Q4 2021 Advanced Drainage Systems Inc Earnings Call
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Good morning, ladies and gentlemen.
And welcome to advanced drainage systems fourth quarter fiscal 2021 results Conference call. My name is Crystal and I am your operator for today's call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session to ask a question during the session you will need to price.
1 on your telephone if you require any further assistance please press star zero.
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.
Yeah.
Good morning, everyone. Thanks for joining us today with me here I have Scott Barbour, our president and CEO and Scott Cottrill, our CFO.
Over the long like also 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 for 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 on.
All of which speak only as of today.
Lastly in the press release, we issued this morning is posted on the Investor Relations section of our website.
A copy of the release is also of that included in an 8-K submitted to the SEC.
Will make a replay of this conference call available via webcast on the company website.
I'll now turn the call over to Scott Barbour.
Thanks, Mike Good morning, everyone. Thank you for joining us on today's call.
We delivered another quarter of record financial performance in the fourth quarter of fiscal 2021.
Sales grew 20% year over year, driven by 21% residential sales growth kind of.
11% non residential sales growth as we continued to execute at those ABS and the infiltrator and the favorable demand environment.
The residential market remains strong for those.
The nickel trader residential market sales grew over 20% in the fourth quarter, driven by favorable dynamics of new home construction repair remodel and onsite septic accelerated buyer of material conversion strategy that both businesses.
The residential market sales of increased to 39% of our domestic sales as compared to 23% prior to the infiltrator acquisition the.
The market indicators show that the homebuilders continue to acquire land for future development and that there is an overall shortage in available homes, which drives the front end new community development sales of ABS.
And the onsite septic systems sales of effort infiltrator are driven during the home completion stage.
In addition, the repair remodel business remains robust.
<unk> participates in the repair remodel segment of the residential market through retail, which is about 40% of the legacy businesses residential sales.
It will chair the infiltrator repair remodel business and the residential onsite septic market accounts for roughly 1 third of their business.
Growth in our non residential end market was broad based throughout the United States. We continue to benefit from growth in horizontal construction, such as warehouses distribution centers data centers data centers as well as the developments the followed the residential build out.
About 2 thirds of our domestic allied product sales are in the nonresidential market, where sales increased 13% further giving us confidence in the underlying market strength.
Sales in the agriculture market increased 50% this quarter driven by strong demand as the spring selling season got off to a good start.
The agriculture economy, the economy remains favorable and we continue to benefit from the programs, we put in place around the organizational changes new product introductions and improving execution.
We experienced strong demand in the Midwest region, particularly in Minnesota, Ohio, Iowa, and Michigan further we are expanding our presence in key strategic areas like Missouri and parts of the southeast to drive increased market share.
International sales also increased 49%, primarily driven by sales growth in our Canadian business, which nearly doubled compared to last year.
Canada is doing well across both of the construction and Andrew and agriculture end markets with similar trends to the United States.
Additionally, this quarter, we continued to leverage our pipe manufacturing facilities in Mexico to help service the strong demand we experienced in the United States.
Finally, the infiltrator continues to exceed expectations with the 23% sales growth in the fourth quarter against a very tough comparisons for the prior year and broad based growth across the infiltrator product portfolio.
This includes double digit growth in tank in Richfield products.
With strong growth in Florida, Tennessee, Alabama, and Indiana among other states.
This was led by our material conversion strategy of displacing concrete septic tanks with plastic tanks and the economic advantages of septic chambers in Litchfield systems, Inc.
Phil trader business is benefiting from strong distribution presence in the southeast and Midwest as well as rapidly growing micro policies in areas, which typically lack the sewer infrastructure needed to support rapid housing development.
Moving to profitability, we achieved record fourth quarter adjusted EBITDA during the period.
Adjusted EBITDA margin increased 190 basis points the increase in profitability in both businesses was driven by leverage from the strong sales growth favorable pricing as well as contributions from our operational productivity initiatives, which helped to offset inflationary costs.
I am very proud of our employees and management team at the ABS and infiltrator for bringing the fiscal 2021.2 of close with strong financial performance this quarter.
I would like to highlight our fiscal 2021 financial performance compared to the 2018 Investor Day plan now that we finished out the year.
