue to assess bolt on acquisition opportunities through our disciplined process staying close to our core and focusing on adding products to our water management solutions back.
Lastly, due to the uncertain market environment, we're not providing guidance on the call today.
That I'll open the call for questions operator, please open the line.
At this time, if you'd like to ask a question over the phone lines. Please press Star then one on your telephone keypad.
We'll pause for a moment on election day roster.
Your first question comes from line of Macfarlane of Baird. Your line is open.
Good morning, everyone.
Hey, Michael Good morning, So so let's start on the route Nonresi side, you know the commentary in the short term points to a little decline, but stability overall, maybe specifically, how you're thinking about backlog, but.
More importantly, once you get passed the next couple of quarters, what's the current thinking internally for how we joined that business could be given your various exposure points in that channel.
Well, we do.
We do feel at this Scott Barber.
We do feel like we understand and see you know for than for the next.
Couple of quarters, you know a very stable nonresidential environment, we look at all of those high frequency metrics and they are pretty good and I think when I think just about nonresidential, it's going to be a couple of things one it's going to be segmenting that market and are under.
Standing very carefully those segments that will be growing those that are not growing.
And you know all those segments Mike.
And making sure that we've got the right people focused on warehouses and data centers and those kind of places where we know money is being spent we're pursuing a lot of large warehouse jobs right now.
So we see that and we know the big developers are in that so we're quite focused on that we also believe horizontal construction.
Could you know we're much better in terms of participation been vertical construction will probably be more favored so we're quite focused on that and then quite quite honestly. It you know there is some I would call it.
Some power other incumbency, where we have a large high touch salesforce, Ralph they're seeing all the job. So when when things are being bid we're going to seal.
I think that gives us a nice advantage that in this kind of national footprint, we have versus a lot of competitors. So we can move around to the right geographies within that non residential but there there is definitely going to be.
Change and we are I think we're proving to ourselves, but were pretty good flexing and moving resources to the point of attack even when we can really really beyond the field like like we've not been able to over the last couple of months from a selling perspective.
And I guess, the flip side of that is the residential piece, which given the infiltrator acquisitions coming in a really nice mix for you guys that serves as a mitigation point when that change point comes in if you consider that market how much of an offset do you think of that how sustainable is the underlying.
Trend from what you see in is there any is there any reason that you would participate more or less.
In that recovery coupon residential side into core businesses.
I think we'll participate more for two reasons.
One is the infiltrator market sure model, it's a prudent business model, it's a material conversion model. They have all the right distribution to reach the touch points out there. It's a very consistent grower market share gainer and again, they will be benefited from the move outside of the.
Cities.
Number two is we have had several initiatives in mds to pursue residential developers residential home builders infrastructure and as you saw those grew pretty nicely in this last quarter. So the way we kinda look at it is you know if we can you know kind of.
Grow at better than the market rates within will trader and those residential initiatives on adss, we've got a really good chance of offsetting.
Whatever market declines might occur in nonresidential, so thats off kind of thinking about it and making sure were allocated resources both.
Sales resources and capital you heard me mentioned in there we're going to step up some capital we've already stepped up some capital going to step up some more capital infiltrator to make sure. They have got all the capacity they need we're moving some selling resources from nonresidential to this residential homebuilder in development and infrastructure pursuits.
So we're we're definitely trying to be agile to understand the done that the dynamic you asked a question about.
Yeah that makes a lot of sense and a certain certainly a well time transaction last one from me.
Maybe just help I'd say that it yeah.
[laughter].
That's it for me help me help me understand the sustainability on the margin side, obviously resin a tailwind for you neutral trade inclusion helped a lot as well, but rather than the tailwind and how sustainable do you think of that is in whatever pricing dynamics looking like in the market right now.
Pricing dynamics are pretty favorable I mean I think.
I mean favorable in the sense that you know, we're able to hold price.
In the market today across across the board really.
Between ample trader and aid, yes, there's always a few skirmishes going on.
And it will deal with those.
And I guess I think we've taken somewhat of a a step change you know resin. We will go up and down you know there's tools will use to mitigate that pricing and operational initiatives, but overall the improvements you saw in transportation into manufacturing to the four wall for all manufacturing here I think.
Some of the things we've done and learn how to do kind of in this cost structure. We have today will benefit us long term.
But it's not I don't think we're going to go all the way what we're not going to go back to where we work, let's put it that way, but we will have seasonal and and and deferred factors that were gone we'll have to deal with that said, we have a lot of tools and the tool kit.
