Q2 2022 Advanced Drainage Systems Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to advance drainage assistance second quarter, a fish called 2022 results conference call.
My name is me and I am your operator for Denise call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
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I wouldn't know liked at the end of presentation over their hosts for today's call Mister Mike Higgins, Vice President of corporate strategy and Investor Relations.
Thank you and good morning, everyone with me today, I have Scott Barbour, 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 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 is also that included in an 8-K submit it to the S E C.
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 Barbara.
Thank you Mike you. Good morning, Thank you everybody for joining us on today's call.
We achieved a record 706 million in sales in the second quarter, an increase of 30% compared to the same period last year.
Sales growth was primarily driven by pricey at both atheists and nipple trader across our geographies and our and our end markets.
A volume was down slightly in the second quarter, primarily due to the retail business within the atheist residential in market, which had a difficult comparison relative to last year, when we experienced record shipping levels and the cat in the retail category at the height of the COVID-19 pandemic excluding.
Retail the avs construction market sales volume was up slightly despite constraints within our manufacturing and transportation operations.
Infiltrator sales increased 38%.
Primarily do disable favorable pricing as well as a slight volume increase with strong growth in the southeast and southern regions of the United States.
Additionally, international sales for the total company increased 29% this quarter with double digit growth and a Canadian and Mexican businesses.
Our backlog and pace of orders remain favorable as well as our ability to capture price in the market, which gives us confidence in the updated sales targets we issued today.
The price increases we implemented in the second quarter will get their full run rate in the physical third quarter and we have obtained some additional pricing on certain products and in certain markets to cover the continued inflationary cost pressures.
Overall, the demand environment remains favourable and are leading indicators 0.2 continued strength as we work through the high levels of backlog in our order book.
From my perspective, we must continue to work down the backlogs are both atheists an infiltrator manner.
<unk> through through the customary whether in seasonal impacts in the second half of the physical year.
And continue to leverage the self help programs that are creating a digital production capacity.
In addition, we are focused on installing and wrapping up new equipment coming online, which will add some production capability in the second half of the year and additional capacity as we enter physical 20th twenty-three this coming April.
Moving to profitability.
Chested EBITDA decreased 5% this quarter Fey.
Favorable pricing issued over the past year covered inflationary cost pressure on materials and diesel however, labor shortages in both manufacturing and transportation impacted our profitability.
This was particularly evident within our transportation business, where we had to ship more deliveries to third party logistics services.
Cost premium compared to our internal fleet. In addition, the year over your cost for third party logistics services is up significantly.
Within the manufacturing organization, we were unable to consistently operate all the production lines, we wanted to run due to labor shortages.
Importantly, the programs we discussed on her last call around skew reduction process simplification inventory consolidation and sourcing products from Mexico are working resulting in improved daily production rates as we progress through the second fiscal quarter and into October.
Availability of raw materials was more problematic in the first part of the quarter, but improved month to month.
Material costs remained elevated and as expected the second quarter had the largest gap between high material prices this year and historically low prices of last year.
Importantly, we were able to maintain the amount of adjusted EBITDA generated as vehicle to your business in the second quarter.
Infiltrator products are primarily produced at a single manufacturing location and less transportation sensitive than the avs products, while it will trade her face similar headwinds from labor and transportation the impact on profit profitability was less pronounced.
Overall, the first half of this fiscal year is largely played out as we expected.
As discussed on our first quarter to call, we're going to see the year over your improvement in adjusted EBITDA in the back half of this fiscal year.
We will realize the full run rate of price increases in the third quarter as well as the benefits for myself health initiatives.
Though this year has been challenging we remain confident in our ability to identify and execute the right programs to expand our margins overtime.
Finally, a year to date capital spending more than doubled in the first half of this fiscal year, we were making investments to increase capacity with some having an impact in queue for for infiltrator and the a D S pipe manufacturing.
We started up a production line in the Midwest at the end of the first quarter to help increase increase the capacity and we also made investments in the storm tech business to increase production capacities and infiltrator.
<unk> new injection molding processes presses are starting up now with additional pressures coming online in the fourth quarter to support the growing on site septic business.
These new investments also include automation that will help offset the impact from the labor shortages.
Importantly, once or approved capital investments are up and running we expect capacity will increase by double digit at both atheists, an infiltrator, which will allow us to continue to meet the robust demand environment through the back half of this fiscal year and beyond.
All that said court drivers of our business remains strong.
We will continue to systematically work or self help programs, particularly on the labor transportation that improve both production in our service levels to customers and as we move through this unique period with record demand significant inflation labor challenges. We recovered the programs were working will benefit our business for many years to come.
With that I'll turn it over to Scott control to further discuss the financial results. Thanks, Scott on slide five we present, our second quarter of fiscal 2022 financial performance.