We communicated the 3 year plan in November 2018 about a year of after I got your ABS and I'm very pleased to have exceeded the targets we laid out.
The <unk> legacy business grew sales of 7.7% CAGR driven by the sales programs, we laid out in November 2018.
We continue to execute our proven market share model converting traditional materials to our plastic pipe products and the strong and the storm water market to drive this outperformance.
Our sales team is going after the significant growth opportunity for large diameter, HP pipe, which has grown at a double digit CAGR over the 3 year period. We are focused on key for growth in key states, mainly Florida, Texas, and California, as well as additional priority states, where we have where we find attractive.
Attractive market opportunities.
We continue to penetrate the allied product market through our existing portfolio as well as the innovation and acquisitions Allied product sales have also grown at a double digit CAGR of over the time period.
Finally, our agriculture, and Canada businesses performed above our expectations, both returning to strong growth.
And the plan laid out in November 2018, we stated our intention to grow adjusted EBITDA margin to between 18 and 19% the legacy Ada the avs.
<unk> business finished the fiscal 2021 with the margin of 24.
For 3% significantly outperforming our plan the outperformance was driven by execution top line growth favorable material cost fixed cost leverage as well as improved efficiency in our supply chain operations and distribution.
The improvement of profitability as well as execution of our working capital initiatives and the acquisition of infiltrator drove the improvement in free cash flow conversion to 66% of adjusted EBITDA significantly better than the 45% in fiscal 2018 and above our target of at least 50%.
Our performance over the last 3 years, coupled with the acquisition of Infiltrator change the growth and financial profile of the company the <unk>.
The acquisition of Infiltrator was of Great addition to our business theoretical trader, we increased our exposure to the residential market diversifying our end market exposure and gained a very high quality management team set of engineers and operators, who continue to execute the infiltrator proven business model.
We believe executing on the strategies and plans laid out in 2018 increases the value of our business as evidenced by the significant increase in our stock price since issuing this plan in 2018, we will continue to focus on driving top line growth, improving our profitability and converting profitability the cash at a high rate.
In turn creating additional value for our shareholders. We will continue to pursue these proven strategies and we'll issue. Our next 3 year plan. This fall at our next Investor day.
In summary, we did a great job of executing in this quarter and fiscal year and are pleased to continue our track record of generating above market growth across our key end markets.
In the past, we've shown our growth relative to the market. However market statistics for a bit distorted right now due to the pin debit pandemic, making it more difficult to measure that said, regardless of how you measure of the market growth or decline, we handily outperformed the market, giving us confidence that our material conversion story is in <unk>.
Pat or even accelerating.
Our success in growing above market as a function of our unique advantages. We continue to have success in gaining market and wallet share for our material conversion and water management strategies we.
For more vector to key states, where construction activity remains high.
The focused bets and others, where we see opportunities for growth.
We are benefiting from broader market trends, including rapid growth in micro policy areas and high higher exposure to suburban development.
And since the acquisition of Infiltrator, we are more exposed to the residential construction market, which now represents nearly 40% of sales.
And within the non residential market. We are also benefiting from our outsized exposure to horizontal construction, which was far more healthy the vertical vertical construction of this past year.
In other words, we're an evolving and is stronger today than any point in our history and we look forward to the future.
As we look for fiscal 2022, we will build on our strong market position execution of new levels of profitability I want to thank our employees, who are the bedrock of our success over this past year, we will stay focused on employee health and safety and then on non delivering the needs of our customers.
We are well positioned to capitalize on market demand, while continuing to generate above market growth through the execution of our material conversion and water management solutions strategies, we remain focused as always on disciplined execution with that I'll turn it over to Scott Cottrill to further discuss the financial results.
Thanks, Scott on slide 7 we present, our fourth quarter of fiscal 2021 financial performance.
I'll be brief on this slide as Scott covered a lot of the details already but I do want to highlight a few key points. Our strong top line revenue growth of 20% was driven by both volume and pricing with strong growth across our <unk> and infiltrator businesses as well as on each of our segments markets and product applications.
The demand environment for our products remain attractive and we expect these dynamics to continue as we move forward into calendar 2021 for.
The 31% growth in consolidated adjusted EBITDA was driven by strong top line growth. In addition to favorable pricing operational efficiency initiatives as well as our synergy programs.