And a lot of different initiatives.
That we can continue to push ahead on that I think we'll we'll show demonstrate that where we've got more in the tank relative to margins.
That's super helpful. Thanks, Great quarter.
Thank you. Thanks. Thanks.
Your next question comes from we'll just line of John Lovallo of Bank of America. Your line is open.
Good morning, guys. Thank you for taking my questions as well.
The first one maybe we can dig in just a little bit deeper on the organic EBITDA margin expansion.
830 basis points in you listed I think for kind of drivers wrong that slow manufacturing cost mitigation and leverage is there any way you could cut at least dimensionalize the impact from each of those.
Scott, Yeah, Hey, John the way I would talk to it is when you go to the EBITDA Bridge and you look at kind of that Boston area. It highlights those areas and again I'll walk the left the right a little bit, but again the volume a high end, there and was stable and our allied products.
Continue to grow so you get really good leverage there on kind of that volume side of the out Scott just hit on kind of that lower input cost environment and much like we continue to talk to we're able to hold on to most of our pricing on a year over year basis, even given that lower input costs.
Environment. So that's why you see that great leverage on on that $17 million that was indicated there as well on the manufacturing and transportation I think thats, where we get the most excited that's where you see kind of that operational improvement we've been talking about for the last 12 to 24 months.
We've got our operational excellence initiatives that are taking flight.
And you saw those starting to come in we talked about we weren't really very happy with our performance at our absorption of fixed cost back in January February and March of last year. This year, we did a much better job around that so you saw that come through as well and then the synergies that we're getting related to the Infiltrator Act.
Position.
We're getting those.
Fully on on schedule with the run rate synergies that that we talked about as to the mitigation actions that we took.
I will tell you that in the quarter, probably around $5 million upfront mitigation actions that we took that you could call temporary if you want but we'll continue with those as we go here into Q2 and as we work forward, but there was not a lot in the numbers and the 80 at legacy margin before.
Payments that was other than good operational performance.
Good I had one one thing to that.
Yeah, John do you recall, we talked quite a bit that.
Big lift we dimple trader was around materials work, you know material science materials bind materials things like that and and I think those are kind of woven into what Scott said.
And those are things that aren't going to come back out you know those initiatives those kinds of things. So we're we're really happy with how the those synergy programs in the into leadership of those synergy programs and the digging in on those is gone. So far so you not all of it is synergy, but I think that.
An important thing in one of those things into tool kit, we have going forward that we haven't had in the past was that that synergy work with ample trader, particularly on the materials yeah right on it one more types, it's worth it those operational initiatives and excellence initiatives.
Again multiple summer in flight now summer hitting our resolve some will be heading here as we moved through the next 369 months. So that's where we're getting good traction and very pleased with our results.
Yeah, perfect that's exactly what I was getting at thank you and then in terms of the comment on demand being similar to what we saw in the first quarter I mean quarter to date or would you say that were organic volume is running up sort of mid single digits is that fair way to think about it.
Year over year sequential.
Year over year.
Yes, probably doing that a sequential is slightly ahead July was slightly ahead of June.
On a daily basis and [laughter] after two days of all our two or three days of August it's kind of the same but.
Okay, a trying to go back to our experience of April May June what we see happening right now it looks a lot like June.
And when I say now I meant really July and the first couple of days and I <unk>.
Given the backlog at the pace of orders the book to Bill all that stuff is lining up you know in a varied for a very similar type of.
Sales performance I think.
That's great and then finally, yeah, nice cash position and liquidity position any updates on your thoughts around capital allocation anything around that you saw that might be able to take place.
Nothing on these top no we saw a question.
No not to do on that I'm, just I'm joking with young nothing new on on that you know we had our board meeting this week and we talked a lot with them about.
Capital allocation and deployment and both.
Capital investments, we need to make at IPL trader and Ats.
Things that we're we've been working on we continue to kind of bring to fruition and then we're going to a very.
Disciplined process I you know we've spoken in the past with you all about establishing a good process to look at acquisitions and be very thoughtful and deliberative and we started that back late last year. After we got comfort with how things were going with ROI in the team and ample trader.
And we saw this cash position building, we saw the liquidity coming forward. We didn't think it would be quite as good as it is but we knew was going to be goods. So we've started down that path. There is nothing to really due to report on that besides that.
Probably Scott My myself, a couple of others, it's been in quite a bit of time, you know thinking and working working on that with with our board and we had a good good discussion with them yesterday about that.