From a topline perspective, we generated significant growth year over year, driven by both atheists, an infiltrator legacy idiots pipe products grew 31% Allied products sales grew 19% an infiltrator sales increased 38% with double digit sales growth in both tanks and least field products, we continued to them.
Concentrate our pricing power with significant year to date price increases across each of our our segments is Scott mentioned during the second quarter strengthened our construction market sales, partially were offset by constraints within manufacturing and transportation as well as weakness in our retail and market, which was impacted by tough comparisons.
You have a year.
Consolidated adjusted EBITDA decreased 5% to $165 million, resulting in an adjusted EBITDA margin of twenty-three 0.3% in the quarter. We knew this quarter would be our most challenging from a year over year comp perspective, given the low impart input costs and high demand environment, we experienced last year.
Importantly, we have good line of sight into the costs impacting our business and I've taken action to mitigate them in the back half of this year.
These efforts have already contributed to margin improvement on a sequential basis throughout the second quarter.
The long term fundamentals of our business remain intact and we are on track to hit the double digit growth and our adjusted EBITDA guidance for the fiscal year.
Moving to slide six we generated $31 million a free cash flow year to date. In addition to the growth oriented capital investments got outlined working capital was a significant use of cashier to date as we purchase raw materials and built inventory at a much higher cost compared to last year in order to support the debate.
Band, we're experiencing we continuing to make progress on a working capital initiatives. Most recently working to extend our payment terms with some of our largest suppliers.
As a percent of sales working capital was 22% as compared to 20% in the same period last year.
From a capital deployment perspective, we remain committed to efficient and disciplined capital allocation to drive shareholder value or.
Our first priority for capital deployment remains investing organically in the growth of the business as we view this as the highest return and lowest risk use of are available capital to that and we have spent more than two times the amount as last year. At this time, primarily on these type of growth initiatives.
For the full year, we continue to expect between $130 million and $150 million in capital expenditures with the largest investments focused on future growth followed by your productivity and automation initiatives.
In addition, we continue to work an active emanate pipeline focused on staying close to the core including regional pipe capacity Allied products that fit our solutions package and recycling capacity to support the future growth of the business.
We are committed to a strong balance sheet financial flexibility and returning excess cash to our shareholders as demonstrated by the $312 million return to shareholders year to date through share buybacks and dividends, we completed our share repurchase program in the second quarter purchasing a total of two point <unk>.
6 million chairs year to date.
Finally, our 12th trailing 12 month leverage ratio was 1.7 times remaining below are targeted leverage of two to three times that we've previously communicated.
Finally on slide seven we have updated our fiscal 20 twenty-two guidance.
Based on our performance in pricing actions taken to date order activity backlog in current market trends. We currently expect net sales to be in the range of 2.55 billion to 2.65 billion represented growth of 29th at 34% over the prior year.
Alright, adjusted EBITDA guidance is unchanged at a range of $635 million to $665 million representing growth of 12% to 17% over last year.
The increase in our revenue guidance today is due primarily to the continued strength in orders in our backlog as well as the impact of favorable pricing that we've introduced to the market to date we.
With that I'll open the call for questions operator, Please open the line.
Absolutely as a reminder to ask a question you will need to practice, Taiwan on your telephone.
Got your question.
<unk> bye.
While the compiled.
Austin.
Your first question comes from the line of my <unk> I'm <unk>. Your line is open.
Hey, good morning, everyone.
Okay mourning mourning.
So, let's let's talk too and the moving pieces as we go to the back half the fiscal year for you Uhm, obviously, the guidance implies above normal seasonal above normal seasonal ramp and EBITDA levels since she moved to the back half of the year.
I'm I'm, hoping we can just talk about the components behind that because it seems like it's a combination of capacity coming online being able to loosen some of the labor shortages and the impacts and then also price cost and price timing. So maybe we could starting to capacity piece first uhm and just understand what leverage you.
Size of pulled in and what this could mean for for for demand as we move to the back half or at least the ability to service the demand in the back half and if that question needs to have the labor peace embedded in it certainly understand.
Okay I think of it in three component did Scott Barbara by the way Mike Martin.
Cause I think of it the three components uhm.
For that back half.
Come together prior plan and we have good line of sight on it.
It's let's call it price material.
Capacity as you described.
And then volume.
Just release of orders to go through there.
This material I think we've worked very hard on in the front half of both companies and I think as you see in this that kind of moving along.
Very very nicely and per plan.
Capacity I would say has got better as we've gone through the months. There is a labor component to that and we're working to mitigate that is not fully mitigated, but I think if it stays the way it is right now.
We can get through that.
And and the machinery that is coming online that we mentioned in this.