In addition, due to the strong results for fiscal 2021, and the reward the incredible service and dedication of our employees. This past year, we decided to pay of 1 time bonus to employees, who are not part of our annual incentive compensation plans, resulting in approximately $4 million of additional compensation expense in the quarter.
Our ability to deliver in the face of of uniquely challenging year, and a strong demand environment with not of impossible without their hard work and dedication.
Moving to slide 8 we present, our full year results.
Revenue this year increased 19% to of $1 billion $983 million coming in above the high end of our guidance range systems.
The result of strong demand, we experienced this year growing double digits in both the domestic and international businesses.
Our adjusted EBITDA increased $205 million to $567 million driven by strong volume growth in both pipe and allied products favorable pricing and material cost and operational efficiency initiatives that offset inflationary cost pressures.
Infiltrator.
<unk>, an additional $88 million driven by strong volume growth favorable price cost performance as well as continued benefits from our synergy programs. We also had the benefit of owning <unk> for the full year as compared to 8 months in fiscal 2020.
Finally, our adjusted EBITDA margin increased 700 basis points to 28, 6% a company record.
Moving to slide 9 our year to date free cash flow increased $134 million to $373 million as compared to $239 million in the prior year. These impressive free cash flow results were driven by our strong sales growth on profitability as well as the execution on our working cap.
<unk> initiatives.
Our working capital decreased to approximately 18% of sales down from 21% of sales last year.
Further our trailing 12 month of leverage ratio is now 1.1 times, we ended the quarter in a favorable very favorable liquidity position with $195 million of cash and $339 million available under our revolving credit facility, bringing our total liquidity to $534 million.
<unk>.
And finally on slide 10, we have our fiscal 2022 guidance based on our performance to date order activity backlog and current market trends. We currently expect net sales to be in the range of of $2 billion $220 million to $2 billion $300 million.
Representing growth of 12% to 16% over this past year and adjusted EBITDA to be in the range of $635 million to $665 million representing growth of 12% to 17% over this past year.
As we look for the fiscal 2022, we are confident in the demand environment across our end markets and our largest domestic market nonresidential forward looking indicators are robust and our backlog of the open orders are at the highest levels in recent memory.
Our residential end market growth is also expected to remain strong, particularly in the key southern Crescent States, we are focused on including Florida and Texas. In addition, our agricultural market remains robust with strength in crop pricing driving investments in land productivity through better field drainage and finally, the international outlook is.
Turning more favorable driven by our business in Canada, which is our largest international market.
Our Mexican business is stabilized and we will continue to leverage our Mexican manufacturing assets to help service the strong demand coming from the U S.
Lastly, the exports business is expected to rebound as COVID-19 restrictions continue to EPS.
The strong demand outlook gives us confidence on our revenue guidance. We have also executed several price increases since our third quarter call across all of our end markets at both ads and infiltrator to date, our pricing actions are flowing through and we will continue to closely monitor the situation to ensure we stay ahead of inflation.
And any cost pressures on.
On the cost side, we're seeing inflationary pressure on materials labor and transportation as well as some issues with labor availability.
Within transportation, the third party market availability of tight and there is inflationary cost pressure on diesel wages and commentary on rates.
In this type of inflationary cost environment. We are also able to control our transportation costs better than most due to our large internal fleet and we are working to leverage such to offset the rising costs. We are seeing through payload efficiency route planning and other programs to more efficiently serve our customers.
While we expect EBITDA margins to be flat to slightly up this year. It is important to highlight that we expect the most pressure on our price cost spread to occur during the first half of our fiscal year.
Bottom line, we believe our long term growth and margin expansion of ability remains intact. Despite the near term inflationary cost environment.
We will be dealing with this year.
Given our strong balance sheet and leverage position strategic capital deployment remains 1 of our top priorities. We will continue to execute a balanced and disciplined capital deployment strategy focusing on organic investments as our highest return lowest risk option in fiscal 2022, we plan to spend between 100.
30, and $150 million on capital expenditures to support growth recycling innovation productivity and safety initiatives at both ads and infiltrator basically doubling our commitment to capex year over year.