Okay. Thanks, very much guys.
Thank you.
Again, if you would like to ask a question over the phone lines. Please press Star then one on your were telephone keypad.
Your next question comes from the line of.
Sure. So loop capital your line is open.
Hi, Thanks, Thanks for having <unk>.
Call you indicated he had visibility out through September just curious visibility improves just given what you're seeing the macro.
Isn't returned to more seasonal levels and just how far out there right.
Right now.
Hi, good morning to Scott Barber and welcome Uh Huh.
Okay.
Yeah, we do have I think very good visibility into September you know kind of driving my comments around this quarter will look a lot like the last quarter. I think you know I would my admired our band right now is that things were going to be.
Fairly stable there'll be some noise underneath it.
Don't know exactly what's going to happen with with all the reopenings in schools and the election in those kinds of things, but paces pretty good and I think that could extend through our construction season.
And ER and we look at the macroeconomic data just like you guys do we were hoping it would settle down with the let's call. It a smooth reopening.
It did I mean, the smoothed reopening really didnt occur so that we still we thought there would be a little more clarity on the long term I don't think this really develop that way.
But we know how to operate in this environment and we will continue to to to watch that very closely but I feel pretty good out out through the into this quarter and through our construction season.
And I said in the comments, but I would reiterate that you know the the fall for our agriculture business is shaping up pretty nicely, which is good to see.
And that's an important piece of our business as we move into September October and November now it could be can vary with poor weather conditions as we get later in the year towards November December.
And we had a pretty good very good year last year, but things are shaping up nicely for us now and are a renewed focus on that as well as the the bent towards residential with ample trader and some of the Ats initiatives I think have paid off well for the company and I'm glad on year and a half.
But and if you talked about some of the capital.
Infusion into house it sounds like there should we anticipate any step up cost or startup costs or any potential inefficiencies as you look to to bring some extra capacity on.
So that's a good that's a really good question and that capital is not on the ground. Yet you know those are that's equipment. This.
Still kind of in process of being built and not delivered.
And there are always.
There are always a difficulties when you start on major capital equipment like that.
That said you know that's a pretty profitable well run very solid operational in engineering group. There will have some issues I mean, there always are but I have a lot of confidence and that team that will will find ways through that in it it might Dennis for a month or two months, but it's not at cripple.
If you know what I mean, I mean, it's just you're going to have to go through those things, there's a bit of birthing pains on those we at a company like that I think the scope and profitability of it we're we're very well positioned to absorb that.
Okay. Thank you last question.
Looking at inventories this crucial rock.
Was that in your opinion seasonal a little bit more than seasonal did you see any destocking.
Distribution just curious if so could you end up seeing a restocking here.
If you aren't already.
It is more seasonal there's we're not a.
You know I read the business not neither business Ats, nor infiltrate are really relies on a big stocking up a distribution and drawdown. So you don't give some of those inertial forces in this company did I am looking for that Destocking.
Really demand driven a and then be someone input costs, driven because when we procure and lower and lower pricing, we get a we get an inventory dropdown.
Great makes sense, thanks forgotten in our best of luck.
Yeah. Thank you.
Okay, and if you would like to ask a question over the phone lines. Please press Star then one on your telephone keypad.
[noise] [noise] there are no further questions over the phone lines at this time I turn the call back over to the presenters.
Alright, Thanks, a lot we appreciate the questions and I'm sure, we'll get a lot more here as we go go through today and we really appreciate you all joining us.
It was good quarter for us and where we're quite happy with how things are going it both Ats and infiltrator as you know we've all we've all got challenges. So it's kind of unique SEC of certain circumstances, but as I said earlier, we will we've proven that we know how to operate in this environment.
We'll continue to focus on health and safety of our employees, it's very important to us.
We continue to provide you know very essential products for storm water management, and onsite septic waste water solutions to our customers and communities they serve.
We'll continue to protect our profitability balance sheet.
Due to economic uncertainty uncertainty arriving from from Cowen 19, and we feel confident will come through this will come through it as a startup company. We're learning things every day.
I want to thank our employees.
They've done a fantastic job.
Here over these last four five months in a very unusual set of circumstances and I'm really proud of how they they've come through this.
I wish I could tell them, it's all over but it's not and we're gonna have to continue to operate in this way for for originally thought but they.
The bottom so I really appreciate all that.
And.
And operator, I think that's all for us here.
This concludes today's conference call you may now disconnect.
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Yes.