Or decisions made as long as a year ago and that stuff is hitting the floor and and wrapping up nice impacts on both companies, but a little ahead infiltrator than than on the pipe side. So that's good because the infiltrator you know, it's a very profitable company.
<unk>, that's a very good shipping pace page to that distribution, so that capacity peace.
And the reason Scott went through more on the capital B spent now does have a nice impact in the second half and for the first time, we also kind of revealed that it gives us once ramped up kind of nice double digit increases in our capacity.
Going forward, we never really talked about that very much but we thought it was important to begin now that we see it coming online getting in there and then probably the one that I think about the most is the volume release.
Price in good shape capital spending capacity coming online nicely than the volume piece, which could be.
No a lot of things that can go on on that volume released the orders are there. The backlog is there, but you've got to get people to released it. It takes shipments of the sites, which can be driven by seasonality other supply chain issues or labor issues that the contractor might have so some a bit out of our control, but we're working it very.
Very hard and closely which we're pretty good at to make sure. We can we get everything shipped we can.
Not to move it pieces in there kind of a long answer, but I hope that that's where you were headed.
Well it was a lot of questions here.
One question [laughter].
Typical of multi tiered question.
Well, you know trying to get as much as possible I guess, so the the the price cost piece and Uhm Scott mentioned that it was.
Margin levels got better through the quarter.
As we get to the back half here do you think you're above the curve in the third quarter or the fourth quarter, which one when it comes to not just mitigating the the the diesel and and the resin where commodity inflation like you did this quarter, but also maybe getting on top of the transportation piece in labor.
Pieces or does that take a little bit more time.
It takes a little bit more time, but I think well that sequential improvement. We saw intraquarter is something that we plan on now obviously, you've got some seasonality impacts and leverage impacts as we go but that that pricing pizza this and getting to that run rate later and as we go through this this third quarter I think becomes extremely leveraging and when we get into.
To that fourth quarter, you see kind of that nice margin improvement on a year over year basis as well. So I would say it continues to get better as we marched through the back half with kind of that inflection point on a year over year basis by Q4, So the gross put up piece looks.
Looks good yeah, the leverage on the SGI piece, we're going to continue to get it's just on the gross profit pieces drive in it.
So in other words sequential improvement in the margins through the back half of the year. Despite what are the kind of the normal seasonal factors given all those things you mentioned that fair.
Directionally, yes.
Okay.
Alright, I've I've asked a chunk so I'll I'll I'll pass it on thank you for the time I appreciate it.
Yeah, you got them welcome.
Your next question comes from the line of Josh.
Konwinski of Morgan Stanley.
Let me guess.
Morning, Hey, Josh.
So I'm gonna have to kind of a multipart question as well and you know what that's the price you pay so.
N D you kind of volume and price situation, obviously, we can sort of see how chunky places this year.
Scott you mentioned, where you're at and then a little bit more as well.
If we just take some of the historical bouts of inflation is maybe a proxy for for what happens is rising rolls over and it looks like it's starting to.
How much of that do you think you end up retaining I mean, obviously you know the margins of the company have come up a lot over the last four or five years is using inflation is sort of a price umbrella and then retaining some of that it's cost formalize.
An outside piece of that a smaller piece like maybe just maybe help dimension out that piece of it cause I think we all can appreciate that like maybe fried celebrated in for a longer period of time, Labor's probably elevated forever uhm, but there are some pieces that that could be a little bit more temporary.
We would agree with you.
Exactly agree with you on that.
And I think as we <unk>.
Look forward.
We would expect to remonstrate prior performance on retaining price.
We will retain 100 per cent of it there's some markets that are more competitive as the others either by segment or by region and we will certainly continue.
Execute this conversion story and share gains story that we want to do but we will I think retain.
A good piece of this price I mean I'm sure every every all people running industrial companies right now we're asking in this this question of themselves. Josh is how about you just cannot keep as we go forward and where we're trying to work all kinds of different parts of our value proposition to do that.
You you've heard me talk about this in the past it's not just the product is the service we provide and is the transportation services. We provide is that all that we do to help people design projects and things like that so we'll we'll look at our whole value proposition.
And work that piece very very hard to that place retention. Please.
Got it that's helpful. And then maybe just sort of a follow up to that.
You know obviously you guys are providing more of a premium product on say like the pipe sizes labor avoidance. There's other reasons why that's like a more desirable outcome what is sort of the price differential at the gas you know kind of a cross your market you know versus reinforced concrete does it still a discount or you start.
To come in to lock it up there.
I'd say, it's more than lobster today than than than perhaps where we were historically historically Josh and.
And we look at this very closely.
Particular markets, where we want to protect our market share or gain market share there's other markets where.
We probably.
Given a bit back.
On our conversion story.