In addition to organic investments we continue to actively explore M&A opportunities that are aligned with our strategic vision. We're extremely excited about the M&A opportunities we are pursuing and see this as a key component of our capital deployment strategy in both the near term and longer term.
In addition to investing in the business.
On deploying capital organically and through M&A, we can add today announced the 22% increase in our quarterly dividend as well as of $250 million increase in our share repurchase program. We previously had $42 million available under this program and the increase announced today brings the total authorization.
<unk> the $292 million.
With that I'll open the call for questions operator, Please open the line.
As a reminder to ask a question you need to press star 1 on your telephone to withdraw your question press, the pound or hash key free cash.
The request that you ask 1 question and only 1 related follow up if you would like to ask additional questions. Please press star 1 to be re entered into the queue.
Your first question comes from the like the line of Mike Halloran with RW Baird.
Hey, good morning, everyone.
So let's start on the on the.
On the pricing inflation side, so at the end of their Scott you mentioned the <unk>.
For the price increases across all of your product categories. How are you seeing that layer in as you look for the year, how should we think about price cost by quarter, probably will touch on in the front half of the fiscal year, a little bit of more balance maybe even slightly positive in the back.
And how you're accumulating thinking about what price cost looks like for the year.
Yeah, Michael Scott here, so youre thinking about the right way, so our revenue guidance range of 12% to 16%.
Think about that as more pricing than volume is the way I would talk to that for the full year.
The other part on the phasing I think it's really important for folks to understand based on kind of what we're seeing.
Have seen over the last couple of months and recently, we look at the first half as being kind of of that more narrow price cost spread environment will stay in front of it on the dollar perspective, but as we've talked margins, we see that as kind of the.
The tightest period, and then when you get to the second half the net obviously eases up and lead us to our guidance of flat to up 30 basis points from a margin perspective for the year. So the first half will be the tightest the tightest part for us of our fiscal year.
And then the follow up is could you put debt then in the context of how you think about margins over time here.
Certainly felt like from from Scott of original prepared remarks that this is the new baseline that you think you can expand margins off of the overtime just help understand the levers as we sit here even if inflation.
The cost of the inputs remains at an elevated level.
Good morning, Mike Scott Barbour, and I think the way we are thinking and working this is the game has changed a bit on us.
Of this year.
The really high inflation.
The environment. So it's now about.
Getting pricing getting productivity, but mainly pricing to offset those kind of.
That inflation and it becomes a dollar of gain good enough dollars to offset that we'll try to get some some SG&A leverage.
And that'll be the game and the dialogue that we work here.
Until the cash.
The rapid rise of inflation.
Levels out of.
Or begins to go back the other way and then over the long term the programs we've been working on.
The productivity capital investment operating the businesses better are still intact and there is still going on underneath all of this messiness of inflation and then we will begin to be on this March.
<unk> expansion again.
Once the environment I would say.
Kind of of returns to normal or we get all of the right things in place.
<unk>.
And we feel very confident about that that's also driving a lot of the capital spending that we're doing.
And we spend.
A lot of our time and energy, making sure we've got the right resources to execute on that kind of expansion.
Thanks, Scott Thanks, Scott appreciate it.
Alright, thank you.
Your next question comes from the line of Matthew Bouley with Barclays.
Good morning, Congrats on the results thanks for taking the questions.
I wanted to ask share on that last point there Scott just the.
Capex in.
And the big uptick this year.
You guys of sort of daylight in the past couple of quarters around potential growth investment to come.
And clearly coming to fruition here could you just outline a little more of the specifics around where youre investing.
Of your product categories needs additional capacity and just maybe any elaboration on around.
The amount of capacity you are adding in dollar terms or however, you want to frame that thank you.
Hey, Matt Scott Cottrill here, Yes, I would say when you look at the 2 businesses right and I'll break it down between assets and infiltrator, we've talked about infiltrator kind of in that reinvestment cycle at the well that they go through every 3 to 5 years.
I'll start with demand the demand that we're seeing across both businesses is significant so as you look through the acceleration.
And investments it's the.
Day in front of that right, it's not that we're out of capacity or that we can't handle the growth is to make sure. We can handle it efficiently and serve our customers as best we can and get our inventory health, where it needs to be so a lot of what you see on the applicator side is the support growth by and large that's the bulk of what we're spending on that side on the Aaas.
Side of the house again, it's still a big piece of the increase that we're seeing year over year is the support that demand thats coming our way now we're doing it but lead times or are moving out on us and we need the kind of continued to stay in front of it and better serve our customers. So it's capacity and the support that demand and that growth is coming our way.
But I would say also on our side and we've talked about it we've got a lot of productivity initiatives that are in flight right. Our ops excellence initiatives a lot of those are still early innings, and we got on investing tooling and molds and so forth to get that those assets, where they need to be to be more efficient as we move product around the network.
For 2 start reducing the amount of moving around the network debt our product does before it gets to the customer so <unk> got that in debt automation, we've talked about it but that downstream automation.
He will his key within our businesses and again, our network of 48 plants in the U S. A lot of opportunity to get more efficient make it a safer place for our employees.
So a lot of things that we're doing that and again, we spent close to $80 million. This past year of big increase year over year. So we're getting in front of it and then the 150 is not insignificant, but it is the best for use in top priority of our capital deployment options and we know that so big effort there and we're also investing in <unk>.
Arnell resources to make sure that we can deploy and accelerate that capex organically.
Great that's really helpful color there.
The second 1 I wanted to ask on non res.
Obviously for the past 2 quarters here I think your own non res performance has been relatively decoupled from I think what a lot of of C. As kind of the underlying non res market.
I'm curious what if any areas of your own business do you think.
There was some negative impact from the sluggish market over the past year. Because the question is going forward as we think about non residential indicators of reflecting positively or there's still areas of your own business.
That have yet to sort of rebounds with the rest of the non res market. Thank you.
So.
Scott Barbour and I would answer that.
More geographically.
Then product line wise, where it goes we certainly had geographies the northeast and northwest are good examples of that debt that were not robust.
At all in the nonresidential.
Over the past 12 months.
That said they are rebounding pretty rapidly right now so youre getting that pent up demand.
Packed from the regions, which are big regions for the ABS.
Pete Pizza piece of the business, we might have had.
<unk>.
1 the allied product line that grew a little less than the others because it was a little tougher for us to get in front of people.
And the kind of a high touch sales environment. There. So we did see that.
In a couple of them now it's rebounded here is the pent up demand in non residential has his pop pop and we've been able to get out and see people into that high touch selling again.
But we had some pockets we definitely had some pockets, but not many non.
Meaning it was pretty good year.
The next question comes from the line of Kenneth Shaban with loop capital markets.
Thank you.
Piggyback on the non res question, just curious just with respect to your observation that you've got.
The record backlogs.
Seems like the backlogs have increased.
No.
On the backlog is something that you started to see really accelerate in.
In the fourth quarter or was it the function of Covid.
The high coming into Covid, and then maybe you have the delay in servicing.
For projects for some regions and then.
We're just kind of see catch up so any color on the.
The kind of how the backlog of could evolve it would be helpful.
Sure.
Scott Barbour again, and our backlog did accelerate at both businesses over the past 3 months.
<unk>.
Both pretty robust with packaged sales said, our lead times have gone out of bit across across our businesses because of that backlog to increase the rapid backlog the increase.
In certain regions it pent up demand the catch up.
I would put the northeast and northwest in that category I think in other areas the.
Like the presses the sunbelt they kept going.
Through the through the year the.
They're continuing.
To grow pretty rapidly.
Contributed to that backlog increase and I think it's all the same things you've been hearing people moving to the sunbelt.
People, making the choices to live in different areas that more favorable favorable to the micro politics or the suburban from you.
Get that kind of spread.
All we're seeing all of those trends and I think.
Had been a bit of at.
At the forefront of those we're also seeing some catch up in Texas by the way, which has had a heck of a year Hurricanes last fall the winter Apocalypse in February it's raining like heck down there the last few days.
Big Covid outbreak in Houston, which is the big market. So it's trying to bounce back.
Pretty good also.
And when the place of Texas gets going it runs pretty hard.
So all of those factors are at play right now and kind of that the acceleration of the backlog that you. The did you are hearing about it.
<unk> seen in us.
Great Thanks for that.