Intentionally because we didn't have the capacity in that in that region to service. It when it came up as you as you know we've discussed has really been in an availability game here I mean in the industry for the last eight months six O six to eight months.
But I would tell you that that that that advantage as private collapsed because our escalation in price but.
I think we also know very cleverly, where that is and how to how to how to make.
In game adjustments if necessary.
Got I appreciate it that's all.
Alright. Thanks.
Again to ask a question you want or need to press one on your telephone keypad again that is star one on your telephone keypad.
Your next question comes from the line of Gary <unk> <unk> capital. Your line is open.
Oh, hi, Thanks for taking my question I wanted to ask just hold on the shelf gotten this increase in recognizing the balance of that is coming from pricing, but I'm. Just wondering if you might be able to.
Cause I will be more colors as to where that's coming from Missouri and it seems like it's pretty broad base, but any more more color. Bye bye segment is cheap to where you're getting be incremental place more successfully.
Oh got it.
You know I I think that this is Scott Barbour and uhm.
A couple of things you know the pricing is very broad based.
An infiltrator products.
And in the Avs products, there's kind of no segment that is untouched.
By this.
It has probably been a little more aggressive on what I would call.
Products that we stock.
Versus products that are project based.
You know those tend to be a very normal behavior or you know some of our stuff. We're competing on projects every day and you Gotta make sure your competitive some stuff goes into stock.
Added distribution that tends to be.
Not as.
Everyday.
Competitive it's gotta be in line, but but a little different so.
And I think that that's how I would describe that.
Environment. The agriculture is always a little more competitive also than the than the commercial businesses.
Michael would you add anything to that or yeah.
I would agree with Scott Eric This is Mike Higgins when when we look at our end markets the pricing increase on a year over your basis is really pretty pretty steady yeah and that's.
A bit by design, it's how we price is Scott said before it's pretty consistent across the products.
And that translates to pretty consistent pricing in the end markets. There's no one place that stands out.
80% of the price is I think the right is maybe what you were trying to get at yeah, and geographically, we're seeing be incremental pricing gains that we would want to see as well. So it's not like one part of the country carrying it first one other.
Great.
What I was looking for one of the follow up with.
The issue of capacity in the capacity, that's coming online is that requiring incremental labor, maybe more broadly touched a little bit.
Looking to.
To ramp up of labor just keeping the.
The headwind to manufacturing and on the transportation side, you know can you expand a little bit more of that you know where are you in the hiring process. It's a really.
That's a very good question and when we we work on a lot. So let's take it into pieces I would say is the infiltrator capacity comes online yeah. Those are pretty automated manufacturing cells. So the labor that comes online there is.
Pretty small.
10 people six people.
To ramp up a whole bunch of capacity ended on on site in Kentucky, they're doing all kinds of other projects of automation that frees up labor and kind of net debt you don't see big increases in head count as they add what are very nice chunks of incremental capacity.
In the pipe, making business, we're trying to do a very similar thing so the projects that Scott and I've been looking at an approving that our board has approved come in installed with less heads.
Needed them prior investments that would have been made.
Uhm. So again, we're trying to replicate in the pipe is this what the infiltrator guys who've done for many many years is.
At each increment of capacity it needs less incrementals heads. So again, it's gonna be and kind of tens and twenties type of people, which is not easy to go get but we also are doing a much better job on the pipe side of.
Incremental ties on activities that are free net headcount so.
Worried about it yes.
Made additional incremental capital to do automation and better material handling to try to minimize the impact.
Of additional heads and recognizing the environment that we're in today and likely will be in for for for awhile in terms of labor availability.
Got it thank you.
Yeah.
There are no further audio of question at this time please continue.
Alright.
Good good questions and we appreciate it today you know.
When we were talking to you in 90 days ago. We knew this was gonna be a tough our toughest quarter. We had a lot of things in flight. We've made a lot of progress over those 90 days.
I tell you that Scott and I believe we ended up just a little bit better than we thought where we were going to for the corner as a result of many of those initiatives, particularly in the operations and the logistics pieces people are people are working hard rowing very very hard here to to service customers.
To get capacity up so that we can we can take advantage of the this nice market that we have not lost on us that we're spending capital and need to do that well.
We've done the buyback.
And done a lot of.
A lot of cash out the door here in the last quarter, but all things that we planned to do it including rebuilding of the balance sheet with some inventory so lots of moving pieces, but plain out like we thought it would be a good meeting with our board over the last several days tremendous support for them.
The programs that were running both Ed Infiltrator and a D. S. So where we think we have really good alignment in the company right now on the task ahead of us for the remainder of this year for the next couple of years, which were pretty enthused about so.
So we appreciate your participation today and look forward to catching up with you all over the course of today in the next couple of weeks. Thanks.
This concludes today's conference call. Thank you for participating Gimme Nah just kidding.
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