My follow up question is I was hoping you could unpack some of the underlying assumptions of how your sales guidance for a little bit more for whether it's the little bit more granularity on price mix for expectations by segment in the end markets and then also just around the seasonality.
I think last year sales were a little bit closer to 50, 50 front of house versus back half.
I think historically, you've had maybe about 50, 557% right or sales on the front half of the year. So anything that we should be paying attention to as we model out there the front half back on.
And any seasonality there it will be about where it has historically been I wouldn't think about it any significantly different than that this year as you go into it.
I think that might be getting to the exact if you will to go through it I think on the on the revenue guidance.
We're on.
Not going to give it any more granularity than kind of where we're at obviously, we're kind of as we go through the year kind of revise that as we see kind of where all of the pricing ends up and everything else, but based on where we have line of sight today.
This is kind of where we're at at that 12% to 16% up on the top line again, just think about it is more on that pricing side than on the volume side.
Kind of the best way to talk to it right now.
Yes, I think if you think about the seasonality in that kind of shift this year. The factors that we don't think will take place if you'd go back to Q3 remember lots of the country kind of restricted from Covid as we got into our Q3 of that opened up.
And that kind of phenomenon, probably isn't going to happen again.
And then Q4 tends to be heavily reliant on weather and it was pretty favorable this year is very favorable.
Who knows what's going to happen next year, but.
From the weather standpoint for.
Yes, no it makes sense, thanks for the help except for losses.
Okay.
As a reminder to ask a question you'll need for Crestar 1 on your telephone to withdraw your question press the pound or hash key we kind of request that you ask 1 question on only 1 related follow up if you would like to ask additional questions. Please press star 1 to be re entered into the queue.
Your next question comes from the line of Josh <unk> from Morgan Stanley.
Hey, good morning, guys.
Good morning.
Yes.
The 2 to dig in a little bit on on price cost here I guess kind of on the commodity complex in general.
Are you guys seeing anything on the availability side.
That is giving you concern I know that shortages are our kind of of the centre square and bingo. These days.
Yes, the resident get called out from time to time anything that you guys would flag there on on that front.
Yes, and yes.
Sure.
We are.
I think the best way to describe the Josh is.
In February and early March probably was the iron.
Most impact.
It gets better all the time.
I'd say were down to the managing very isolated but real.
Resin problems on occasion.
It's very material and supplier specific right now versus pervasive.
In February and through March, but essentially the winter Apocalypse half if the golf it took 4 to 6 weeks by.
By the time those things both of those plant started back up the transportation got cleared and then we were kind of kind of the then puts us in the mode of managing spot stuff and now as they try to catch up.
And restock their inventory and supply chains.
You end up managing.
What would be spot shortages not per basis things, where you can't run for 3 or 4 days now through that kind of run it on my answer here.
We pivoted to running more recycled in February and March so that we could keep production going not always exactly the mix of products. We wanted but we felt that was the right thing to do because we could go back and adjust our production schedules.
And we still we're still doing some of that but not near as much as we were in February but I bring it up.
To highlight this really nice advantage we have.
These recycling operations, we have our visibility into that supply base of.
Sales and recycled material.
And it's both of the ABS and infiltrator.
This happens so of.
Big work item for us to keep our eye on on that sector.
Got it and then just given that so much of the top line is sort of.
The price driven.
Yes, clearly you guys have good pricing power I understand a lot of because of the Dol offsetting that even on the dollar basis, but to the extent that a lot of what you just mentioned.
Seeing more supplier of weighted than necessarily just demand related presumably at some time at some point in not too distant future, we get a little bit early on the resin side do you think you hold that price do you think you'd get back on that sort of the dollar for dollar basis like how does that evolve on the other side.
I would imagine you guys are able to retain most of that.
Outside of maybe some particularly.
Cute situations.
We'll work to retain.
We will definitely work to retain.
And thread the needle on continuing our market share gains and conversion from traditional materials to plastic materials at both.
For both infiltrator.
Yes.
So will.
At this time I would like to turn the call back over to Chief Executive Officer, Scott Barbour for closing remarks.
We will continue executing our strategies in these fast growing states throughout the southern Crescent of the U S as well as mitigating inflationary pressure through favorable pricing and productivity initiatives.
Operator that concludes our call.